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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB - AMENDMENT NO. 1
Registration Statement of Small Business Issuer
pursunt to Section 12(g) of the Securities Exchange Act of 1934
TENGASCO, INC.
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Name of Registrant as specified in its charter
TENNESSEE 87-0267438
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State of Incorporation I.R.S. Employer I.D. No.
603 Main Avenue, Suite 500
Knoxville, Tennessee 37902
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Address of principal executive offices Zip Code
Issuer's Telephone Number (423) 523 - 1124
Issuer's Facsimile Number (423) 523 - 9894
Securities to be registered under Section 12(b) of the Act:
None
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Securities to be registered under Section 12(g) of the Act:
$0.001 par value Common Voting Stock
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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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TABLE OF CONTENTS
PART I ........................................................... 4
Item 1. Description of Business.................................... 4
Glossary of Terms ................................................ 4
Business Development ............................................. 4
General .......................................................... 9
Special Risk Factors ............................................. 12
Limited History .................................................. 12
Going Concern .................................................... 12
Limited Market for Common Stock .................................. 13
General Economic Risks/Potential ................................. 13
Future Acquisitions .............................................. 13
Future Capital Requirements; Uncertainty of Future
Funding .......................................................... 13
Replacement of Reserves .......................................... 14
Uncertainty of Reserve Estimates ................................. 14
Operating Hazards ................................................ 15
Future Sales of Common Stock ..................................... 15
Control by Current Security Holders .............................. 17
Warrants ......................................................... 17
Competition ...................................................... 17
Dependence on Technical Personnel ................................ 17
Governmental Regulations ......................................... 18
Market for the Shares ............................................ 18
Dividends Unlikely ............................................... 18
Principal Products or Services and Markets ....................... 18
Reserve Analyses ................................................. 19
Distribution Methods of Products or Services ..................... 19
Status of Any Publicly Announced New Product or Service .......... 20
Competitive Business Conditions, Competitive Position
in the Industry and Methods of Competition ....................... 20
Sources and Availability of Raw
Materials and Names of Principal Suppliers ....................... 21
Dependence on One or a Few Major Customers ....................... 21
Patents, Trademarks, Licenses, Franchises,
Concessions, Royalty Agreements, Labor Contracts ................. 22
Need for Governmental Approval of Principal
Products or Services ............................................. 22
Effect of Existing or Probable Governmental
Regulations on Business .......................................... 22
Research and Development ................................ 23
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Cost and Effects of Compliance with
Environmental Laws ................................................ 24
Number of Total Employees and
Number of Full-Time Employees ............................. 24
Item 2. Management's Discussion and Analysis or Plan of
Operation ................................................ 24
Other Significant Plans ................................... 26
Results of Operations ..................................... 27
Liquidity ................................................. 28
Item 3. Description of Property ................................... 29
Property Location, Facilities, Size and Nature
of Ownership .............................................. 29
Disclosure of Oil and Gas Operations ...................... 30
Item 4. Security Ownership of Certain Beneficial Owners and
Management................................................. 31
Security Ownership of Certain Beneficial Owners ........... 31
Five Percent Stockholders ................................. 32
Directors and Executive Officers .......................... 32
Changes in Control ........................................ 33
Item 5. Directors, Executive Officers. Promoters and Control
Persons.................................................... 34
Identification of Directors and Officers .................. 34
Business Experience ....................................... 35
Committees ................................................ 36
Family Relationships ...................................... 36
Certain Legal Proceedings ................................. 36
Item 6. Executive Compensation .................................... 38
Compensation .............................................. 38
Bonuses and Deferred Compensation ......................... 42
Compensation Pursuant to Plans ............................ 42
Pension Table ............................................. 42
Other Compensation ........................................ 43
Options Granted ........................................... 44
Compensation of Directors ................................. 45
Employment Contracts ...................................... 45
Termination of Employment and Change of Control
Arrangement ............................................... 45
Item 7. Certain Relationships and Related Transactions ............ 45
Transactions with Management and Others ................... 45
Certain Business Relationships............................. 47
Indebtedness of Management ................................ 48
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Parents of the Issuer ..................................... 48
Transactions with Promoters ............................... 48
Item 8. Description of Securities ................................. 49
Authorized Capital Stock .................................. 49
Common Stock .............................................. 49
PART II ........................................................... 50
Item 1. Market Price of and Dividends on the Common Stock and
Other Stockholder Matters ................................. 50
Market Information ........................................ 50
Holders ................................................... 51
Dividends ................................................. 51
Item 2. Legal Proceedings ......................................... 52
Item 3. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 54
Change from David T. Thomson, CPA to
Charles M. Stivers, CPA ................................... 54
Change from Charles M. Stivers, CPA,
to Price-Bednar, LLP, CPA ................................. 55
Change from Price-Bednar, LLP, CPA
to Charles M. Stivers, CPA ................................ 56
Change from Charles M. Stivers, CPA
to BDO Seidman, LLP ....................................... 58
Item 4. Recent Sales of Unregistered Securities ................... 59
Item 5. Indemnification of Directors and Officers ................. 64
PART F/S .......................................................... 66
PART III .......................................................... 67
Item 1. Index to Exhibits ......................................... 67
SIGNATURES ........................................................ 68
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PART I
Item 1. 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 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 business 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. Copies of the initial Articles
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of Incorporation and the current Bylaws of the Company are attached hereto and
incorporated herein by reference. See the Exhibit Index.
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. A copy of the Articles of Amendment effecting
this change is attached hereto and incorporated herein by reference. See the
Exhibit Index.
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. A copy of the Articles
of Amendment effecting these changes is attached hereto and incorporated herein
by reference. See the Exhibit Index.
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 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
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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. A copy of the Articles of Amendment effecting these changes is
attached hereto and incorporated herein by reference. See the Exhibit Index.
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 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. A copy of the Articles of
Amendment effecting these changes is attached hereto and incorporated herein by
reference. See the Exhibit Index.
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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;
(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
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Department of Commerce of the State of Utah on May 5, 1995. Unless otherwise
noted, all subsequent computations in this Registration Statement 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. Copies of the Articles of Merger and Plan of
Merger to effect the change of domicile, change the name of the Company to
"Tengasco, Inc." and to effect the one for two reverse split; the Purchase
Agreement with IRC; and the Tennessee Articles of Incorporation of the
wholly-owned subsidiary formed for the purpose of changing the Company's
domicile are attached hereto and incorporated herein by reference. See the
Exhibit Index.
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 the "Restricted
Stock Options Table" under the caption "Executive Compensation," Part I, Item 6,
below.
Mr. Stocksill resigned on November 26, 1996. Mr. Manhoff
resigned on February 7,1997. Mr. Valliant resigned on January 27, 1997. Mr.
Becker resigned on January 30, 1997. Mr. Arzonetti resigned on February 7, 1997.
Mr. Fetter 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
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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 either as 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%. A true
and correct copy of the Beech Creek Lease Schedule is attached hereto and
incorporated herein by reference. See the Exhibit Index.
(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. A true and correct copy of the Wildcat Lease Schedule is
attached hereto and incorporated herein by reference. See the Exhibit Index.
(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%. A true and
correct copy of the
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Burning Springs Lease Schedule is attached hereto and incorporated herein by
reference. See the Exhibit Index.
(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. A true and
correct copy of the Fentress County Lease Schedule is attached hereto and
incorporated herein by reference. See the Exhibit Index.
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 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.
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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.
A true and correct copy of the Swan Creek Lease Schedule is
attached hereto and incorporated herein by reference. See the Exhibit Index.
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.
A true and correct copy of the Alabama Lease Schedule is
attached hereto and incorporated herein by reference. See the Exhibit Index.
Substantial additional evaluation and remedial work will be
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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.
Special Risk Factors.
The present and intended business operations of the Company
must be considered to be highly speculative and involve substantial risks, and
an investment in securities of the Company should only be considered by those
persons who can bear the economic risk of loss of their entire investment. Among
the risk factors to be considered are the following:
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 find the working capital 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 the caption "Market Price of and Dividends on the
Company's Common Stock and Other Stockholder Matters," Part II, Item 1, below.
Going Concern. The Company's auditors have included an
explanatory paragraph in their report which expressed substantial
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doubt 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.
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
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 the caption "Market Price of and Dividends on
the Company's Common Stock and Other Stockholder Matters," Part II, Item 1,
below.
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.
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 the
caption "Management's Discussion and Analysis or Plan of Operation," Part I,
Item 2, 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.
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
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investment banking and brokerage firms 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 this caption "Management's Discussion and Analysis or Plan of
Operation," Part I, Item 2, below.
Replacement of Reserves. The Company's future success will
depend upon its ability to find, acquire and develop 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.
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
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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 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 the Reports of
Coburn Petroleum Engineering, copies of which are attached hereto and
incorporated herein by reference, and all of which are modified by the foregoing
unknown factors. See the Exhibit Index. Also, see the heading "General" of this
caption, above, and the caption "Description of Property," Part I, Item 3.
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.
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. Effective June 30, 1997, all of the shares of the common stock owned
by IRC will 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
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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", Part I, Item 4 below. For information
regarding common stock ownership of IRC 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 Securities and Exchange
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 the caption "Recent Sales of
Unregistered Securities," Part II, Item 4, below.
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
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general circulation, where possible, in order for the Company to satisfy the
requirements of having the required information "currently publicly available."
Assuming this 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 may be sold without restriction after a
holding period of two years and may be sold in limited quantities after a
holding period of one year.
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 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.
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 invaildate those warrants. (See "Legal
Proceedings")
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 the heading "Competition" under this caption.
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 the caption "Directors, Executive
Officers, Promoters and Control Persons," Part I Item 5, below.
Similarly, the oil and gas exploration industry requires the
use of personnel with substantial technical expertise. In the event
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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.
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 the
headings "Effect of Existing or Probable Governmental Regulations on Business"
and "Costs and Effects of Compliance with Environmental Laws," of this caption.
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 affect 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.
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.
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
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approximately 90% completed 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.
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. A copy of that report is annexed
hereto and incorporated herein by reference. See the Exhibit Index. 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%, before taxes,
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 the heading "Special Risk Factors" specifically the risk factor
entitled "Uncertainty of Reserve Estimates," of this caption.
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
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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 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 does not have any publicly announced new product
or service.
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
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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 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 the headings "Competitive Business
Conditions, Competitive Position in the Industry and Methods of Competition," of
this caption.
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. Copies of those contracts are
annexed hereto and incorporated herein by reference. See the Exhibit Index.
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
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day. Sales to Powell Valley Electric Cooperative are to be determined at a
future date.
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 caption. The amounts
of the royalties on each of the Company's leases are listed on the attached
lease schedules. See the Exhibit Index.
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 the heading "Effect of Existing or Probable
Governmental Regulations on Business" of this caption.
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 the heading "Disclosure
of Oil and Gas Operations" of the caption "Description of Property," Part I,
Item 3, 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, the Company does not have
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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 has been adopted which
provides for the erection of signs at each well and at strategic loactions 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.
Research and Development
The Company has not expended any material amount in research
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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 the heading "Number of Total Employees and
Number of Full-Time Employees," of this caption.
Cost and Effects of Compliance With Environmental Laws
See the heading "Effect of Existing or Probable Governmental
Regulations on Business," of this caption.
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.
Item 2. Management's Discussion and Analysis of 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.
The Company has successfully completed four wells in this
area, all of which have been flow tested by metering gas from the wells through
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 pressure of 800 psi. Another well,
the Sutton #1 tested at 1,200,000 cubic feet per day with a pressure of 150 psi.
The Company's present plans call for the drilling of
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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 $5,352,688 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 Energy Services, Inc.("Enserch"),
a major marketer of natural gas, pursuant to which the Company will receive 50%
of the 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
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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 also intends to actively pursue the gas marketing
business on the 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. The Company has entered into an
agreement with Enserch Energy Services, Inc., ("Enserch") pursuant to which the
Company and Enserch will market each other=s products. A copy of that agreement
is annexed hereto and incorporated herein by reference. See the Exhibit Index.
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
26
<PAGE>
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 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 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 to
the increased general and administrative expense, offset somewhat by the
non-recurrence of losses on marketable
27
<PAGE>
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 1996, 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 is 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. Repayment of the
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.
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 $5,532,688 by private sales of its common stock and participation
arrangements in well drilling with Shigemi Morito, a Director, and a third
party.
During 1996, the Company sold 166,667 shares of stock it had
acquired from IRC pursuant to the Purchase Agreement for $250,000; received
$91,119 from the exercise of options; $280,690 from a private placement of its
stock.
These revenues and loans accounted for substantially all of
the Company's liquidity during this year.
28
<PAGE>
Item 3. 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 the heading "General"
under the caption "Description of Business," Part I, Item 1, 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% 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.
29
<PAGE>
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"). Copies of the lease
schedules listing these leases are attached hereto and are incorporated herein
by reference. See the headings "Business Development" and "General" under the
caption "Description of Business," Part I, Item 1, above, and the Exhibit Index.
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 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.
30
<PAGE>
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.
Item 4. 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," Part I, Item 6,
below).
31
<PAGE>
Five Percent Stockholders
Number of Shares Percent
Name and Address Title Beneficially Owned of Class
- ---------------- ----- ------------------ --------
Industrial Resources Stockholder 2,836,999 44.4%
Corporation(1)
Ste. 500-600 Main Ave.
Knoxville, TN 37902
Malcolm E. Ratliff(2) Chief Executive 254,689 3.98%
12608 Avallon Place Officer
Knoxville, TN 37922
Directors and Executive Officers
Name and Address Title Shares Beneficially Percent of
- ---------------- ------- Owned 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
- --------------------
(1) 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.
(2) Malcolm E. Ratliff is a Vice-President of Industrial Resources
Corporation.
32
<PAGE>
James B. Kreamer Director 0 0
3621 Cabin Creek Rd.
London, KY 40741
William A. Moffett Director 37,397 0.6%
1073 Encantado Drive
Santa Fe, NM 87501
Shigemi Morita Director 114,300 1.9%
80 Park Avenue
New York, N.Y. 10016
Malcolm E. Ratliff(3) 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
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.
- ------------
(3) 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.
33
<PAGE>
Item 5. 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.
Date of
Positions Election or
Name Held Designation
- ---- --------- -----------
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, OK 73003
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
34
<PAGE>
Elizabeth Wendelken Secretary 3/13/97
8023 Stanley Road
Powell, TN 37849
James A. Gerding Director 9/4/97
405 Le Conte View Drive
Gattenburg, TN 37738
Business Experience
- -------------------
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 University.
Since approximately 1980 he has been the Chief Executive Officer of Pancake
Pantry, Inc. which owns one restaurant and franchises another. In addition, he
is a co-owner of the Village, a 27 store shopping complex in Gattenburg,
Tennessee.
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
35
<PAGE>
Mitsubishi International, Ltd. in Tokyo. He remains as President and as a
consultant.
Malcom 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 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
36
<PAGE>
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;
(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.
37
<PAGE>
ITEM 6
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 COMPENSATION TABLE(4)
----------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
Restricted Securities
Name & Position Year Salary Bonus Stock Awards Underlying Options(5)
- --------------- ---- ------ ----- ------------ ------------------
<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(6) 1994 0 0 0 0
</TABLE>
- --------------------------
(4) No other compensation was received by any officer or director.
(5) No stock options have been repriced during the last completed fiscal
year.
(6) Has 75,000 options exercisable at $5.00 per share which expire on
February 24, 1999. 22,346 are vested.
38
<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(7) 1994 0 0 0 0
Chief Financial 1995 0 0 0 100,000
Officer 1996 $2,885 0 0 0
James A. Gerding 1994 0 0 0 0
Director 1995 0 0 0 0
1996 0 0 0 0
Kelly S. Grabill 1994 0 0 0 0
Secretary 1995 $10,653 0 0 250,000
1996 $ 7,104 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
</TABLE>
- --------------------------
(7) Has 100,000 options exercisable at $5.00 per share, which expire on
February 24, 1999. 29,795 are vested.
39
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
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
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(8) 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(9)
Lyle Stocksill 1994 0 0 0 0
Director 1995 0 0 0 0
1996 0 0 0 100,000
</TABLE>
- --------------------------
(8) Value on May 2, 1997, the date of issue of these shares, was $53,750.
(9) Received in 1997.
40
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
George E. Walter Jr. 1994 0 0 0 0
Presidentand 1995 $ 2,584 0 0 400,000
Director 1996 $923 0 0 0
James C. Walter 1994 0 0 0 0
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 0
1996 $14,500 0 0 10,000(10)
</TABLE>
- --------------------------
(10) Received in 1997.
41
<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:
Name Options Exercise Unexercised Value of
Exercised Price Options Unexercised
Options
- ----------------------------------------------------------------------
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 the heading "Other Compensation" and the "Restricted Stock Options Table" of
this caption, below.
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.
42
<PAGE>
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 the names of the optionees, the
number of shares granted, the dates granted, the exercise price the expiration
dates, the number of shares vested and the market value of the shares as of
September 30,1996.
43
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR AND TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Name of Option Holder Securities % of Exercise Expiration Grant Date
Underlying Total Price Date Value
Total Options 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>
44
<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.
Item 7. 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.
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
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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 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 were 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 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
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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 Company owned by IRC.
Certain Business Relationships
Except as set forth hereafter, there are no business
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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 $882,000 of debt payable to
IRC to 164,000 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.
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 by
virtue of its stock ownership, the Company has no parents.
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", Part I, Item 1 above, and
those options outlined under the caption "Executive Compensation", Part I, Item
6 above, 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
48
<PAGE>
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. See the caption "Description of Business", Part I, Item 1
above, and the Exhibit Index.
Item 8. 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 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 by-laws 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 "Dividends" of the caption "Market Price of and
Dividends On the Company's Common Equity and Other Stockholder Matters," Part
II, Item 1, 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 by-laws or Articles of
Incorporation of the Company which would delay, defer or prevent a change in
control of the Company.
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PART II
Item 1. Market Price of and Dividends on the Company's Common
Stock and Other 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 "Special Risk Factors" of the caption
"Description of Business," Part I, Item 1, above, of this Registration Statement
may have a substantial adverse impact on any such public market. See the
specific risk factor entitled "Future Sales of Common Stock," therein.
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:
- THIS SPACE INTENTIONALLY LEFT BLANK -
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Bid
Quarter ending: High Low
March 31, 1994(8) 0.25 2
June 30, 1994 0.25 0.125
September 30, 1994 0.25 0.125
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
- -----------
(8) The high bid price for the quarter ended March 31, 1994 is a trading
price only.
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<PAGE>
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.
Item 2. 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, 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
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
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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 $4,101,600
by means of private placements of its common stock, $582,222 as loans from IRC,
Malcolm E. Ratliff and Tracmark9 and $310,000 pursuant to an arrangement with
Shigemi Morita, a director of the Company and a 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
$1,702,708 during August through October 1997 for completion of this work and to
finance drilling activities by means of private placements of its stock.
- ---------
(9) 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.
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Item 3. 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. This financial
statement accompanies this Registration Statement.
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. This financial statement accompanies this Registration Statement.
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
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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.
The Company has provided Mr. Thomson with a copy of the
disclosure provided under this caption of the Registration Statement, and has
advised him to provide the Company with a letter addressed to the Securities and
Exchange Commission as to whether he agrees or disagrees with the disclosures
made herein. A copy of his response is attached hereto and incorporated herein
by reference. See the Exhibit Index.
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:
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(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 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 has
advised him to provide the Company with a letter addressed to the Securities and
Exchange Commission as to whether he agrees or disagrees with the disclosures
made herein. A copy of his response is attached hereto and incorporated herein
by reference. See the Exhibit Index.
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
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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;
(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 has
advised them to provide the Company with a letter addressed
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<PAGE>
to the Commission as to whether they agree or disagree with the disclosures made
herein. A copy of their response is attached hereto and incorporated herein by
reference. See the Exhibit Index
Change from Charles M. Stivers, CPA, to BDO Seidman
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 includes a paragraph which discusses 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 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
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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 has
advised him to provide the Company with a letter addressed to the Commission as
to whether they agree or disagree with the disclosures made herein. A copy of
their response is attached hereto and incorporated herein by reference. See the
Exhibit Index
Item 4. 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
59
<PAGE>
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
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
60
<PAGE>
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
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 Stever, 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
61
<PAGE>
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
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
62
<PAGE>
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
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
63
<PAGE>
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 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 5. Indemnification of Directors and Officers.
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
64
<PAGE>
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 be 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 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 duty or 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.
65
<PAGE>
PART F/S
Index to Financial Statements
Financial Statements
Audited Financial Statements for the years ended
December 31, 1995 and December 31, 1996 ......... F-1
Independent Auditors' Reports ................... F-4
Balance Sheet, December 31, 1995 and
December 31, 1996 ............................... F-6
Consolidated Statements of Loss for the years
ended December 31, 1995 and December 31, 1996 ... F-8
Statement of Stockholder's Equity for the
years ended December 31, 1995 and December
31, 1996 ........................................ F-9
Statement of Cash Flow for the years ended
December 31, 1995 and December 31, 1996,
during the development stage .................... F-10
Notes to the Financial Statements ............... F-11
Unaudited Financial Statements for the nine
months ended September 30, 1997 ................. F-31
Balance Sheet September 30, 1997................. F-33
Statement of Loss for the nine months
ended September 30, 1997......................... F-35
Statement of Stockholder's Equity for the
nine months ended September 30, 1997............. F-36
Statement of Cash Flow for the nine months
ended September 30, 1997......................... F-37
Notes to Financial Statement .................... F-38
66
<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 10-5B, 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 III
Item 1. Index to Exhibits.
The following exhibits are filed as a part of this Amended
Registration Statement:
Number Description
5.1 Opinion of Robson & Miller, LLP
23.1 Consent of Charles M. Stivers, CPA
23.3 Consent of BDO Seidman, LLP
23.4 Consent of Robson & Miller, LLP (filed with
exhibit 5.1)
23.5 Consent of Coburn Petroleum Engineering Co.
* Summaries of all exhibits contained within this
Registration Statement are modified in their
entirety by reference to these Exhibits.
67
<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 10SB 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 9, 1997
- ----------------------
James B. Kreamer
Director December 9, 1997
- ----------------------
William A. Moffett
68
<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
69
<PAGE>
INDEX TO EXHIBITS
Number Description
5.1 Opinion of Robson & Miller, LLP
23.1 Consent of Charles M. Stivers, CPA
23.3 Consent of BDO Seidman, LLP
23.4 Consent of Robson & Miller, LLP (filed with
exhibit 5.1)
23.5 Consent of Coburn Petroleum Engineering Co.
* Summaries of all exhibits contained within this
Registration Statement are modified in their
entirety by reference to these Exhibits.
<PAGE>
EXHIBIT 5.1
<PAGE>
ROBSON & MILLER, LLP
COUNSELLORS AT LAW
666 THIRD AVENUE, 18TH FLOOR
NEW YORK, NY 10017-4011
TEL (212) 949-1860
FAX (212) 949-1871
December 10, 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-10 (the
"Registration Statement") and all amendments thereto, to be filed with the
Securities and Exchange Commission for the purpose of registering all of the
outstanding and issued common stock, $.001 par value per share (the "Common
Stock") 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 connectin with the
authorization of the issuance of its Common Stock. 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 all of the Company's
outstanding and issued shares of Common Stock have been duly executed and
delivered and the consideration therefor duly paid, and such shares are validly
issued, fully paid and nonassessable.
<PAGE>
ROBSON & MILLER, LLP
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
2
<PAGE>
EXHIBIT 23.1
<PAGE>
[Letterhead of Charles M. Stivers]
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 10-SB,
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 10-SB.
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 10-SB)of Tengasco, Inc.
/s/ Charles M. Stivers
-------------------------------
Charles M. Stivers, CPA
<PAGE>
EXHIBIT 23.3
<PAGE>
Consent of Independent Certified Public Accountants
Tengasco, Inc.
Knoxville, Tennessee
We hereby consent to the use in 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. Our report contains an explanatory paragraph regarding the
Company's ability to continue as a going concern.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
December 8, 1997
<PAGE>
EXHIBIT 23.5
<PAGE>
[Letterhead of Coburn Petroleum Engineering]
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,
Coburn Petroleum Engineering
/s/ R.W. Coburn
R.W. Coburn
Registered Petroleum Engineer
Oklahoma #3349
RWC/ps
cc: Mort Robson
666 3rd Avenue
New York, NY 10017
