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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2 - Amendment No. 1
Registration Statement Under The Securities Act of 1933
TENGASCO, INC.
(Name of small business issuer in its charter)
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Tennessee 1381 87-0267438
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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603 Main Avenue, Suite 500, Knoxville, Tennessee 37902 (423) 523-1124
(Address and Telephone number of Principal Executive Offices)
603 Main Avenue, Knoxville, Tennessee 37902
(Address of Principal Place of Business or Intended Place of Business)
Wesley Baker, 603 Main Avenue, Suite 500,
Knoxville, Tennessee 37902 (423) 523-1124
(Name Address and Telephone number of Agent for Service of Process)
Approximate Date of Proposed Sale to Public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Title of each class of Dollar Amount to be Proposed maximum Proposed maximum Amount of Registration
securities to be registered registered offering price per unit aggregate offering price Fee
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Shares of common stock, $11,079,917 $16.19(1) $3,317,096 $3,268.58
$0.001 par value
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The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
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1 This is the average of the closing bid and ask price of the Company's
Common Stock as listed on the OTC Bulletin Board on December 8, 1997.
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TENGASCO, INC.
684,368 Shares of Common Stock, $0.001 par value
This Prospectus relates to the resale of 684,368 shares of common stock,
$0.001 par value (the "Shares") owned by certain shareholders (hereinafter
collectively referred to as the "Selling Shareholders") of Tengasco, Inc., a
Tennessee corporation (the "Company"). The Company will not receive any of the
proceeds on the resale of the Shares by the Selling Shareholders. The resale of
the Shares of the Selling Shareholders is subject to the requirements of the
Securities Act of 1933, as amended (the "Act"). Sales of the Shares or the
potential of such sales at any time may have an adverse effect on the market
price of the Shares offered hereby. See "Risk Factors".
The Shares offered by this Prospectus may be resold from time to time by
the Selling Shareholders, or by their transferees. No underwriting arrangements
have been entered into by the Selling Shareholders or the Company. The
distribution of the Shares by the Selling Shareholders may be effected in one or
more transactions that may take place in the over-the-counter market including
ordinary broker's transactions, privately negotiated transactions or through
sales to one or more dealers for resale of such Shares as principals at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Shareholders
against certain liabilities, including liabilities under the Act.
The Selling Shareholders and intermediaries through whom the Shares may be
sold may be deemed "underwriters" within the meaning of the Act with respect to
the Shares offered and any profits realized or commissions received may be
deemed underwriting compensation. The Company has agreed to indemnify the
Selling Shareholders against certain liabilities, including liabilities under
the Act.
All costs incurred in the registration of the Shares of the Selling
Shareholders are being borne by the Company.
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "DILUTION" AND "RISK FACTORS"
WHICH BEGIN ON PAGE 6.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is December 9, 1997
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (together with all
amendments and exhibits thereto the "Registration Statement") under the
Securities Act of 1933, as amended with respect to the Common Stock offered
hereby. This Prospectus does not include all of the information set forth in the
Registration Statement pursuant to the Rules and Regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and, in each instance,
if such contract or document is filed as an exhibit, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement. The Registration Statement, including schedules and exhibits thereto
may be obtained from the principal offices of the Commission at 450 Fifth
Street, N.W., Washington D.C. 20549 upon payment of the fee prescribed or may be
examined there without charge.
As of the date hereof, the Company is not a reporting company, as that term
is defined under the Securities Acts, and therefore, does not file reports and
other information with the Commission. However, the Company intends to furnish
an annual report, which will include audited financial statements, to its
stockholders. In addition, the Company will provide, without charge, to its
stockholders, upon written or oral request by such stockholder, a copy of any
information referred to herein that is incorporated by reference except exhibits
to such information that are incorporated by reference unless the exhibits are
themselves specifically incorporated by reference. All such requests should be
directed to Wesley Baker, at Tengasco, Inc., 603 Main Avenue, Knoxville,
Tennessee 37902, telephone number (423) 523-1124.
The Company is an electronic filer. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
such site is (http://WWW.SEC.GOV)
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. AN
INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FACTORS IDENTIFIED UNDER THE
HEADING "RISK FACTORS".
THE COMPANY
The Company is in the business of exploring for and developing oil and
natural gas properties. Although the Company has been in existence for 81 years,
its activities in the oil and gas business commenced only in 1995 with the
acquisition of numerous oil and gas properties. These properties include the
following:
(i) a 100% working interest in 41 oil and gas leases on a total of
8,058 acres, more or less, and a 25% working interest on one lease of 462
acres, more or less, located in Clay County, Kentucky (collectively, the
"Beech Creek Leases");
(ii) a 100% working interest in 5 oil and gas leases on a total of 741
acres, more or less, located in Clay County, Kentucky (collectively, the
"Wildcat Leases");
(iii) a 100% working interest in six oil and gas leases on a total of
744 acres, more or less, located in Clay County, Kentucky (collectively,
the "Burning Springs Leases");
(iv) a 100% working interest in nine oil and gas leases on a total of
2,121 acres, more or less, located in Fentress County, Tennessee
(collectively, the "Fentress County Leases").
(v) a 100% working interest in 210 oil and gas leases on a total of
30,367 acres more or less, located in Hancock and Claiborne Counties,
Tennessee (collectively, the "Swan Creek Leases").
The Beech Creek Leases contain four wells. These four wells have been
tested and management believes they are capable of producing gas in paying
quantities. Tests have indicated that these wells are capable of producing 500
mcf of gas per day at a production cost of $.50 per mcf and distribution cost of
$.25 per mcf. At current market prices between $3.50 and prices of $4.50 per
mcf, the wells should prove profitable. Flow lines have been laid to connect
these wells to the gas transmission system of Wiser Oil Co. However, the wells
are not presently in production.
The Burning Springs Leases contain a total of 11 gas
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wells, all of which are shut-in. Several of the wells were in production in 1996
and were hooked up to a nearby Southern Gas Company transport line. At present,
the wells are not producing since the compressors and related equipment have
been moved to the Swan Creek leases where, it is anticipated, the wells will be
more profitable. The Company intends to evaluate the wells that are listed as
shut-in to determine whether it would be desirable to rework them, i.e., to
clean the casings of impurities and to seek to penetrate further into the rock
structure. After the evaluation, they will be either reworked or plugged.
The Fentress County Leases currently have one well, which is shut-in. The
well will require additional work to initiate production.
Substantial additional evaluation and remedial work will be necessary in
order to determine whether most of the Company's wells will be able to produce
oil and gas in paying quantities and to make them produce in such quantities.
The Company's ability to perform these operations will depend to a great degree
on its ability to raise sufficient funding to develop its leases, as to which no
assurance can be given. Nor can any assurance be given that if the Company is
able to obtain such funding, it will be able to produce oil and gas in
profitable quantities.
The Company will conduct exploration and production activities to produce
crude oil and natural gas. The principal markets for these commodities are local
refining companies, major natural gas transmission pipeline companies, local
utilities and private industry end users, which purchase the crude oil, and
natural gas pipeline companies, which purchase the gas. There are currently two
gas transmission lines that run through the Beech Creek Leases. These lines can
be accessed to sell gas produced from the leases. There are two more
transmission lines within approximately two miles of these leases.
In Hancock County, gas production from the Swan Creek Leases will be
delivered into the major transmission line of East Tennessee Natural Gas. At the
present time, there is no completed pipeline from these leases to the East
Tennessee Natural Gas pipeline. The Company is in the process of constructing
such a pipeline which is approximately 90% completed and is expected to be
completed by the end of 1997. The pipeline which was commenced during the last
quarter of 1996 will be approximately 23 miles long and is made of 8 inch steel
pipe. The cost to date has been approximately $1,888,312. Completion is expected
to cost approximately an additional $500,000. The Company has acquired all
necessary regulatory approvals and necessary property rights to complete this
pipeline. The Company's pipeline will not only service the Company's wells,
connecting its wells to gas purchasers but, will provide transportation of gas
for small independent producers in the local area as well. It is anticipated
that direct
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sales could also be made to some local towns and industries. No assurance can be
given that the Company will be able to produce a sufficient quantity of crude
oil or natural gas to make these operations profitable.
The estimated present net reserve values based upon a report from Coburn
Petroleum Engineering, an independent expert, indicate a present value of
$33,874,577 for the Swan Creek Field, $5,929,992 for the Beech Creek Leases,
$996,280 for the Fentress County Leases and $547,248 for the Burning Springs
Leases. Reserve analyses are at best speculative, especially when based upon
limited production; no assurance can be given that the reserves attributed to
these leases exist or will be economically recoverable.
THE OFFERING
Shares of Common Stock Offered ........... 684,368(1)
Shares of Common Stock outstanding
as of September 30, 1997.................. 6,389,000
Use of Proceeds .......................... None of the proceeds
will be received by
the Company
SUMMARY FINANCIAL DATA
The following table sets forth certain consolidated financial data of the
Company for nine months ended September 30, 1997 and the two years ended
December 31, 1996.
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1 This includes 100,000 shares issuable to one of the Selling Shareholders
upon the exercise of an option granted to that Selling Shareholder on
January 30, 1996 by the Company at an exercise price of $6.375 and 300,000
shares issuable to another Selling Shareholder upon the exercise of an
option granted to him by Industrial Resources Corporation ("IRC") on May 7,
1997 to acquire 300,000 shares of the Company's common stock. The exercise
price is $10.00 per share.
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Data relating to the years ended December 31, 1996 and 1995 is derived from
Consolidated Financial Statements appearing elsewhere in this Prospectus. 1996
data has been audited by BDO Seidman, LLP. 1995 data has been audited by Charles
M. Stivers, CPA. The selected consolidated financial data should be read in
conjunction with, and is qualified in its entirety by reference to, the
consolidated financial statements, the notes thereto and the reports thereon
included elsewhere in this Prospectus.
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(unaudited)
Nine months ended Year ended Year ended
Income Statement Data 9/30/97 12/31/96 12/31/95
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Revenue $ 0 $ 26,253 $ 28,526
Costs and other
deductions $ 2,679,987 $ 1,787,317 $ 1,275,000
Net loss ($2,679,987) ($1,761,064) ($1,246,481)
Earnings per Share ($ 0.33) ($ 0.28) ($ 0.36)
Balance Sheet Data:
Working Capital ($2,228,745) ($1,065,711) $ 161,933
Total Assets $ 4,242,430 $ 2,727,221 $ 1,180,969
Long-Term Liabilities $ 151,610 $ 47,828 $ 59,000
Stockholders' Equity $ 1,486,566 $ 1,455,007 $ 1,019,386
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RISK FACTORS
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT
BE PURCHASED BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR TOTAL INVESTMENT.
PROSPECTIVE INVESTORS OF THE SHARES OFFERED HEREIN SHOULD GIVE CAREFUL
CONSIDERATION, IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, TO THE
FOLLOWING RISK FACTORS.
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1. Limited History. Although the Company was organized in 1916, it must be
regarded as being in a formative stage due to its lack of significant business
operations during recent years and the fact that it did not acquire any oil or
gas leases until 1995. Prior to its acquisition of these leases, the Company had
never been involved in the oil and gas business. Its future success depends upon
its ability to profitably operate its existing wells and to expand its
operations through the acquisition of additional oil and gas producing
properties and/or the acquisition of additional oil and gas leases. No assurance
can be given that the Company will be successful in making such acquisitions. If
the Company is successful in acquiring additional leases, it faces the risk that
the geology reports on which it relies are inaccurate, that the oil and/or gas
reserves are less than anticipated, that it will not have sufficient funds to
drill on the property, that it will not be able to market the oil and/or gas due
to a lack of a market or the lack of pipelines, and that fluctuations in the
prices of oil and/or gas will make development of those leases uneconomical. The
Company is also subject to all of the risks inherent in attempting to expand a
relatively new business venture. These risks include, but are not limited to,
possible inability to profitably operate its existing properties or properties
to be acquired in the future, the existence of undisclosed actual or contingent
liabilities, the inability to fund the requirements of such properties and the
inability to acquire additional properties that will have a positive effect on
the Company's operations. There can be no assurance that the Company will
achieve a level of profitability that will provide a return on invested capital
or that will result in an increase in the market value of the Company's
securities. See, "Market Price of and Dividends on the Company's Common Equity
and Other Stockholder Matters."
2. Going Concern. The Company's auditors have indicated doubts about the
Company's ability to continue as a going concern in view of the recurring losses
from operations and the Company's working capital deficiency.
3. Limited Market for Common Stock. Although the Company's common stock is
listed on the OTC Bulletin Board of the National Association of Securities
Dealers, Inc. (the "NASD"), the market for such shares only commenced in May,
1995, following the acquisition of the oil and gas leases described above, and
there can be no assurance that it will continue or be maintained. As a result of
the limited market, purchasers of shares offered hereby may have difficulty in
effecting sales of their stock and/or obtaining a satisfactory price for those
shares. Any market price for shares of common stock of the Company is likely to
be very volatile, and factors such as success or lack thereof in drilling, the
ability or inability to acquire additional oil and gas
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producing properties, competition, governmental regulation and fluctuations in
operating results may all have a significant effect. In addition, the stock
markets generally have experienced, and continue to experience, extreme price
and volume fluctuations which have affected the market price of many small
capital companies and which have often been unrelated to the operating
performance of these companies. These broad market fluctuations, as well as
general economic and political conditions, may adversely affect the market price
of the Company's common stock. See,"Market Price of and Dividends on the
Company's Common Equity and Other Stockholder Matters."
4. General Economic Risks/Potential Volatility of Stock Price. The
Company's current and future business plans are dependent, in large part, on the
state of the general economy. Adverse changes in general and local economic
conditions may cause high volatility in the market price of the Company's
securities and may adversely affect an investment in these securities. Oil and
gas prices are extremely volatile and are subject to substantial seasonal,
political, world wide supply of oil and gas and other fluctuations and risks,
all of which are beyond the Company's control.
5. Future Acquisitions. The Company intends to develop and expand its
business, principally by developing its existing oil and gas leases and
acquiring additional oil and gas-producing properties and/or leases. See
"Management's Discussion and Analysis or Plan of Operation" below. The Company
has not selected any particular properties in connection with its expansion
plans and may not be able to locate desirable property and/or it may not be able
to provide the funds necessary to acquire additional property.
6. Future Capital Requirements; Uncertainty of Future Funding. The Company
presently has limited operating capital. It will require substantial additional
funding in order to realize its goals of conducting oil and gas exploration
operations and acquiring additional oil and gas properties. The Company is
currently negotiating with investment banking firms and other entities to raise
these funds through equity or debt financing, which may be very difficult for
such a highly speculative enterprise. There can be no assurance that such
additional funding will be made available to the Company, or if made available,
that the terms thereof will be satisfactory to the Company. Furthermore, any
equity funding will cause a substantial decrease in the proportional ownership
interests of existing stockholders. If such funding is not made available to the
Company, it is doubtful that the Company will be able to conduct its planned
business operations. See "Management's Discussion and Analysis or Plan of
Operation".
7. Replacement of Reserves. The Company's future success will depend upon
its ability to find, acquire and develop
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additional oil and gas reserves that are economically recoverable. The proven
reserves of the Company will generally decline as they are produced, except to
the extent that the Company conducts revitalization activities, or acquires
properties containing proven reserves, or both. To increase reserves and
production, the Company must continue its development and drilling programs,
identify and produce previously overlooked or by-passed zones and shut-in wells,
acquire additional properties or undertake other replacement activities. The
Company's current strategy is to increase its reserve base, production and cash
flow through the development of its existing oil and gas fields and selective
acquisitions of other promising properties where the Company can utilize new and
existing technology. The Company can give no assurance that its planned
revitalization, development and acquisition activities will result in
significant additional reserves or that the Company will have success in
discovering and producing reserves at economical exploration and development
costs. The Company may not be able to locate geologically satisfactory property,
particularly since it will be competing for such property with other oil and gas
companies, many of which have much greater financial resources than the Company.
Moreover, even if desirable properties are available to the Company, it may not
have sufficient funds with which to acquire additional leases. Furthermore,
while the Company's revenues may increase if prevailing oil and gas prices
increase significantly, the Company's exploration costs for additional reserves
may also increase.
8. Uncertainty of Reserve Estimates. Oil and gas reserve estimates and the
present value estimates associated therewith are based upon numerous
engineering, geological and operational assumptions that generally are derived
from limited data. Common assumptions include such matters as the extent and
average thickness of a particular reservoir, the average porosity and
permeability of the reservoir, the anticipated future production from existing
and future wells, future development and production costs and the ultimate
hydrocarbon recovery percentage. As a result, oil and gas reserve estimates and
present value estimates are frequently revised in subsequent periods to reflect
production data obtained after the date of the original estimates. If reserve
estimates are inaccurate, production rates may decline more rapidly than
anticipated, and future production and revenues may be less than estimated.
Moreover, significant downward revisions of reserve estimates may adversely
affect the Company's ability to borrow funds in the future or have an adverse
impact on other financing arrangements.
In addition, any estimates of future net revenues and the present value
thereof are based upon period ending prices and on cost assumptions made by the
Company which only represent its best estimate. If these estimates of
quantities, prices and costs prove inaccurate and the Company is unsuccessful in
expanding its oil and gas reserves base, and/or declines in and instability of
oil and
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gas prices occur, write-downs in the capitalized costs associated with the
Company's oil and gas assets may be required. The Company will also rely to a
substantial degree on reserve estimates in connection with the acquisition of
producing properties. If the Company overestimates the potential oil and gas
reserves of a property to be acquired, or if its subsequent operations on the
property are not successful, the acquisition of the property could result in
substantial losses to the Company. See, "Description of Property".
9. Operating Hazards. Oil and gas operations involve a high degree of risk.
Natural hazards, such as excessive underground pressures, may cause costly and
dangerous blowouts or make further operations on wells financially or physically
impractical. Similarly, the testing and recompletion of oil and gas wells
involves a high degree of risk arising from operational failures, such as
blowouts, fires, pollution, collapsed casing, loss of equipment and numerous
other mechanical and technical problems. Any of the foregoing hazards may result
in substantial losses or liabilities to third parties, including claims for
bodily injuries, reservoir damage, loss of reserves, environmental damage and
other damage to persons or property. The Company does not have insurance against
such hazards.
10. Future Sales of Common Stock. IRC currently beneficially owns
approximately 2,827,767 shares of the common stock of the Company or
approximately 44.27% of its outstanding voting securities. This amount is based
upon 6,389,000 shares being outstanding or beneficially owned, and assumes the
exercise of 497,097 shares vested under options granted by the Company as of May
31, 1996. At June 30, 1997, all of the shares of the common stock owned by IRC
have been beneficially owned for two years, and subject to compliance with the
applicable provisions of Rule 144 of the Securities and Exchange Commission, IRC
may then commence to sell these "restricted securities" in an amount equal to up
to 1% of the then outstanding securities of the Company, or the average weekly
trading volume in the securities of the Company on any recognized automated
system during the four weeks preceding any Notice of Sale pursuant to Rule 144,
in any three month period, provided the Company satisfies the "current public
information available" requirements of Rule 144 at that time. In such event,
such sales could have a substantial adverse effect on any public market that may
then exist in the Company's common stock. Purchasers of shares offered hereby
may experience, as a result, substantial difficulty in selling their shares at
satisfactory prices. Sales of any of these shares by IRC could severely affect
the ability of the Company to secure the necessary debt or equity funding for
the Company's proposed business operations. For additional information
concerning the present market for shares of common stock of the Company, See the
caption "Market Price of and Dividends on the Company's Common Stock and Other
Stockholder Matters." For information regarding common stock ownership of IRC
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and the Ratliff family, see, "Security Ownership of Certain Beneficial Owners
and Management." The additional 164,266 shares of common stock of the Company
acquired by IRC in exchange for debt of the Company as outlined under the
heading "Business Development" below (76,557 shares were issued in March, 1996,
and 87,709 shares were issued in April, 1996), will have satisfied the present
two year Rule 144 holding period in March and April, 1998, respectively, and
will also then be available for resale pursuant to Rule 144.
A total of 505,000 "unregistered" and "restricted" shares of the Company's
common stock were issued to Jeffrey D. Jenson, M. E. Ratliff and Leonard W.
Burningham, Esq., pursuant to the Compensation Agreements that were executed on
May 2, 1995. Pursuant to Rule 144 of the Commission the shares owned by Messrs.
Jenson and Burningham, who are non-affiliates, may now be sold without
restriction. The shares owned by M. E. Ratliff, who is an affiliate, may not be
sold until the Company is subject to the reporting requirements of Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 Act, as amended (the "1934
Act"). The resale of these securities may also have a substantial adverse impact
on any then-existing public market for the Company's common stock. See, "Recent
Sales of Unregistered Securities."
The availability of Rule 144 for resales of "restricted securities" by
affiliates is primarily conditioned upon the Company being a "reporting company"
under the 1934 Act, and being current" in all reports required to be filed, or
having "currently publicly available" the type of information usually provided
to broker-dealers effecting transactions in securities of a company as required
by Rule l5c2-1 1 (a)(5) of the Securities and Exchange Commission. If the
Company was not a "reporting company" at the time any holder of "restricted
securities" had held such securities for one year (two years in the case of an
affiliate), this type of information would have had to have been provided to
stockholders of the Company on a periodic basis over the previous two years, and
the Company's balance sheet and income statement at such time should be not less
than six months old. Further, this type of information should also have been
provided to nationally recognized manuals, broker-dealers effecting transactions
in the securities of the Company and newspapers of general circulation, where
possible, in order for the Company to satisfy the requirements of having the
required information "currently publicly available." Simultaneously with the
filing of this Prospectus and the Company's SB-2 Registration Statement for the
Shares offered hereby, the Company is filing a Registration Statement on Form
10SB to become a reporting company. Assuming that Registration Statement becomes
effective, and the Company thereafter files all reports required to be filed by
it with the Securities and Exchange Commission, the Company would have the
required information "currently publicly available" concerning it as required by
subparagraph (c)(l) of Rule 144. Shares held by non-affiliates would then be
able to be sold
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without restriction after a holding period of two years and could be sold in
limited quantities after a holding period of one year.
11. Control by Current Security Holders. The Shares offered hereby
represent a minority of the Company's outstanding voting equity. By virtue of
IRC's present ownership of approximately 44.27% of the Company's outstanding
voting securities, the management of IRC has the ability to effect significantly
the election of the Company's directors, who in turn elect all executive
officers. The management of IRC may be deemed to have substantial control over
the management and affairs of the Company. Malcolm E. Ratliff, the Company's
Chief Executive Officer, is the son of the owner of a majority of the
outstanding shares of IRC. He is also an officer of IRC. See "Security Ownership
of Certain Beneficial Owners and Management." Upon conclusion of this offering
IRC's control will not be diminished.
12. Warrants. Warrants which were issued in connection with loans made to
the Company could under certain circumstances enable the holders of such
warrants to acquire a controlling interest in the Company. The Company has
commenced a lawsuit seeking to invalidate those warrants. (See "Legal
Proceedings")
13. Competition. The Company's oil and gas exploration activities are
centered in a highly competitive field. In seeking any other suitable oil and
gas properties for acquisition, or drilling rig operators and related personnel
and equipment, the Company will be competing with a number of other companies,
including large oil and gas companies and other independent operators with
greater financial resources. Management does not believe that the Company's
initial competitive position in the oil and gas industry will be significant.
See "Competition."
14. Dependence on Technical Personnel. Certain members of present
management have substantial expertise in the areas of endeavor presently
conducted and to be engaged in by the Company. To the extent that their services
become unavailable, the Company will be required to retain other qualified
personnel. There can be no assurance that it will be able to recruit and hire
qualified persons upon acceptable terms. See "Directors, Executive Officers,
Promoters and Control Persons."
Similarly, the oil and gas exploration industry requires the use of
personnel with substantial technical expertise. In the event that the services
of its current technical personnel become unavailable, the Company will need to
hire qualified personnel to take their place; no assurance can be given that it
will be able to recruit and hire such persons on mutually acceptable terms.
15. Governmental Regulations. The Company is subject to numerous state and
federal regulations, environmental and otherwise, that may have a substantial
negative effect on its
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ability to operate at a profit. For a discussion of the risks involved as a
result of such regulations, See "Effect of Existing or Probable Governmental
Regulations on Business" and "Costs and Effects of Compliance with Environmental
Laws."
16. Market for the Shares. The Company's Common Stock is presently traded
on the OTC Bulletin Board. There can be no assurance that there will be a market
for the Shares or that the price of such stock will be maintained hereafter. Due
to numerous factors the price of the Company's Common Stock may fluctuate
significantly. If the price of the Company's Common Stock trades for less than
$5.00 per share on the OTC Bulletin Board or the National Quotation Bureau's
"pink sheets", the stock will become subject to the Commission's penny stock
disclosure requirements. This may have a substantial adverse effect on the
liquidity of the Company's common stock and, in addition, these regulations
could limit the ability of brokers/dealers to sell the Company's securities and
thus the ability of purchasers of the Company's securities, including the Shares
offered hereby, to sell such securities in the secondary market.
17. Dividends Unlikely. The holders of Common Stock of the Company are
entitled to receive dividends when, as and if declared by the Company's Board of
Directors. The Board does not intend to declare any dividends in the foreseeable
future and earnings, if any, will be used to finance the requirements of the
Company.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of Shares by
the Selling Shareholders. All of the proceeds from such sales will be retained
by the Selling Shareholders.
DETERMINATION OF PRICE OF SHARES
The price received by the Selling Shareholders will be determined by
prevailing market prices at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
DILUTION
The Company is not selling any of the Shares offered. As a result, no
dilution will result from the sale of the Shares in
13
<PAGE>
this Offering.
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to persons
for whom the Company is registering the Shares for resale to the public. The
Company will not receive any of the proceeds from the sale of the Shares by the
Selling Shareholders. Beneficial ownership of the Shares by such Selling
Shareholders after this Offering will depend on the number of Shares sold by
each Selling Shareholder. This table assumes that all of the Shares offered
hereby will be sold.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned
Prior To Offering(2) After the Offering
Name and Address of -------------------------- Number of -------------------------
Beneficial Owner Number Percent Shares Offered Number Percent
---------------- ------ ------- -------------- ------ -------
<S> <C> <C> <C> <C> <C>
Gregory K. Allsberry 1,418 *(3) 1,418 0 0
7711 Carondelet
St. Louis, MO. 63105
James P. Enright, Jr. 5,939 * 5,939 0 0
728 Zeiss Street
St. Louis, MO. 63125
William Evans 12,121 * 12,121 0 0
5 Wellington Ln.
Southwest Harbor,
ME. 04679
Constance Gianella 2,228 * 2,228 0 0
</TABLE>
- --------
2 Applicable percentage of ownership is based upon 6,389,000 shares of Common
Stock of the Company outstanding as of September 30, 1997.
3 * Indicates that the percentage of shares beneficially owned does not
exceed one percent of the Company's outstanding Common Stock.
14
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
IRA Rollover
1028 Summer Tree Dr.
Manchester, MO. 63011
Richard Gianella 1,151 * 1,151 0 0
IRA Rollover
1028 Summer Tree Dr.
Manchester, MO. 63011
Richard Gianella 1,731 * 1,731 0 0
Rev Trust
U/A/D 1-13-94
Richard Gianella TTEE
1028 Summer Tree Dr.
Manchester, MO. 63011
Arthur J. Giorgio IRA 254 * 254 0 0
1251 Cliffridge Ln.
Valley, Park, MO. 63088
Sarah J. Goy 6,470 * 6,470 0 0
IRA Rollover
1028 Summer Tree Dr.
Manchester, M0. 63011
Neal Harding(4) 129,424 2% 429,424 0 0
5544 Fairfax St.
Orlando, Fl. 32812
Christopher Harding 5,000 * 5,000 0 0
2509 Planside Dr.
Louisville, Ky. 40299
Shannon Shay Herlihy 5,000 * 5,000 0 0
2509 Plantside Dr.
Louisville, Ky. 40299
Donald Janda 2,131 * 2,131 0 0
105 14th Ave.
Charles City, IA. 50616
</TABLE>
- --------
4 Includes 300,000 shares of common stock issuable upon exercise of an option
granted to this Selling Shareholder by IRC on May 7, 1997. The exercise
price of the option is $10.00 per share.
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Robert Janda 22,730 * 22,730 0 0
Bank of St. Edward
P.O. Box 188.
St. Edward, NE
Kenny Securities Corp. 100,000(5) 1.5% 100,000 0 0
7711 Carondelet Ave.
St. Louis, Mo. 63105
Peter Kollinger, 15,909 * 15,909 0 0
MD Rev Trust
U/A/D 7-25-90
Peter Kollinger, MD TTEE
900 W. Temple Ave. - Suite 205
Effingham, IL. 62401
Kossmeyer & Associates 15,489 * 15,489 0 0
Profit Sharing Plan
U/A/D 12-12-85
FBO Carl F. Kossmeyer
38 Muirfield
St. Louis, MO. 63141
Brandon S. Kossmeyer 2,504 * 2,504 0 0
401(k) Profit Sharing Plan
U/A/D 9-26-85
FBO Carl F. Kossmeyer
12161 Lackland Rd.
St. Louis, MO. 63146
Carl F. Kossmeyer 1,542 * 1,542 0 0
Rev Trust
U/A/D 1-13-94
Carl F. Kossmeyer TTEE
38 Muirfield
St. Louis, MO. 63141
</TABLE>
- --------
5 Represents 100,000 shares of Common Stock issuable upon exercise of an
option granted to this Selling Shareholder by the Company on January 6,
1996. The exercise price of the option is $6 3/8 per share. The principal
of Kenny Securities Corp. are John J. Kenny and J. Michael Short.
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Chase B. Kossmeyer IRA 254 * 254 0 0
38 Muirfield
St. Louis, MO. 63141
Clayton C. Kossmeyer IRA 254 * 254 0 0
38 Muirfield
St. Louis, MO. 63141
Maria P. Kossmeyer 4,369 * 4,369 0 0
Rev Trust
U/A/D 1-13-94
Maria P. Kossmeyer TTEE
38 Muirfield
St. Louis, MO. 63141
Maria P. Kossmeyer 272 * 272 0 0
Custodian for
Chase B. Kossmeyer
38 Muirfield
St. Louis, MO. 63141
Maria P. Kossmeyer 199 * 199 0 0
Custodian for
Clayton C. Kossmeyer
38 Muirfield
St. Louis, MO. 63141
Maria P. Kossmeyer 713 * 713 0 0
Custodian for
Meryl A. Kossmeyer
38 Muirfield
St. Louis, MO. 63141
Meryl A. Kossmeyer IRA 254 * 254 0 0
38 Muirfield
St. Louis, MO. 63141
Mark Kruger 12,121 * 12,121 0 0
27 Arundel Pl. .
St. Louis, M0. 63015
Samuel Mickelson and 6,470 * 6,470 0 0
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Seena Mickelson JT WROS
8089 Whispering Palm Dr.
Boca Raton, FL. 33496
Robert Nicholson 5,515 * 5,515 0 0
5734 Paddington Way
Boca Raton, FL 33486
William Stern 6,470 * 6,470 0 0
c/o Mark Twain Bank
1631 S. Lindbergh Blvd.
St. Louis, MO. 63131
Tornado Fund 6 7,127 * 7,127 0 0
Attn: Dean Carlton
2010 Winter Haven
St. Louis, MO. 63052
Paul J. Wirtz 1,418 * 1,418 0 0
11078 Oregon Curve
Bloomington, MN. 55438
Gudrun A. Zoeller 7,491 * 7,491 0 0
7572 Sierra Dr. East
Boca Raton, FL. 33433
</TABLE>
PLAN OF DISTRIBUTION
Upon the effectiveness of the Registration Statement, the Selling
Shareholders may use this Prospectus, as updated from time to time, to offer the
Shares for sale by the Selling Shareholders directly, or through broker-dealers
or agents as may be designated from time to time by the Selling Shareholders, or
through a combination of such methods. Sales may be effected on the OTC Bulletin
Board or otherwise, at market prices prevailing at the time of sale, at prices
related to prevailing market prices, or at negotiated prices. Broker-dealers and
agents will receive
- ------
6 The principals of Tornado Fund are Dean Carlton and Kyle Kabance.
18
<PAGE>
compensation in the form of concessions or commissions from the Selling
Shareholders and/or purchasers of the Shares for whom they may act as agent.
Such compensation will be negotiated and paid for by either the Selling
Shareholders and/or purchasers. The Company has not arranged for the sale of any
of the Shares and is not responsible for any concessions or commissions to be
paid in connection with such sales. Each Selling Shareholder and any brokers or
agents that participate in the distribution of the Shares may be deemed
underwriters under the Securities Acts.
The Shares may be sold on the OTC Bulletin Board or in privately negotiated
transactions. Sales of the Shares on the OTC Bulletin Board may be made by one
or more of the following means: (a) block trades in which a broker-dealer will
attempt to sell shares as agent but may position and resell a portion of the
block as principal to facilitate the transactions; (b) purchases by a
broker-dealer as principal and resale by such broker-dealer for its account
pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers; and (d) any other
means permitted by applicable regulations and laws. In addition, any Shares
which qualify for sale pursuant to Rule 144 under the Act may be sold under Rule
144 rather than pursuant to this Prospectus.
Upon the Company being notified by a Selling Shareholder that any material
arrangement has been entered into with a broker-dealer for the sale of Shares
under any circumstances which require the filing of a supplemental prospectus, a
supplemental prospectus will be filed under Rule 424(c) under the Act setting
forth the names of the participating broker-dealers, the number Shares involved,
the price at which such Shares were sold by the Selling Shareholder, and the
commission paid or discounts or concessions allowed by the Selling Shareholder
to such broker-dealers.
LEGAL PROCEEDINGS
Except as described hereafter, the Company is not a party to any pending
material legal proceeding. To the knowledge of management, no federal, state or
local governmental agency is presently contemplating any proceeding against the
Company. To the knowledge of management, no director, executive officer or
affiliate of the Company or owner of record or beneficially of more than 5% of
the Company's common stock is a party adverse to the Company or has a material
interest adverse to the Company in any proceeding.
The Company is a defendant in an action commenced on March 18, 1997 in the
Supreme Court of the State of New York, New York County by a lender, Ulrich
Hocker, seeking the recovery of $250,000 based upon a promissory note. The
plaintiff sought accelerated summary judgment by filing a motion without a
19
<PAGE>
complaint. The motion was denied and the plaintiff was given an opportunity to
file a complaint which he did on November 10, 1997. The Company plans to defend
the action and has been advised by counsel that it has valid defenses to the
claim.
The Company filed an action in Chancery Court for Knox County, Tennessee
on March 21, 1997 against that lender and two other lenders, Thieme Fonds and
Wallington Investments, Ltd., as well as Theodore Scallan, the Company's former
President, to invalidate warrants which were issued in connection with and as
consideration for those loans. The warrants authorize the lenders to purchase
common Stock of the Company at $5 per share or at lower prices depending upon
the difference between $17 per share and the market price of the Company's stock
at the time the warrants are exercised. Should the market value of the
Company's stock drop low enough, the exercise price of the warrants would be so
low that the holders of the warrants could theoretically acquire a controlling
interest in the Company. It is the position of management that these warrants
were never validly issued and are null and void because they were not properly
authorized by the Company's Board of Directors. In addition, it is the position
of the Company that fees paid to Heiko Thieme who represented all of the lenders
and the warrants issued as consideration for the loan constituted usurious
interest.
In connection with the aforementioned loan transactions, the Company
granted a mortgage to the lenders on all of its property. The existence of that
mortgage has hindered the Company's efforts to obtain funding for the purpose of
completing the pipeline and continuing drilling activities. The Company sought
permission from the Court in Tennessee to substitute a bond in place of the
mortgage. The Court refused the request because all of the defendants had not
yet been served. All defendants have now been served and the Company intends to
renew its request to file a bond. The Company has received a proposal from
counsel for the defendants offering to release the mortgage if a bond in the
amount of approximately $1,350,000 is filed. The Company is now attempting to
arrange for the issuance of the bond.
At the time the Company sought to obtain a release of the mortgage by
filing a bond, it was important to obtain that release because the availability
of additional necessary funds was conditioned upon a lender's ability to obtain
a first mortgage on the leased property. Since that time, the Company has been
able to obtain additional financing in the amount of $5,352,688 by means of
private placements of its common stock, $582,222 as loans from IRC, Malcolm E.
Ratliff and Tracmark(7) and $310,000 pursuant to an arrangement with Shigemi
Morita, a director of the Company and
- --------
7 On June 30, 1997, these loans were converted into 86,084 shares of the
Company's common stock at a price of $5.62 per share.
20
<PAGE>
William E. Evans, as Trustee, to fund the drilling of additional wells on a loan
participation basis.
An action was commenced on March 5, 1996 in the Circuit Court of Hancock
County, Tennessee by the Company and Paul H. Reed, a landowner from whom the
Company had leased certain land, against Eastern American Energy seeking a
determination that a lease entered into more than ten years earlier between the
landowner and Eastern American Energy had terminated. The Circuit Court held
that, under Tennessee law, the lease had terminated because Eastern American
Energy was not producing oil or gas. Eastern American Energy appealed to the
Court of Appeals which affirmed the decision below in favor of the Company.
The United States Environmental Protection Agency issued an order, to the
Company on July 16, 1997 directing it to take certain remedial action to restore
certain damage to the Clinch River resulting from the Company's construction of
the pipeline. The Company has complied with all the requirements set forth in
the order and has been determined to be in full compliance by the U.S.
Environmental Protection Agency. The order required that all work be stopped
pending compliance. That stop order was lifted on September 20, 1997 and the
Company has continued its work on the pipeline which has only 3 miles to go and
should be completed by the end of 1997. The Company raised approximately
$5,352,688 during August through November 1997 for completion of this work and
to finance drilling activities by means of sales of restricted stock.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS and CONTROL PERSONS
Identification of Directors and Executive Officers
The following table sets forth the names of all current directors and
executive officers of the Company. These persons will serve until the next
annual meeting of stockholders (to be held at such time as the Board of
Directors shall determine) or until their successors are elected or appointed
and qualified, or their prior resignations or terminations.
21
<PAGE>
<TABLE>
<CAPTION>
Date of
Positions Election or
Name Held Designation
- ---- ---- -----------
<S> <C> <C> <C>
William A. Moffett Director 5/95
1073 Encantado Drive
Santa Fe, NM 87501
James B. Kreamer Director 3/13/97
3621 Cabin Creek Road
London, KY 40741
Malcolm E. Ratliff Chief Executive 3/13/97
12008 Avalon Place Officer
Knoxville, TN 37922
Shigemi Morita Director 3/13/97
80 Park Avenue
New York, N.Y. 10016
Allen Sweeney Chairman of 3/13/97
1400 Oak Tree Drive Board
Edmund, OK73003
Joseph E. Armstrong Director 3/13/97
2624 Selma Avenue
Knoxville, TN 37914
Robert M. Carter Executive 3/13/97
317 Heathermoor Drive Vice-President
Knoxville, TN 37922
Sheila Sloan Treasurer 3/13/97
121 Oostanali Way
Loudon, TN 37774
Elizabeth Wendelken Secretary 3/13/97
8023 Stanley Road
Powell, TN 37849
James A. Gerding Director 9/4/97
405 LeConte View Drive
Gattenburg, TN 37738
</TABLE>
Business Experience
22
<PAGE>
Joseph Earl Armstrong is 40 years old and a resident of Knoxville,
Tennessee. He is a graduate of the University of Tennessee and Morristown
College where he received a Bachelor of Science Degree in Business
Administration. From 1988 to the present, he has been an elected State
Representative for Legislative District 15 in Tennessee. From 1994 to the
present he has been in charge of government relations for the Atlanta Life
Insurance Co. From 1981 to 1994 he was a District Manager for the Atlanta Life
Insurance Co.
James A. Gerding is 69 years old. He has a Bachelor of Science Degree and a
Masters of Business Administration Degree from Indiana Univiersity. Since
approximately 1980 he has been the Chief Executive Officer of Pancake Pantry,
Inc. which owns one restaurant and franchise another. In addition he is a
co-owner of the Village, a 27 store shopping complex in Gattenburg, Tenessee.
James B. Kreamer is 58 years old. He earned a Degree in Business from the
University of Kansas in 1963. He has been the owner of several business
enterprises. In 1982, he purchased a seat on the Kansas City Board of Trade
where he served on several committees working on the development of futures
trading. Since 1979, he has been engaged in the oil and gas business as an
investor. He currently serves as a member of the Board of Directors of Panaco,
Inc., a NASDAQ energy company.
William A. Moffett is 63 years old. He received a BS Degree in Geological
Engineering from Oklahoma University in 1956. From 1977 to 1982, he was
Operations Manager for Esso Exploration and Production in the United Kingdom.
From 1982 to 1984, he was General Production Manager for Intercol (an affiliate
of Exxon in Colombia). From 1984 to 1991 he was CEO for Stan Vac Indonesia, a
joint Exxon/Mobil affiliate. From 1991 until his employment by the Company, Mr.
Moffett was retired.
Shigemi Morita is 62 years old. He received an A.B. Degree from Elon
College in North Carolina. From 1969 to 1996 he was the President and CEO of
Morita & Co., an insurance agency specializing in insurance for Japanese
companies doing business in the United States. In 1996, Morita & Co., Inc. was
acquired by Tokio Marine Management, Inc., Mitsubishi International Corporation
in New York and Mitsubishi International, Ltd. in Tokyo. He remains as President
and as a consultant.
Malcolm E. Ratliff is 51 years old. He attended the University of
Mississippi from 1965 to 1967. He has been involved in the oil and gas business
since 1974, initially as a roustabout and then developing oil and gas leases. In
1992 he was involved with personal investments. In 1993 and 1994 he experienced
serious health problems which prevented him from working. In April 1995, he
became associated with the Company and, after its merger with Onasco, he served
as a consultant to the Company's Board of Directors. Since March 13, 1997 he has
been Chief Executive Officer of the Company. He is presently acting as interim
President of the Company as a result of the death, on September 13, 1997, of
Daniel Follmer, the Company's President.
Allen H. Sweeney is 47 years old. He received an MBA in finance from
Oklahoma City University in 1972 and a Bachelor Degree
23
<PAGE>
in Accounting from Oklahoma State University in 1969. From 1978 to 1980, he
served as Treasurer and CEO of Phoenix Resources Company. From 1980 to 1981, he
served as Vice-President-Finance for Plains Resources, Inc. From 1982 to 1984,
he was Vice-President-Finance for Wildcat Mud, Inc. From 1984 to 1992 he
operated an independent consulting service under the name of AHS and Associates,
Inc. Since 1992, he has served as Director and President of Columbia Production
Company and Mid-America Waste Management, Inc. Mr. Sweeney is a Director of
Frontier Natural Gas Corporation of Houston, Texas, a public corporation.
Committees
At the present time, the Company has no operating committees.
Family Relationships
There are no family relationships between any of the present directors or
executive officers of the Company.
Involvement in Certain Legal Proceeding
To the knowledge of management, during the past five years, no present or
former director, executive officer, affiliate or person nominated to become a
director or an executive officer of the Company:
(1) Filed a petition under the federal bankruptcy laws or any state
insolvency law, nor had a receiver, fiscal agent or similar officer appointed by
a court for the business or property of such person, or any partnership in which
he or she was a general partner at or within two years before the time of such
filing, or any corporation or business association of which he or she was an
executive officer at or within two years before the time of such filing;
(2) Was convicted in a criminal proceeding or named subject of a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(3) Was the subject of any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining him or her from or otherwise limiting his
or her involvement in any type of business, securities or banking activities;
24
<PAGE>
(4) Was found by a court of competent jurisdiction in a civil action, by
the Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated any federal or state securities law, and the
judgment in such civil action or finding by the Securities and Exchange
Commission has not been subsequently reversed, suspended, or vacated.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS and MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following tables set forth the share holdings of the Company's
directors and executive officers and those persons who own more than 5% of the
Company's common stock as of June 30, 1997 with these computations being based
upon 6,398,000 shares of common stock being outstanding and assumes the exercise
of 281,376 shares vested under options granted by the Company as of June 30,
1997. (See the heading "Other Compensation" and the "Restricted Stock Options
Table," under the caption "Executive Compensation" below).
25
<PAGE>
Five Percent Stockholders
<TABLE>
<CAPTION>
Number of Shares Percent
Name and Address Title Beneficially Owned of Class
- ---------------- ----- ------------------ --------
<S> <C> <C> <C>
Industrial Resources Stockholder 2,836,999 44.4%
Corporation (8)
Ste. 500-600 Main Ave.
Knoxville, TN 37902
Malcolm E. Ratliff(9) Chief Executive 254,689 3.98%
12608 Avallon Place Officer
Knoxville, TN 37922
Directors and Executive Officers
Number of Shares Percent
Name and Address Title Beneficially Owned of Class
- ---------------- ----- ------------------ --------
Joseph Earl Armstrong Director 0 0
2624 Selma Avenue
Knoxville, TN 37914
Robert M. Carter Exec. Vice 23,000 0.4%
317 Heathermoor Drive President
Knoxville, TN 37922
James A. Gerding Director 0 0
405 Le Conte View Drive
Gattenburg, TN 37738
James B. Kreamer Director 0 0
3621 Cabin Creek Rd.
London, KY 40741
William A. Moffett Director 37,397 0.6%
- --------
</TABLE>
7 James Ratliff is the sole owner of the outstanding securities of IRC, and,
accordingly, he may be deemed to be an affiliate of the Company. He is also
the father of Malcolm E. Ratliff, who received 215,000 shares of common
stock of the Company pursuant to one of the compensation Agreements. See
the heading "Business Development" of the caption "Description of
Business", Part I, Item 1.
9 Malcolm E. Ratliff is a Vice-President of Industrial Resources Corporation.
26
<PAGE>
<TABLE>
<S> <C> <C> <C>
1073 Encantado Drive
Santa Fe, NM 87501
Shigemi Morita Director 114,300 1.9%
80 Park Avenue
New York, N.Y. 10016
Malcolm E. Ratliff10 CEO and 254,689 3.98%
12008 Avallon Place President
Knoxville, TN
Sheila F. Sloan Treasurer 2,000 0
121 Oostanali Way
Loudon, TN 37774
Allen H. Sweeney Chairman of 100,500 1.6%
1400 Oak Tree Drive the Board
Edmund, OK 73003
Elizabeth Wendelken Secretary 0 0
8023 Stanley Road
Powell, TN 37849
All Officers and 529,682 8.48%
Directors as a Group
</TABLE>
Changes in Control
Except as indicated below, to the knowledge of the Company's management,
there are no present arrangements or pledges of the Company's securities which
may result in a change in control of the Company.
DESCRIPTION OF SECURITIES
Authorized Capital Stock
The authorized capital stock of the Company consists of 50,000,000 shares
of common stock with a one mill ($0.001) par value per share.
Common Stock. The holders of the common stock are entitled to one vote per
share on each matter submitted to a vote
- --------
10 The principal shareholder of IRC is the father of Malcolm E. Ratliff.
128,052 shares of stock of IRC are owned by Tracmark, Inc., a corporation,
the principal shareholders of which are Malcolm E. Ratliff and his father.
27
<PAGE>
at any meeting of stockholders. Shares of common stock do not carry cumulative
voting rights, and therefore, a majority of the shares of outstanding common
stock will be able to elect the entire Board of Directors and, if they do so,
minority stockholders would not be able to elect any persons to the Board of
Directors. The Company's Bylaws provide that a majority of the issued and
outstanding shares of the Company shall constitute a quorum for stockholders
meetings except with respect to certain matters for which a greater percentage
quorum is required by statute or the by-laws.
Stockholders of the Company have no preemptive rights to acquire additional
shares of common stock or other securities. The common stock is not subject to
redemption and carries no subscription or conversion rights. In the event of
liquidation of the Company, the shares of common stock are entitled to share
equally in corporate assets after satisfaction of all liabilities. Holders of
common stock are entitled to receive such dividends as the Board of Directors
may from time to time declare out of funds legally available for the payment of
dividends. The Company seeks growth and expansion of its business through the
reinvestment of profits, if any, and except as indicated under the heading
"Market Price of and Dividends On the Company's Common Equity and Other
Stockholder Matters" - "Dividends" below, the Company does not anticipate that
it will pay dividends in the foreseeable future.
The Board of Directors has the authority to issue the authorized but
unissued shares of common stock without action by the stockholders. The issuance
of such shares would reduce the percentage ownership held by existing
shareholders and may dilute the book value of their shares.
There are no provisions in the Bylaws or Articles of Incorporation of the
Company which would delay, defer or prevent a change in control of the Company.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES and AGENTS
Section 48-18-502 of the Tennessee Business Corporation Act (the "TBCA")
allows a corporation to indemnify any director in any civil or criminal
proceeding (other than a proceeding by or in the right of the corporation in
which the director was adjudged liable to the corporation or any other
proceeding in which he or she was adjudged liable on the basis that he or she
improperly received a personal benefit) by reason of service as a director if
the person to be indemnified conducted himself or herself in good faith and in a
manner reasonably believed to be in, or not opposed to, the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful.
28
<PAGE>
Unless limited by its charter, Section 48-18-503 of the TBCA requires a
corporation to indemnify a director who was wholly successful, on the merits or
otherwise, in the defense of any proceeding to which he or she was a party
because of his or her role as director against reasonable expenses incurred in
connection with the proceeding. The Company's charter does not provide any
limitations on this right of indemnification.
Pursuant to Section 48-18-504 of the TBCA, the Company may advance a
director's expenses incurred in defending any proceeding upon receipt of an
undertaking and a statement of the director's good faith belief that he or she
has met the standard of conduct described in Section 48-18-502.
Section 48-18-505 of the TBCA permits a court, upon application of a
director, to order indemnification if it determines that the director is
entitled to mandatory indemnification under Section 48-18-503 or that he or she
is fairly and reasonably entitled to indemnification, whether or not he or she
met the standards set forth in Section 48-18-502.
Section 48-18-506 of the TBCA limits indemnification under Section
48-18-502 to situations in which either (i) the majority of a disinterested
quorum of directors; (ii) independent special legal counsel; or (iii) the
stockholders determine that indemnification is proper under the circumstances.
Section 48-18-507 of the TBCA extends certain indemnification rights to
officers, employees and agents of a corporation as well.
Regardless of whether a director, officer, employee or agent has the right
to indemnity under Section 48-18-502 or Section 48-18-503 of the TBCA, Section
48-18-508 allows the corporation to purchase and maintain insurance on his or
her behalf against liability resulting from his or her corporate role.
Section 48-18-509 of the TBCA provides that the rights to indemnification
and advancement of expenses shall not be deemed exclusive of any other rights
under any bylaw, agreement, stockholder vote or vote of disinterested directors;
however, no indemnification may be made where a final adjudication adverse to
the director establishes his or her liability for breach of the duty of loyalty
to the corporation or its stockholders or for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against public policy as
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expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defenses of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being offered hereunder, the Company
will, unless in the opinion of its counsel that matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
questions whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
DESCRIPTION OF BUSINESS
Glossary of Terms
Confirmed Structure: A structure that is defined due to actual geological
testing and information.
Farmout Agreement: A form of agreement between oil and gas operators
whereby the owner of a lease who is not interested in drilling at the time,
agrees to assign the lease or a portion of it to another operator who wishes to
drill the acreage. The assignor may or may not retain an interest (royalty or
production payment) in the production.
Hydrocarbons: Organic chemical compounds of hydrogen and carbon atoms.
There are a vast number of these compounds, and they form the basis of all
petroleum products. They may exist as gases, liquids or solids. An example of
each is methane, hexane and asphalt.
Verified Structure: A structure that is verified by actual geological
testing and/or penetration.
Wildcat: A term applied to a mining company organized, or to a mine or well
dug, in an attempt to develop unproven ground far from previous production. Any
risky venture in the mining or petroleum industry.
Shut-in Well: A well that is not in production because of a lack of a
market or a pipeline connection.
Shut-in Royalty: Payment to royalty owners under the
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terms of a mineral lease that allows the operator or lessee to defer production
from a shut-in well.
Business Development.
The Company is in the business of exploring for and producing oil and gas
and marketing gas in Tennessee produced by others. The Company's activities in
the oil and gas field did not commence until May 2, 1995. At present it has no
producing properties. However, it has drilled 5 wells in the Swan Creek field
all of which have commercial quantities of gas. Two additional wells are
currently being drilled in that field and are expected to be completed by
December 15, 1997.
The Company was initially organized under the laws of the State of Utah on
April 18, 1916, under the name "Gold Deposit Mining & Milling Company." The
Company was formed for the purpose of mining, reducing and smelting mineral
ores.
The Company's Articles of Incorporation were amended on April 12, 1966, by
unanimous vote of the shareholders, to provide that the Company shall have a
perpetual existence.
On November 10, 1972, the Company conveyed to an unaffiliated entity
substantially all of the Company's assets at that time, and the Company ceased
all business operations.
On July 12, 1984, the Company's Articles of Incorporation were again
amended to: (i) authorize it to engage in any business or enterprise deemed to
be beneficial to the Company; (ii) increase the authorized capital of the
Company from 1,000,000 shares to 50,000,000 shares of common stock (which
allowed the Company to issue the "unregistered" and "restricted" shares referred
to in the preceding paragraph); (iii) reduce the par value of its common stock
from $0.10 to $0.001; (iv) provide that fully-paid stock shall not be liable for
any further call or assessment; and (v) provide that stockholders shall not have
preemptive rights to acquire unissued shares. There were 980,778 outstanding
voting securities of the Company on the date of the adoption of this amendment
by the stockholders of the Company, and 696,146 shares were voted in favor of
these amendments with none opposing and none abstaining.
From approximately 1983 to 1991, the operations of the Company were limited
to seeking out the acquisition of assets, property or businesses.
In contemplation of completing a "reverse" reorganization with Onasco
Biotechnologies, Inc. ("Onasco Texas"), the stockholders of the Company adopted,
ratified and approved the
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following amendments to the Company's Articles of Incorporation: (i) a forward
split of the then outstanding 2,480,778 shares of common stock of the Company on
a basis of 2.015496 for one, resulting in 5,000,000 post-split shares being
outstanding, and retaining the par value at $0.001 per share, with the
appropriate adjustments being made in the additional paid-in capital and stated
capital accounts of the Company; and (ii) a change of the Company's name to
"Onasco Companies, Inc." These amendments were subject to the completion of the
contemplated reorganization.
The Company entered into an Agreement and Plan of Reorganization with
Onasco Texas and all of its stockholders on December 17, 1991 (the "Onasco
Plan"). Pursuant to the Onasco Plan, the Company acquired all of the issued and
outstanding shares of common stock of Onasco Texas in consideration of the
Company's issuance of an aggregate total of 15,000,000 post-split "unregistered"
and "restricted" shares of its $0.001 par value common stock to the stockholders
of Onasco Texas, pro rata, in accordance with their respective interests in
Onasco Texas.
The Onasco Plan was effective as of December 18, 1991, the date on which
the aforesaid Articles of Amendment respecting the reorganization with Onasco
Texas were filed with the Department of Commerce of the State of Utah. There
were 2,480,778 outstanding voting securities of the Company on the date of the
adoption of this amendment by the stockholders of the Company, and 1,339,146
shares were voted in favor of these amendments with none opposing and none
abstaining.
Onasco Texas, which became a wholly owned subsidiary of the Company
following the completion of the Onasco Plan, was organized under the laws of the
State of Texas on October 17, 1991. The Company carried on the business
operations previously conducted by Onasco Texas, which consisted of the
development of diagnostic kits to screen for the presence of Type D retrovirus
in humans and monkeys and a putative, synthetic vaccine against such viruses.
These operations, which primarily involved research and development activities,
proved unsuccessful and were discontinued in June, 1994, and Onasco Texas was
dissolved by resolution of the Board of Directors on or about April 10, 1995.
The dissolution did not involve any bankruptcy or similar proceeding.
In accordance with the Utah Revised Business Corporation Law, which became
effective in 1991, on September 11, 1992, the Company's Articles of
Incorporation were further amended (i) to authorize the stockholders of the
Company to take any action without a meeting, that could have been taken at a
meeting of the stockholders, if consents are signed by stockholders holding at
least the number of shares that would be necessary to take the action at a
meeting (this action was not possible under prior law); and (ii) to provide for
the reclassification of each outstanding share of its common stock to become
one-twentieth of one share of
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new common stock (designated "Reconstituted Common Stock"), effective September
15, 1992, with no fractional shares being created and no stockholder to hold
less than one share, and with no change in the par value or the authorized
capital. The net effect of this reclassification was a one share for twenty
reverse split of the outstanding shares of common stock. There were 20,259,987
outstanding voting securities of the Company on the date of the adoption of this
amendment by the stockholders of the Company, and 14,800,000 shares were voted
in favor of these amendments with none opposing and none abstaining; the
outstanding voting securities of the Company were reduced to 1,012,999 shares as
a result of the reverse split.
In connection with a change in control of the Company in the summer of
1994, Duane S. Jenson and his son, Jeffrey D. Jenson, purchased 697,500 shares
of the Company's common stock, constituting approximately 67% of the then
outstanding voting securities of the Company, from Dr. Robert C. Bohannon, Ph.D.
and his family, in consideration of the sum of $10,000. Dr. Bohannon was
formerly the principal stockholder of Onasco Texas, and had served as the
President, CEO, Vice President and a director of the Company since the
completion of the Onasco Plan. Dr. Bohannon resigned these positions with the
Company, effective June 13, 1994, compromised a debt of the Company to him for
past services rendered to the Company prior to the change in control, and
designated Jeffrey D. Jenson to serve as President, CEO, Secretary/Treasurer and
a director of the Company. At the time of the change of control, Dr. Bohannon
was the sole director and executive officer of the Company. The remaining 33% of
the Company's stock was held by original public shareholders. Subsequent to the
change in control, Dr. Bohannon did not perform any services for the Company.
Prior to the change in control, no director of the Company received compensation
in excess of $100,000 per annum.
At a special meeting of stockholders held on April 28, 1995, the Company's
stockholders voted
(i) to approve the execution of an agreement (the "Purchase Agreement")
pursuant to which the Company would acquire certain oil and gas leases,
equipment, securities and vehicles owned by Industrial Resources Corporation
("IRC"), a Kentucky corporation, in consideration of the issuance of 4,000,000
post-split (as described below) "unregistered" and "restricted" shares of the
Company's common stock;
(ii) to amend the Articles of Incorporation of the Company to effect a
reverse split of the Company's outstanding $0.001 par value common stock on a
basis of one share for two, retaining the par value at $0.001 per share, with
appropriate adjustments being made in the additional paid-in capital and stated
capital accounts of the Company;
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(iii) to change the name of the Company to "Tengasco, Inc."; and
(iv) to change the domicile of the Company from the State of Utah to the
State of Tennessee by merging the Company into Tengasco, Inc., a Tennessee
corporation, formed by the Company solely for this purpose.
The Purchase Agreement was duly executed by the Company and IRC, effective
May 2, 1995. The reverse split, name change and change of domicile became
effective on May 4, 1995, the date on which duly executed Articles of Merger
effecting these changes were filed with the Secretary of State of the State of
Tennessee; a certified copy of the Articles of Merger from the State of
Tennessee was filed with the Department of Commerce of the State of Utah on May
5, 1995. Unless otherwise noted, all subsequent computations in this Prospectus
retroactively reflect this one for two reverse split and all other reverse
splits outlined above under this caption. There were 1,037,650 outstanding
voting securities of the Company on the date of the adoption of the amendments
by the stockholders of the Company, and 801,383 shares were voted in favor of
the amendments with none opposing and none abstaining.
At the annual meeting of stockholders held January 30, 1996, the following
persons were elected as directors of the Company, to serve until the next annual
meeting of the stockholders of the Company or until their successors are elected
and qualified, or their prior resignations or terminations: Walter C. Arzonetti;
Benton L. Becker; Charles N. Manhoff, William A. Moffett, and Lyle G.
Stockstill. At the annual meeting, 4,047,550 shares of the 5,239,300 outstanding
voting securities were voted in favor of the election, with none opposing and
none abstaining.
At the annual meeting of the directors held January 30, 1996, immediately
following the annual meeting of the stockholders, the following persons were
elected as executive officers of the Company, to serve until the next annual
meeting of the Board of Directors of the Company or until their successors are
elected and qualified, or their prior resignations or terminations: Ted P.
Scallan, President and CEO; Kelley S. Grabill, Secretary; and Jeffrey D.
DeMunnik, Treasurer. At its annual meeting, the Board of Directors also adopted
resolutions pursuant to which options to purchase "unregistered" and
"restricted" shares of common stock of the Company were granted to Messrs.
Jeffrey D. DeMunnik, Kelley S. Grabill, Ted P. Scallan and Lyle G. Stockstill,
directors or executive officers of the Company, and to certain other persons,
who were consultants or employees. See, "Executive Compensation" "Restricted
Stock Options Table" below.
Mr. Stocksill resigned on November 25, 1996 and Messrs. Manhoff and
Arzonetti resigned on February 7,1997. Mr. Valliant
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resigned on January 27, 1997. Mr. Becker resigned on January 30, 1997. Mr.
Fetters and Mr. Wright resigned on March 13, 1997. On March 13, 1997, Joseph
Armstrong, James B. Kreamer, Shigemi Morita and Allen Sweeney were elected by
the Board of Directors to serve as directors to replace resigned directors until
the next annual meeting of shareholders.
Theodore P. Scallan resigned as President and CEO on November 26, 1996 and
was replaced by James E. Kaiser who served until January 24, 1997 and was then
replaced as President by Daniel G. Follmer and as CEO by Malcolm E. Ratliff. Mr.
Follmer also served as Chief Financial Officer since March 13, 1997.
Mr. Follmer died on September 13, 1997 and has not yet been replaced as
either President or CFO. Mr. Ratliff is presently acting as interim President.
Jeffrey DeMunnik resigned as Secretary on December 4, 1996 and as Treasurer
on January 17, 1997. He was replaced as Secretary by Elizabeth Wendelken and as
Treasurer by Sheila F. Sloan.
Robert C. Carter was elected a Vice-President on December 4, 1996 and
served until March 13, 1997 when he was elected Executive Vice-President.
General
In connection with the Purchase Agreement, the Company acquired from IRC
the following properties:
(i) a 100% working interest in 41 oil and gas leases on a total of 8,058
acres, more or less, and a 25% working interest on one lease of 462 acres, more
or less, located in Clay County, Kentucky (collectively, the "Beech Creek
Leases"). Each of these leases provides for a landowner royalty of 12.5% of the
oil produced and saved from the leased premises or, at the lessee's option, to
pay the market price for such 12.5% royalty. The leases also provide for a
landowner royalty equal to 12.5% of the market price at the well of the gas sold
or used off the premises, except for injection for secondary recovery of oil.
The lessors are also entitled to free gas for all stoves and inside lights in
the principal dwelling house on the leased properties by making connection to
the well or wells at their own expense and risk. The Beech Creek Leases are also
subject to overriding royalties ranging from 1.25% to 5%.
(ii) a 100% working interest in 5 oil and gas leases on a total of 741
acres, more or less, located in Clay County, Kentucky (collectively, the
"Wildcat Leases"). Each of these leases is subject to a 12.5% landowner royalty,
on the same terms as the Beech Creek Leases, and a 3.125% overriding royalty.
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(iii) a 100% working interest in six oil and gas leases on a total of 744
acres, more or less, located in Clay County, Kentucky (collectively, the
"Burning Springs Leases"). Each of these leases is subject to a 12.5% landowner
royalty, on the same terms as the Beech Creek Leases and the Wildcat Leases, and
overriding royalties ranging from 3.125% to 7.5%.
(iv) a 100% working interest in nine oil and gas leases on a total of 2,121
acres, more or less, located in Fentress County, Tennessee (collectively, the
"Fentress County Leases"). Each of these leases is subject to a 12.5% landowner
royalty, on the same terms as the above referenced leases, and a 19% overriding
royalty; and a 25% overriding royalty on one existing well. Section 60-1-301 of
the Tennessee Code provides for a severance tax of 3% on all gas and oil removed
from the ground in Tennessee.
The initial term of each of the above referenced leases ranges from one
year to four years, with each lease to remain in effect thereafter for as long
as (i) oil, gas, casing-head gas or casing-head gasoline is being produced on
the leased premises, (ii) the Company has drilled a producing well and shut-in
royalty is paid for the right to inject, store and remove gas, or (iii) the
Company commences drilling another well or paying rentals within one year of
drilling a dry hole on the leased premises.
For those leases that are subject to a rental requirement, the obligation
to pay rent arises only when no well is in production on the leased
premises. Rent may be paid annually or quarterly, and once it has been paid,
the Company has the right to defer the commencement of a well for the period for
which the rent was paid. Rent amounts vary from $1 to $5 per acre per year, with
certain leases providing for a flat rental payment of $1500.
The Beech Creek Leases contain four wells. These four wells have been
tested and management believes they are capable of producing gas in paying
quantities. Flow lines have been laid to connect these wells to the gas
transmission system of Wiser Oil Co., however, the wells are not presently in
production.
The Wildcat Leases have no wells at this time. The Company intends to
evaluate the potential of this lease block in 1997 and to schedule promising
locations for future drilling. Wiser Oil Company and Somerset Gas, two of the
oil purchasers in the area, have lines running on or adjacent to the lease
block.
The Burning Springs Leases contain a total of 11 gas wells, all of which
are shut-in. Several of the wells were in production in 1996 and were hooked up
to a nearby Southern Gas Company transport line. At present, the wells are not
producing since the compressors and related equipment have been moved to the
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Swan Creek leases where, it is anticipated, the wells will be more profitable.
The Company intends to evaluate the wells that are listed as shut-in for
possible workover or deepening potential; after the evaluation, they will be
either reworked or plugged.
The Fentress County Leases currently have one well, which is shut-in. The
well will require additional work to initiate production.
Following the completion of the Purchase Agreement, the Company acquired a
100% working interest in 210 oil and gas leases on a total of 30,367 acres more
or less, located in Hancock, Claiborne County, Tennessee (collectively, the
"Swan Creek Leases"). Each of these leases provides for a landowner royalty of
12.5%, leaving the Company a net royalty interest of 87.5% in each lease.
The term of these leases is similar to the terms set forth above with
respect to the leases acquired from IRC.
There are five existing wells on the Swan Creek Leases. All of these wells
have been completed and will be available for production as soon as the pipeline
is completed. The first two wells have recently tested at 4.8 million cubic feet
and 1.2 million cubic feet, respectively, of gas per day.
The Company also acquired a 100% working interest in four oil and gas
leases on a total of 1,003.19 acres, more or less, located in Lauderdale County,
Alabama (collectively, the "Alabama Leases"). Each of these leases provides for
a landowner royalty of 12.5%, leaving the Company a net royalty interest of
87.5% in each lease.
The Alabama Leases have no existing wells. These leases will be designated
for wildcat purposes and there is no immediate plan to acquire additional leases
in the area or to begin an exploration program.
The term of these leases is similar to the terms described above with
respect to the leases acquired from IRC.
For those leases that are subject to a rental requirement, the date of the
Company's next rent payment is shown on the applicable lease schedule attached
hereto as an Exhibit. The obligation to pay rent arises only when no well is
in production on the leased premises. Rent may be paid annually or quarterly,
and once it has been paid, the Company has the right to defer the commencement
of a well for the period for which the rent was paid. Rent amounts are $1 per
acre per year.
Substantial additional evaluation and remedial work will be necessary in
order to determine whether most of the Company's
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wells will be able to produce oil and gas in paying quantities and to make them
produce in such quantities. The Company's ability to perform these operations
will depend to a great degree on its ability to raise sufficient funding to
develop its leases, as to which no assurance can be given. Nor can any assurance
be given that if the Company is able to obtain such funding, it will be able to
produce oil and gas in profitable quantities.
Governmental Regulations
The Company is subject to numerous state and federal regulations,
environmental and otherwise, that may have a substantial negative effect on its
ability to operate at a profit. For a discussion of the risks involved as a
result of such regulations, see, "Effect of Existing or Probable Governmental
Regulations on Business" and "Costs and Effects of Compliance with Environmental
Laws" hereinafter in this section.
Principal Products or Services and Markets
The Company will conduct exploration and production activities to produce
crude oil and natural gas. The principal markets for these commodities are local
refining companies, major natural gas transmission pipeline companies, local
utilities and private industry end users, which purchase the crude oil, and
natural gas pipeline companies, which purchase the gas. There are currently two
gas transmission lines that run through the Beech Creek Leases; these lines can
be accessed to sell gas produced from the leases. There are two more
transmission lines within approximately two miles of these leases.
In Hancock County, gas production from the Swan Creek Leases will be
delivered into the major transmission line of East Tennessee Natural Gas. At the
present time, there is no completed pipeline from these leases to the East
Tennessee Natural Gas pipeline. The Company is in the process of constructing
such a pipeline which is approximately 90% completed as to length and is
expected to be completed by the end of 1997. The pipeline will be
approximately 23 miles long and is made of 8 inch steel pipe. The cost to date
has been approximately $1,833,000. Completion is expected to cost approximately
an additional $500,000. The Company has acquired all necessary regulatory
approvals and 100% of necessary property rights to complete this pipeline. The
Company's pipeline will not only service the Company's wells, but, will provide
transportation of gas for small independent producers in the local area as well.
It is anticipated that direct sales could also be made to some local towns and
industries. No assurance can be given that the Company will be able to produce a
sufficient quantity of crude oil or natural gas to make these operations
profitable.
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Reserve Analyses
Coburn Petroleum Engineering of Tulsa, Oklahoma, has performed reserve
analyses of all the Company's productive leases. R. W. Coburn, a registered
petroleum engineer, and the owner of Coburn Petroleum Engineering, has no
interest in the Company or IRC, and performed these services at his standard
rate ($90 per hour was billed and paid for these reports). The net reserve
values used hereafter were obtained from a report dated June 18, 1997 prepared
by Coburn Petroleum Engineering. In substance, the report, used estimates of oil
and gas reserves based upon standard petroleum engineering methods which include
decline curve analysis, volumetric calculations, pressure history, analogy,
various correlations and technical judgment. Information for this purpose was
obtained from owners of interests in the areas involved, state regulatory
agencies, commercial services, outside operators and files of Coburn Petroleum
Engineering.
Discounting the net reserve values by 10% results in a present value of
$33,874,577 for the Swan Creek Field, $5,929,992 for the Beech Creek Leases,
$996,280 for the Fentress County Leases and $547,248 for the Burning Springs
Leases. Reserve analyses are at best speculative, especially when based upon
limited production; no assurance can be given that the reserves attributed to
these leases exist or will be economically recoverable. See "Risk Factors" -
"Uncertainty of Reserve Estimates."
It is standard in the industry for reserve analyses such as these to be
used as a basis for financing of drilling costs.
Distribution Methods of Products or Services
Crude oil is normally distributed in this area by tank truck and natural
gas is distributed and transported via pipeline. Gas purchasers in the area
include Delta Natural Gas Company, Inc., Wiser Oil Company, Southern Gas Company
of Delaware, Inc., Somerset Gas and East Tennessee Natural Gas. Delta and Wiser
operate a gas gathering system that runs through the center of the Company's
Beech Creek leases. The existing Beech Creek wells have been tied into the Wiser
Oil Company system in anticipation of future production. The Burning Springs
wells are connected to Southern Gas Company's gathering system.
Should the Company decide to use transmission lines owned by other
businesses, it will have to negotiate the prices to be paid with the owner of
that transmission line, provided capacity is available. There can be no
assurance that prices can be negotiated which will enable the Company to sell
its products profitably.
Oil from the Fentress County Leases will be stored in a
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tank battery, consisting of two 210 barrel tanks, while awaiting shipment by
tank truck.
Gas production from the Swan Creek Leases will go into the East Tennessee
Natural Gas transmission system through use of the pipeline presently under
construction by the Company, as described above.
The Company has no farmout agreements with any entity.
Status of Any Publicly Announced New Product or Service
The Company has publicly announced its agreement with Enserch Energy
Services, Inc. ("Enserch") to market gas provided by that Company in Tennessee
and Southeastern United States. See Management's Discussion and Analysis of Plan
of Operation below.
Competitive Business Conditions, Competitive Position in the
Industry and Methods of Competition
The Company's contemplated oil and gas exploration activities in the States
of Kentucky and Tennessee will be undertaken in a highly competitive and
speculative business atmosphere. In seeking any other suitable oil and gas
properties for acquisition, the Company will be competing with a number of other
companies located in the State of Kentucky and elsewhere, including large oil
and gas companies and other independent operators with greater financial
resources. Management does not believe that the Company's initial competitive
position in the oil and gas industry will be significant.
At the local level, the Company has only two competitors in the area of its
acreage blocks in the State of Kentucky, who are: Equitable Resources and
Ashland Oil. Its principal competitors in the State of Tennessee are Ashland Oil
and Miller Services; and in the State of Alabama are Engineering Development
Corp. and Torch Operating Co. In the area of the Company's pipeline, the Company
is in a favorable position since it will own the only pipeline within a 20 mile
radius. Within that area, the Company owns leases on approximately 30,367 acres.
In addition, remaining landowners will find it difficult to deal with any other
oil and gas companies since such companies will not have access to a pipeline.
Management does not foresee any difficulties in procuring drilling rigs or
the manpower to run them in the area of its operations. The experience of
management has been that in most instances, drilling rigs have only a one or two
day waiting period; however, several factors, including increased competition in
the area, may limit the availability of drilling rigs, rig operators
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and related personnel and/or equipment; such an event may have a significant
adverse impact on the profitability of the Company's operations.
The Company anticipates no difficulty in procuring well drilling permits
which are obtained from the Tennessee Oil and Gas Board. They are usually issued
within one week of application. The Company generally does not apply for a
permit until it is actually ready to commence drilling operations. The Company
presently has five well drilling permits for use anywhere in Tennessee.
The prices of the Company's products are controlled by the world oil market
and the United States natural gas market; thus, competitive pricing behaviors
are considered unlikely; however, competition in the oil and gas exploration
industry exists in the form of competition to acquire the most promising acreage
blocks and obtaining the most favorable prices for transporting the product.
Management believes that the Company is well-positioned in these areas because
of the transmission lines that run through and adjacent to the properties it
leases and because it holds relatively large acreage blocks in what management
believes are promising areas.
Sources and Availability of Raw Materials
and Names of Principal Suppliers
Excluding the development of oil and gas reserves and the production of oil
and gas, the Company's operations are not dependent on the acquisition of any
raw materials. See, "Competitive Business Conditions, Competitive Position in
the Industry and Methods of Competition" set forth above.
Dependence on One or a Few Major Customers
The Company will be dependent on local purchasers of hydrocarbons in the
areas where its properties are located for sales of its products. The five
purchasers in the areas of the Company's operations are Wiser, Southern, Delta,
Somerset and East Tennessee Natural Gas. The only customers with which the
Company has a written contract are Hawkins County Utilities and Powell Valley
Electric Cooperative. Those entities have agreed to purchase gas from the
Company's Hancock County fields upon completion of the pipeline. It is
anticipated that sales to Hawkins County Utilities will amount to approximately
4,000 MCF per day. Sales to Powell Valley Electric Cooperative are to be
determined at a future date.
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Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or
Labor Contracts, including Duration
Royalty agreements relating to oil and gas production are standard in the
industry. The amount of the Company's royalty payments varies from lease to
lease. See, the heading "General" under this section. The amounts of the
royalties on each of the Company's leases may be obtained from the Company.
Need for Governmental Approval of Principal Products or Services
None of the principal products or services offered by the Company require
governmental approval; however, permits are required for drilling oil or gas
wells. See, "Effect of Existing or Probable Governmental Regulations on
Business" below in this section.
Effect of Existing or Probable Governmental Regulations on Business
Exploration and production activities relating to oil and gas leases are
subject to numerous environmental laws, rules and regulations. The Federal Clean
Water Act requires the Company to construct a fresh water containment barrier
between the surface of each drilling site and the underlying water table. This
involves the insertion of a seven-inch diameter steel casing into each well,
with cement on the outside of the casing. The cost of compliance with this
environmental regulation is approximately $10,000 per well.
The State of Kentucky also requires oil and gas drillers to obtain a permit
for their activities and to post with the Division of Oil and Gas of the
Kentucky Department of Minerals and Mines (the "Kentucky Division") a bond to
ensure that each well is properly plugged when it is abandoned. These bonds are
based on $1 per foot. Each of the Kentucky wells has a $5,000 bond which was
originally posted by IRC and remains in place. The Kentucky Division will retain
the bond until the subject wells are plugged.
The State of Tennessee also requires the posting of a bond to ensure that
the Company's wells are properly plugged when abandoned. A separate $2,000 bond
is required for each well drilled. The Company currently has a $10,000 bond on
deposit with the State of Tennessee. See, "Description of Property" "Disclosure
of Oil and Gas Operations" below.
The State of Alabama also requires the posting of a bond to ensure that the
Company's wells are properly plugged when abandoned. A single-well bond, which
varies between $5,000 and $50,000, depending upon well depth, or a blanket bond
of $100,000, may be obtained for wells drilled on-shore. At the present time,
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the Company does not have plans to drill any wells in the State of Alabama.
The Company's operations are also subject to laws and regulations requiring
removal and cleanup of environmental damages under certain circumstances. Laws
and regulations protecting the environment have generally become more stringent
in recent years, and may in certain circumstances impose "strict liability,"
rendering a corporation liable for environmental damages without regard to
negligence or fault on the part of such corporation. Such laws and regulations
may expose the Company to liability for the conduct of operations or conditions
caused by others, or for acts of the Company which were in compliance with all
applicable laws at the time such acts were performed. The modification of
existing laws or regulations or the adoption of new laws or regulations relating
to environmental matters could have a material adverse effect on the Company's
operations. In addition, the Company's existing and proposed operations could
result in liability for fires, blowouts, oil spills, discharge of hazardous
materials into surface and subsurface aquifers and other environmental damage,
any one of which could result in personal injury, loss of life, property damage
or destruction or suspension of operations.
The Company believes it is presently in compliance with all applicable
federal, state or local environmental laws, rules or regulations; however,
continued compliance (or failure to comply) and future legislation may have an
adverse impact on the Company's present and contemplated business operations.
At Board of Directors' meetings held June 6 and 7, 1995, the Board of
Directors adopted resolutions to form an Environmental Response Policy and
Emergency Action Response Policy Program. A plan was recently adopted which
provides for the erection of signs at each well and at strategic locations along
the pipeline containing telephone numbers of the Company's office and the home
telephone numbers of key personnel. A list will be maintained at the Company's
office and at the home of key personnel listing phone numbers for fire, police,
emergency services and Company employees who will be needed to deal with
emergencies.
The foregoing is only a brief summary of some of the existing environmental
laws, rules and regulations to which the Company's business operations are
subject, and there are many others, the effects of which could have an adverse
impact on the Company. Future legislation in this area will no doubt be enacted
and revisions will be made in current laws. No assurance can be given as to what
effect these present and future laws, rules and regulations will have on the
Company's current and future operations.
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Research and Development
The Company has not expended any material amount on research and
development activities during the last two fiscal years. Research done in
conjunction with its exploration activities will consist primarily of running
radiometric surveys on the lease blocks and conducting geological research on
the surface. This work will fall under the job description of the geologist to
be hired for these activities and will not have a material cost of anything more
than his or her standard salary. See "Number of Total Employees and Number of
Full-Time Employees" set forth below in this section.
Cost and Effects of Compliance With Environmental Laws
See, "Effect of Existing or Probable Governmental Regulations on Business"
set forth above in this section.
Number of Total Employees and Number of Full-Time Employees
The Company presently has twenty full-time employees and one part-time
employee. When it commences its full-scale oil and gas operations, the Company
plans to add additional full-time employees, exclusive of executive officers.
The Company has hired a full-time geologist at a salary of $40,000 per
year. His duties for the Company include: surface and sub-surface geology, log
correlation, surface and sub-surface mapping, field--research (i.e.,
radiometric, gravity, magnetic and geochemical research) and well-site geology.
MANAGEMENT'S DISCUSSION and ANALYSIS or PLAN of OPERATION
The Company intends to continue its 48 well drilling program on the Swan
Creek leases. The existence of substantial deposits of hydrocarbons (oil and/or
gas) in the Swan Creek structure (i.e. the rock formation beneath the surface)
is confirmed by the following facts:
The Swan Creek structure is located in an area known as the Eastern
Overthrust Belt which is an area with numerous faults. A fault is an area where
geologic plates overlap. The porous rock within such areas generally contain
significant amounts of oil and/or gas. The Eastern Overthrust Belt is
geologically similar to the Western Overthrust Belt located in the Rocky
Mountains, where there are other oil and gas producing properties.
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The Company has successfully completed four wells in this area, all of
which have been flow tested by metering gas from the wells through a one-half
inch orifice. These tests all verify the presence of a substantial reservoir of
natural gas and/or oil. One of these wells, the Reed #1 tested at 4,800,000
cubic feet of gas per day with a flowing pressure of 800 psi. Another well, the
Sutton #1 tested at 1,200,000 cubic feet per day with a flowing pressure of 150
psi.
The Company's present plans call for the drilling of approximately fifty
additional wells on the Swan Creek leases over a two to three year period at a
cost of approximately $225,000 per well. Completion of the pipeline presently
being constructed by the Company and which is necessary in order for the Company
to be able to sell its gas is anticipated by the end of 1997 at an additional
cost of approximately $500,000.
The Company is currently drilling two of the additional wells with funds
advanced on a participation basis by a director and a third-party. The
arrangement provides for the participants to receive 25% of income. Drilling is
anticipated to be continued with additional funds provided on a similar
participating basis until income from well production is sufficient to fund
further drilling.
The Company during 1997 has procured funds from private sales of restricted
securities in the amount of approximately $5,000,000 and from loans in the
aggregate amount of $580,000 from IRC, Tracmark, Inc. and Malcolm E. Ratliff
which were thereafter converted to common stock of the Company.
Thereafter, the Company plans to construct two extensions to its pipelines
so as to enable it to exploit other leases which are part of the Swan Creek
leases. These extensions which will be approximately 40 miles in length will
cost approximately $4,000,000. The Company's ability to expand its operations in
this manner is dependent upon the success of the Company's drilling program.
Moreover, no assurance can be given that the Company will be able to obtain the
required rights of way to construct any such pipeline, and the pipeline
currently under construction will only serve production from a portion of the
Swan Creek Field.
The Company does not presently have the funds needed to enable it to
complete the extensions to its pipeline, although it does have funds necessary
to complete the pipeline.
The Company presently has funds sufficient to drill at least 20 additional
wells and anticipates no difficulty in funding additional wells if the wells it
drills prove to be productive.
The Company also anticipates income from the sale of gas pursuant to a
marketing agreement with Enserch, a major marketer of natural gas, pursuant to
which the Company will receive 50% of the
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profits derived from the sale of natural gas in Tennessee and other Southeastern
States. Enserch is a wholly owned subsidiary of Texas Utilities, Inc., a public
company listed on the New York Stock Exchange engaged in the production and sale
of hydrocarbons. It has a net worth of more than $2,000,000,000. To date, it has
not exploited the market in Tennessee and Southeastern United States.
The Enserch agreement has a term of five years and will terminate May 31,
2002 and thereafter, will continue from year to year unless terminated.
Exploitation of the other leases held by the Company is being placed on
hold at the present time.
The sales price for gas is determined on the basis of an index used by all
suppliers and users of gas. The price fluctuates between $2.50 per MCF and $4.50
per MCF, usually higher during the cold weather months. The cost of production
from the well averages approximately $.50 per MCF. Transportation costs are
approximately $.25 per MCF which includes amortization of the pipeline. In
addition, the Company anticipates receiving revenue from third parties who
desire to use the pipeline.
To date, the Company has not drilled any dry wells.
There can be no assurance, of course, that all of the funding necessary for
the completion of the wells will become available. It is anticipated that the
Company will implement development programs on the Beech Creek and Fentress
County Leases sometime in the future. The Swan Creek Leases are being given
first priority because of their higher economic attractiveness.
Management anticipates both short term and long term increases in oil and
gas prices which should have a positive effect on the Company's income and
profits. The belief is based, among other things, upon the following factors:
1. Instability in the Middle East:
2. Conversion of electric generating plants from coal to gas;
3. Discontinuance of construction of nuclear power plants;
4. Increased use of natural gas to decrease the greenhouse effect.
The Company has no plans, at present, to increase the number of its
employees significantly.
Other Significant Plans
The Company, pursuant to its agreement with Enserch, also intends to
actively pursue the gas marketing business on the
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Eastern seaboard. The Eastern seaboard, and Tennessee in particular, has
numerous industrial end users of natural gas that are currently exposed to a
limited number of gas suppliers. Enserch at present has no sales force in the
Southeastern United States and intends to rely on the Company which will be the
only Tennessee company selling gas in Tennessee. The agreement with Enserch
provides for the Company to share equally in profits from sales of gas.
In addition to an active drilling program the Company intends to continue
strategically acquiring leases in promising areas in the States of Kentucky and
Tennessee. No assurance can be given that the Company will be able to identify
or acquire any such leases or that if it does acquire any such leases, they will
be profitable.
This plan of operation is based upon many variables and estimates, all of
which may change or prove to be other than or different from information relied
upon.
Results of Operations
Effective May 2, 1995, and pursuant to a Purchase Agreement, the Company
acquired certain oil and gas-leases, equipment, marketable securities and
vehicles, from IRC. Following the completion of this transaction, the Company
changed its domicile to the State of Tennessee on May 5, 1995. Prior to the
completion of this Purchase Agreement, the Company had been inactive from 1993,
and had little or no assets or operations. The assets reflected as being owned
on December 31, 1995, were all primarily acquired from IRC.
During the year ended December 31, 1996, the Company had revenues of
$26,253 as compared with revenues of $28,526 for the year ended December 31,
1995. The revenues resulted from the sale of gas. The Company has shut in the
wells which produced that gas, transferring some of the equipment to the Swan
Creek lease in anticipation of the completion of the pipeline.
Depletion, depreciation and amortization expense increased from $89,528 for
1995 to $133,187 for 1996 as a result of the fact that the Company did not
acquire its assets from IRC until May, 1995 so that there were only seven months
of depreciation during 1995.
Unrealized holding losses on marketable equity securities ($593,792 in
1995) were a one-time event and were not incurred in 1996.
General and administrative expense also increased substantially during the
same periods as the result of the addition
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of four full time employees and salaried executive officers, and increased
rental for new executive offices which were leased in January, 1996.
Interest expense increased from $32,594 to $145,302 in 1996 due to the
amortization of long-term debt discounts associated with certain stock warrants
granted in connection with such debt.
The increase in net loss from operations during the year ended December 31,
1996 as compared with the year ended December 31, 1995 was due primarily to the
increased general and administrative expense, offset somewhat by the
non-recurrence of losses on marketable equity securities.
The Company had no revenues during the nine month period ending September
30, 1997 since it shut in the wells which it had been operating in 1996 in order
to concentrate on the pipeline and the Swan Creek leases.
Liquidity
Loans in the aggregate total of $882,112 were advanced by IRC, a related
party and an "affiliate" of the Company during the year ended December 31, 1995,
and 164,266 "unregistered" and "restricted" shares of the Company's common stock
were issued as of December 31, 1995, in full payment of this indebtedness.
Revenues from operations during the year ended December 31, 1996 and the
nine months ended September 30, 1997 were insufficient to fund the Company's
operations. The Company has relied upon loans of $1,000,000 from Neal Harding
in 1997, loans of approximately $941,000 by IRC and $110,350 by Malcolm E.
Ratliff during 1996. The loans from IRC and Mr. Ratliff plus accrued interest
were satisfied by the issuance of 101,146 shares of the Company's common stock
to IRC and 13,320 shares to Malcolm E. Ratliff. The loan from Mr. Harding was
used primarily for pipeline construction and was payable on December 31, 1997.
Mr Harding has agreed to extend payment of $500,000 of his loan to the Company
until June 30, 1998. The balance of the loan which is due December 31, 1997 will
be paid out of funds presently in the Company's possession.
In 1997, IRC advanced $323,005 to the Company, Malcolm E. Ratliff advanced
$12,000 and Tracmark, Inc., a subsidiary of IRC, advanced $133,420. These loans,
plus accrued interest, were satisfied by the issuance of 59,328 shares of the
Company's common stock to IRC, 2,204 shares to Malcolm E. Ratliff and 24,552
shares to Tracmark, Inc. In addition, during 1997 the Company received
$4,222,000 by private sales of its common stock and participation arrangements
in well drilling with Shigemi Morito, a Director, and a third party.
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During the first quarter of 1996, the Company sold 166,667 shares of stock
of another corporation that it had acquired from IRC pursuant to the Purchase
Agreement for $250,000; received $91,119 from the exercise of options; and
$280,690 from a private placement of stock.
These revenues and loans accounted for substantially all of the Company's
liquidity during this year.
DESCRIPTION OF PROPERTY
Property Location, Facilities, Size and Nature of Ownership
The Company holds oil and gas leases on the following properties located
near Manchester, Kentucky: (i) 8,058 acres in the Beech Creek Leases; (ii) 744
acres in the Wildcat Leases; and (iii) 741 acres in the Burning Springs Leases.
The Company also holds leases on 2,121 acres in Fentress County, Tennessee, near
Jamestown. There are currently two producing wells on the Tennessee acreage,
only one of which is owned by the Company. Additionally, the Company holds
leases on 30,363 acres in Hancock County, Tennessee, and 1,003.19 acres in
Lauderdale County, Alabama. The initial terms of these leases varies from one to
four years. Many of them can be extended at the option of the Company by payment
of annual rent. Some of them will terminate unless the Company has commenced
drilling. However, the Company does not anticipate any difficulty in continuing
those leases, particularly in Hancock County, since the Company's pipeline will
be the only means available to landowners in that area to sell any gas produced
from wells on their property. See "Description of Business" "General" above.
The Beech Creek Leases provide for a landowner royalty of 12.5% of the oil
produced and saved from the leased premises or, at the lessee's option, to pay
the market price for such 12.5% royalty. The leases also provide for a landowner
royalty equal to 12.5% of the market price at the well of the gas sold or used
off the premises, except for injection for secondary recovery of oil. The
lessors are also entitled to free gas for all stoves and inside lights in the
principal dwelling house on the leased properties by making connection to the
well or wells at their own expense and risk. The Beech Creek Leases are also
subject to overriding royalties ranging from 1.25% to 5%.
The Wildcat Leases provide for a 12.5% landowner royalty, on the same terms
as the Beech Creek Leases, and a 3.125% overriding royalty.
The Burning Springs Leases are subject to a 12.5%
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landowner royalty, on the same terms as the Beech Creek Leases and the Wildcat
Leases, and overriding royalties ranging from 3.125% to 7.5%.
The Fentress County Leases are subject to a 12.5% landowner royalty, on the
same terms as the above referenced leases, and a 19% overriding royalty; and a
25% overriding royalty on one existing well. Section 60-1-301 of the Tennessee
Code provides for a severance tax of 3% on all gas and oil removed from the
ground in Tennessee.
The Company leases its principal executive offices, consisting of
approximately 4,731 square feet located at 603 Main Avenue, Suite 500,
Knoxville, Tennessee, at a monthly rent of $3,942.50.
In addition, the Company has drilling equipment and vehicles which it
acquired from IRC. All of this equipment is in satisfactory operating condition.
The securities which the Company acquired from IRC were sold during 1996 for
$250,000.
Disclosure of Oil and Gas Operations
On May 2, 1995, upon the execution of the Purchase Agreement with IRC, the
Company acquired the rights to certain oil and gas leases in the State of
Kentucky (the "Beech Creek Leases," "Wildcat Leases" and "Burning Springs
Leases") and the State of Tennessee (then "Fentress County Leases").
Subsequently, the Company also acquired additional acreage in Tennessee (the
"Swan Creek Leases") and in Alabama (the "Alabama Leases"). See "Description of
Business" - "Business Development" and "General" above.
The Company was not engaged in the business of oil and gas exploration and
development prior to the date of the IRC Purchase Agreement. IRC, the entity
from which the Company acquired certain of these properties, drilled four wells
on the Beech Creek Leases in the past three years. All of these wells are
capable of producing gas in paying quantities, according to tests run on the
wells. IRC also drilled a well on one of the Fentress County Leases; this well
is currently shut in and awaiting a workover.
Eleven wells on the Burning Springs leases are currently shut-in. There are
two completed wells on the Swan Creek leases, the Reed #1 and the Sutton #1,
which discovered and proved the structure in the early 1980s. These wells have
recently tested at 4,800,000 and 1,200,000 cubic feet of gas per day. The
Company has drilled three additional wells in 1996. Development of the Swan
Creek Field will require the completion of the pipeline to deliver gas to a
transmission company with the tie-in point being located
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approximately 23 miles away from the field. The pipeline is approximately 90%
completed and is expected to be complete by the end of the year.
Tests to date on the completed wells on the Swan Creek leases indicate
substantial potential for future deliverability. Based upon engineering reports,
management believes that the wells drilled to date have a life expectancy of
approximately 37 years on a declining basis.
The Company does not pay any taxes on its leased property and does not
carry any insurance on the vacant land.
The Alabama Leases have no existing wells. These leases are "wildcat"
explorations and there is no immediate plan to acquire additional leases in the
area or to begin an exploration program.
No estimate of total, proved net oil or gas reserves has been filed with or
included in reports to any federal authority since the beginning of the
Company's last fiscal year.
The Company is currently not a party to any contract or agreement
obligating it to provide a fixed and determinable quantity of oil or gas in the
future, but anticipates entering into such contracts for delivery of gas
commencing as early as December, 1997.
CERTAIN RELATIONSHIPS and RELATED TRANSACTIONS
Transactions with Management and Others
Except as set forth hereafter, there have been no material transactions,
series of similar transactions or currently proposed transactions, to which the
Company or any of its subsidiaries was or is to be a party, in which the amount
involved exceeds $60,000 and in which any director or executive officer or any
security holder who is known to the Company to own of record or beneficially
more than 5% of the Company's common stock, or any member of the immediate
family of any of the foregoing persons, had a material interest.
At the Company's inception, the Board of Directors authorized the issuance
of 600,000 shares of its then $0.10 par value common voting stock to directors,
executive officers and persons who may be deemed to have been promoters or
founders of the Company in consideration of the conveyance to the Company of
approximately 10 lode mining claims located in the Battle Mountain Mining
District, State of Nevada. The Company conducted limited mining operations
following its organization.
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In connection with a change in control of the Company, in January, 1983,
the Board of Directors of the Company authorized the issuance of 1,500,000
"unregistered" and "restricted" shares of its common stock to certain directors
and executive officers in consideration of cash and services rendered of an
aggregate value of $7,500.
At a special meeting of the Board of Directors held April 11, 1995, the
Board of Directors adopted resolutions providing for the granting of options to
purchase "unregistered" and "restricted" shares of common stock of the Company
to certain directors, executive officers and consultants whose service was to
commence on the closing of a Purchase Agreement then being negotiated with
Industrial Resources Corporation, a Kentucky corporation ("IRC"). See,
"Executive Compensation" - "Other Compensation" below.
At a special meeting of stockholders held on April 28, 1995, the Company's
stockholders voted to approve the execution of the Purchase Agreement pursuant
to which the Company would acquire certain oil and gas leases, equipment,
securities and vehicles owned by IRC, in consideration of the issuance of
4,000,000 post-split (as described below) "unregistered" and "restricted" shares
of the Company's common stock.
Thereafter, the Purchase Agreement was amended to provide for the sale of
certain additional assets for a price of $450,000 paid by the execution by the
Company of a promissory note in that amount.
The assets acquired by the Company pursuant to the Purchase Agreement, as
amended, consisted of machinery and equipment, vehicles, computer equipment,
furniture and fixtures, well equipment, land leases, intangible drilling costs
and stock of United Petroleum Corp., a public company. The book value of these
assets was $1,752,000 at the time of the acquisition. The 4,000,000 shares of
the Company's stock given as consideration for those assets had a market value,
at that time, of $1,000,000 based upon a bid price of $.25 as reported by the
National Quotation Bureau. The total cost of these assets to the Company,
including the $450,000 note, was $1,450,000. IRC may be deemed to have been an
affiliate. The Company believes that the terms of the Purchase Agreement were at
least as favorable as those it could have received from an unaffiliated party.
On May 2, 1995, in connection with the execution of the Purchase Agreement,
Jeffrey D. Jenson, Kathleen L. Morrison and Travis T. Jenson resigned as
directors and executive officers of the Company and the following individuals
rwere appointed to serve as directors in their stead: George E. Walter, Jr.;
Raymond E. Johnson; Jack E. Earnest; Edgar G. Baugh; Walter C. Arzonetti;
Charles N. Manhoff; Joe B. Mattei; William A. Moffett; John O'Hagan; and Benton
L. Becker. George E. Walter, Jr. was also
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appointed President/CEO of the Company, and James C. Walter was appointed Vice
President and Secretary/Treasurer. None of the retiring directors had received
compensation in excess of $100,000 prior to May 2, 1995.
As compensation for services rendered and to be rendered to the Company,
including services relating to the Purchase Agreement, on May 2, 1995, the
Company also executed three written compensation agreements (the "Compensation
Agreements") providing for the issuance of a total of 505,000 "unregistered" and
"restricted" shares of common stock to the following individuals: M. E. Ratliff,
Jeffrey D. Jenson; and Leonard W. Burningham, Esq.
The Compensation Agreements of Messrs. Ratliff and Jenson provided for the
issuance of 215,000 and 240,000 "unregistered" and "restricted" post-split
shares (the one for two reverse split was not effected until May 4, 1995),
respectively, to these individuals as compensation for services valued by the
Company at $21,500 each. Initially, Mr. Ratliff was to receive the same number
of shares as Mr. Jenson; however, he agreed to reduce the number of shares he
was to receive by 25,000 shares, with the additional shares being allocated as
part of the shares of common stock to be issued to Mr. Burningham under one of
the Compensation Agreements, as outlined below. The shares issued to Mr. Jenson
who is a non-affiliate, may be sold without restriction at any time after May 4,
1997. The shares issued to Mr. Ratliff, who may be deemed an affiliate, may not
be sold until such time as the Company becomes a reporting company in accordance
with the Rules of the Commission.
The Compensation Agreement of Mr. Burningham provided for the issuance of
50,000 "unregistered" and "restricted" post-split shares of common stock as
compensation for legal services rendered and to be rendered to the Company,
exclusive of costs. These services were valued by the Company at $5,000. The
shares owned by Mr. Burningham, who is not an affiliate, became free trading on
May 4, 1997 pursuant to Rule 144 of the Rules of the Securities and Exchange
Commission.
Effective December 31, 1995, IRC agreed to accept 164,266 "unregistered"
and "restricted" shares of the Company's common stock, with a market value of
$5.37 per share on such date, as full payment for debt of approximately
$882,112.25 of the Company to IRC. This debt included the note for $450,000 plus
advances of $403,613 made by IRC in 1995, for use as working capital; for
payment of salaries; for the acquisition of leases (approximately 100 leases at
a cost of $4 per acre); for expert evaluations; and for legal services. These
shares represented approximately 3% of the outstanding shares of the Company.
The price was determined based upon the average trading price for shares of
common stock of the Company on the OTC Bulletin Board as of December 31, 1995.
See, "Security Ownership of Certain Beneficial Owners and Management", for
information regarding the voting securities of the
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Company owned by IRC.
Certain Business Relationships
Except as set forth hereafter, there are no business relationships,
existing or planned, between the Company or any of its subsidiaries and any
director or executive officer or any security holder who is known to the Company
to own of record or beneficially more than 5% of the Company's common stock, or
any member of the immediate family of any of the foregoing persons.
During 1995, the Company converted $882,112.25 of debt payable to IRC to
164,366 shares of common stock. The debt included a promissory note for $450,000
which was given to IRC, along with 4,000,000 shares of common stock as the
purchase price for approximately $1,752,000 of assets consisting of property,
plant and equipment, oil and gas leases and marketable securities.
During 1996, the Company converted $992,000 of debt payable to IRC to
101,146 shares of common stock and $114,712 of debt payable to Malcolm E.
Ratliff to 13,320 shares of common stock. Both obligations arose from loans to
the Company by IRC and Malcolm E. Ratliff.
During 1997, the Company converted $333,719 of debt payable to IRC to
59,328 shares of common stock, $12,398 of debt payable to Malcolm E. Ratliff to
2,204 shares of common stock and $138,105 of debt payable to Tracmark, Inc. to
24,552 shares of common stock. Those obligations arose from loans to the Company
by IRC, Malcolm E. Ratliff and Tracmark, Inc.
Repayment of the $1,000,000 loan from Mr. Harding was guaranteed by IRC,
which also granted an option to Mr. Harding to purchase 300,000 shares of stock
of the Company at a price of $10 per share.
Indebtedness of Management
No officer, director or security holder known to the Company to own of
record or beneficially more than 5% of the Company's common stock or any member
of the immediate family of any of the foregoing persons is indebted to the
Company.
Parents of the Issuer
Unless IRC may be deemed to be a parent of the Company, the Company has no
parents.
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Transactions with Promoters
With the exception of the Compensation Agreements of Malcolm E. Ratliff and
Jeffrey D. Jenson, and the issuance of "unregistered" and "restricted" shares of
the Company's common stock to IRC, Malcolm E. Ratliff and Tracmark, Inc. in
cancellation of debt, all as outlined under the heading "Description of
Business" - "Business Development" above, and those options outlined under the
caption "Executive Compensation" below, there have been no material
transactions, series of similar transactions, currently proposed transactions,
or series of similar transactions, to which the Company or any of its
subsidiaries was or is to be a party, in which the amount involved exceeds
$60,000 and in which any promoter or founder or any member of the immediate
family of any of the foregoing persons, had a material interest.
MARKET FOR COMMON EQUITY and RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock is listed on the OTC Bulletin Board of the NASD;
however, the market for shares of the Company's common stock was extremely
limited until the closing of the Purchase Agreement with IRC in May of 1995. No
assurance can be given that the present market for the Company's common stock
will continue or will be maintained, and the sale of the Company's unregistered
and "restricted" common stock pursuant to Rule 144 by IRC or others as outlined
under the heading "Risk Factors" above, may have a substantial adverse impact on
any such public market. See, "Risk Factors" - "Future Sales of Common Stock."
The Company's common stock has been listed on the OTC Bulletin Board since
the quarter ended March 31, 1994. The high and low bid prices for shares of
common stock of the Company since that period ( including inter-dealer
transactions) are as follows:
Quarter ending: High Low
- --------------- ---- ---
March 31, 1994(11) 0.25 0.125
June 30, 1994 0.25 0.125
September 30, 1994 0.25 0.125
- --------
11 The high bid price for the quarter ended March 31, 1994 is a trading price
only.
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December 31, 1994 0.25 0.25
March 31, 1995 0.25 0.25
June 30, 1995 3.75 0.25
September 30, 1995 9.00 3.125
December 31, 1995 8.00 5.375
March 31, 1996 11.00 7.625
June 30,1996 14.50 5.50
September 30, 1996 18.00 8.25
December 31, 1996 18.50 9.50
March 31, 1997 17.25 10.00
June 30, 1997 14.50 10.50
September 30, 1997 13.50 8.25
These bid prices were obtained from the National Quotation Bureau, Inc.
("NQB") and do not necessarily reflect actual transactions, retail markups, mark
downs or commissions. The transactions include inter-dealer transactions.
Holders
The number of record holders of the Company's common stock as of September
30, 1997, was approximately 382.
Dividends
There are no present material restrictions that limit the ability of the
Company to pay dividends on common stock or that are likely to do so in the
future. The Company has not paid any dividends with respect to its common stock,
and does not intend to pay dividends in the foreseeable future.
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EXECUTIVE COMPENSATION
Compensation
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the periods indicated to its directors and
executive officers:
<TABLE>
<CAPTION>
SUMMARY CASH COMPENSATION TABLE(12)
ANNUAL COMPENSATION LONG TERM COMPENSATION
Restricted Securities
Name & Position Year Salary Bonus Stock Awards Underlying Options(13)
- --------------- ---- ------ ----- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Walter C. Arzonetti 1994 0 0 0 0
Director 1995 0 0 0 0
1996 0 0 0 0
Edgar G. Baugh 1994 0 0 0 0
Director 1995 0 0 0 0
1996 0 0 0 0
Benton L. Becker 1994 0 0 0 0
Chairman of 1995 0 0 0 100,000
Board 1996 0 0 0 0
Robert M. Carter(14) 1994 0 0 0 0
</TABLE>
- --------
12 No other compensation was received by any officer or director.
13 No stock options have been received during the last completed fiscal year.
14 Has 75,000 options exercisable at $5.00 per share which expire on February
24, 1999. 22,346 are vested.
57
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Vice-President 1995 0 0 0 75,000
1996 $31,570 0 0 0
Jeffrey DeMunnik 1994 0 0 0 0
Secretary 1995 0 0 0 25,000
Treasurer 1996 $34,077 0 0 0
Jack E. Earnest 1994 0 0 0 0
Director 1995 0 0 0 100,000
1996 0 0 0 0
Daniel G. Follmer(15) 1994 0 0 0 0
Chief Financial 1995 0 0 0 100,000
Officer 1996 $2,885 0 0 0
Kelly S. Grabill 1994 0 0 0 0
Secretary 1995 $10,653 0 250,000
1996 $ 7,104 0 0
James A. Gerding 1994 0 0 0 0
Director 1995 0 0 0 0
1996 0 0 0 0
Raymond E. Johnson 1994 0 0 0 0
Director 1995 0 0 0 100,000
1996 0 0 0 0
James E. Kaiser 1994 0 0 0 0
President 1995 0 0 0 0
1996 $20,000 0 0 0
Charles N. Manhoff 1994 0 0 0 0
Director 1995 0 0 0 100,000
1996 0 0 0 0
Joe B.Mattei 1994 0 0 0 0
Director 1995 0 0 0 100,000
</TABLE>
- --------
15 Has 100,000 options exercisable at $5.00 per share, which expire on
February 24, 1999. 29,795 are vested.
58
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
1996 0 0 0 0
William A. Moffett 1994 0 0 0 0
CEO & Director 1995 0 0 0 100,000
1996 0 0 0 0
John P. O'Hagan 1994 0 0 0 0
Director 1995 0 0 0 100,000
1996 0 0 0 0
Malcolm E. Ratliff 1994 0 0 215,000(16) 0
CEO 1995 0 0 0 0
1996 0 0 0 0
Ted P. Scallan 1994 0 0 0 0
President 1995 0 0 0 100,000
1996 $53,120 0 0 100,000
Sheila Sloan 1994 0 0 0 0
Treasurer 1995 0 0 0 0
1996 $17,850 0 0 10,000(17)
Lyle Stocksill 1994 0 0 0 0
Director 1995 0 0 0 0
1996 0 0 0 100,000
George E. Walter Jr. 1994 0 0 0
President and 1995 $ 2,584 0 0400,000
Director 1996 $923 0 0 0
James C. Walter 1994 0 0 0 0
</TABLE>
- --------
16 Value on May 2, 1997, the date of issue of these shares, was $53,750.
17 Received in 1997.
59
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Vice-President 1995 $23,076 0 0 100,000
Secretary/ 1996 $3,077 0 0 0
Treasurer
Elizabeth Wendelken 1994 0 0 0 0
Secretary 1995 0 0 0
1996 $14,500 0 0 10,000(18)
</TABLE>
- --------
18 Received in 1997.
60
<PAGE>
The following table sets forth the options exercised during the past 18
months by each of the directors and executive officers, the exercise price, the
number of unexercised options and the value of the unexercised options as of
September 30,1997:
Options Exercise Unexercised Value of
Name Exercised Price Options Unexercised
- -----------------------------------------------------------------------
Walter C. Arzonetti 88,493 .275 11,507 $138,084
Robert M. Carter 25,000 .275 0 0
Jeffrey D. DeMunnik 20,644 .275 4,366 52,392
Kelly S. Grabill 12,500 .275 0 0
Raymond Johnson, Dec'd 10,000 .275 0 0
Charles N. Manhoff 88,356 .275 11,644 139,728
Joseph B. Mattei 37,000 .275 63,000 756,000
William A. Moffett 100,000 .275 62,613 751,356
Allen Sweeney 66,849 .275 0 0
James C. Walter 35,616 .275 64,384 772,608
Bonuses and Deferred Compensation
None; not applicable.
Compensation Pursuant to Plans
The Company does not presently have any stock option, stock incentive,
bonus or similar plan for its directors, executive officers or employees;
however, options have been granted to directors and executive officers and
certain consultants of the Company to purchase shares of "unregistered" and
"restricted" common stock of the Company at various prices. See, "Other
Compensation" and the "Restricted Stock Options Table" set forth below in this
section.
61
<PAGE>
Pension Table
The Company does not presently have a pension or similar plan for its
directors, executive officers or employees. Management intends to adopt a 401(k)
plan and full liability insurance for directors and executive officers and a
health insurance plan for employees in the near future.
Other Compensation
On April 11, 1995, the Board of Directors resolved that each member of the
Board of Directors would receive compensation in the form of an option to
purchase 100,000 "unregistered" and "restricted" post-split shares of the
Company's common stock at a price of $0.25 per share. Pursuant to a resolution
of the Board of Directors on May 2, 1995 the exercise price of such options was
increased to $0.275 per share, which amount was then equal to 110% of the
average bid prices for the Company's common stock on the OTC Bulletin Board on
the date of the grant.
Commencing on May 4, 1995, certain other officers and consultants were
induced to serve as executive officers or consultants of the Company in
consideration of the grant of a similar option, and these options were ratified
by the Board of Directors at meetings held June 6 and 7, 1995, in Nashville,
Tennessee. At the annual meeting of the Board of Directors which was held on
January 30, 1996, immediately following the annual meeting of stockholders, the
Board of Directors also granted certain other directors, executive officers,
consultants and employees options to acquire shares of the Company's
"unregistered" and "restricted" shares of common stock of the Company.
The following table sets forth information with respect to the optionees:
62
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR AND TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
===========================================================================================================================
Name of Option Securities % of Exer- Expira- Grant
Holder Underlying Total cise tion Date
Total Options Price Date Value
Options Granted
Granted
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert M. Carter 75,000 25.4 5.0 2/25/99 103,125
Executive Vice-
President
- ---------------------------------------------------------------------------------------------------------------------------
Daniel G. Follmer 100,000 33.8 5.0 2/24/99 137,500
President-Deceased
- ---------------------------------------------------------------------------------------------------------------------------
Ted P. Scallan 100,000 33.8 6.375 2/26/97 81,000
Former President
- ---------------------------------------------------------------------------------------------------------------------------
Sheila Sloan 10,000 3.3 5.0 6/12/98 80,000
Treasurer
- ---------------------------------------------------------------------------------------------------------------------------
Elizabeth Wendelken 10,000 3.3 5.0 6/12/98 80,000
Secretary
===========================================================================================================================
</TABLE>
63
<PAGE>
Compensation of Directors
The Board of Directors has resolved to compensate members of the Board of
Directors for attendance at meetings at the rate of $250 per day, together with
direct out-of-pocket expenses incurred in attendance at the meetings, including
travel.
Members of the Board of Directors may also be requested to perform
consulting or other professional services for the Company from time to time. The
Board of Directors will set a rate of compensation for such services which may
be no less favorable to the Company than if the services had been performed by
an independent third party contractor. The Board of Directors has reserved to
itself the right to review all directors' claims for compensation on an ad hoc
basis.
Employment Contracts
There are presently no employment contracts relating to any member of
management, however, depending upon the Company's operations and Requirements,
the Company may offer long term contracts to directors, executive officers or
key employees in the future.
Termination of Employment and Change of Control Arrangement
None; not applicable.
CHANGES IN and DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING and FINANCIAL DISCLOSURE
Change from David T. Thomson, CPA to Charles M. Stivers, CPA
David T. Thomson, Certified Public Accountant, of Salt Lake City, Utah,
audited the financial statements of Onasco Companies, Inc. (the Company's
predecessor) for the year ended December 31, 1994.
Charles M. Stivers, Certified Public Accountant, of Manchester, Kentucky,
was engaged as the Company's accountant on May 4, 1995, and reviewed interim
unaudited financial statements of the Company prepared by management.
64
<PAGE>
There were no disagreements between the Company and Mr. Thomson, whether
resolved or not resolved, on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which, if not
resolved, would have caused him to make reference to the subject matter of the
disagreement in connection with his report.
The decision to change principal accountants was not submitted for
approval to the Board of Directors; the change was made by the Company's
President to Mr. Stivers because Mr. Stivers was the accountant who audited the
cost basis of the principal assets of the Company acquired from IRC pursuant to
the Purchase Agreement in May of 1995, and the Company had little or no
operations prior to the completion of the Purchase Agreement.
Also, during the Company's two most recent fiscal years, and since then,
Mr. Thomson has not advised the Company that any of the following exist or are
applicable:
(1) That the internal controls necessary for the Company to develop
reliable financial statements do not exist, that information has come
to his attention that has led him to no longer be able to rely on
management's representations, or that has made him unwilling to be
associated with the financial statements prepared by management,
(2) That the Company needs to expand significantly the scope of its audit,
or that information has come to his attention that if further
investigated may materially impact the fairness or reliability of a
previously issued audit report or the underlying financial statements
or any other financial presentation, or cause him to be unwilling to
rely on management's representations or be associated with the
Company's financial statements for the foregoing reasons or any other
reason; or
(3) That he has advised the Company that information has come to his
attention that he has concluded materially impacts the fairness or
reliability of either a previously issued audit report or the
underlying financial statements for the foregoing reasons or any other
reason.
Further, during the Company's two most recent fiscal years and since then,
the Company has not consulted Mr. Thomson regarding the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements or any other financial presentation whatsoever.
65
<PAGE>
The Company has provided Mr. Thomson with a copy of the disclosure provided
under this caption of the Prospectus, and he has provided the Company with a
letter addressed to the Commission stating that he agrees with the disclosures
made herein.
Change from Charles M. Stivers. CPA. to Price-Bednar, LLP, CPA
Price-Bednar, LLP, Certified Public Accountants, were engaged as the
Company's accountants as of February 22, 1996, to audit the financial statements
of the Company for the calendar year ending December 31, 1995.
There were no disagreements between the Company and Mr. Stivers, whether
resolved or not resolved, on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which, if not
resolved, would have caused him to make reference to the subject matter of the
disagreement in connection with his unaudited reports.
The unaudited reports of Mr. Stivers did not contain any adverse opinion or
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
The decision to change principal accountants was submitted for approval to
the Board of Directors; the change was made to Price-Bednar because the Company
was seeking to find a larger accounting firm with more in-depth experience in
Commission filings.
Also, during the Company's most recent fiscal year, and since then, Mr.
Stivers has not advised the Company that any of the following exist or are
applicable:
(1) That the internal controls necessary for the Company to develop
reliable financial statements do not exist, that information has come
to his attention that has led him to no longer be able to rely on
management's representations, or that has made them unwilling to be
associated with the financial statements prepared by management,
(2) That the Company needs to expand significantly the scope of its audit,
or that information has come to his attention that if further
investigated may materially impact the fairness or reliability of a
previously issued audit report or the underlying financial statements
or any other financial presentation, or cause him to be unwilling to
rely on management's representations or be associated with the
Company's financial statements for the foregoing reasons or any other
reason; or
66
<PAGE>
(3) That he has advised the Company that information has come to his
attention that he has concluded materially impacts the fairness or
reliability of either a previously issued audit report or the
underlying financial statements for the foregoing reasons or any other
reason.
Further, during the Company's most recent fiscal year and since then, the
Company has not consulted Mr. Stivers regarding the application of accounting
principles to a specified transaction, either completed or proposed or the type
of audit opinion that might be rendered on the Company's financial statements or
any other financial presentation whatsoever.
The Company has provided Mr. Stivers with a copy of the disclosure provided
under this caption of the Registration Statement, and he has provided the
Company with a letter addressed to the Commission stating that he agrees with
the disclosures made herein.
Change from Price-Bednar, LLP, CPA to Charles M. Stivers, CPA
The Company had engaged the services of another accountant to complete
certain preparatory on-site audit activities for preliminary review by
Price-Bednar. These services were not timely provided by the other accountant.
Also, many of the records of IRC were unavailable, and, Price-Bednar required a
number of these records to be reconstructed prior to its completion of the
audit. During the week of May 20, 1996, the Company was advised that the
principal accountant of Price-Bednar, who was responsible for the Company's
audit, would be out of town for the following week, and it became clear that
Price-Bednar would not be able to complete the audit for at least three weeks,
because certain information requested by them had not yet been provided by the
Company. Price-Bednar was terminated by the President, effective June 7, 1996,
and Charles M. Stivers, CPA, who had been engaged to conduct the preparatory
on-site audit activities for Price-Bednar when the other accountant failed to
perform as promised, indicated that he could timely deliver the required audit
report and was promptly engaged to do so by the Board of Directors.
Also, during, the Company's two most recent fiscal years, and since then,
Price-Bednar has not advised the Company that any of the following exist or are
applicable:
(1) That the internal controls necessary for the Company to develop
reliable financial statements do not exist, that information has come
to their attention that has led them to no longer be able to rely on
management's representations, or that has made them unwilling to be
associated with the financial statements prepared by management;
67
<PAGE>
(2) That the Company needs to expand significantly the scope of its audit,
or that information has come to their attention that if further
investigated may materially impact the fairness or reliability of a
previously issued audit report or the underlying financial statements
or any other financial presentation, or cause them to be unwilling to
rely on management's representations or be associated with the
Company's financial statements for the foregoing reasons or any other
reason; or
(3) That they have advised the Company that information has come to their
attention that they have concluded materially impacts the fairness or
reliability of either a previously issued report or the underlying
financial statements for the foregoing reasons or any other reason.
Further, during the Company's two most recent fiscal years and since then,
the Company has not consulted Price-Bednar regarding the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements or any other financial presentation whatsoever.
The Company has provided Price-Bednar with a copy of the disclosure
provided under this caption of the Registration Statement, and it has provided
the Company with a letter addressed to the Commission stating that it agrees
with the disclosures made herein.
Change from Charles M. Stivers, CPA, to BDO Seidman,LLP
On December 15, 1996, the Company terminated Charles M. Stivers, CPA and
retained BDO Seidman, LLP to conduct the audit of the Company's financial
statements for the year ended December 31, 1996 because it became apparent that
Charles M. Stivers, as an individual practitioner, would not be able to perform
the required audit on a timely basis.
The report of Charles M. Stivers for fiscal year ended December 31, 1995
was qualified to express doubts about the Company's ability to continue as a
going concern in view of its operating losses and working capital deficiency.
During, the Company's two most recent fiscal years, and since then, Charles
M. Stivers has not advised the Company that any of the following exist or are
applicable:
(1) That the internal controls necessary for the
68
<PAGE>
Company to develop reliable financial statements do not exist, that
information has come to his attention that has led him to no longer be
able to rely on management's representations, or that has made him
unwilling to be associated with the financial statements prepared by
management;
(2) That the Company needs to expand significantly the scope of its audit,
or that information has come to his attention that if further
investigated may materially impact the fairness or reliability of a
previously issued audit report or the underlying financial statements
or any other financial presentation, or cause him to be unwilling to
rely on management's representations or be associated with the
Company's financial statements for the foregoing reasons or any other
reason; or
(3) That he has advised the Company that information has come to his
attention that he has concluded materially impacts the fairness or
reliability of either a previously issued report or the underlying
financial statements for the foregoing reasons or any other reason.
Further, during the Company's two most recent fiscal years and since then,
the Company has not consulted Charles M. Stivers regarding the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements or any other financial presentation whatsoever.
The Company has provided Charles M. Stivers with a copy of the disclosure
provided under this caption of the Registration Statement, and he has provided
the Company with a letter addressed to the Commission stating that he agrees
with the disclosures made herein.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by the law firm of Robson & Miller, LLP, 666 Third Avenue, New York, New
York 10017, telephone number (212) 949- 1860. Robson & Miller, LLP was not hired
on a contingent basis and is not receiving any interest, direct or indirect in
the Company. Neither Robson & Miller, LLP or any of its partners or employees is
a director, officer, employee, voting trustee, promoter or underwriter of the
Company.
69
<PAGE>
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by David T. Thomson, CPA (1994),
Charles M. Stivers, CPA (1995) and BDO Seidman, LLP, Independent certified
public accountants (1996), to the extent and for the periods set forth in their
reports, which contain an explanatory paragraph regarding the Company's ability
to continue as a going concern, appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of said firms as experts in auditing and accounting.
70
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any security other than the
securities offered by this Prospectus or an offer to sell or a solicitation of
an offer to buy the securities to or from any person in any jurisdiction in
which such offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder at any time shall, under any
circumstances, imply that there has been no change in the business or affairs of
the Company since the date hereof or that the information in this Prospectus
herein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
Page
Available Information ..................................................... 2
Prospectus Summary ........................................................ 3
The Company ........................................................ 3
The Offering ....................................................... 5
Summary Financial Data ............................................. 5
Risk Factors .............................................................. 6
Use of Proceeds ........................................................... 13
Determination of Price of Shares .......................................... 13
Dilution .................................................................. 13
Selling Shareholders ...................................................... 14
Plan of Distribution ...................................................... 18
Legal Proceedings ......................................................... 19
Directors, Executive Officers, Promoters and
Control Persons ........................................................... 21
Identification of Directors and Officers ........................... 21
71
<PAGE>
Business Experience ................................................ 22
Committees ......................................................... 24
Family Relationships ............................................... 24
Involvement in Certain Legal Proceedings ........................... 24
Security Ownership of Certain Beneficial
Owners and Management ..................................................... 25
Security Ownership of Certain Beneficial
Owners ............................................................. 25
Changes in Control ................................................. 27
Description of Securities ................................................. 27
Authorized Capital Stock ........................................... 27
Indemnification of Directors, Officers,
Employees and Agents ...................................................... 28
Description of Business ................................................... 30
Glossary of Terms ................................................. 30
Business Development .............................................. 31
General ........................................................... 35
Governmental Regulations .......................................... 38
Principal Products or Services and Markets ........................ 38
Reserve Analyses .................................................. 39
Distribution Methods of Products or Services ...................... 39
Status of Any Publicly Announced
New Product or Service ............................................ 40
Competitive Business Conditions, Competitive
Position in the Industry and
Methods of Competition ............................................ 40
Sources and Availability of Raw Materials
and Names of Principal Suppliers .................................. 41
Dependence on One or a Few Major Customers ........................ 41
Patents, Trademarks, Licenses, Franchises,
72
<PAGE>
Concessions, Royalty Agreements, Labor
Contracts, including Duration ..................................... 42
Need for Governmental Approval of Principal
Products or Services .............................................. 42
Effect of Existing or Probable Governmental
Regulations on Business ........................................... 42
Research and Development .......................................... 44
Cost and Effects of Compliance with
Environmental Laws ................................................ 44
Number of Total Employees and
Number of Full-Time Employees ..................................... 44
Management's Discussion and Analysis of
Plan of Operation ......................................................... 44
Other Significant Plans ........................................... 46
Results of Operations ............................................. 47
Liquidity ......................................................... 48
Description of Property ................................................... 49
Property Location, Facilities, Size and Nature
of Ownership ...................................................... 49
Disclosure of Oil and Gas Operations .............................. 50
Certain Relationships and Related Transactions ............................ 51
Transactions with Management and Others ........................... 51
Certain Business Relationships .................................... 54
Indebtedness of Management ........................................ 54
Parents of the Issuer ............................................. 54
Transactions with Promoters ....................................... 55
Market For Common Equity and Related Stockholder Matters .................. 55
Market Information ................................................ 55
Holders ........................................................... 56
Dividends ......................................................... 56
73
<PAGE>
Executive Compensation .................................................... 57
Compensation ...................................................... 57
Bonuses and Deferred Compensation ................................. 61
Compensation Pursuant to Plans .................................... 61
Pension Table ..................................................... 62
Other Compensation ................................................ 62
Compensation of Directors ......................................... 64
Employment Contracts .............................................. 64
Termination of Employment and Change of Control ................... 64
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................................. 64
Change from David T. Thomson, CPA to
Charles M. Stivers, CPA ........................................... 64
Change from Charles M. Stivers, CPA, to
Price-Bednar, LLP, CPA ............................................ 66
Change from Price-Bednar, LLP, CPA to
Charles M. Stivers, CPA ........................................... 67
Change from Charles M. Stivers, CPA to
BDO Seidman, LLP .................................................. 68
Legal Matters ............................................................. 69
Experts ................................................................... 70
Financial Statements ...................................................... F-1
Audited Financial Statements for 1995 and 1996 .................... F-1
Unaudited Financial Statements for
Nine Months ended September 30, 1997 ..............................F-30
74
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Consolidated Financial Statements
Years Ended December 31, 1996 and 1995
F-1
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
================================================================================
Consolidated Financial Statements
Years Ended December 31, 1996 and 1995
F-2
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Contents
================================================================================
Report of Independent Certified Public Accountants 2
Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Balance sheets 4
Statements of loss 5
Statements of stockholders' equity 6
Statements of cash flows 7
Notes to financial statements 8-27
F-3
<PAGE>
CHARLES M. STIVERS
Certified Public Accountant
1106 Manchester Square Shopping Center
Manchester, Kentucky 40962
(606)598-1464
MEMBER MEMBER
KENTUCKY SOCIETY OF AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS
Report of Independent Certified Public Accountants
Board of Directors
Tengasco, Inc.
Knoxville, Tennessee
I have audited the balance sheet of Tengasco, Inc. as of December 31, 1995, and
the related statements of loss, stockholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on our audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that our audit provides a reasonable basis for our opinion.
In my opinion financial statements referred to above present fairly, in all
material respects, the financial position of Tengasco, Inc. as of December 31,
1995, and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency, which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Charles M. Stivers
- ---------------------------
Charles M. Stivers
Certified Public Accountant
Manchester, Kentucky
June 5, 1997
F-4
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Tengasco, Inc.
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheet of Tengasco, Inc.
and subsidiary as of December 31, 1996, and the related consolidated statements
of loss, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tengasco, Inc. and
subsidiary as of December 31, 1996, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. In addition, as of December 31, 1996,
management estimates that additional costs of approximately $1,500,000 are
required to complete its pipeline facilities under construction. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ BDO SEIDMAN, LLP
Atlanta, Georgia
June 5, 1997
(Except for Note 14(c)
as to which date is
December 1, 1997)
F-5
<PAGE>
================================================================================
December 31, 1996 1995
================================================================================
Assets (Note 9)
Current
Cash and cash equivalents $ 146,554 $ 712
Marketable equity securities (Note 5) -- 250,000
Accounts receivable 4,658 9,018
Prepaid expenses and other 7,463 4,786
- --------------------------------------------------------------------------------
Total current assets 158,675 264,516
Oil and gas properties, net (on the basis
of full cost accounting) (Note 6) 1,287,142 658,082
Pipeline facilities under construction, at cost (Note 7) 887,315 --
Property and equipment, net (Notes 8 and 10) 203,244 247,401
Other 190,845 10,970
- --------------------------------------------------------------------------------
$2,727,221 $1,180,969
================================================================================
F-6
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Consolidated Balance Sheets
================================================================================
December 31, 1996 1995
===============================================================================
Liabilities and Stockholders' Equity
Current
Notes payable (Note 9) $ 780,000 $ --
Loans payable to affiliates (Note 4) 48,190 --
Current maturities of long-term debt (Note 10) 14,017 34,038
Accounts payable - trade 347,093 46,922
Accrued liabilities 35,086 21,623
- -------------------------------------------------------------------------------
Total current liabilities 1,224,386 102,583
Long term debt, less current maturities (Note 10) 47,828 59,000
- -------------------------------------------------------------------------------
Total liabilities 1,272,214 161,583
- -------------------------------------------------------------------------------
Commitments and contingencies (Notes 7, 9 and 11)
Stockholders' equity (Notes 9 and 14(c))
Common stock, $.001 par value; 50,000,000 shares
authorized 5,708 5,229
Additional paid-in capital 4,783,369 2,425,185
Unamortized stock option awards (292,186) (130,208)
Accumulated deficit (3,041,884) (1,280,820)
- -------------------------------------------------------------------------------
Total stockholders' equity 1,455,007 1,019,386
- -------------------------------------------------------------------------------
$ 2,727,221 $ 1,180,969
===============================================================================
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Consolidated Statements of Loss
<TABLE>
<CAPTION>
====================================================================================
Years ended December 31, 1996 1995
====================================================================================
<S> <C> <C>
Revenues
Oil and gas revenues $ 26,253 $ 27,802
Other revenues -- 724
- ------------------------------------------------------------------------------------
Total revenues 26,253 28,526
- ------------------------------------------------------------------------------------
Costs and expenses
Production costs and taxes 17,138 20,072
Depletion, depreciation and amortization 133,187 89,528
General and administrative costs 1,491,690 539,061
Unrealized holding loss on marketable equity
securities (Note 5) -- 593,752
Interest expense 145,302 32,594
- ------------------------------------------------------------------------------------
Total costs and expenses 1,787,317 1,275,007
- ------------------------------------------------------------------------------------
Net loss $(1,761,064) $(1,246,481)
====================================================================================
Net loss per common share (Note 14(c)) $ (0.28) $ (0.28)
====================================================================================
Weighted average common shares outstanding (Note 14(c)) 6,382,840 4,440,398
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Consolidated Statements of Stockholders' Equity
=========================================================================================================================
Unamortized
Common Stock Additional stock
------------------------- paid-in option Accumulated
Shares Amount capital awards deficit
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,037,600 $ 1,038 $ 5,300 $ -- $ (34,339)
Net effect of 1 for 2 reverse split (518,800) (519) -- -- --
Common stock issued to acquire assets
of Industrial Resources Corporation 4,000,000 4,000 1,215,460 -- --
Common stock issued to individuals 505,000 505 47,500 -- --
Common stock issued for equipment 8,000 8 2,200 -- --
Common stock issued for exercised options 33,200 33 9,100 -- --
Common stock subscribed for the
extinguishment of debt 164,300 164 881,900 -- --
Stock option awards -- -- 190,625 (190,625) --
Amortization of stock option awards -- -- -- 60,417 --
Common stock options granted to
non-employees -- -- 45,000 -- --
Transfer of debt to equity by shareholder -- -- 28,100 -- --
Net loss for the year ended
December 31, 1995 -- -- -- -- (1,246,481)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 5,229,300 5,229 2,425,185 (130,208) (1,280,820)
Common stock issued for exercised options 327,079 327 90,792 -- --
Common stock issued for the
extinguishment of debt 65,569 66 638,823 -- --
Common stock subscribed for the
extinguishment of debt 48,897 49 421,052 -- --
Stock option awards -- -- 225,000 (225,000) --
Amortization of stock option awards -- -- -- 63,022 --
Common stock options granted to
non-employees -- -- 371,864 -- --
Common stock issued for private
placements 36,982 37 280,653 -- --
Stock warrants issued in connection
with notes payable -- -- 330,000 -- --
Net loss for the year ended
December 31, 1996 -- -- -- -- (1,761,064)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 5,707,827 $ 5,708 $ 4,783,369 $ (292,186) $(3,041,884)
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Consolidated Statements of Cash Flows
===========================================================================================
Years ended December 31, 1996 1995
===========================================================================================
<S> <C> <C>
Operating activities
Net loss $(1,761,064) $(1,246,481)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization 133,187 89,528
Unrealized holding loss on marketable equity securities -- 593,752
Loss on disposal of property and equipment 3,671 --
Compensation paid in stock options 434,886 105,417
Amortization of imputed value of stock warrants issued
in connection with notes payable 110,000 --
Changes in assets and liabilities:
Accounts receivable 4,360 (9,018)
Prepaid expenses and other (2,677) (4,786)
Accounts payable 300,171 19,422
Accrued liabilities 13,463 21,623
Stockholder advances payable -- (500)
- -------------------------------------------------------------------------------------------
Cash used in operating activities (764,003) (431,043)
- -------------------------------------------------------------------------------------------
Investing activities
Proceeds from sale of marketable equity securities 250,000 --
Additions to property and equipment (60,754) (86,786)
Net additions to oil and gas properties (644,951) --
Additions to pipeline facilities under construction (887,315) --
- -------------------------------------------------------------------------------------------
Cash used in investing activities (1,343,020) (86,786)
- -------------------------------------------------------------------------------------------
Financing activities
Payment of loan costs and other (238,798) (10,970)
Proceeds from borrowings 2,156,581 93,038
Repayments of borrowings (36,727) --
Proceeds from issuance of common stock 371,809 436,473
- -------------------------------------------------------------------------------------------
Cash provided by financing activities 2,252,865 518,541
- -------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 145,842 712
Cash and cash equivalents, beginning of year 712 --
- -------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 146,554 $ 712
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
1. Summary of Significant Accounting Policies
Organization
Tengasco, Inc. (the "Company"), a publicly held corporation, was organized
under the laws of the State of Utah on April 18, 1916, as Gold Deposit
Mining and Milling Company. The Company subsequently changed its name to
Onasco Companies, Inc.
On May 2, 1995, pursuant to a Purchase and Exchange Agreement, the Company
acquired from Industrial Resources Corporation, a Kentucky corporation
("IRC"), certain oil and gas leases, equipment, marketable securities and
vehicles in exchange for common stock (see Note 3).
The Company changed its domicile from the State of Utah to the State of
Tennessee on May 5, 1995 and its name was changed from "Onasco Companies,
Inc." to "Tengasco, Inc."
The Company's principal business consists of oil and gas well drilling,
production and related property management in the Appalachian region of
eastern Tennessee and eastern Kentucky. The Company's corporate offices are
in Knoxville, Tennessee.
During 1996, the Company formed Tengasco Pipeline Corporation, a
wholly-owned subsidiary, to manage the construction and operation of a
23-mile gas pipeline.
Consolidation
The consolidated financial statements include the accounts of the Company
and Tengasco Pipeline Corporation. All significant intercompany balances
and transactions have been eliminated.
Cash Equivalents
The Company considers all investments with a maturity of three months or
less when purchased to be cash equivalents.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas
property acquisition, exploration and development activities. Under this
method, all productive and nonproductive costs incurred in connection with
the acquisition of, exploration for and development of oil and gas reserves
for each cost center
F-11
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
are capitalized. Capitalized costs include lease acquisitions, geological
and geophysical work, delay rentals and the costs of drilling, completing
and equipping oil and gas wells. Gains or losses are recognized only upon
sales or dispositions of significant amounts of oil and gas reserves.
Proceeds from all other sales or dispositions are treated as reductions to
capitalized costs.
The capitalized costs of oil and gas properties, plus estimated future
development costs relating to proved reserves and estimated costs of
plugging and abandonment, net of estimated salvage value, are amortized on
the unit-of-production method based on total proved reserves. The costs of
unproved properties are excluded from amortization until the properties are
evaluated, subject to an annual assessment of whether impairment has
occurred. The costs of significant development projects awaiting completion
of pipeline facilities are excluded from amortization until such time as
the pipeline facilities are completed. The Company's proved gas reserves
were estimated by Coburn Petroleum Engineering, independent petroleum
engineers, as of December 31, 1996.
The capitalized oil and gas property and pipeline costs, less accumulated
depreciation, depletion and amortization and related deferred income taxes,
if any, are generally limited to an amount (the ceiling limitation) equal
to the sum of: (a) the present value of estimated future net revenues
computed by applying current prices in effect as of the balance sheet date
(with consideration of price changes only to the extent provided by
contractual arrangements) to estimated future production of proved oil and
gas reserves, less estimated future expenditures (based on current costs)
to be incurred in developing and producing the reserves using a discount
factor of 10% and assuming continuation of existing economic conditions;
and (b) the cost of investments in unevaluated properties excluded from the
costs being amortized.
Pipeline Facilities Under Construction
Pipeline facilities under construction are carried at cost. The Company
will provide for depreciation of the pipeline facilities using the
straight-line method over the estimated useful life of the asset once the
pipeline is completed and placed in service. The pipeline facilities are
expected to be completed during
F-12
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
the third quarter of 1997. Accordingly, no depreciation expense has been
recorded for 1996 and 1995 relating to the pipeline facilities.
Property and Equipment
Property and equipment are carried at cost. The Company provides for
depreciation of property and equipment using the straight-line method over
the estimated useful lives of the assets which range from five to seven
years.
Other Assets
Other assets consist principally of deferred loan costs that the Company is
amortizing over the term of the respective loans, which is six months.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the use of the "liability method." Accordingly, deferred tax
liabilities and assets are determined based on the temporary differences
between the financial statement and tax bases of assets and liabilities,
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
Concentration of Credit Risk
The Company's primary business activities include oil and gas sales to
several customers in the states of Tennessee and Kentucky. The related
trade receivables subject the Company to a concentration of credit risk
within the oil and gas industry.
Loss Per Common Share
Loss per share amounts are computed by dividing net loss by the weighted
average number of common stock and common stock equivalents, if dilutive,
outstanding during each of the periods presented. In addition, when an
initial public offering is contemplated, common stock and common stock
equivalents issued by the Company at a price less than the estimated
initial public offering price during the twelve months immediately
preceding the anticipated initial filing of the offering are treated
F-13
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
as outstanding for all periods presented, using the treasury stock method
(See Note 14(c)).
Accounting Estimates
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The actual results could differ from
those estimates.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents and short-term debt approximate
cost due to the short period of time to maturity. Fair values of long-term
debt are based on quoted market prices or pricing models using current
market rates.
Significant Risks and Uncertainties
The Company's operations are subject to all of the environmental and
operational risks normally associated with the oil and gas industry. The
Company maintains insurance that is customary in the industry; however,
there are certain risks for which the Company does not maintain full
insurance coverage. The occurrence of a significant event that is not fully
covered by insurance could have a significant adverse effect on the
Company's financial position.
New Accounting Pronouncements
On March 3, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128).
This pronouncement provides a different method of calculating earnings per
share than is currently used in accordance with Accounting Principles Board
Opinion No. 15, Earnings Per Share. SFAS 128 provides for the calculation
of "Basic" and "Diluted" earnings per share. Basic earnings per share
includes no dilution and is calculated by dividing income available to
common shareholders by the weighted average number of common shares
outstanding for the
F-14
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. The Company will adopt SFAS 128 in 1997 and its
implementation is not expected to have a material effect on the
consolidated financial statements.
2. Going Concern
The Company has experienced losses totalling $1,761,064 and $1,246,481 for
the years ended December 31, 1996 and 1995, respectively, and has a working
capital deficit of $1,065,711 at December 31, 1996. These matters raise
substantial doubt about the Company's ability to continue as a going
concern. In addition, as of December 31, 1996, management estimates that
additional costs of approximately $1,500,000 are required to complete its
pipeline facilities under construction. Management's plans include raising
additional capital in order to complete the pipeline facilities and drill
additional oil and gas wells. In addition, the Company is seeking joint
venture partners to assist in the sales and marketing of its energy
services (see Note 14). The accompanying financial statements do not
include any adjustments relating to the recoverability and classifications
of recorded asset amounts or the amounts and classifications of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
3. Business Acquisition
Effective May 2, 1995, IRC acquired voting control of the Company in
exchange for approximately 60% of the assets of IRC. Accordingly, the
assets acquired were recorded at IRC's historical cost. The transaction was
accomplished through the Company's issuance of 4,000,000 shares of its'
common stock and a $450,000, 8% promissory note payable to IRC. The
promissory note was converted into 83,799 shares of Tengasco, Inc. common
stock in December 1995 (see Note 15). The results of operations for the
year ended December 31, 1995 would not be materially different had the
results of operations of the IRC assets been included from January 1, 1995.
Furthermore, the results of operations of Tengasco, Inc. for the period
from January 1, 1995 to May 2, 1995 were immaterial. Accordingly, the
business combination has not been presented as a reorganization.
F-15
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
4. Related Party Transactions
The Company has loans payable due to affiliates aggregating $48,190. A
major stockholder of the Company is also a major stockholder of the
affiliates. The loans bear interest at the rate of 8% per annum and are due
on demand.
During 1996, the Company converted approximately $1,060,000 of debt payable
to IRC, a related party, to common stock and common stock subscribed (see
Note 15). The Company also converted approximately $100,000 of debt payable
to a major stockholder to common stock subscribed (see Note 15).
5. Marketable Equity Securities
Marketable securities were carried at the lower of cost or market. The
marketable securities were acquired in the Purchase and Exchange Agreement
with IRC on May 2, 1995 and consisted of 500,000 shares of United Petroleum
Corporation stock. The United Petroleum Corporation stock had a
one-for-three reverse stock split on June 13, 1995 which left the Company
with 166,667 shares. The marketable securities were written down to market
in 1995, resulting in a loss of approximately $594,000. The United
Petroleum Corporation stock was sold in January 1996 for $250,000.
F-16
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
6. Oil and Gas Properties
The following table sets forth information concerning the Company's oil and
gas properties at December 31:
1996 1995
===========================================================================
Evaluated $1,288,243 $654,258
Unevaluated 26,317 15,352
---------------------------------------------------------------------------
1,314,560 669,610
Accumulation depreciation,
depletion and amortization (27,418) (11,528)
---------------------------------------------------------------------------
$1,287,142 $658,082
===========================================================================
Evaluated costs excluded from amortization at December 31, 1996 consist of
approximately $730,000 of costs relating the Company's Swan Creek
development project which is awaiting the completion of a gas pipeline
expected to be completed in the third quarter of 1997.
7. Pipeline Facilities Under Construction
During the fourth quarter of 1996, the Company began construction of a
23-mile gas pipeline which will (1) connect the Swan Creek development
project to a gas purchaser and (2) enable the Company to develop gas
transmission business opportunities in the future.
As of December 31, 1996, management estimates the costs to complete the
pipeline are approximately $1,500,000.
In January 1997, the Company entered into an agreement with the Tennessee
Valley Authority ("TVA") whereby the TVA will allow the Company to bury the
pipeline within the TVA's transmission line rights-of-way. In return for
this right, the Company paid $35,000 plus agreed to annual payments of
approximately $6,200 for 20 years. This agreement expires in 2017 at which
time the parties may renew the agreement for another 20 year term in
consideration of similar inflation-adjusted payment terms.
F-17
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
8. Property and Equipment
Property and equipment consisted of the following:
1996 1995
==========================================================================
Machinery and equipment $245,756 $260,693
Vehicles 83,299 85,455
Other 42,113 20,991
--------------------------------------------------------------------------
371,168 367,139
Less accumulated depreciation (167,924) (119,738)
--------------------------------------------------------------------------
Property and equipment - net $203,244 $247,401
==========================================================================
9. Notes Payable
Notes payable consisted of the following:
1996 1995
---------------------------------------------------------------------------
Note payable to an investment company due
May 1997 with interest payable monthly at
10% per annum; less unamortized discount
of $123,750 relating to stock warrants
issued; collateralized by a subordinated
security interest in all assets of the
Company (A). $376,250 $ --
Note payable to an individual due April
1997 with interest payable monthly at 10%
per annum; less unamortized discount of
$48,125 relating to stock warrants
issued; collateralized by all assets of
the Company (B). 201,875 --
Note payable to a company due April 1997
with interest payable monthly at 10% per
annum; less unamortized discount of
$48,125 relating to stock warrants
issued; collateralized by all assets of
the Company (A). 201,875 --
---------------------------------------------------------------------------
$780,000 $ --
===========================================================================
F-18
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
In conjunction with the issuance of the notes payable listed above, the
Company granted the lenders detachable stock warrants which enable the
holder to obtain up to 200,000 shares of the Company's common stock at a
price of $5 per share.
(A) These notes had not been repaid as of the above noted due dates. As
noted in (C) below, the Company has filed a claim against the lenders.
(B) In March 1997, the individual note holder (above) filed a lawsuit
asserting the Company was in default of the $250,000 note. This action
seeks the principal amount, interest, and costs of collection. No
additional costs have been accrued in the accompanying consolidated
financial statements in connection with this lawsuit, as a range of such
costs cannot be estimated. Management believes, however, it has certain
defenses to this motion as noted in (C) below.
(C) Also in March 1997, the Company filed a claim against the above three
lenders and a former officer of the Company asserting that the Company did
not authorize the issuances of certain stock warrants related to the
borrowings and seeking rescission of the warrant agreements. The Company is
disputing the validity of the stock warrant agreements based upon certain
provisions which were not authorized by the board of directors. If the
Company is unsuccessful in its attempt to rescind these stock warrant
agreements, these provisions could result in the lenders obtaining
additional shares and potential controlling interest, as the stock warrant
agreements provide for the granting of increasing amounts of shares, at
pro-rata reduced prices, in the event the market price of the Company's
stock falls below $16 per share.
F-19
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
10. Long Term Debt
Long-term debt consisted of the following:
1996 1995
--------------------------------------------------------------------------
11% installment note, payable $667 monthly,
including interest, due December 2001,
collateralized by a vehicle $ 30,563 $ --
10.7% installment note, payable $423
monthly, including interest, due May
2000, collateralized by a vehicle 14,466 17,800
12% installment note, payable $385
monthly, including interest, due April
2000, collateralized by a vehicle 12,545 15,500
10.5% installment note, payable $789
monthly, including interest, due August
2000, collateralized by a vehicle -- 25,000
Loan payable to an equipment supplier, due
in monthly installments of $5,300 -- 15,900
Other 4,271 18,838
--------------------------------------------------------------------------
Total long term debt 61,845 93,038
Less current maturities (14,017) (34,038)
--------------------------------------------------------------------------
Long term debt, less current maturities $ 47,828 $ 59,000
==========================================================================
F-20
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
The approximate future maturities of debt were as follows:
Year Amount
------------------------------------------------------------------------
1997 $14,017
1998 15,259
1999 14,849
2000 10,166
2001 7,554
------------------------------------------------------------------------
$61,845
========================================================================
11. Commitments
As of December 31, 1996, the future minimum payments to be made under
noncancellable operating leases were:
Year Amount
------------------------------------------------------------------------
1997 $ 51,000
1998 51,000
1999 51,000
2000 47,000
------------------------------------------------------------------------
$200,000
========================================================================
Rent expense was approximately $54,000 and $5,000 for the years ended
December 31, 1996 and 1995, respectively.
F-21
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
12. Stock Options
Changes that occurred in options outstanding in 1996 and 1995 are
summarized below:
1996 1995
-------------------------- --------------------------
Average Average
Exercise Exercise
Shares Price Shares Price
===========================================================================
Outstanding,
beginning
of year 1,791,849 $0.483 -- $ --
Granted 730,000 5.566 1,825,000 0.479
Exercised (327,079) 0.275 (33,151) 0.275
Expired/canceled (992,350) 0.275 -- --
------------ ------------
Outstanding,
end of year 1,202,420 3.295 1,791,849 0.483
Exercisable,
end of year 538,805 1.882 562,260 0.427
===========================================================================
The following table summarizes information about stock options outstanding
at December 31, 1996:
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------
Average
Exercise Remaining Average Average
Price Contractual Exercise Exercise
Range Shares Life Price Shares Price
===========================================================================
$0.275 472,420 0.58 yrs. $0.275 365,687 $0.275
4.000- 730,000 1.19 yrs. 5.565 173,118 5.275
6.375
--------- ---------
Total 1,202,420 0.95 yrs. 3.269 538,805 1.882
===========================================================================
F-22
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
The fair value of stock options used to compute compensation expense to
non-employees is the estimated present value at grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for 1996 and 1995: expected volatility of 54% for both years; a
risk-free interest rate of 5.21% in 1996 and 6.40% in 1995; and an expected
option life of 2.45 years in 1996 and 2.25 years in 1995. The amount of
compensation expense included in general and administrative costs in the
accompanying consolidated statements of loss was approximately $372,000 and
$45,000 at December 31, 1996 and 1995, respectively.
Statement of Financial Accounting Standards No. 123, (SFAS 123),
"Accounting for Stock-Based Compensation" was implemented in January 1996.
As permitted by SFAS 123, the Company has continued to account for stock
compensation to employees by applying the provisions of Accounting
Principles Board Opinion No. 25. If the accounting provisions of SFAS 123
had been adopted, net loss and loss per share would have been as follows:
1996 1995
===========================================================================
Net loss
As reported $(1,761,064) $(1,246,481)
Pro forma (1,932,628) (1,307,960)
===========================================================================
Loss per share
As reported $(0.28) $(0.28)
Pro forma (0.30) (0.29)
===========================================================================
For employees, the fair value of stock options used to compute pro forma
net loss and loss per share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions for 1996 and 1995: Expected volatility of 54%
for both years; a risk free interest rate of 5.52% in 1996 and 6.32% in
1995; and an expected option life of 2.72 years in 1996 and 2.25 years in
1995.
F-23
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
13. Income Taxes
The Company had no taxable income during the years ended December 31, 1996
and 1995.
A reconciliation of the statutory U.S. Federal income tax and the income
tax provision included in the accompanying consolidated statements of loss
is as follows:
Year ended December 31, 1996 1995
==========================================================================
Statutory rate 34% 34%
Tax (benefit) at statutory rate $(599,000) $(424,000)
State income tax (benefit) (99,000) (75,000)
Other 3,000 17,000
Increase in deferred tax asset
valuation allowance 695,000 482,000
--------------------------------------------------------------------------
Total income tax provision $ -- $ --
==========================================================================
The components of the net deferred tax assets and liabilities are as
follows:
Year ended December 31, 1996 1995
-------------------------------------------------------------------------
Deferred tax asset:
Basis difference in marketable
equity securities $ -- $ 238,000
Net operating loss carryforward 798,000 218,000
Capital loss carryforward 238,000 --
Accrued expenses 223,000 39,000
-------------------------------------------------------------------------
1,259,000 495,000
Valuation allowance (1,177,000) (482,000)
-------------------------------------------------------------------------
82,000 13,000
-------------------------------------------------------------------------
Deferred tax liability:
Oil and gas properties 81,000 13,000
Property and equipment 1,000 --
-------------------------------------------------------------------------
82,000 13,000
-------------------------------------------------------------------------
Net deferred taxes $ -- $ --
=========================================================================
F-24
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
The Company recorded a valuation allowance at December 31, 1996 and 1995
equal to the excess of deferred tax assets over deferred tax liabilities as
management is unable to determine that these tax benefits are more likely
than not to be realized.
As of December 31, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $1,995,000 which will
expire, if not utilized, as follows:
Year Amount
------------------------------------------------------------------------
2010 $ 546,000
2011 1,449,000
------------------------------------------------------------------------
Total $1,995,000
========================================================================
Additionally, at December 31, 1996, the Company has a capital loss
carryforward of approximately $594,000 which will expire, if not offset
against a capital gain, in 2001.
14. Subsequent Events
(A) In May 1997, the Company entered into a term loan with an individual
for aggregate proceeds of $1,000,000 which the Company will receive at
various times in the second and third quarters of 1997. The Company
provided the lender with 100,000 shares of common stock as a loan
origination fee. The loan, which is due December 31, 1997, bears interest
at 11% per annum and is secured by equipment owned by a major shareholder
of the Company. IRC is serving as guarantor on the loan facility. In
conjunction with the loan agreement, the lender has an option to purchase
300,000 shares of the Company's common stock from IRC.
(B) In May 1997, the Company entered into a joint venture agreement with
Enserch Energy Services, Inc. ("EES") whereby the Company will share
equally in the gross profit from any sales to customers the parties refer
to each other for energy services. The agreement is in effect until 2002 at
which time the Company and EES can continue the agreement for successive
one-year terms.
(C) During the period from August 1997 to November 1997, the Company raised
net proceeds of approximately $5,200,000 from the issuance of 626,235
shares of Tengasco, Inc. common stock. (See Note 1; "Loss Per Common
Share").
F-25
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
15. Supplemental Disclosure of Cash Flows
The Company paid approximately $26,000 and $33,000 for interest in 1996 and
1995, respectively. The Company paid $0 for income taxes in 1996 and 1995.
In 1996, the Company transferred property and equipment with a net book
value of $46,539 to lenders in exchange for debt reductions aggregating
$42,865 resulting in a loss of $3,674.
In 1996, the Company issued 114,466 shares of common stock and common stock
subscribed to extinguish approximately $1,060,000 of debt, which
approximated fair value of the shares.
In 1995, The Company issued 4,000,000 shares of common stock and a $450,000
8% promissory note to IRC (see Note 3) to acquire approximately $1,752,000
of assets including property, plant, and equipment, oil and gas properties
and marketable equity securities. The Company recorded these assets at the
lower of market or IRC's historical cost basis, except for the marketable
equity securities which were brought over at their lower market value.
In 1995, the Company issued approximately 164,300 shares of common stock to
extinguish approximately $882,000 of debt, which approximated fair value of
the shares. The extinguished debt included the $450,000 8% promissory note,
discussed above.
16. Supplemental Oil and Gas Information
Information with respect to the Company's oil and gas producing activities
is presented in the following tables. Estimates of reserve quantities, as
well as future production and discounted cash flows before income taxes,
were determined by Coburn Petroleum Engineering, independent petroleum
engineer, as of December 31, 1996 and 1995.
Oil and Gas Related Costs
The following table sets forth information concerning costs related to the
Company's oil and gas property acquisition, exploration and development
activities in the United States during the years ended December 31, 1996
and 1995:
F-26
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
1996 1995
===========================================================================
Property acquisition
Proved $ 78,991 $607,809
Unproved 25,274 15,352
Less - proceeds from sales of
properties (100,000) --
Development costs 673,022 43,210
---------------------------------------------------------------------------
$ 677,287 $666,371
===========================================================================
Results of Operations from Oil and Gas Producing Activities
The following table sets forth the Company's results of operations from oil
and gas producing activities for the years ended December 31, 1996 and
1995:
1996 1995
--------------------------------------------------------------------------
Revenues $ 26,253 $ 27,802
Production costs and taxes (17,138) (20,072)
Depreciation, depletion and
amortization (52,145) (24,011)
--------------------------------------------------------------------------
Results of operations before income
taxes (43,030) (16,281)
Income taxes -- --
--------------------------------------------------------------------------
Results of operations from oil
and gas producing activities $ (43,030) $(16,281)
==========================================================================
In the presentation above, no deduction has been made for indirect costs
such as corporate overhead or interest expense. No income taxes are
reflected above due to the Company's tax loss carryforwards. For the years
ended December 31, 1996 and 1995, the depreciation, depletion and
amortization rate per barrel of oil equivalent production was $20.16 and
$90.84, respectively.
Oil and Gas Reserves (unaudited)
The following table sets forth the Company's net proved oil and gas
reserves at December 31, 1996 and 1995 and the changes in net proved oil
and gas reserves for the years then ended. Proved
F-27
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
reserves represent the estimated quantities of crude oil and natural gas
which geological and engineering data demonstrate with reasonable certainty
to be recoverable in the future years from known reservoirs under existing
economic and operating conditions. The reserve information indicated below
requires substantial judgment on the part of the reserve engineers,
resulting in estimates which are not subject to precise determination.
Accordingly, it is expected that the estimates of reserves will change as
future production and development information becomes available and that
revisions in these estimates could be significant.
Oil (bbls) Gas (Mcf)
==========================================================================
Proved reserves
Balance, January 1, 1995 -- --
Acquisition of proved reserves 101,565 5,337,978
Production - (1,586)
--------------------------------------------------------------------------
Balance, December 31, 1995 101,565 5,336,392
Discoveries and extensions -- 17,212,571
Revisions of previous estimates -- 33,902
Production -- (15,510)
--------------------------------------------------------------------------
Balance, December 31, 1996 101,565 22,567,355
==========================================================================
Proved developed non-producing
reserves at, December 31, 1996 -- 7,167,350
==========================================================================
Proved developed non-producing
reserves at, December 31, 1995 -- 2,536,388
==========================================================================
Of the Company's total proved reserves as of December 31, 1996,
approximately 31% were classified as proved developed non-producing and
approximately 69% were classified as proved undeveloped. All of the
Company's reserves are located in the continental United States.
F-28
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
Standardized Measure of Discounted Future Net Cash Flows (unaudited)
The standardized measure of discounted future net cash flows from the
Company's proved oil and gas reserves at December 31, 1996 and 1995 is
presented in the following table:
1996 1995
========================================================================
Future cash inflows $84,106,507 $11,892,672
Future production costs
and taxes (6,219,598) (1,818,322)
Future development costs (5,775,000) (600,000)
Future income tax expenses (18,909,520) (2,156,985)
------------------------------------------------------------------------
Net future cash flows 53,202,389 7,317,365
Discount at 10% for timing
of cash flows (22,823,876) (3,653,903)
------------------------------------------------------------------------
Discounted future net cash
flows from proved reserves $30,378,513 $ 3,663,462
========================================================================
The following table sets forth the changes in the standardized measure of
discounted future net cash flows from proved reserves during 1996 and 1995:
1996 1995
------------------------------------------------------------------------
Balance, beginning of year $ 3,663,462 $ --
Sales, net of production costs
and taxes (9,115) (7,730)
Acquisition of proved reserves 33,874,577 4,665,382
Changes in prices and
production costs 2,374,267 --
Revisions of quantity estimates 42,164 --
Net change in income taxes (9,975,394) (994,190)
Interest factor - accretion of discount 465,765 --
Changes in production rates
and other (57,213) --
------------------------------------------------------------------------
Balance, end of year $30,378,513 $3,663,462
========================================================================
F-29
<PAGE>
Tengasco, Inc.
(formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
================================================================================
The acquisition of proved reserves in 1996 relates to the Swan Creek
development project.
Estimated future net cash flows represent an estimate of future net
revenues from the production of proved reserves using current sales prices,
along with estimates of the operating costs, production taxes and future
development and abandonment costs (less salvage value) necessary to produce
such reserves. The average prices used at December 31, 1996 and 1995 were
$19.10 and $17.00 per barrel of oil and $2.94 and $1.91 per mcf of gas,
respectively. No deduction has been made for depreciation, depletion or any
indirect costs such as general corporate overhead or interest expense.
Operating costs and production taxes are estimated based on current costs
with respect to producing gas properties. Future development costs are
based on the best estimate of such costs assuming current economic and
operating conditions.
Income tax expense is computed based on applying the appropriate statutory
tax rate to the excess of future cash inflows less future production and
development costs over the current tax basis of the properties involved,
less applicable carryforwards, for both regular and alternative minimum
tax.
The future net revenue information assumes no escalation of costs or
prices, except for gas sales made under terms of contracts which include
fixed and determinable escalation. Future costs and prices could
significantly vary from current amounts and, accordingly, revisions in the
future could be significant.
F-30
<PAGE>
TENGASCO, INC.
(Formerly Onasco Companies, Inc.)
CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended
September 30, 1997
Prepared By [ILLEGIBLE]
--------------------
Controller
F-31
<PAGE>
TENGASCO, INC.
(formerly Onasco Companies, Inc.)
CONTENTS
Consolidated Financial Statements
Balance sheets 2
Statements of loss 3
Statements of stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6
F-32
<PAGE>
TENGASCO, INC.
(Formerly Onasco Companies, Inc.)
CONSOLIDATED BALANCE SO BETS
September 30, 1997
ASSETS
September 30, December 31,
1997 1996
(Unaudited) (Audited)
---------- ---------
Current Assets:
Cash and cash equivalents $ 508,218 146,554
Accounts Receivable 2,000 4,658
Other current assets 16,901 7,463
---------- ---------
Total current assets 527,119 158,675
Oil and gas properties, net (on the basis of
full cost accounting) 1,311,107 1,287,142
Pipeline facilities, under construction, at cost 1,643,984 887,315
Property and equipment, net 323,909 203,244
Deferred Financing Costs, net (Note 2) 425,210 170,833
Other 11,101 20,012
---------- ---------
$4,242,430 2,727,221
========== =========
The accompanying notes are in integral part of these financial statements
F-33
<PAGE>
TENGASCO, INC.
(Formerly Onasco Companies, Inc.)
CONSOLIDATED BALANCE SHEETS
September 30, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1997 1996
(Unaudited) (Audited)
----------- ---------
Current liabilities
Notes payable $ 2,009,811 780,000
Loans payable to affiliates 56,129 48,190
Current maturities of long-term debt 37,914 14,017
Accounts payable - trade 389,468 347,093
Accrued liabilities 110,932 35,086
----------- ---------
Total current liabilities 2,604,254 1,224,386
Long term debt, less current maturities 151,610 47,828
----------- ---------
Total liabilities 2,755,864 1,272,214
----------- ---------
Stockholders' equity
Common stock, $.001 par value,
50,000,000 shares authorized 6,382 5,708
Additional paid-in capital 7,414,868 4,783,369
Unamortized stock award (212,813) (292,186)
Deficit (5,721,871) (3,041,884)
----------- ---------
Total stockholders' equity 1,486,566 1,455,007
----------- ---------
$ 4,242,430 2,727,221
=========== =========
The accompanying notes are an integral part of these financial statements
F-34
<PAGE>
TENGASCO, INC.
(Formerly Onasco Companies, Inc.)
STATEMENTS OF LOSS
(Unaudited)
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1996
------------- -------------
Revenues:
Oil and gas revenues $ 0 27,171
--------- ---------
Total Revenues 0 27,171
--------- ---------
Costs and other deductions
Field Expenses 67,276 6,573
Depletion, depreciation and amortization 57,753 61,715
Amortization of deferred financing costs (Note 2) 845,623 0
Interest expense 361,584 14,018
General and administrative costs 1,347,751 1,127,127
--------- ---------
Total costs and other deductions 2,679,987 1,209,433
--------- ---------
Net loss 2,679,987) (1,182,262)
- ---------------------------------------------------- --------- ---------
Loss per share of common stock: (0.39) (0.19)
Weighted Average Shares Outstanding 6,944,392 6,311,295
The accompanying notes are an integral part of these financial statements
F-35
<PAGE>
TENGASCO, INC.
(Formerly Onasco Companies, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Unamortized
----------------------- Paid-in Stock
# Shares Amount Capital Award Deficit
--------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 5,707,827 $ 5,708 $4,783,369 $ (292,186) $(3,041,884)
Common Stock issued for exercised options 357,976 357 98,087
Common Stock issued for private placements 130,543 131 787,709
Common stock subscribed for the
extinguishment of debt (Note 3) 86,084 86 484,135
Common Stock issued for loan origination
fee (Note 2) 100,000 100 1,024,900
Stock option award 30,000 (30,000)
Amortization of stock award 109,373
Common stock options issued 206,668
Net loss for period ended September 30, 1997 (2,679,987)
====================================================================================================================================
Balance, September 30, 1997 6,382,430 $ 6,382 $7,414,868 $(212,8132 $(5,721,871)
========= ========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-36
<PAGE>
TENGASCO, INC.
(Formerly Onasco Companies, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Operating activities
Net loss $(2,679,987) $(1,182,262)
Adjustments to reconcile net loss to cash
used in operating activities:
Depletion, depreciation and amortization 57,753 61,715
Amortization of deferred financing costs 845,623 0
Amortization of imputed value of stock warrants issued 220,000 0
Compensation paid in stock options 241,041 313,124
Changes in assets and liabilities:
Accounts receivable 2,653 200
Prepaid expenses and other (2,070) (3,808)
Accounts payable 42,375 383,875
Accrued liabilities 75,846 48,310
Stockholder advances payable 7,939 0
----------- -----------
Cash used in operating activities (1,188,827) (378,846)
----------- -----------
Investing activities
Proceeds from sale of marketable equity securities 0 250,000
Additions to property and equipment (176,869) (34,550)
Additions to oil and gas properties (273,965) (628,265)
Additions to pipeline facilities (756,669) (461,000)
----------- -----------
Cash used in investing activities (1,207,503) (873,815)
----------- -----------
Financing activities
Proceeds from borrowings 1,144,061 276,445
Repayments of borrowings (6,571) (5,775)
Proceeds from issuance of common stock 1,370,504 991,400
Proceeds from sale of oil and gas properties 250,000 0
----------- -----------
Cash provided by financing activities $ 2,757,994 $ 1,262,070
----------- -----------
Net increase (decrease) in cash and cash
equivalents 361,664 9,409
Cash and cash equivalents, beginning of period 146,554 712
----------- -----------
Cash and cash equivalents, end of period $ 508,218 $ 10,121
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-37
<PAGE>
Tengasco, Inc.
(Formerly Onasco Companies, Inc.)
Notes to Consolidated Financial Statements
(1) The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form lOQ and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended September
30, 1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. For further information, refer to the
Company's consolidated financial statements and footnotes thereto for the year
ended December 31, 1996, included in form SB-2, which are incorporated by
reference herein.
(2) Deferred Financing Costs
In May 1997, the company entered into a term loan agreement with an individual
for aggregate proceeds of $1,000,000. The company provided the lender with
100,000 shares of common stock as an origination fee. The loan, which is due
December 31, 1997, bears interest at 11% per annum and is secured by equipment
owned by a majority shareholder of the company. Industrial Resources
Corporation, ("IRC") is serving as guarantor of the loan facility. In
conjunction with the loan agreement, the lender has an option to purchase
300,000 shares of the company's common stock from IRC. The aggregate value of
the above stock and stock options, which is approximately $1,100,000, is
included as deferred financing costs in the accompanying September 30, 1997
condensed financial statements. These costs, which are non-cash items, are being
amortized over the loan term.
(3) Consolidated Statements of Stockholders Equity
In the second quarter of 1997, the Company issued 86,084 shares of common stock
to extinguish $484,221 of debt, which approximated the fair value of the shares.
F-38
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24 - INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 48-18-502 of the Tennessee Business Corporation Act (the "Act")
authorizes a Tennessee corporation to indemnify any director against liability
incurred in a legal proceeding if (i) he or she conducted himself or herself in
good faith; and (ii) he or she reasonably believed that his or her conduct was
in the best interest of the company or, if the conduct was not undertaken in his
or her official capacity, that it was not opposed to the company's best
interests. In the case of a criminal proceeding, the director must have had no
reasonable cause to believe that his or her conduct was unlawful. A corporation
may not indemnify a director under Section 48-18-502 in connection with a
proceeding "by or in the right of the corporation in which the director was
adjudged liable to the corporation" or in connection with any other proceeding
charging improper personal benefit to him or her, in which he or she was
adjudged liable on the basis that he or she improperly received a personal
benefit.
Unless limited by its charter, Section 48-18-503 of the Act requires a
corporation to indemnify a director who was wholly successful, on the merits or
otherwise, in the defense of any proceeding to which he or she was a party
because of his or her role as director against reasonable expenses incurred in
connection with the proceeding. The Company's charter does not provide any
limitations on this right of indemnification.
Pursuant to Section 48-18-504 of the Act, the Company may advance a
director's expenses incurred in defending any proceeding upon receipt of an
undertaking and a statement of the director's good faith belief that he or she
has met the standard of conduct described in Section 48-18-502.
Section 48-18-505 permits a court, upon application of a director, to order
indemnification if it determines that the director is entitled to mandatory
indemnification under Section 48-18-503 or that he or she is fairly and
reasonably entitled to indemnification, whether or not he or she met the
standards set forth in Section 48-18-502.
Section 48-18-506 limits indemnification under Section 48-18-502 to
situations in which either (i) the majority of a disinterested quorum of
directors; (ii) independent special legal counsel; or (iii) the stockholders
determine that indemnification
II-1
<PAGE>
is proper under the circumstances.
Unless the corporate charter provides otherwise, Section 48-18-507 extends
the rights to indemnification and advancement of expenses to officers, employees
and agents. The Company's corporate charter does not provide for any limitations
on these rights of indemnification.
Regardless of whether a director, officer, employee or agent has the right
to indemnity under Section 48-18-502 or Section 48-18-503, Section 48-18-508
allows the corporation to purchase and maintain insurance on his or her behalf
against liability resulting from his or her corporate role.
Section 48-18-509 provides that the rights to indemnification and
advancement of expenses shall not be deemed exclusive of any other rights under
any bylaw, agreement, stockholder vote or vote of disinterested directors;
however, no indemnification may be made where a final adjudication adverse to
the director establishes his or her liability for breach of the duty of loyalty
to the corporation or its stockholders or for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law.
The Company is seeking bids from insurance companies to provide Directors'
and Executive Officers' Insurance, and has adopted the provisions of the Act.
ITEM 25 - OTHER EXPENSES OF ISSUANCE and DISTRIBUTION
The following table sets forth the estimated costs and expenses to be borne
by the Company in connection with the Offering described in the Registration
Statement other than underwriting commissions and discounts.
Registration Fee $ 3,268.58
Legal Fees and Expenses $25,000.00
Accounting Fees and Expenses $15,000.00
Printing Expenses $ 500.00
Consulting Fee $ 500.00
Miscellaneous Expense $ 1,000.00
----------
Total $45,268.58
II-2
<PAGE>
ITEM 26 - RECENT SALES OF UNREGISTERED SECURITIES
The following table provides information with respect to the sale of all
"unregistered" and "restricted" securities sold by the Company during the past
three years, which were not registered under the 1933 Act:
Number
Date Of Aggregate
Name of Owner Acquired Shares Consideration
- ------------- -------- ------ -------------
Robert C. Bohannon, Ph.D 11/8/94 8,750 1
Henry H. Tate, Jr 11/8/94 3,750 1
Industrial Resources 5/4/95 4,000,000 2
Corporation
M. E. Ratliff 5/15/95 215,000 3
Jeffrey D. Jenson 5/15/95 240,000 3
Leonard W. Burningham, Esq 5/15/95 50,000 3
Duane S. Jenson 9/29/95 4,000 4
Craig Carpenter 9/29/95 4,000 4
Industrial Resources 3/29/96 76,557 5
Corporation 4/10/96 87,709 5
Allen Sweeney 12/31/96 33,151 6
Russell Ratliff 3/29/96 37,534 6
James C. Walter 3/22/96 35,616 6
Mike Johnson 3/26/96 10,000 6
Estate of Raymond E. Johnson 4/3/96 10,000 6
Charles N. Manhoff 4/10/96 88,356 6
Joseph B. Mattei 4/19/96 37,000 6
William A. Moffett 4/23/96 37,397 6
6/25/97 72,603 6
II-3
<PAGE>
Jeffrey DeMunnik 5/29/96 16,664 6
3/15/97 4,000 6
Robert M. Carter 6/15/96 15,671 6
8/26/96 2,000 6
6/30/97 7,329 6
Kelly S. Grabill 7/29/96 12,500 6
Jeff Brockman 7/29/96 10,000 6
8/29/96 62,329 6
Robert Janda 9/5/96 22,730 $ 187,520
Donald Janda 9/5/96 2,131 $ 17,580
William Evans 9/5/96 12,121 $ 100,000
Walter C. Arzonetti 4/22/97 88,493 6
Neil Harding 5/21/97 100,000 7
Michael McCown 6/30/97 50,000 6
Stanley E. and Sharon E 10/15/97 6,000 $ 53,580
Adams
Gurvin and Margaret Bailey 9/29/97 4,500 $ 36,225
Jeannie Borger 10/17/97 224 $ 2,000
Elizabeth E. Burleson 9/15/97 500 $ 3,895
Rev. Tr. Dtd. 5/6/93
Christopher Day 8/22/97 482 $ 2,996
Sharon Funk 10/17/97 5,599 $ 49,999
Frederick Funk 10/17/97 2,158 $ 20,000
Dennis Gates 7,000 $ 58,800
James A. Gerding 8/30/97 20,000 $ 140,000
Wayne H. Gillis 8/26/97 14,286 $ 100,000
Edward W.T. White 8/22/97 80,515 $ 500,000
William C. Habersett 9/22/97 2,197 $ 15,005
TTEE, U.T.D. 9/1/94
William C. Habersett 9/22/97 1,500 $ 11,550
II-4
<PAGE>
TTEE, U.T.D. 9/1/94
Earl Hampton 9/26/97 500 $ 3,850
Bill L. Harbert 10/13/97 34,286 $ 300,002
Robert M. Honeycutt 10/20/97 100 $ 893
Michael J. Jones 10/16/97 2,200 $ 20,020
Paul Claude Jungman 10/15/97 560 $ 5,000
Wilbert L. Kail 9/6/97 1,000 $ 6,650
John P. Kaner 9/24/97 400 $ 2,976
James M. Koukourmelis 10/22/97 500 $ 4,815
Stephen Lautzenhiser 8/19/97 800 $ 4,832
William F. Miller, Jr 10/13/97 3,000 $ 26,250
Shirley Milligan 10/3/97 300 $ 2,415
TTEE, Tr UA 7/30/90
Donald L. Scott 10/16/97 2,200 $ 20,020
Randall L. Scott 10/16/97 2,200 $ 20,020
Robert J. Stanley 10/14/97 11,313 $ 100,006
Joseph Steuer, Jr 8/19/97 1,703 $ 9,996
Shawn Lee Thurman 8/26/97 219 $ 1,495
T. Owen Vickers 10/14/97 7,584 $ 64,994
Viam Charitable and 10/13/97 11,905 $ 100,000
Educational Foundation, Inc.
Robert A. Lange 10/10/97 1,500 $ 13,245
Thomas Strickland, Jr 8/27/97 200 $ 1,174
Frank S.Buck and 10/22/97 5,000 $ 47,250
Martha Buck
Daryl Greene 10/13/97 5,000 $ 42,000
Regions Bank, TTEE for 10/13/97 5,656 $ 49,999
Bobby P. Lemay Directed IRA
II-5
<PAGE>
The Fortune Hunters 10/9/97 201 $ 1,759
Investment Club
Step, Inc. 10/22/97 2,000 $ 18,200
S. Kent Stewart TTEE 10/23/97 2,500 $ 22,550
UA Tr. Dtd. 12/28/88
Egger and Company 10/28/97 202,380 $1,700,000
Spoonbill, Inc. 10/23/97 54,946 $ 499,993
Patricia Knott 10/24/97 500 $ 4,550
Ronald M. Jones 10/28/97 1,500 $ 12,600
John Ershek 11/3/97 5,000 $ 41,100
Richard H. Reventlaw 11/6/97 10,989 $ 99,999
Charles A. Thomson 10/29/97 2,000 $ 15,400
Micah Cole Nevin 11/6/97 100 $ 945
Richard T. Arkwright 11/4/97 10,989 $ 99,999
William Curtis Leonard 11/7/97 216 $ 2,004
Peter C.C. Huang 11/6/97 16,008 $ 149,994
Stephen Huang 11/6/97 5,336 $ 49,998
Deidra A. Huang 11/6/97 5,336 $ 49,998
William Edgar Welden, Sr 11/11/97 2,528 $ 25,000
William Edgar Welden, Jr 11/11/97 506 $ 5,000
Hamac & Co. 11/5/97 10,582 $ 99,999
Spoonbill, Inc. 10/23/97 38,460 $ 349,983
William C. Habersett, 11/14/97 1,000 $ 10,240
TTEE Tr. 9/1/94
W. N. Watson 11/6/97 534 $ 5,003
Terry Gillis 11/6/97 2,667 $ 24,989
Joseph Presnell 11/14/97 2,000 $ 20,480
Harold P. L'Hussier 11/17/97 1,406 $ 15,002
II-6
<PAGE>
Edith T. Habersett, TTEE 11/18/97 1,500 $ 16,020
Robert A. Chandler 11/13/97 500 $ 4,945
Spoonbill, Inc. 10/23/97 16,486 $ 149,983
Terry Gillis 11/14/97 1,465 $ 15,001
1 Issued in consideration of services rendered to the Company. The
services were ministerial and the compensation was nominal since the
shares were restricted and the average market price before a discount
were only $0.18 per share.
2 Issued to IRC in consideration of the conveyance by IRC to the Company
of certain oil and gas leases, equipment, securities and vehicles
pursuant to the Purchase Agreement. See, "Description of Business" -
"Business Development" above.
3 Issued in consideration of services rendered to the Company. See,
"Description of Business" - "Business Development" above. The services
related to the negotiation and consummation of the Purchase Agreement.
The value attributed to the shares would have been approximately $0.12
per share based upon an average market price of $0.18 per share
discounted because of the restricted nature of the shares and the lack
of liquidity.
4 Issued in consideration of the conveyance of an Eimco Caterpillar.
5 Issued in consideration of the cancellation of debt owed by the
Company to IRC. See, "Description of Business" - "Business
Development" above.
6 Issued pursuant to Stock Option Agreements adopted by the Board of
Directors granting these persons an option to purchase "unregistered"
and "restricted" shares of the Company's common stock at a price of
$0.275 per share. See, "Executive Compensation" - "Restricted Stock
Options Table" above.
7 Issued as consideration for the granting of a loan in the amount of
$1,000,000.
Management believes that all of the foregoing persons were either
"accredited investors" as that term is defined under applicable federal and
state securities laws, rules and
II-7
<PAGE>
regulations, or were persons who by virtue of background, education and
experience who could accurately evaluate the risks and merits attendant to an
investment in the securities of the Company. Further, all such persons were
provided with access to all material information regarding the Company, prior to
the offer or sale of these securities, and each had an opportunity to ask of and
receive answers from directors, executive officers, attorneys and accountants
for the Company. The offers and sales of the foregoing securities are believed
to have been exempt from the registration requirements of Section 5 of the 1933
Act, as amended, pursuant to Section 4(2) thereof, and from similar state
securities laws, rules and regulations covering the offer and sale of securities
by available state exemptions from such registration.
ITEM 27 - EXHIBITS
The following exhibits are filed as a part of this Registration Statement:
Number Description
3.1 Initial Articles of Incorporation
3.2 Bylaws
3.3 Articles of Amendment dated April 12, 1966
3.4 Articles of Amendment dated July 12, 1984
3.5 Articles of Amendment dated December 18, 1991
3.6 Articles of Amendment dated September 11, 1992
3.7 Articles of Incorporation of the Tennessee wholly-owned
subsidiary **
3.8 Articles of Merger and Plan of Merger (taking into account the
formation of the Tennessee wholly-owned subsidiary for the
purpose of changing the Company's domicile and effecting reverse
split)
5.1 Opinion of Robson & Miller, LLP
10.1(a) Purchase Agreement with IRC
10.1(b) Amendment to Purchase Agreement with IRC
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<PAGE>
10.1(c) General Bill of Sale and Promissory Note
10.2(a) Compensation Agreement - M. E. Ratliff
10.2(b) Compensation Agreement - Jeffrey D. Jenson
10.2(c) Compensation Agreement - Leonard W. Burningham, Esq.
10.3 Agreement with The Natural Gas Utility District of Hawkins
County, Tennessee
10.4 Agreement with Powell Valley Electric Cooperative, Inc.
10.5 Agreement with Enserch Energy Services, Inc.
16.1 Letter of David T. Thomson, CPA, Regarding Change in Certifying
Accountant
16.2 Letter of Charles M. Stivers, CPA, Regarding Change in Certifying
Accountant
16.3 Letter of Price-Bednar, LLP, CPA, Regarding Change in Certifying
Accountant
23.1 Consent of Charles M. Stivers, CPA
23.2 Consent of David T. Thomson, CPA
23.3 Consent of BDO Seidman, LLP
23.4 Consent of Robson & Miller, LLP
23.5 Consent of Coburn Petroleum Engineering Co.
99.1 Beech Creek Lease Schedule
99.2 Wildcat Lease Schedule
99.3 Burning Springs Lease Schedule
99.4 Fentress County Lease Schedule
99.5 Swan Creek Lease Schedule
99.6 Alabama Lease Schedule
99.7 Coburn Engineering Report
* Summaries of all exhibits contained within this Registration
Statement are modified in
II-9
<PAGE>
their entirety by reference to these Exhibits.
** These are form documents much of which are substantially
handwritten and may be illegible. The best available copy thereof
has been filed with the Commission and copies may be obtained
from the principal executive offices of the Company at no charge.
ITEM 28 - UNDERTAKINGS
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to the Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Act;
(ii) Reflect in the Prospectus any facts or events which individually
or together represent a fundamental change in the information in the
Registration Statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) That, for the purpose of determining any liability under the Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
The Company hereby undertakes:
(1) For determining any liability under the Act, treat the information
omitted from the form prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Company under Rule 424(b)(1) or (4) or 497(n) under the Act as part of the
Registration Statement as of the time the Commission declared it effective.
(2) For determining liability under the Act, treat
II-10
<PAGE>
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and the offering of the securities as that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised in the
opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defenses of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel that matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the questions whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing of Form SB-2 and authorized this registration
statement on its behalf by the undersigned, thereunto duly authorized, in the
City of Knoxville, State of Tennessee on the 9th day of December, 1997.
Tengasco, Inc.
By: s/Malcolm E. Ratliff
--------------------------
Malcolm E. Ratliff
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
s/Malcolm E. Ratliff Chief Executive December 9, 1997
- --------------------------- Officer
Malcolm E. Ratliff
s/Allen H. Sweeney Chairman of the Board December 9, 1997
- --------------------------- of Directors
Allen H. Sweeney
s/Joseph Earl Armstrong Director December 9, 1997
- ---------------------------
Joseph Earl Armstrong
s/James A. Gerding Director December 9, 1997
- ---------------------------
James A. Gerding
Director December , 1997
- ---------------------------
James B. Kreamer
Director December , 1997
- ---------------------------
William A. Moffett
II-12
<PAGE>
s/Shigemi Morita Director December 9, 1997
- ---------------------------
Shigemi Morita
s/Robert M. Carter Executive December 9, 1997
- --------------------------- Vice-President
Robert M. Carter
s/Sheila F. Sloan Treasurer December 9, 1997
- ---------------------------
Sheila F. Sloan
s/Elizabeth Wendelken Secretary December 9, 1997
- ---------------------------
Elizabeth Wendelken
II-13
<PAGE>
EXHIBIT INDEX
Number Description
3.1 Initial Articles of Incorporation
3.2 Bylaws
3.3 Articles of Amendment dated April 12, 1966
3.4 Articles of Amendment dated July 12, 1984
3.5 Articles of Amendment dated December 18, 1991
3.6 Articles of Amendment dated September 11, 1992
3.7 Articles of Incorporation of the Tennessee wholly-owned
subsidiary **
3.8 Articles of Merger and Plan of Merger (taking into account the
formation of the Tennessee wholly-owned subsidiary for the
purpose of changing the Company's domicile and effecting reverse
split)
5.1 Opinion of Robson & Miller, LLP
10.1(a) Purchase Agreement with IRC
10.1(b) Amendment to Purchase Agreement with IRC
10.1(c) General Bill of Sale and Promissory Note
10.2(a) Compensation Agreement - M. E. Ratliff
10.2(b) Compensation Agreement - Jeffrey D. Jenson
10.2(c) Compensation Agreement - Leonard W. Burningham, Esq.
10.3 Agreement with The Natural Gas Utility District of Hawkins
County, Tennessee
10.4 Agreement with Powell Valley Electric Cooperative, Inc.
10.5 Agreement with Enserch Energy Services, Inc.
16.1 Letter of David T. Thomson, CPA, Regarding Change in Certifying
Accountant
16.2 Letter of Charles M. Stivers, CPA, Regarding Change in Certifying
Accountant
16.3 Letter of Price-Bednar, LLP, CPA, Regarding Change in Certifying
Accountant
23.1 Consent of Charles M. Stivers, CPA
23.2 Consent of David T. Thomson, CPA
23.3 Consent of BDO Seidman, LLP
23.4 Consent of Robson & Miller, LLP
23.5 Consent of Coburn Petroleum Engineering Co.
99.1 Beech Creek Lease Schedule
99.2 Wildcat Lease Schedule
99.3 Burning Springs Lease Schedule
99.4 Fentress County Lease Schedule
99.5 Swan Creek Lease Schedule
99.6 Alabama Lease Schedule
99.7 Coburn Engineering Report
* Summaries of all exhibits contained within this Registration
Statement are modified in their entirety by reference to these
Exhibits.
** These are form documents much of which are substantially
handwritten and may be illegible. The best available copy thereof
has been filed with the Commission and copies may be obtained
from the principal executive offices of the Company at no charge.
<PAGE>
[LETTERHEAD OF ROBSON & MILLER, LLP]
December 8, 1997
Tengasco, Inc.
603 Main Avenue - Suite 500
Knoxville, Tennessee 37902
Re: Tengasco, Inc.
Gentlemen:
We have acted as counsel to Tengasco, Inc., a Tennessee corporation (the
"Company"), in connection with a registration statement on Form SB-2 (the
"Registration Statement") and amendments thereto, to be filed with the
Securities and Exchange Commission for the purpose of registering an aggregate
of 684,368 shares (the "Shares") of common stock, $.001 par value per share (the
"Common Stock") owned by certain shareholders (collectively the "Selling
Shareholders") of the Company under the Securities Act of 1933, as amended (the
"Act").
As counsel for the Company, we have examined and are familiar with the
Certificate of Incorporation and By-Laws of the Company, and all amendments
thereto. We are also familiar with the form of the Company's stock certificate,
as well as all corporate proceedings taken by the Company in connection with the
authorization of the issuance and acquisition of the Shares by the Selling
Shareholders. Throughout such examination we have assumed the genuineness of
signatures and accuracy and conformity to original documents of all copies of
documents supplied to us. As to questions of fact material to the opinion
expressed herein, we have, when relevant facts were not independently
determinable, relied upon information furnished to us by officers and directors
of the Company or their duly authorized agents or employees.
Based upon the foregoing, it is our opinion that the Shares have been duly
executed and delivered and the consideration therefor duly paid, and such Shares
are validly issued, fully paid and nonassessable and owned by the Selling
Shareholders.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Robson & Miller, LLP
Robson & Miller, LLP
<PAGE>
[LETTERHEAD OF CHARLES M. STIVERS, C.P.A.]
December 5, 1997
Securities and Exchange Commission
459 Fifth Street
Washington, D.C. 20549
Gentlemen:
We have read the statements made by Tengasco, Inc. in Amended Form SB-2,
which we understand will be filled with the Commission, with respect to the
change in accountants from Price-Bednar, LLP to our firm and thereafter, from
our firm to DBO Seidman LLP. We agree with the statements concerning our firm in
such Amended Form SB-2.
Further, I consent to the reference to me under the captions "Experts" and
"Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure" and to the use of my report for the year ended December 31, 1995 in
the Amended Registration Statement (Form SB-2) of Tengasco, Inc.
/s/ Charles M. Stivers
----------------------
Charles M. Stivers, C.P.A.
<PAGE>
EXHIBIT 23.3
<PAGE>
Consent of Independent Certified Public Accountants
Tengasco, Inc.
Knoxville, Tennessee
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated June 5, 1997 (except for Note 14(c)
as to which date is December 1, 1997), relating to the consolidated financial
statements of Tengasco, Inc., which is contained in that Prospectus. Our report
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
December 2, 1997
<PAGE>
EXHIBIT 23.5
<PAGE>
Coburn Petroleum Engineering
R. W. Coburn
November 19, 1997
Mr. Wesley Baker, General Counsel
Tengasco, Inc.
603 Main Street, Suite 500
Knoxville, Tennessee 37902
Dear Mr. Baker:
This letter constitutes my consent for Tengasco to use my engineering reports
which were submitted as an exhibit to the Securities & Exchange Commission and
as a reference to that exhibit in the prospectus.
Very truly yours,
/s/ R. W. Coburn
R. W. Coburn
Registered Petroleum Engineer
Oklahoma #3349
RWC/ps
cc: Mort Robson
666 3rd Avenue
New York, New York 10017
