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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2 - AMENDMENT NO. 2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TENGASCO, INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
Tennessee 1381 87-0267438
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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603 Main Avenue, Suite 500, Knoxville, Tennessee 37902 (423) 523-1124
(Address and Telephone number of Principal Executive Offices)
603 Main Avenue, Knoxville, Tennessee 37902
(Address of Principal Place of Business or Intended Place of Business)
Wesley Baker, 603 Main Avenue, Suite 500, Knoxville, Tennessee 37902
(423) 523-1124
(Name Address and Telephone number of Agent for Service of Process)
Approximate Date of Proposed Sale to Public: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of each class Dollar Amount to Proposed Proposed Amount of
of securities to be be registered maximum offering maximum Registration Fee
registered price per unit aggregate offering
price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of common $7,634,125 $11,155(1) $7,634,125 $2,252.07
stock, $0.001 par
value
==================================================================================================================
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The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
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1 This is the average of the closing bid and ask price of the
Company's Common Stock as listed on the OTC Bulletin Board on May 11, 1998.
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TENGASCO, INC.
684,368 Shares of Common Stock, $0.001 par value
This Prospectus relates to the resale of 684,368 shares of common
stock, $0.001 par value (the "Shares") owned by certain shareholders
(hereinafter collectively referred to as the "Selling Shareholders") of
Tengasco, Inc., a Tennessee corporation (the "Company"). The Company will not
receive any of the proceeds on the resale of the Shares by the Selling
Shareholders. The resale of the Shares of the Selling Shareholders is subject to
the requirements of the Securities Act of 1933, as amended (the "Act"). Sales of
the Shares or the potential of such sales at any time may have an adverse effect
on the market price of the Shares offered hereby. See "Risk Factors".
The Shares offered by this Prospectus may be sold from time to time by
the Selling Shareholders, or by their transferees. No underwriting arrangements
have been entered into by the Selling Shareholders or the Company. The
distribution of the Shares by the Selling Shareholders may be effected in one or
more transactions that may take place in the over-the-counter market including
ordinary broker's transactions, privately negotiated transactions or through
sales to one or more dealers for resale of such Shares as principals at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling
Shareholders.
The Selling Shareholders and intermediaries through whom the Shares may
be sold may be deemed "underwriters" within the meaning of the Act with respect
to the Shares offered and any profits realized or commissions received may be
deemed underwriting compensation. The Company has agreed to indemnify the
Selling Shareholders against certain liabilities, including liabilities under
the Act.
All costs incurred in the registration of the Shares of the Selling
Shareholders are being borne by the Company.
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "DILUTION" AND "RISK FACTORS"
WHICH BEGIN ON PAGE 6.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is May 11, 1998
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") Registration Statements on Forms SB-2 and 10-SB (together with all
amendments and exhibits thereto the "Registration Statement") under the
Securities Act of 1933, as amended, and Form 10-KSB for the year ended December
31, 1997 with respect to the Common Stock offered hereby. This Prospectus does
not include all of the information set forth in those Registration Statements
pursuant to the Rules and Regulations of the Commission. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, but, such references are materially complete and,
in each instance, if such contract or document is filed as an exhibit, reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement or Form 10-KSB. The Registration Statement, including
schedules and exhibits thereto may be obtained from the principal offices of the
Commission at 450 Fifth Street, N.W., Washington D.C. 20549 upon payment of the
fee prescribed or may be examined there without charge.
As of the date hereof, the Company is a reporting company, as that term
is defined under the Securities Acts, and therefore, files reports and other
information with the Commission. In addition, the Company will provide, without
charge, to its stockholders, upon written or oral request by such stockholder, a
copy of any information referred to herein that is incorporated by reference
except exhibits to such information that are incorporated by reference unless
the exhibits are themselves specifically incorporated by reference. All such
requests should be directed to Wesley Baker, at Tengasco, Inc., 603 Main Avenue,
Knoxville, Tennessee 37902, telephone number (423) 523-1124.
The Company is an electronic filer. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
such site is (http://WWW.SEC.GOV)
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. AN
INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FACTORS IDENTIFIED UNDER THE
HEADING "RISK FACTORS".
THE COMPANY
The Company is in the business of exploring for and producing
oil and gas in Tennessee and Kansas and marketing gas in Tennessee produced by
others. The Company's activities in the oil and gas business did not commence
until May 1995 with the acquisition of numerous oil and gas properties.
Effective December 31, 1997, the Company acquired from AFG
Energy, Inc. ("AFG"), a private company, approximately 30,000 acres of leases in
the vicinity of Hayes, Kansas (the "Kansas Properties"). Included in the
acquisition which closed on March 5, 1998 are 273 wells, of which 149 are
producing oil wells and 59 are producing gas wells, a related 50 mile pipeline
and gathering system, 3 compressors and 11 vehicles. The total purchase price of
these assets was approximately $5.5 million, which consisted of $3 million in
cash and seller financing of $2.5 million. Interest on the debt is 9% per annum.
The loan is payable in 23 installments of $79,500 plus a final payment of
approximately $984,000 in February, 2000.
In addition to the Kansas Properties, the Company has
interests in the following oil and gas properties:
(i) a 100% working interest in 210 oil and gas
leases on a total of 30,367 acres more or less, located in Hancock and Claiborne
Counties, Tennessee (collectively, the "Swan Creek Leases").
(ii) 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");
(iii) 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");
(iv) 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");
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(v) 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").
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
from the Company's pipeline which was recently completed. The pipeline which was
commenced during the last quarter of 1996 is approximately 23 miles long and is
made of 8 inch steel pipe. The cost to date has been approximately $3,400,000.
The Company's pipeline will not only service the Company's wells, connecting its
wells to gas purchasers but, will provide transportation of gas for small
independent producers in the local area as well. It is anticipated that direct
sales could also be made to some local towns and industries. No assurance can be
given that the Company will be able to produce a sufficient quantity of crude
oil or natural gas to make these operations profitable.
The estimated present net reserve values based upon a report
from Coburn Petroleum Engineering, an independent expert, discounting the net
reserve values by 10%, before taxes, results in a present value of $27,809,084
for the Swan Creek Field and $1,378,718 for the Beech Creek Leases. According to
a report by Columbia Engineering, an independent expert, discounting the net
reserve values by 10%, before taxes, results in a present value of $10,351,389
for the Kansas Properties. 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.
A complete discussion of the Company's business is set forth
later in this Prospectus under the heading "Description of Business."
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THE OFFERING
Shares of Common Stock Offered ........... 684,368(1)
Shares of Common Stock outstanding
as of April 1, 1998....................... 7,319,670
Use of Proceeds .......................... None of the proceeds
will be received by
the Company
SUMMARY FINANCIAL DATA
The following table sets forth certain consolidated financial
data of the Company for the three months ended March 31, 1998 and the years
ended December 31, 1997 and December 31, 1996.
Data relating to the three months ended March 31, 1998 and the
years ended December 31, 1997 and 1996 is derived from Consolidated Financial
Statements appearing elsewhere in this Prospectus. The financial statements for
the three months ended March 31, 1998 are unaudited. The 1997 and 1996 data has
been audited by BDO Seidman, LLP. The selected consolidated financial data
should be read in conjunction with, and is qualified in its entirety by
reference to, the consolidated financial statements, the notes thereto and the
reports thereon included elsewhere in this Prospectus.
- --------
1 This includes 100,000 shares issuable to one of the
Selling Shareholders upon the exercise of an option
granted to that Selling Shareholder on January 30, 1996
by the Company at an exercise price of $6.375 and 300,000
shares issuable to another Selling Shareholder upon the
exercise of an option granted to him by Industrial
Resources Corporation ("IRC") on May 7, 1997 to acquire
300,000 shares of the Company's common stock. The
exercise price is $10.00 per share.
5
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<TABLE>
<CAPTION>
Three months
ended- Unaudited Year ended Year ended
Income Statement Data 3/31/98 12/31/97 12/31/96
<S> <C> <C> <C>
Revenue $610,509 $0 $26,253
Costs and other
deductions $959,963 $4,176,876 $1,787,317
Net loss ($349,454) ($4,176,876) ($1,761,064)
Basic and Diluted loss ($0.05) ($0.67) ($0.32)
per Share
Balance Sheet Data:
Working Capital ($2,343,137) ($1,774,571) ($1,065,711)
Total Assets $11,646,640 $14,644,811 $2,727,221
Long-Term Liabilities $1,826,950 $2,006,293 $47,828
Stockholders' Equity $6,436,510 $6,001,481 $1,455,007
</TABLE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR TOTAL
INVESTMENT. PROSPECTIVE INVESTORS OF THE SHARES OFFERED HEREIN SHOULD GIVE
CAREFUL CONSIDERATION, IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS,
TO THE FOLLOWING RISK FACTORS.
1. Limited History. Although the Company was organized in
1916, it must be regarded as being in a formative stage due to its lack of
significant business operations during recent years and the fact that it did not
acquire any oil or gas leases until 1995. Prior to its acquisition of these
leases, the Company had never been involved in the oil and gas business. Its
future success depends upon its ability to profitably operate its existing wells
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and to expand its operations through the acquisition of additional oil and gas
producing properties and/or the acquisition of additional oil and gas leases. No
assurance can be given that the Company will be successful in making such
acquisitions. If the Company is successful in acquiring additional leases, it
faces the risk that the geology reports on which it relies are inaccurate, that
the oil and/or gas reserves are less than anticipated, that it will not have
sufficient funds to drill on the property, that it will not be able to market
the oil and/or gas due to a lack of a market or the lack of pipelines, and that
fluctuations in the prices of oil and/or gas will make development of those
leases uneconomical. The Company is also subject to all of the risks inherent in
attempting to expand a relatively new business venture. These risks include, but
are not limited to, possible inability to profitably operate its existing
properties or properties to be acquired in the future, the existence of
undisclosed actual or contingent liabilities, the inability to fund the
requirements of such properties and the inability to acquire additional
properties that will have a positive effect on the Company's operations. There
can be no assurance that the Company will achieve a level of profitability that
will provide a return on invested capital or that will result in an increase in
the market value of the Company's securities. See, "Market Price of and
Dividends on the Company's Common Equity and Other Stockholder Matters."
2. Going Concern. The Company's auditors have indicated doubts
about the Company's ability to continue as a going concern in view of the
recurring losses from operations and the Company's working capital deficiency.
3. Limited Market for Common Stock. Although the Company's
common stock is listed on the OTC Bulletin Board of the National Association of
Securities Dealers, Inc. (the "NASD"), the market for such shares only commenced
in May, 1995, following the acquisition of the oil and gas leases described
above, and there can be no assurance that it will continue or be maintained. As
a result of the limited market, purchasers of shares offered hereby may have
difficulty in effecting sales of their stock and/or obtaining a satisfactory
price for those shares. Any market price for shares of common stock of the
Company is likely to be very volatile, and factors such as success or lack
thereof in drilling, the ability or inability to acquire additional oil and gas
producing properties, competition, governmental regulation and fluctuations in
operating results may all have a significant effect. In addition, the stock
markets generally have experienced, and continue to experience, extreme price
and volume fluctuations which have affected the market price of many small
capital companies and which have often been unrelated to the operating
performance of these companies. These broad market fluctuations, as well as
general economic and political conditions, may adversely affect the market price
of the Company's common stock. See,"Market
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Price of and Dividends on the Company's Common Equity and Other
Stockholder Matters."
4. General Economic Risks/Potential Volatility of Stock Price.
The Company's current and future business plans are dependent, in large part, on
the state of the general economy. Adverse changes in general and local economic
conditions may cause high volatility in the market price of the Company's
securities and may adversely affect an investment in these securities. Oil and
gas prices are extremely volatile and are subject to substantial seasonal,
political, world wide supply of oil and gas and other fluctuations and risks,
all of which are beyond the Company's control.
5. Future Acquisitions. The Company intends to develop and
expand its business, principally by developing its existing oil and gas leases
and acquiring additional oil and gas-producing properties and/or leases. See
"Management's Discussion and Analysis or Plan of Operation" below. The Company
acquired a majority of the assets of AFG Energy, Inc. as of December 31, 1997,
but has not selected any particular additional properties in connection with its
expansion plans and may not be able to locate desirable property and/or it may
not be able to provide the funds necessary to acquire additional property.
6. Future Capital Requirements; Uncertainty of Future Funding.
The Company presently has limited operating capital. It will require substantial
additional funding in order to realize its goals of conducting oil and gas
exploration operations and acquiring additional oil and gas properties. The
Company is currently negotiating with investment banking firms and other
entities to raise these funds through equity or debt financing, which may be
very difficult for such a highly speculative enterprise. There can be no
assurance that such additional funding will be made available to the Company, or
if made available, that the terms thereof will be satisfactory to the Company.
Furthermore, any equity funding will cause a substantial decrease in the
proportional ownership interests of existing stockholders. If such funding is
not made available to the Company, the Company will be hampered in its ability
to conduct its planned business operations. See "Management's Discussion and
Analysis or Plan of Operation".
7. Replacement of Reserves. The Company's future success will
depend upon its ability to find, acquire and develop 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
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replacement activities. The Company's current strategy is to increase its
reserve base, production and cash flow through the development of its existing
oil and gas fields and selective acquisitions of other promising properties
where the Company can utilize new and existing technology. The Company can give
no assurance that its planned revitalization, development and acquisition
activities will result in significant additional reserves or that the Company
will have success in discovering and producing reserves at economical
exploration and development costs. The Company may not be able to locate
geologically satisfactory property, particularly since it will be competing for
such property with other oil and gas companies, many of which have much greater
financial resources than the Company. Moreover, even if desirable properties are
available to the Company, it may not have sufficient funds with which to acquire
additional leases. Furthermore, while the Company's revenues may increase if
prevailing oil and gas prices increase significantly, the Company's exploration
costs for additional reserves may also increase.
8. Uncertainty of Reserve Estimates. Oil and gas reserve
estimates and the present value estimates associated therewith are based upon
numerous engineering, geological and operational assumptions that generally are
derived from limited data. Common assumptions include such matters as the extent
and average thickness of a particular reservoir, the average porosity and
permeability of the reservoir, the anticipated future production from existing
and future wells, future development and production costs and the ultimate
hydrocarbon recovery percentage. As a result, oil and gas reserve estimates and
present value estimates are frequently revised in subsequent periods to reflect
production data obtained after the date of the original estimates. If reserve
estimates are inaccurate, production rates may decline more rapidly than
anticipated, and future production and revenues may be less than estimated.
Moreover, significant downward revisions of reserve estimates may adversely
affect the Company's ability to borrow funds in the future or have an adverse
impact on other financing arrangements.
In addition, any estimates of future net revenues and the
present value thereof are based upon period ending prices and on cost
assumptions made by the Company which only represent its best estimate. If these
estimates of quantities, prices and costs prove inaccurate and the Company is
unsuccessful in expanding its oil and gas reserves base, and/or declines in and
instability of oil and gas prices occur, write-downs in the capitalized costs
associated with the Company's oil and gas assets may be required. The Company
will also rely to a substantial degree on reserve estimates in connection with
the acquisition of producing properties. If the Company overestimates the
potential oil and gas reserves of a property to be acquired, or if its
subsequent operations on the property are not successful, the acquisition of the
property could result in substantial losses to the Company. See, "Description of
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Property".
9. Operating Hazards. Oil and gas operations involve a high
degree of risk. Natural hazards, such as excessive underground pressures, may
cause costly and dangerous blowouts or make further operations on wells
financially or physically impractical. Similarly, the testing and recompletion
of oil and gas wells involves a high degree of risk arising from operational
failures, such as blowouts, fires, pollution, collapsed casing, loss of
equipment and numerous other mechanical and technical problems. Any of the
foregoing hazards may result in substantial losses or liabilities to third
parties, including claims for bodily injuries, reservoir damage, loss of
reserves, environmental damage and other damage to persons or property. The
Company does not have insurance against such hazards.
10. Future Sales of Common Stock. IRC currently beneficially
owns approximately 3,191,395 shares of the common stock of the Company or
approximately 43.6% of its outstanding voting securities. This amount is based
upon 7,319,670 shares being outstanding or beneficially owned. The shares owned
by IRC include include 187,239 shares owned directly by Malcolm E. Ratliff and
61,052 shares owned directly by Tracmark, Inc. 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. James Ratliff is also the father of Malcolm E.
Ratliff, the Company's Chief Executive Officer and a nominee for Director.
Malcolm E. Ratliff is the President of IRC and his wife, Linda Ratliff, is the
Secretary of IRC. Tracmark, Inc., is a corporation, the sole shareholder of
which is James Ratliff, as Trustee for the Ratliff Family. James Ratliff is the
President, Malcolm E. Ratliff is the Vice-President and Linda Ratliff is the
Secretary-Treasurer of Tracmark, Inc. which may also be deemed an affiliate of
the Company. At May 1, 1998, all of the shares of the common stock owned by IRC
have been beneficially owned for two years, and subject to compliance with the
applicable provisions of Rule 144 of the Securities and Exchange Commission, IRC
may then commence to sell these "restricted securities" in an amount equal to up
to 1% of the then outstanding securities of the Company, or the average weekly
trading volume in the securities of the Company on any recognized automated
system during the four weeks preceding any Notice of Sale pursuant to Rule 144,
in any three month period, provided the Company is current in filing required
reports with the Securities and Exchange Commission. The Company is presently
current in its fillings. 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
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present market for shares of common stock of the Company, See the caption
"Market Price of and Dividends on the Company's Common Stock and Other
Stockholder Matters." For information regarding common stock ownership of IRC
and the Ratliff family, see, "Security Ownership of Certain Beneficial Owners
and Management."
A total of 505,000 "unregistered" and "restricted" shares of
the Company's common stock were issued to Jeffrey D. Jenson, M. E. Ratliff and
Leonard W. Burningham, Esq., pursuant to the Compensation Agreements that were
executed on May 2, 1995. Pursuant to Rule 144 of the Commission the shares owned
by Messrs. Jenson and Burningham, who are non-affiliates, may now be sold
without restriction. The shares owned by M. E. Ratliff, who is an affiliate, may
be sold in accordance with the provisions of Rule 144 since the Company is
subject to the reporting requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 Act, as amended (the "1934 Act"). The resale of
these securities may also have a substantial adverse impact on any then-existing
public market for the Company's common stock. See, "Recent Sales of Unregistered
Securities."
The availability of Rule 144 for resales of "restricted
securities" by affiliates is primarily conditioned upon the Company being a
"reporting company" under the 1934 Act, and being current" in all reports
required to be filed. The Company is presently a reporting company and is
current in all required reports. Shares held by non-affiliates are able to be
sold after a holding period of one year.
11. Control by Current Security Holders. The Shares offered
hereby represent a minority of the Company's outstanding voting equity. By
virtue of IRC's present ownership of approximately 44.27% of the Company's
outstanding voting securities, the management of IRC has the ability to effect
significantly the election of the Company's directors, who in turn elect all
executive officers. The management of IRC may be deemed to have substantial
control over the management and affairs of the Company. Malcolm E. Ratliff, the
Company's Chief Executive Officer, is the son of the owner of a majority of the
outstanding shares of IRC. He is also an officer of IRC. See "Security Ownership
of Certain Beneficial Owners and Management." Upon conclusion of this offering
IRC's control will not be diminished.
12. Warrants. Warrants which were issued in connection with
loans made to the Company could under certain circumstances enable the holders
of such warrants to acquire a controlling interest in the Company. The Company
has commenced a lawsuit seeking to invalidate those warrants. (See "Legal
Proceedings")
13. Competition. The Company's oil and gas exploration
activities are centered in a highly competitive field. In seeking any other
suitable oil and gas properties for acquisition, or
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drilling rig operators and related personnel and equipment, the Company will be
competing with a number of other companies, including large oil and gas
companies and other independent operators with greater financial resources.
Management does not believe that the Company's initial competitive position in
the oil and gas industry will be significant. See "Competition."
14. Dependence on Technical Personnel. Certain members of
present management have substantial expertise in the areas of endeavor presently
conducted and to be engaged in by the Company. To the extent that their services
become unavailable, the Company will be required to retain other qualified
personnel. There can be no assurance that it will be able to recruit and hire
qualified persons upon acceptable terms. See "Directors, Executive Officers,
Promoters and Control Persons."
Similarly, the oil and gas exploration industry requires the
use of personnel with substantial technical expertise. In the event that the
services of its current technical personnel become unavailable, the Company will
need to hire qualified personnel to take their place; no assurance can be given
that it will be able to recruit and hire such persons on mutually acceptable
terms.
15. Governmental Regulations. The Company is subject to
numerous state and federal regulations, environmental and otherwise, that may
have a substantial negative effect on its ability to operate at a profit. For a
discussion of the risks involved as a result of such regulations, See "Effect of
Existing or Probable Governmental Regulations on Business" and "Costs and
Effects of Compliance with Environmental Laws."
16. Market for the Shares. The Company's Common Stock is
presently traded on the OTC Bulletin Board. There can be no assurance that there
will be a market for the Shares or that the price of such stock will be
maintained hereafter. Due to numerous factors the price of the Company's Common
Stock may fluctuate significantly. If the price of the Company's Common Stock
trades for less than $5.00 per share on the OTC Bulletin Board or the National
Quotation Bureau's "pink sheets", the stock will become subject to the
Commission's penny stock disclosure requirements. This may have a substantial
adverse effect on the liquidity of the Company's common stock and, in addition,
these regulations could limit the ability of brokers/dealers to sell the
Company's securities and thus the ability of purchasers of the Company's
securities, including the Shares offered hereby, to sell such securities in the
secondary market.
17. Dividends Unlikely. The holders of Common Stock of the
Company are entitled to receive dividends when, as and if declared by the
Company's Board of Directors. The Board does not intend to declare any dividends
in the foreseeable future and earnings, if any, will be used to finance the
requirements of the
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Company.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale
of Shares by the Selling Shareholders. All of the proceeds from such sales will
be retained by the Selling Shareholders.
DETERMINATION OF PRICE OF SHARES
The price received by the Selling Shareholders will be
determined by prevailing market prices at the time of sale, at prices related to
such prevailing market prices or at negotiated prices.
DILUTION
The Company is not selling any of the Shares offered. As a
result, no dilution will result from the sale of the Shares in this Offering.
SELLING SHAREHOLDERS
The following table sets forth certain information with
respect to persons for whom the Company is registering the Shares for resale to
the public. The Company will not receive any of the proceeds from the sale of
the Shares by the Selling Shareholders. Beneficial ownership of the Shares by
such Selling Shareholders after this Offering will depend on the number of
Shares sold by each Selling Shareholder. This table assumes that all of the
Shares offered hereby will be sold.
13
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned
Prior To Offering(2) After the Offering
Name and Address of ------------------------- Number of -------------------------
Beneficial Owner Number Percent Shares Offered Number Percent
- ------------------- ------ ------- -------------- ------ -------
<S> <C> <C> <C> <C> <C>
Gregory K. Allsberry 1,418 *3 1,418 0 0
7711 Carondelet
St. Louis, MO. 63105
James P. Enright, Jr. 5,939 * 5,939 0 0
728 Zeiss Street
St. Louis, MO. 63125
William Evans 12,121 * 12,121 0 0
5 Wellington Ln.
Southwest Harbor,
ME. 04679
Constance Gianella 2,228 * 2,228 0 0
IRA Rollover
1028 Summer Tree Dr.
Manchester, MO. 63011
Richard Gianella 1,151 * 1,151 0 0
IRA Rollover
1028 Summer Tree Dr.
Manchester, MO. 63011
Richard Gianella 1,731 * 1,731 0 0
Rev Trust
U/A/D 1-13-94
Richard Gianella TTEE
1028 Summer Tree Dr.
Manchester, MO. 63011
Arthur J. Giorgio IRA 254 * 254 0 0
1251 Cliffridge Ln.
Valley, Park, MO. 63088
</TABLE>
- --------
(2) Applicable percentage of ownership is based upon 7,319,670 shares of
Common Stock of the Company outstanding as of April 27, 1998.
(3) * Indicates that the percentage of shares beneficially owned does not
exceed one percent of the Company's outstanding Common Stock.
14
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Sarah J. Goy 6,470 * 6,470 0 0
IRA Rollover
1028 Summer Tree Dr.
Manchester, M0. 63011
Neal Harding4 129,424 1.76% 429,424 0 0
5544 Fairfax St.
Orlando, Fl. 32812
Christopher Harding 5,000 * 5,000 0 0
2509 Planside Dr.
Louisville, Ky. 40299
Shannon Shay Herlihy 5,000 * 5,000 0 0
2509 Plantside Dr.
Louisville, Ky. 40299
Donald Janda 2,131 * 2,131 0 0
105 14th Ave.
Charles City, IA. 50616
Robert Janda 22,730 * 22,730 0 0
Bank of St. Edward
P.O. Box 188.
St. Edward, NE
Kenny Securities Corp. 100,000(5) 1.37% 100,000 0 0
7711 Carondelet Ave.
St. Louis, Mo. 63105
Peter Kollinger, 15,909 * 15,909 0 0
MD Rev Trust
U/A/D 7-25-90
</TABLE>
- --------
(4) Includes 300,000 shares of common stock issuable upon exercise of an
option granted to this Selling Shareholder by IRC on May 7, 1997. The exercise
price of the option is $10.00 per share.
(5) Represents 100,000 shares of Common Stock issuable upon exercise of an
option granted to this Selling Shareholder by the Company on January 6, 1996.
The exercise price of the option is $6 3/8 per share. The principal of Kenny
Securities Corp. are John J. Kenny and J. Michael Short.
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Peter Kollinger, MD TTEE
900 W. Temple Ave. - Suite 205
Effingham, IL. 62401
Kossmeyer & Associates 15,489 * 15,489 0 0
Profit Sharing Plan
U/A/D 12-12-85
FBO Carl F. Kossmeyer
38 Muirfield
St. Louis, MO. 63141
Brandon S. Kossmeyer 2,504 * 2,504 0 0
401(k) Profit Sharing Plan
U/A/D 9-26-85
FBO Carl F. Kossmeyer
12161 Lackland Rd.
St. Louis, MO. 63146
Carl F. Kossmeyer 1,542 * 1,542 0 0
Rev Trust
U/A/D 1-13-94
Carl F. Kossmeyer TTEE
38 Muirfield
St. Louis, MO. 63141
Chase B. Kossmeyer IRA 254 * 254 0 0
38 Muirfield
St. Louis, MO. 63141
Clayton C. Kossmeyer IRA 254 * 254 0 0
38 Muirfield
St. Louis, MO. 63141
Maria P. Kossmeyer 4,369 * 4,369 0 0
Rev Trust
U/A/D 1-13-94
Maria P. Kossmeyer TTEE
38 Muirfield
St. Louis, MO. 63141
Maria P. Kossmeyer 272 * 272 0 0
Custodian for
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Chase B. Kossmeyer
38 Muirfield
St. Louis, MO. 63141
Maria P. Kossmeyer 199 * 199 0 0
Custodian for
Clayton C. Kossmeyer
38 Muirfield
St. Louis, MO. 63141
Maria P. Kossmeyer 713 * 713 0 0
Custodian for
Meryl A. Kossmeyer
38 Muirfield
St. Louis, MO. 63141
Meryl A. Kossmeyer IRA 254 * 254 0 0
38 Muirfield
St. Louis, MO. 63141
Mark Kruger 12,121 * 12,121 0 0
27 Arundel Pl. .
St. Louis, M0. 63015
Samuel Mickelson and 6,470 * 6,470 0 0
Seena Mickelson JT WROS
8089 Whispering Palm Dr.
Boca Raton, FL. 33496
Robert Nicholson 5,515 * 5,515 0 0
5734 Paddington Way
Boca Raton, FL 33486
William Stern 6,470 * 6,470 0 0
c/o Mark Twain Bank
1631 S. Lindbergh Blvd.
St. Louis, MO. 63131
Tornado Fund(6) 7,127 * 7,127 0 0
Attn: Dean Carlton
</TABLE>
- --------
(6) The principals of Tornado Fund are Dean Carlton and Kyle
Kabance.
17
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
2010 Winter Haven
St. Louis, MO. 63052
Paul J. Wirtz 1,418 * 1,418 0 0
11078 Oregon Curve
Bloomington, MN. 55438
Gudrun A. Zoeller 7,491 * 7,491 0 0
7572 Sierra Dr. East
Boca Raton, FL. 33433
</TABLE>
PLAN OF DISTRIBUTION
Upon the effectiveness of the Registration Statement, the
Selling Shareholders may use this Prospectus, as updated from time to time, to
offer the Shares for sale by the Selling Shareholders directly, or through
broker-dealers or agents as may be designated from time to time by the Selling
Shareholders, or through a combination of such methods. Sales may be effected on
the OTC Bulletin Board or otherwise, at market prices prevailing at the time of
sale, at prices related to prevailing market prices, or at negotiated prices.
Broker-dealers and agents will receive compensation in the form of concessions
or commissions from the Selling Shareholders and/or purchasers of the Shares for
whom they may act as agent. Such compensation will be negotiated and paid for by
either the Selling Shareholders and/or purchasers. The Company has not arranged
for the sale of any of the Shares and is not responsible for any concessions or
commissions to be paid in connection with such sales. Each Selling Shareholder
and any brokers or agents that participate in the distribution of the Shares may
be deemed underwriters under the Securities Acts.
The Shares may be sold on the OTC Bulletin Board or in
privately negotiated transactions. Sales of the Shares on the OTC Bulletin Board
may be made by one or more of the following means: (a) block trades in which a
broker-dealer will attempt to sell shares as agent but may position and resell a
portion of the block as principal to facilitate the transactions; (b) purchases
by a broker-dealer as principal and resale by such broker-dealer for its account
pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers; and (d) any other
means permitted by applicable regulations and laws. In addition, any Shares
which qualify for sale pursuant to Rule 144 under the Act may be sold under Rule
144 rather than pursuant to this Prospectus.
18
<PAGE>
Upon the Company being notified by a Selling Shareholder that
any material arrangement has been entered into with a broker-dealer for the sale
of Shares under any circumstances which require the filing of a supplemental
prospectus, a supplemental prospectus will be filed under Rule 424(c) under the
Act setting forth the names of the participating broker-dealers, the number
Shares involved, the price at which such Shares were sold by the Selling
Shareholder, and the commission paid or discounts or concessions allowed by the
Selling Shareholder to such broker-dealers.
LEGAL PROCEEDINGS
Except as described hereafter, the Company is not a party to
any pending material legal proceeding. To the knowledge of management, no
federal, state or local governmental agency is presently contemplating any
proceeding against the Company. To the knowledge of management, no director,
executive officer or affiliate of the Company or owner of record or beneficially
of more than 5% of the Company's common stock is a party adverse to the Company
or has a material interest adverse to the Company in any proceeding.
The Company is a defendant in an action commenced on March 18,
1997 in the Supreme Court of the State of New York, New York County by a lender,
Ulrich Hocker, seeking the recovery of $250,000 based upon a promissory note.
The plaintiff sought accelerated summary judgment by filing a motion without a
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, including a defense of usury.
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
19
<PAGE>
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 had hindered the Company's efforts to obtain funding for the
purpose of completing the pipeline and continuing drilling activities. The
Company sought permission from the Court in Tennessee to substitute a bond in
place of the mortgage. The Court refused the request because all of the
defendants had not yet been served. All defendants have now been served and the
Company intends to renew its request to file a bond. The Company has received a
proposal from counsel for the defendants offering to release the mortgage if a
bond in the amount of approximately $1,350,000 is filed. The Company is now
attempting to arrange for the issuance of the bond.
At the time the Company sought to obtain a release of the
mortgage by filing a bond, it was important to obtain that release because the
availability of additional necessary funds was conditioned upon a lender's
ability to obtain a first mortgage on the leased property. Since that time, the
Company has been able to obtain additional financing in the amount of $6,307,201
by means of private placements of its common stock, $582,222 as loans from IRC,
Malcolm E. Ratliff and Tracmark and $310,000 pursuant to an arrangement with
Shigemi Morita, a director of the Company and 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 decision of the Circuit Court has been affirmed by the Supreme
Court of Tennessee.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS and CONTROL PERSONS
Identification of Directors and Executive Officers
The following table sets forth the names of all current
20
<PAGE>
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
- ---- ---- -----------
Joseph E. Armstrong Director 3/13/97
2624 Selma Avenue
Knoxville, TN 37914
James B. Kreamer Director 3/13/97
3621 Cabin Creek Road
London, KY 40741
William A. Moffett Director 5/95
1073 Encantado Drive
Santa Fe, NM 87501
Shigemi Morita Director 3/13/97
80 Park Avenue
New York, N.Y. 10016
Allen Sweeney Director 3/13/97
1400 Oak Tree Drive
Edmund, OK 73003
Malcolm E. Ratliff Chief Executive 4/21/98
12608 Avallon Place Officer
Knoxville, TN 37922
Robert M. Carter President 3/13/98
317 Heathermoor Drive
Knoxville, TN 37922
William F. Stenken Chief Accounting 3/13/98
12 Eagle Court Officer
Crossville, TN 38558
Sheila Sloan Treasurer 3/13/97
121 Oostanali Way
Loudon, TN 37774
Elizabeth Wendelken Secretary 3/13/97
8023 Stanley Road
Powell, TN 37849
21
<PAGE>
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 B. Kreamer is 58 years old. He earned a Degree in
Business from the University of Kansas in 1963. He has been the owner of several
business enterprises. In 1982, he purchased a seat on the Kansas City Board of
Trade where he served on several committees working on the development of
futures trading. Since 1979, he has been engaged in the oil and gas business as
an investor. He currently serves as a member of the Board of Directors of
Panaco, Inc., a NASDAQ energy company.
William A. Moffett is 63 years old. He received a BS Degree in
Geological Engineering from Oklahoma University in 1956. From 1977 to 1982, he
was Operations Manager for Esso Exploration and Production in the United
Kingdom. From 1982 to 1984, he was General Production Manager for Intercol (an
affiliate of Exxon in Colombia). From 1984 to 1991 he was CEO for Stan Vac
Indonesia, a joint Exxon/Mobil affiliate. From 1991 until his employment by the
Company, Mr. Moffett was retired.
Shigemi Morita is 62 years old. He received an A.B.
Degree from Elon College in North Carolina. From 1969 to 1996 he
was the President and CEO of Morita & Co., an insurance agency
specializing in insurance for Japanese companies doing business in
the United States. In 1996, Morita & Co., Inc. was acquired by
Tokio Marine Management, Inc., Mitsubishi International Corporation
in New York and Mitsubishi International, Ltd. in Tokyo. He remains
as President and as a consultant.
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.
22
<PAGE>
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. From March 13,
1997 until March 13, 1998 when he resigned for health reasons, he was the Chief
Executive Officer of the Company, and until his resignation on March 13, 1998,
he was also acting as interim President of the Company as the result of the
death, on September 19, 1997, of Daniel Follmer, the Company's President. On
April 21, 1998 at the request of the Company's Board of Directors, Mr. Ratliff
agreed to return to the management of the Company as its Chief Executive
Officer.
Robert M. Carter is 62 years old. He received a B.A. degree in
Business form the Middle Tennessee State College. For 35 years was an owner of
Carter Lumber & Building Supply Company and Carter Warehouse in Loudon County,
Tennessee. He has been with the Company since 1995 and during that time has been
involved in all phases of the Company's business including pipeline
construction, leasing financing and the negotiation of acquisitions. Mr. Carter
was elected Vice-President of the Company in March, 1996, as Executive
Vice-President in April 1997 and on March 13, 1998 he was elected as President
of the Company.
William F. Stenken is 60 years old. Mr. Stenken is a certified
public accountant. He received a B.S with honors in Accounting from the
University of Cincinnati in 1967. From 1967 to 1970 he was a senior accountant
with KPMG Peat Marwick CPA's. Since then he has held controller positions for
various companies, including a transportation company and a meat processing and
commodities trading organization. He has held internal audit management
positions with major bank holding companies, American Fletcher Bancorporation
and PNC Bank. He has been with the Company since May 1997 and on March 13, 1998
he was elected as the Company's Chief Financial Officer.
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.
23
<PAGE>
Involvement in Certain Legal Proceeding
During the past five years, no present or former director,
executive officer, affiliate or person nominated to become a director or an
executive officer of the Company:
(1) Filed a petition under the federal bankruptcy laws or
any state insolvency law, nor had a receiver, fiscal agent or similar officer
appointed by a court for the business or property of such person, or any
partnership in which he or she was a general partner at or within two years
before the time of such filing, or any corporation or business association of
which he or she was an executive officer at or within two years before the time
of such filing;
(2) Was convicted in a criminal proceeding or named subject of
a pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) Was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction,
permanently or temporarily enjoining him or her from or otherwise limiting his
or her involvement in any type of business, securities or banking activities;
(4) Was found by a court of competent jurisdiction in a civil
action, by the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated any federal or state securities law, and the
judgment in such civil action or finding by the Securities and Exchange
Commission has not been subsequently reversed, suspended, or vacated.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS and MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following tables set forth the share holdings of the
Company's directors and executive officers and those persons who own more than
5% of the Company's common stock as of June 30, 1997 with these computations
being based upon 6,398,000 shares of common stock being outstanding and assumes
the exercise of 281,376 shares vested under options granted by the Company as of
June 30, 1997. (See the heading "Other Compensation" and the "Restricted Stock
Options Table," under the caption "Executive Compensation" below).
24
<PAGE>
Five Percent Stockholders
-------------------------
Number of Shares Percent
Name and Address Title Beneficially Owned of Class
- ---------------- ----- ------------------ --------
Industrial Resources Stockholder 3,191,395 43.6%
Corporation(7)
Ste. 500-600 Main Ave.
Knoxville, TN 37902
Directors and Executive Officers
--------------------------------
Shares Beneficially Percent of
Name and Address Title Owned Class
- ---------------- ----- ----- -----
Joseph Earl Armstrong Director 50,000(8) Less than 1%
2624 Selma Avenue
Knoxville, TN 37914
Robert M. Carter President 98,000(9) 1.3%
317 Heathermoor Drive
Knoxville, TN 37922
James B. Kreamer Director 50,000(10) Less than 1%
3621 Cabin Creek Rd.
London, KY 40741
- --------
(7) James Ratliff is the sole owner of the outstanding securities of
Industrial Resources Corporation (" IRC"), and, accordingly, he may be deemed to
be an affiliate of the Company. James Ratliff is also the father of Malcolm E.
Ratliff, the Company's Chief Executive Officer and a nominee for Director.
Malcolm E. Ratliff is the President of IRC and his wife, Linda Ratliff, is the
Secretary of IRC. Tracmark, Inc., is a corporation, the sole shareholder of
which is James Ratliff, as Trustee for the Ratliff Family. James Ratliff is the
President, Malcolm E. Ratliff is the Vice-President and Linda Ratliff is the
Secretary-Treasurer of Tracmark, Inc. which may also be deemed an affiliate of
the Company. The shares listed here for IRC include 187,239 shares owned
directly by Malcolm E. Ratliff and 61,052 shares owned directly by Tracmark,
Inc..
(8) Consists of shares underlying an option.
(9) Consists of 23,000 shares held directly and options to purchase 75,000
shares.
(10) Consists of options to purchase shares.
25
<PAGE>
William A. Moffett Director 100,000 1.4%
1073 Encantado Drive
Santa Fe, NM 87501
Shigemi Morita Director 156,741(11) 2.1%
80 Park Avenue
New York, N.Y. 10016
Malcolm E. Ratliff Chief 3,191,395(12) 43.6%
12608 Avallon Place Executive
Knoxville, TN 37922 Officer
Sheila F. Sloan Treasurer 12,000(13) Less than 1%
121 Oostanali Way
Loudon, TN 37774
William Stenken Chief -0- -0-
12 Eagle Court Accounting Officer
Crossville, TN 38588
Allen H. Sweeney Chairman of 150,500(14) 2.04%
1400 Oak Tree Drive the Board
Edmund, OK 73003
Elizabeth Wendelken Secretary 11,000(15) Less than 1%
- --------
(11) Consists of 34,741 shares held directly, 72,000 shares held as an IRA
beneficiary and options to purchase 50,000 shares.
(12) Malcolm E. Ratlif, the Company's Chief Executive Officer and a nominee
for Director, is also a Vice-President of Industrial Resources Corporation
("IRC").James Ratliff who is the father of Malcolm E. Ratliff, is the sole
shareholder and President of IRC and Linda Ratliff, the wife of Malcolm E.
Ratliff, is the Secretary of IRC. Malcolm E. Ratliff is also Vice-President of
Tracmark, Inc., a corporation whose sole stockholder is James Ratliff as Trustee
for the Ratliff Family. James Ratliff is the President and Linda Ratliff is the
Secretary-Treasurer of Tracmark, Inc. The shares listed here include 2,943,104
shares owned directly by IRC and 61,052 shares owned directly by Tracmark, Inc.
(13) Consists of 2,000 shares held directly and options to purchase 10,000
shares.
(14) Consists of 100,500 shares held indirectly through a company which he
controls and options to purchase 50,000 shares.
26
<PAGE>
8023 Stanley Road
Powell, TN 37849
All Officers and 3,819,636(16) 50.3%
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.
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
Bylaws provide that a majority of the issued and outstanding shares of the
Company shall constitute a quorum for stockholders meetings except with respect
to certain matters for which a greater percentage quorum is required by statute
or the by-laws.
Stockholders of the Company have no preemptive rights to
acquire additional shares of common stock or other securities. The common stock
is not subject to redemption and carries no subscription or conversion rights.
In the event of liquidation of the Company, the shares of common stock are
entitled to share
- --------
(15)Consists of 1,000 shares held directly and options to purchase 10,000
shares.
(16)Consists of shares held directly and indirectly by management, shares
held by Industrial Resources Corporation, shares held by Tracmark, Inc. and
270,000 shares underlying options.
27
<PAGE>
equally in corporate assets after satisfaction of all liabilities. Holders of
common stock are entitled to receive such dividends as the Board of Directors
may from time to time declare out of funds legally available for the payment of
dividends. The Company seeks growth and expansion of its business through the
reinvestment of profits, if any, and except as indicated under the heading
"Market Price of and Dividends On the Company's Common Equity and Other
Stockholder Matters" - "Dividends" below, the Company does not anticipate that
it will pay dividends in the foreseeable future.
The Board of Directors has the authority to issue the
authorized but unissued shares of common stock without action by the
stockholders. The issuance of such shares would reduce the percentage ownership
held by existing shareholders and may dilute the book value of their shares.
There are no provisions in the Bylaws or Articles of
Incorporation of the Company which would delay, defer or prevent a change in
control of the Company.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES and AGENTS
Section 48-18-502 of the Tennessee Business Corporation Act
(the "TBCA") allows a corporation to indemnify any director in any civil or
criminal proceeding (other than a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation or any
other proceeding in which he or she was adjudged liable on the basis that he or
she improperly received a personal benefit) by reason of service as a director
if the person to be indemnified conducted himself or herself in good faith and
in a manner reasonably believed to be in, or not opposed to, the best interests
of the corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe the conduct was unlawful.
Unless limited by its charter, Section 48-18-503 of the TBCA
requires a corporation to indemnify a director who was wholly successful, on the
merits or otherwise, in the defense of any proceeding to which he or she was a
party because of his or her role as director against reasonable expenses
incurred in connection with the proceeding. The Company's charter does not
provide any limitations on this right of indemnification.
Pursuant to Section 48-18-504 of the TBCA, the Company may
advance a director's expenses incurred in defending any proceeding upon receipt
of an undertaking and a statement of the director's good faith belief that he or
she has met the standard of conduct described in Section 48-18-502.
Section 48-18-505 of the TBCA permits a court, upon
28
<PAGE>
application of a director, to order indemnification if it determines that the
director is entitled to mandatory indemnification under Section 48-18-503 or
that he or she is fairly and reasonably entitled to indemnification, whether or
not he or she met the standards set forth in Section 48-18-502.
Section 48-18-506 of the TBCA limits indemnification under
Section 48-18-502 to situations in which either (i) the majority of a
disinterested quorum of directors; (ii) independent special legal counsel; or
(iii) the stockholders determine that indemnification is proper under the
circumstances.
Section 48-18-507 of the TBCA extends certain indemnification
rights to officers, employees and agents of a corporation as well.
Regardless of whether a director, officer, employee or agent
has the right to indemnity under Section 48-18-502 or Section 48-18-503 of the
TBCA, Section 48-18-508 allows the corporation to purchase and maintain
insurance on his or her behalf against liability resulting from his or her
corporate role.
Section 48-18-509 of the TBCA provides that the rights to
indemnification and advancement of expenses shall not be deemed exclusive of any
other rights under any bylaw, agreement, stockholder vote or vote of
disinterested directors; however, no indemnification may be made where a final
adjudication adverse to the director establishes his or her liability for breach
of the duty of loyalty to the corporation or its stockholders or for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law.
Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful
defenses of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being offered
hereunder, the Company will, unless in the opinion of its counsel that matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the questions whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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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 field did not commence until May 2, 1995. As of
December 31, 1997, it had no producing properties. However, it had drilled 5
wells in the Swan Creek field in Tennessee all of which had commercial
quantities of gas. Two additional wells in that field have since been completed.
The Company has now completed construction of its pipeline in Tennessee which it
anticipates will be connected to its wells by the end of May, 1998 at which time
it expects to commence production and sale of gas.
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Effective December 31, 1997, the Company acquired from AFG
30,000 acres of leases in the vicinity of Hayes, Kansas (the "Kansas
Properties"). Included in the acquisition which closed on March 5, 1998 are 273
wells, of which 149 are producing oil wells and 59 are producing gas wells, a
related 50 mile pipeline and gathering system, 3 compressors and 11 vehicles.
The total purchase price of these assets was approximately $5.5 million, which
consisted of $3 million in cash and seller financing of $2.5 million. Interest
on the debt is at 9% and is payable in 23 installments of $79,500 plus a final
payment of approximately $984,000 in February, 2000.
The Company was initially organized under the laws of the
State of Utah on April 18, 1916, under the name "Gold Deposit Mining & Milling
Company." The Company was formed for the purpose of mining, reducing and
smelting mineral ores.
The Company's Articles of Incorporation were amended on April
12, 1966, by unanimous vote of the shareholders, to provide that the Company
shall have a perpetual existence.
On November 10, 1972, the Company conveyed to an unaffiliated
entity substantially all of the Company's assets at that time, and the Company
ceased all business operations.
On July 12, 1984, the Company's Articles of Incorporation were
again amended to: (i) authorize it to engage in any business or enterprise
deemed to be beneficial to the Company; (ii) increase the authorized capital of
the Company from 1,000,000 shares to 50,000,000 shares of common stock (which
allowed the Company to issue the "unregistered" and "restricted" shares referred
to in the preceding paragraph); (iii) reduce the par value of its common stock
from $0.10 to $0.001; (iv) provide that fully-paid stock shall not be liable for
any further call or assessment; and (v) provide that stockholders shall not have
preemptive rights to acquire unissued shares. There were 980,778 outstanding
voting securities of the Company on the date of the adoption of this amendment
by the stockholders of the Company, and 696,146 shares were voted in favor of
these amendments with none opposing and none abstaining.
From approximately 1983 to 1991, the operations of the Company
were limited to seeking out the acquisition of assets, property or businesses.
In contemplation of completing a "reverse" reorganization with
Onasco Biotechnologies, Inc. ("Onasco Texas"), the stockholders of the Company
adopted, ratified and approved the 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
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retaining the par value at $0.001 per share, with the appropriate adjustments
being made in the additional paid-in capital and stated capital accounts of the
Company; and (ii) a change of the Company's name to "Onasco Companies, Inc."
These amendments were subject to the completion of the contemplated
reorganization.
The Company entered into an Agreement and Plan of
Reorganization with Onasco Texas and all of its stockholders on December 17,
1991 (the "Onasco Plan"). Pursuant to the Onasco Plan, the Company acquired all
of the issued and outstanding shares of common stock of Onasco Texas in
consideration of the Company's issuance of an aggregate total of 15,000,000
post-split "unregistered" and "restricted" shares of its $0.001 par value common
stock to the stockholders of Onasco Texas, pro rata, in accordance with their
respective interests in Onasco Texas.
The Onasco Plan was effective as of December 18, 1991, the
date on which the aforesaid Articles of Amendment respecting the reorganization
with Onasco Texas were filed with the Department of Commerce of the State of
Utah. There were 2,480,778 outstanding voting securities of the Company on the
date of the adoption of this amendment by the stockholders of the Company, and
1,339,146 shares were voted in favor of these amendments with none opposing and
none abstaining.
Onasco Texas, which became a wholly owned subsidiary of the
Company following the completion of the Onasco Plan, was organized under the
laws of the State of Texas on October 17, 1991. The Company carried on the
business operations previously conducted by Onasco Texas, which consisted of the
development of diagnostic kits to screen for the presence of Type D retrovirus
in humans and monkeys and a putative, synthetic vaccine against such viruses.
These operations, which primarily involved research and development activities,
proved unsuccessful and were discontinued in June, 1994, and Onasco Texas was
dissolved by resolution of the Board of Directors on or about April 10, 1995.
The dissolution did not involve any bankruptcy or similar proceeding.
In accordance with the Utah Revised Business Corporation Law,
which became effective in 1991, on September 11, 1992, the Company's Articles of
Incorporation were further amended (i) to authorize the stockholders of the
Company to take any action without a meeting, that could have been taken at a
meeting of the stockholders, if consents are signed by stockholders holding at
least the number of shares that would be necessary to take the action at a
meeting (this action was not possible under prior law); and (ii) to provide for
the reclassification of each outstanding share of its common stock to become
one-twentieth of one share of 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
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of this reclassification was a one share for twenty reverse split of the
outstanding shares of common stock. There were 20,259,987 outstanding voting
securities of the Company on the date of the adoption of this amendment by the
stockholders of the Company, and 14,800,000 shares were voted in favor of these
amendments with none opposing and none abstaining; the outstanding voting
securities of the Company were reduced to 1,012,999 shares as a result of the
reverse split.
In connection with a change in control of the Company in the
summer of 1994, Duane S. Jenson and his son, Jeffrey D. Jenson, purchased
697,500 shares of the Company's common stock, constituting approximately 67% of
the then outstanding voting securities of the Company, from Dr. Robert C.
Bohannon, Ph.D. and his family, in consideration of the sum of $10,000. Dr.
Bohannon was formerly the principal stockholder of Onasco Texas, and had served
as the President, CEO, Vice President and a director of the Company since the
completion of the Onasco Plan. Dr. Bohannon resigned these positions with the
Company, effective June 13, 1994, compromised a debt of the Company to him for
past services rendered to the Company prior to the change in control, and
designated Jeffrey D. Jenson to serve as President, CEO, Secretary/Treasurer and
a director of the Company. At the time of the change of control, Dr. Bohannon
was the sole director and executive officer of the Company. The remaining 33% of
the Company's stock was held by original public shareholders. Subsequent to the
change in control, Dr. Bohannon did not perform any services for the Company.
Prior to the change in control, no director of the Company received compensation
in excess of $100,000 per annum.
At a special meeting of stockholders held on April 28,
1995, the Company's stockholders voted
(i) to approve the execution of an agreement (the "Purchase
Agreement") pursuant to which the Company would acquire certain oil and gas
leases, equipment, securities and vehicles owned by Industrial Resources
Corporation ("IRC"), a Kentucky corporation, in consideration of the issuance of
4,000,000 post-split (as described below) "unregistered" and "restricted" shares
of the Company's common stock;
(ii) to amend the Articles of Incorporation of the Company to
effect a reverse split of the Company's outstanding $0.001 par value common
stock on a basis of one share for two, retaining the par value at $0.001 per
share, with appropriate adjustments being made in the additional paid-in capital
and stated capital accounts of the Company;
(iii) to change the name of the Company to "Tengasco, Inc.";
and
(iv) to change the domicile of the Company from the State
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of Utah to the State of Tennessee by merging the Company into Tengasco, Inc., a
Tennessee corporation, formed by the Company solely for this purpose.
The Purchase Agreement was duly executed by the Company and
IRC, effective May 2, 1995. The reverse split, name change and change of
domicile became effective on May 4, 1995, the date on which duly executed
Articles of Merger effecting these changes were filed with the Secretary of
State of the State of Tennessee; a certified copy of the Articles of Merger from
the State of Tennessee was filed with the Department of Commerce of the State of
Utah on May 5, 1995. Unless otherwise noted, all subsequent computations in this
Prospectus retroactively reflect this one for two reverse split and all other
reverse splits outlined above under this caption. There were 1,037,650
outstanding voting securities of the Company on the date of the adoption of the
amendments by the stockholders of the Company, and 801,383 shares were voted in
favor of the amendments with none opposing and none abstaining.
At the annual meeting of stockholders held January 30, 1996,
the following persons were elected as directors of the Company, to serve until
the next annual meeting of the stockholders of the Company or until their
successors are elected and qualified, or their prior resignations or
terminations: Walter C. Arzonetti; Benton L. Becker; Charles N. Manhoff, William
A. Moffett, and Lyle G. Stockstill. At the annual meeting, 4,047,550 shares of
the 5,239,300 outstanding voting securities were voted in favor of the election,
with none opposing and none abstaining.
At the annual meeting of the directors held January 30, 1996,
immediately following the annual meeting of the stockholders, the following
persons were elected as executive officers of the Company, to serve until the
next annual meeting of the Board of Directors of the Company or until their
successors are elected and qualified, or their prior resignations or
terminations: Ted P. Scallan, President and CEO; Kelley S. Grabill, Secretary;
and Jeffrey D. DeMunnik, Treasurer. At its annual meeting, the Board of
Directors also adopted resolutions pursuant to which options to purchase
"unregistered" and "restricted" shares of common stock of the Company were
granted to Messrs. Jeffrey D. DeMunnik, Kelley S. Grabill, Ted P. Scallan and
Lyle G. Stockstill, directors or executive officers of the Company, and to
certain other persons, who were consultants or employees. See, "Executive
Compensation" "Restricted Stock Options Table" below.
Mr. Stocksill resigned on November 25, 1996 and Messrs.
Manhoff and Arzonetti resigned on February 7,1997. Mr. Valliant
resigned on January 27, 1997. Mr. Becker resigned on January 30,
1997. Mr. Fetters and Mr. Wright resigned on March 13, 1997.
Theodore P. Scallan resigned as President and CEO on
November 26, 1996 and was replaced by James E. Kaiser who served
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until January 24, 1997 and was then replaced as President by Daniel G. Follmer
and as CEO by Malcolm E. Ratliff.
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.
On March 13, 1997, at the Company's annual meeting of
shareholders, Joseph Armstrong, James B. Kreamer, William A. Moffett, Shigemi
Morita and Allen Sweeney were elected to serve as directors to replace resigned
directors until the next annual meeting of shareholders.
At the annual meeting of the directors held March 13,
1997, 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: Malcolm E. Ratliff, Chief Executive Officer. Mr. Ratliff
subsequently resigned as Chief Executive Officer; Daniel G. Follmer, President
and Chief Financial Officer; Robert M. Carter, Executive Vice-President; Wesley
M. Baker, General Counsel; Elizabeth Wendlken, Secretary; and, Sheila F. Sloan,
Treasurer.
On September 4, 1997, James A. Gerding was added as a Director
by the Company's Board of Directors to serve in that capacity until the next
annual meeting of the Company's shareholders. Mr. Gerding resigned as a Director
in April 1998 for personal reasons.
Mr. Follmer died on September 13, 1997. Malcolm E. Ratliff
until he resigned due to health reasons served as both CEO and interim
President. On March 13, 1998, Robert Carter replaced him as President and
William F. Stenken replaced him as the Company's Chief Accounting Officer. On
April 21, 1998 at the request of the Company's Board of Directors, Mr. Ratliff
agreed to return to the management of the Company as its Chief Executive
Officer.
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
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these leases provides for a landowner royalty of 12.5% of the oil produced and
saved from the leased premises or, at the lessee's option, to pay the market
price for such 12.5% royalty. The leases also provide for a landowner royalty
equal to 12.5% of the market price at the well of the gas sold or used off the
premises, except for injection for secondary recovery of oil. The lessors are
also entitled to free gas for all stoves and inside lights in the principal
dwelling house on the leased properties by making connection to the well or
wells at their own expense and risk. The Beech Creek Leases are also subject to
overriding royalties ranging from 1.25% to 5%.
(ii) a 100% working interest in 5 oil and gas
leases on a total of 741 acres, more or less, located in Clay County, Kentucky
(collectively, the "Wildcat Leases"). Each of these leases is subject to a 12.5%
landowner royalty, on the same terms as the Beech Creek Leases, and a 3.125%
overriding royalty.
(iii) a 100% working interest in six oil and gas
leases on a total of 744 acres, more or less, located in Clay County, Kentucky
(collectively, the "Burning Springs Leases"). Each of these leases is subject to
a 12.5% landowner royalty, on the same terms as the Beech Creek Leases and the
Wildcat Leases, and overriding royalties ranging from 3.125% to 7.5%.
(iv) a 100% working interest in nine oil and gas
leases on a total of 2,121 acres, more or less, located in Fentress County,
Tennessee (collectively, the "Fentress County Leases"). Each of these leases is
subject to a 12.5% landowner royalty, on the same terms as the above referenced
leases, and a 19% overriding royalty; and a 25% overriding royalty on one
existing well. Section 60-1-301 of the Tennessee Code provides for a severance
tax of 3% on all gas and oil removed from the ground in Tennessee.
The initial term of each of the above referenced leases ranges
from one year to four years, with each lease to remain in effect thereafter for
as long as (i) oil, gas, casing-head gas or casing-head gasoline is being
produced on the leased premises, (ii) the Company has drilled a producing well
and shut-in royalty is paid for the right to inject, store and remove gas, or
(iii) the Company commences drilling another well or paying rentals within one
year of drilling a dry hole on the leased premises.
For those leases that are subject to a rental requirement, the
obligation to pay rent arises only when no well is in production on the leased
premises. Rent may be paid annually or quarterly, and once it has been paid, the
Company has the right to defer the commencement of a well for the period for
which the rent was paid. Rent amounts vary from $1 to $5 per acre per year, with
certain leases providing for a flat rental payment of $1500.
The Beech Creek Leases contain four wells. These four
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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.
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 seven existing wells on the Swan Creek Leases. All
of these wells have been completed and will be available for production and
delivery through the Company's newly completed pipeline by April 30, 1998. The
first two wells have recently tested at 4.8 million cubic feet and 1.2 million
cubic feet, respectively, of gas per day.
The Company also acquired a 100% working interest in four oil
and gas leases on a total of 1,003.19 acres, more or less, located in Lauderdale
County, Alabama (collectively, the "Alabama Leases"). Each of these leases
provides for a landowner royalty of 12.5%, leaving the Company a net royalty
interest of 87.5% in each lease.
The Alabama Leases have no existing wells. These leases
will be designated for wildcat purposes and there is no immediate
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plan to acquire additional leases in the area or to begin an exploration
program.
The term of these leases is similar to the terms described
above with respect to the leases acquired from IRC.
For those leases that are subject to a rental requirement, the
date of the Company's next rent payment is shown on the applicable lease
schedule attached hereto as an Exhibit. The obligation to pay rent arises only
when no well is in production on the leased premises. Rent may be paid annually
or quarterly, and once it has been paid, the Company has the right to defer the
commencement of a well for the period for which the rent was paid. Rent amounts
are $1 per acre per year.
Substantial additional evaluation and remedial work will be
necessary in order to determine whether most of the Company's 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.
Effective December 31, 1997, the Company acquired all of the
assets of AFG which included 149 producing oil wells and 59 producing gas wells
in the vicinity of Hayes, Kansas (the "Kansas Properties") and a gathering
system including 50 miles of pipeline. Pursuant to the acquisition agreement,
the Company is entitled to all income from the Kansas Properties effective
January 1, 1998. The aggregate production for the Kansas Properties at present
is approximately 28,400 mcf of gas per month and 15,000 barrels of oil per
month. Revenues for the Kansas Wells for the first quarter of 1998 was
approximately $610,000.
Governmental Regulations
The Company is subject to numerous state and federal
regulations, environmental and otherwise, that may have a substantial negative
effect on its ability to operate at a profit. For a discussion of the risks
involved as a result of such regulations, see, "Effect of Existing or Probable
Governmental Regulations on Business" and "Costs and Effects of Compliance with
Environmental Laws" hereinafter in this section.
Principal Products or Services and Markets
The Company will conduct exploration and production
activities to produce crude oil and natural gas. The principal
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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. During March, 1998, the Company
completed construction of a pipeline which is approximately which will connect
wells on these leases to the East Tennessee Natural gas pipeline. The pipeline
is approximately 23 miles long and is made of 8 inch steel pipe. The cost to
date has been approximately $3,400,000. 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 of the Company's productive leases (with the exception
of the wells acquired from AFG). R.W. Coburn, a registered petroleum engineer,
and the owner of Coburn Petroleum Engineering, has in interest in the company or
IRC, and performed these services at his standard rate of $90 per hour which was
billed and paid for these reports. The net reserve values used hereafter were
obtained from a report dated February 18, 1998 prepared by Coburn Petroleum
Engineering. In substance, the report used estimates of oil and gas reserves
based upon standard petroleum engineering methods which include decline curve
analysis, volumetric calculations, pressure history, analogy, various
correlations and technical judgment. Information for this purpose was obtained
from owners of interests in the areas involved, state regulatory agencies,
commercial services, outside operators and files of Coburn Petroleum
Engineering. According to the report of Coburn Engineering, discounting the net
reserve values by 10%, before taxes, results in a present value of $27,809,084
for the Swan Creek Field and $1,378,718 for the Beech Creek leases.
Columbia Engineering based in Oklahoma City, Oklahoma,
has performed a reserve analysis of the Kansas Properties. David F.
Yard, a registered petroleum engineer is the principal of Columbia
Engineering. Neither Columbia Engineering or Mr. Yard has an
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interest in the Company or IRC and Mr. Yard performed these services at his
standard rate of $75 per hour. The net reserve values used hereafter were
obtained from a report dated March 2, 1998. According to the report of Columbia
Engineering, discounting the net reserve values by 10%, before taxes, results in
a present value of $10,351,389 for the Kansas Properties.
Reserve analyses are at best speculative, especially when
based upon limited production; no assurance can be given that the reserves
attributed to these leases exist or will be economically recoverable. See "Risk
Factors" - "Uncertainty of Reserve Estimates."
It is standard in the industry for reserve analyses such
as these to be used as a basis for financing of drilling costs. ^
Distribution Methods of Products or Services
Crude oil is normally distributed in this area by tank truck
and natural gas is distributed and transported via pipeline. Gas purchasers in
the area include Delta Natural Gas Company, Inc., Wiser Oil Company, Southern
Gas Company of Delaware, Inc., Somerset Gas and East Tennessee Natural Gas.
Delta and Wiser operate a gas gathering system that runs through the center of
the Company's Beech Creek leases. The existing Beech Creek wells have been tied
into the Wiser Oil Company system in anticipation of future production. The
Burning Springs wells are connected to Southern Gas Company's gathering system.
Should the Company decide to use transmission lines owned by
other businesses, it will have to negotiate the prices to be paid with the owner
of that transmission line, provided capacity is available. There can be no
assurance that prices can be negotiated which will enable the Company to sell
its products profitably.
Oil from the Fentress County Leases will be stored in a tank
battery, consisting of two 210 barrel tanks, while awaiting shipment by tank
truck.
Gas production from the Swan Creek Leases will go into the
East Tennessee Natural Gas transmission system through use of the pipeline
presently under construction by the Company, as described above.
The Company has no farmout agreements with any entity.
Status of Any Publicly Announced New Product or Service
The Company has publicly announced its agreement with
Enserch Energy Services, Inc. ("Enserch") to market gas provided by
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that Company in Tennessee and Southeastern United States. See Management's
Discussion and Analysis of Plan of Operation below.
In March 1997, the Company signed a teaming agreement with
Operations Management International ("OMI") to operate, as a subcontractor, the
steam generating facilities at the East Tennessee Technology Park ("ETTP") in
Oak Ridge, Tennessee. This is the site of the original Manhattan Project that
has been privatized by the United States Department of Energy ("DOE") and
currently produces enriched uranium for commercial and military use. OMI is a
subsidiary of CH2M Hill, Ltd., an international engineering and operations
company.
Engineering studies indicate the Company may be able to earn a
net profit of approximately $300,000 per year from this operation. In March
1998, OMI signed a contract with DOE to manage the ETTP. At the same time, the
Company signed a transition agreement with OMI to take over steam services at
this factory facility in April 1998. During this transition period, OMI will
reimburse the Company for costs incurred with the transition. The Company's
future plans call for investing approximately $7,000,000 in steam operating
turbines to convert this facility to an electric co-generation operation.
Electricity produced would be sold locally to the ETTP or the Tennessee Valley
Authority. The Company has not as of this time arranged financing for this
co-generation equipment. No assurances can be given that the Company will be
able to procure such financing.
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, Tennessee and Kansas 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.
There are numerous producers in the are of the Kansas
Properties. Some are larger and some smaller than the Kansas Properties.
However, management expects that it will be able to sell all the gas and oil the
Kansas properties produce.
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, "Competitive Business Conditions,
Competitive Position in the Industry and Methods of Competition" set forth
above.
Dependence on One or a Few Major Customers
The Company will be dependent on local purchasers of
hydrocarbons in the areas where its properties are located for
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sales of its products. The five purchasers in the areas of the Company's
operations are Wiser, Southern, Delta, Somerset and East Tennessee Natural Gas.
The only customers with which the Company has a written contract are Hawkins
County Utilities and Powell Valley Electric Cooperative. Those entities have
agreed to purchase gas from the Company's Hancock County fields upon completion
of the pipeline. It is anticipated that sales to Hawkins County Utilities will
amount to approximately 4,000 MCF per day. Sales to Powell Valley Electric
Cooperative are to be determined at a future date.
Natural gas from the Kansas Properties is delivered to
Kansas-Nebraska Energy, Inc. in Bushton, Kansas. At present, crude oil from the
Kansas Properties is being trucked and transported through pipelines to the
National Cooperative Refining Association in McPherson, Kansas, 120 miles from
Hayes. National Cooperative is solely responsible for transportation of products
whether by truck or pipeline. An additional purchaser of the crude oil produced
is Farmland Industries in Neodosha, Kansas. There is a limited market in the
area and the only other purchaser of crude oil is Koch Oil. The Company,
however, anticipates that it will be able to sell all of the oil and gas
produced from the Kansas Properties.
Patents, Trademarks, Licenses, Franchises, Concessions,
Royalty Agreements or Labor Contracts, including Duration
Royalty agreements relating to oil and gas production are
standard in the industry. The amount of the Company's royalty payments varies
from lease to lease. See, the heading "General" under this section. The amounts
of the royalties on each of the Company's leases may be obtained from the
Company.
Need for Governmental Approval of Principal Products or Services
None of the principal products or services offered by the
Company require governmental approval; however, permits are required for
drilling oil or gas wells. See, "Effect of Existing or Probable Governmental
Regulations on Business" below in this section.
Effect of Existing or Probable Governmental Regulations on Business
Exploration and production activities relating to oil and gas
leases are subject to numerous environmental laws, rules and regulations. The
Federal Clean Water Act requires the Company to construct a fresh water
containment barrier between the surface of each drilling site and the underlying
water table. This involves the insertion of a seven-inch diameter steel casing
into each well, with cement on the outside of the casing. The cost of compliance
with this environmental regulation is approximately $10,000 per
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well.
The State of Kentucky also requires oil and gas drillers to
obtain a permit for their activities and to post with the Division of Oil and
Gas of the Kentucky Department of Minerals and Mines (the "Kentucky Division") a
bond to ensure that each well is properly plugged when it is abandoned. These
bonds are based on $1 per foot. Each of the Kentucky wells has a $5,000 bond
which was originally posted by IRC and remains in place. The Kentucky Division
will retain the bond until the subject wells are plugged.
The State of Tennessee also requires the posting of a bond to
ensure that the Company's wells are properly plugged when abandoned. A separate
$2,000 bond is required for each well drilled. The Company currently has a
$10,000 bond on deposit with the State of Tennessee. See, "Description of
Property" "Disclosure of Oil and Gas Operations" below.
The State of Alabama also requires the posting of a bond to
ensure that the Company's wells are properly plugged when abandoned. A
single-well bond, which varies between $5,000 and $50,000, depending upon well
depth, or a blanket bond of $100,000, may be obtained for wells drilled
on-shore. At the present time, the Company does not have plans to drill any
wells in the State of Alabama.
As part of the Company's purchase of the Kansas Properties it
acquired a statewide permit to drill in Kansas, such permits being applied for
and issued within one-two weeks prior to drilling. At the present time, the
State of Kansas does not require the posting of a bond either for permitting or
to insure that the Company's wells are properly plugged when abandoned. All of
the wells in the Kansas Properties have all permits required and are in
compliance with the laws of the State of Kansas.
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
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injury, loss of life, property damage or destruction or suspension of
operations.
The Company believes it is presently in compliance with all
applicable federal, state or local environmental laws, rules or regulations;
however, continued compliance (or failure to comply) and future legislation may
have an adverse impact on the Company's present and contemplated business
operations.
At Board of Directors' meetings held June 6 and 7, 1995, the
Board of Directors adopted resolutions to form an Environmental Response Policy
and Emergency Action Response Policy Program. A plan was recently adopted which
provides for the erection of signs at each well and at strategic locations along
the pipeline containing telephone numbers of the Company's office and the home
telephone numbers of key personnel. A list will be maintained at the Company's
office and at the home of key personnel listing phone numbers for fire, police,
emergency services and Company employees who will be needed to deal with
emergencies.
The foregoing is only a brief summary of some of the existing
environmental laws, rules and regulations to which the Company's business
operations are subject, and there are many others, the effects of which could
have an adverse impact on the Company. Future legislation in this area will no
doubt be enacted and revisions will be made in current laws. No assurance can be
given as to what effect these present and future laws, rules and regulations
will have on the Company's current and future operations.
Research and Development
The Company has not expended any material amount on research
and development activities during the last two fiscal years. Research done in
conjunction with its exploration activities will consist primarily of running
radiometric surveys on the lease blocks and conducting geological research on
the surface. This work will fall under the job description of the geologist to
be hired for these activities and will not have a material cost of anything more
than his or her standard salary. See "Number of Total Employees and Number of
Full-Time Employees" set forth below in this section.
Cost and Effects of Compliance With Environmental Laws
See, "Effect of Existing or Probable Governmental Regulations
on Business" set forth above in this section.
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Number of Total Employees and Number of Full-Time Employees
The Company presently has thirty-one full-time employees and
no part-time employee. When it commences its full-scale oil and gas operations,
the Company plans to add additional full-time employees, exclusive of executive
officers.
The Company has hired a full-time geologist at a salary of
$40,000 per year. His duties for the Company include: surface and sub-surface
geology, log correlation, surface and sub-surface mapping, field--research
(i.e., radiometric, gravity, magnetic and geochemical research) and well-site
geology.
MANAGEMENT'S DISCUSSION and ANALYSIS or PLAN of OPERATION
The Company intends to continue its 50 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 seven wells in this
area, all of which have been flow tested by metering gas from the wells through
a one-half inch orifice. These tests all verify the presence of a substantial
reservoir of natural gas and/or oil. One of these wells, the Reed #1 tested at
4,800,000 cubic feet of gas per day with a flowing pressure of 800 psi. Another
well, the Sutton #1 tested at 1,200,000 cubic feet per day with a flowing
pressure of 150 psi.
The Company's present plans call for the drilling of
approximately fifty additional wells on the Swan Creek leases over a two to
three year period at a cost of approximately $250,000 per well.
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 a fully paid 25%
working interest in the respective wells. If, however, it is determined that a
well(s) is no longer economically feasible and as such is plugged and abandoned,
the
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above parties have the option to convert the amounts paid to restricted common
shares of the Company at 70% of the then current market value.
Effective December 31, 1997, the Company acquired from AFG, a
private company, approximately 30,000 acres of leases in the vicinity of Hayes,
Kansas (the "Kansas Properties"). Included in the acquisition which closed on
March 5, 1998 are 149 producing oil wells, 59 producing gas wells and a related
50 mile pipeline and gathering system. Historically, these oil and gas wells
have produced approximately $3.4 million in net annual revenues. However, the
first quarter of 1998 net revenues have been lower than in the prior two years
as a result of lower oil and gas prices. The Company expects to increase current
production by reworking certain existing wells at a projected cost of $1.4
million. The acquisition was for a total purchase price of approximately $5.5
million, which consisted of $3 million in cash and seller financing of $2.5
million. Interest on the debt is at 9% per annum. The loan is payable in 23
monthly installments of $79,500 plus a final payment of approximately $984,000
in February 2000. The Company's ability to rework existing wells and/or drill
additional wells is, however, dependent on its obtaining additional debt or
equity financing.
The Company's future plans include constructing two extensions
to its pipelines in Tennessee 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 $7.5 million. 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.
The Company presently has funds sufficient to drill at least
20 additional wells and anticipates no difficulty in funding additional wells if
the wells it drills prove to be productive.
The Company also anticipates income from the sale of gas
pursuant to a marketing agreement with Enserch, a major marketer of natural gas,
pursuant to which the Company will receive 50% of the 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.
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The Enserch agreement has a term of five years and will
terminate May 31, 2002 and thereafter, will continue from year to year unless
terminated.
Exploitation of the other leases held by the Company is being
placed on hold at the present time.
The sales price for gas is determined on the basis of an index
used by all suppliers and users of gas. The price fluctuates between $2.50 per
MCF and $4.50 per MCF, usually higher during the cold weather months. The cost
of production from the well averages approximately $.50 per MCF. Transportation
costs are approximately $.25 per MCF which includes amortization of the
pipeline. In addition, the Company anticipates receiving revenue from third
parties who desire to use the pipeline.
To date, the Company has not drilled any dry wells.
There can be no assurance, of course, that all of the funding
necessary for the completion of the wells will become available. It is
anticipated that the Company will implement development programs on the Beech
Creek and Fentress County Leases sometime in the future. The Swan Creek Leases
are being given first priority because of their higher economic attractiveness.
Management anticipates both short term and long term increases
in oil and gas prices which should have a positive effect on the Company's
income and profits. The belief is based, among other things, upon the following
factors:
1. Instability in the Middle East:
2. Conversion of electric generating plants from
coal to gas;
3. Discontinuance of construction of nuclear power
plants;
4. Increased use of natural gas to decrease the
greenhouse effect.
The Company has no plans, at present, to increase the number
of its employees significantly.
Other Significant Plans
The Company, pursuant to its agreement with Enserch, also
intends to actively pursue the gas marketing business on the Eastern seaboard.
The Eastern seaboard, and Tennessee in particular, has numerous industrial end
users of natural gas that are currently exposed to a limited number of gas
suppliers. Enserch at present has no sales force in the Southeastern United
States and intends to rely on the Company which will be the only Tennessee
company selling gas in Tennessee. The agreement with Enserch
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provides for the Company to share equally in profits from sales of gas.
In addition to an active drilling program the Company intends
to continue strategically acquiring leases in promising areas in the States of
Kentucky and Tennessee. No assurance can be given that the Company will be able
to identify or acquire any such leases or that if it does acquire any such
leases, they will be profitable.
This plan of operation is based upon many variables and
estimates, all of which may change or prove to be other than or different from
information relied upon.
Results of Operations
Effective May 2, 1995, and pursuant to a Purchase Agreement,
the Company acquired certain oil and gas-leases, equipment, marketable
securities and vehicles, from IRC. Following the completion of this transaction,
the Company changed its domicile to the State of Tennessee on May 5, 1995. Prior
to the completion of this Purchase Agreement, the Company had been inactive from
1993, and had little or no assets or operations. The assets reflected as being
owned on December 31, 1995, were all primarily acquired from IRC.
During the first quarter of 1998 the Company recognized
$610,500 in revenues from the Kansas Properties. These are the first significant
revenues the Company has recognized. Production costs and taxes increased
$243,943 during the first quarter of 1998 from the first quarter of 1997 due to
the inclusion of operating costs for the Kansas properties. During the year
ended December 31, 1997, the Company had no revenues of as compared with
revenues of $26,253 for the year ended December 31, 1996. The Company has shut
in the wells which produced the gas in 1996 and has transferred some of the
equipment to the Swan Creek leases in anticipation of the completion of its
pipeline.
Depletion, depreciation and amortization expense, during the
first quarter of 1998 increased $101,170 from the first quarter of 1997
primarily due to a $99,000 charge for depletion of oil and gas properties
computed on the units of production basis using the first quarter production for
the Kansas Properties. Depletion, depreciation and amortization expense, which
prior to the acquisition of the Kansas Properties had remained constant, was
$79,267 in 1997 and $76,520 in 1996.
A realized loss on sale of investments of $80,677 in 1997 was
incurred as a result of the Company trading in natural gas future and option
contracts during December 1997. The Company did not have any open positions in
any derivative contracts at December
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31, 1997. Trading in derivatives during the first quarter of 1998 has not
resulted in any material realized or unrealized gains or losses for the Company.
General and administrative expense increased $173,491 for the
first quarter of 1998 as compared to the first quarter of 1997. A majority of
this increase was attributable to three areas: personnel costs increased $37,000
due to higher staffing levels at the corporate office; legal and accounting
expenses increased $45,000; and, public relations costs increased $71,000.
General and administrative expense increased by approximately $267,000 in 1997
from 1996 primarily as the result of additional personnel at the Company's
headquarters and the cost of travel and expense by management in an effort to
raise funds through debt and equity financing.
Interest expense for the first quarter of 1998 decreased
$240,354 from the first quarter of 1997. The 1997 expense included a $165,000
charge for the imputed value of common stock warrants issued and $113,750 for
amortization of deferred loan costs. The 1998 expense does not include a charge
for either of these items as they were fully amortized during 1997. Interest
expense for notes payable in the first quarter of 1998 increased $38,000 over
the first quarter of 1997.Interest expense increased from $201,969 in 1996 to
$1,691,754 in 1997 as the result of: (1) amortization of $1,100,000 in loan fees
which were paid by the issuance of common stock and options; (2) amortization of
the imputed value of stock warrants issued in connection with notes payable (the
validity of these warrants is being contested by the Company. See, "Part I"
"Item 3 - Legal Proceedings"); (3) amortization of debt issuance costs relating
to the pipeline financing which occurred in the fourth quarter of 1996; and, (4)
increased amounts of debt financing during 1997.
Public relations and legal and accounting expense increased by
approximately $563,000 in 1997 as a result of costs incurred to promote the
Company's common stock through several market makers, as well as significant
costs for legal and accounting services related to the filings of Forms 10-SB
and SB-2.
Liquidity
The Company expects to earn a profit in 1998 as a result of
its acquisition of the Kansas Properties and sales of natural gas to a local
public utility through its new pipeline in Tennessee which should commence in
May of 1998 upon connection of seven existing natural gas wells to the pipeline.
The Company's primary cash requirements are for capital
expenditures and operating expenses. The primary source of cash prior to the
first quarter of 1998 has been private placements of
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common stock, loans from individuals, loans from a majority stockholder and
participation agreements with investors who provided funds for drilling wells.
Investing activities during the first quarter of 1998 included
additions of $397,795 to oil and gas properties and $823,802 to complete the
Company's pipeline in Tennessee. The additions to oil and gas properties were
primarily costs for drilling two additional wells in the Swan Creek field in
Northeastern Tennessee.
Cash and cash equivalents at March 31, 1998 decreased
$3,988,833 from the December 31, 1997 balance of $4,451,274 due primarily to the
following: during the first quarter of 1998 the Company closed the purchase of
the Kansas Properties effective December 31, 1997. The Company paid $2,990,253
in cash and entered into a note payable agreement with the seller for
$2,500,000; the Company paid $507,486 in cash to reduce a note payable to an
individual; and, net cash used in operating activities was $309,307.
Proceeds from private placements of 129,833 shares of common
stock totaled $973,562 during the first quarter of 1998. Placement fees for
private placements occurring during the fourth quarter of 1997 and the first
quarter of 1998 totalling $235,000 were credited to a Director as part of his
payments to the Company for participation agreements giving him a 25% working
interest in three of the Company's wells in the Swan Creek field.
During 1997, as in the prior year, revenues from operations
were insufficient to fund the Company's operations. The Company's primary source
of funds during 1997 were from private placements of restricted common stock of
the Company in the amount of approximately $6,307,000, obtaining short-term debt
financing of approximately $1,000,000 from an individual, Neal Harding, and
loans in the aggregate amount of $463,000 from related parties.
The loan from Mr. Harding was used primarily for pipeline
construction. 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 it owned at a price of $10 per share. One-half of that loan was
repaid in January 1998 from existing cash revenues and Mr. Harding has agreed to
extend payment of the balance of the loan until June 30, 1998.
In 1997, IRC, Malcolm E. Ratliff and Tracmark, Inc., a
subsidiary of IRC, advanced loans to the Company in the aggregate amount of
$463,000. 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.
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The Company is continuing to seek additional debt and or
equity funding in order to complete additional wells, rework existing wells and
extend its pipeline as described above.
The Company has experienced losses totalling $4,176,876 and
$1,761,064 for the years ended December 31, 1997 and 1996, respectively, and has
a working capital deficit of $1,774,571 at December 31, 1997. (See, Report of
Independent Certified Public Accountants included elsewhere in this report.) In
addition, the Company completed its pipeline in Tennessee in the first quarter
of 1998 at an additional cost of approximately $804,000. Management's plans
include raising additional capital in order to pay for drilling additional oil
and gas wells. In addition, in 1998, management expects the Company to incur
positive cash flow from its acquisition of the Kansas Properties and in May 1998
from the Swan Creek leases and the use of its pipeline in Tennessee. It is
anticipated that these revenues will be able to be used to pay the costs of
drilling additional oil and gas wells. This is, however, a forward looking
statement and is subject to many variables over which the Company has no control
such as the price of oil and gas, competition, inflation, etc. Therefore, there
can be no assurances that the revenues from the Kansas Properties and Swan Creek
leases will be sufficient to pay the costs of drilling additional oil and gas
wells.
Year 2000 Risks
As is the case with other companies using computers in their
operations, the Company is faced with the task of addressing the Year 2000 issue
during the next two years. The Year 2000 issue arises from the widespread use of
computer programs that rely on two-digit codes to perform computations or
decision-making functions. The Company has not yet performed a comprehensive
review of its computer programs to identify the systems that would be affected
by the Year 2000 issue nor has it yet reviewed the Company's Year 2000 exposure
to customers, distributors, suppliers and banking institutions. Management is
presently unable to estimate the costs associated with modification or
replacement of systems affected by the Year 2000 issue, however, these costs
could be significant.
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
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holds leases on 2,121 acres in Fentress County, Tennessee, near Jamestown. There
are currently two producing wells on the Tennessee acreage, only one of which is
owned by the Company. Additionally, the Company holds leases on 30,363 acres in
Hancock County, Tennessee, and 1,003.19 acres in Lauderdale County, Alabama. The
initial terms of these leases varies from one to four years. Many of them can be
extended at the option of the Company by payment of annual rent. Some of them
will terminate unless the Company has commenced drilling. However, the Company
does not anticipate any difficulty in continuing those leases, particularly in
Hancock County, since the Company's pipeline will be the only means available to
landowners in that area to sell any gas produced from wells on their property.
See "Description of Business" "General" above.
The Beech Creek Leases provide for a landowner royalty of
12.5% of the oil produced and saved from the leased premises or, at the lessee's
option, to pay the market price for such 12.5% royalty. The leases also provide
for a landowner royalty equal to 12.5% of the market price at the well of the
gas sold or used off the premises, except for injection for secondary recovery
of oil. The lessors are also entitled to free gas for all stoves and inside
lights in the principal dwelling house on the leased properties by making
connection to the well or wells at their own expense and risk. The Beech Creek
Leases are also subject to overriding royalties ranging from 1.25% to 5%.
The Wildcat Leases provide for a 12.5% landowner royalty, on
the same terms as the Beech Creek Leases, and a 3.125% overriding royalty.
The Burning Springs Leases are subject to a 12.5% landowner
royalty, on the same terms as the Beech Creek Leases and the Wildcat Leases, and
overriding royalties ranging from 3.125% to 7.5%.
The Fentress County Leases are subject to a 12.5% landowner
royalty, on the same terms as the above referenced leases, and a 19% overriding
royalty; and a 25% overriding royalty on one existing well. Section 60-1-301 of
the Tennessee Code provides for a severance tax of 3% on all gas and oil removed
from the ground in Tennessee.
The Company leases its principal executive offices, consisting
of approximately 4,731 square feet located at 603 Main Avenue, Suite 500,
Knoxville, Tennessee, at a monthly rent of $3,942.50.
In addition, the Company has drilling equipment and vehicles
which it acquired from IRC. All of this equipment is in satisfactory operating
condition. The securities which the Company acquired from IRC were sold during
1996 for $250,000.
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Effective December 31, 1997, the Company acquired from AFG, a
private company, approximately 30,000 of acres of leases in the vicinity of
Hayes, Kansas. Included in the acquisition which closed on March 5, 1998 were
273 wells of which 149 are producing oil wells and 59 are producing gas wells, a
related 50 mile pipeline and gathering system, 3 compressors and 11 vehicles.
The total purchase price of these assets was approximately $5.5 million, which
consisted of $3 million in cash and seller financing of $2.5 million. Interest
on the debt is at 9% and is payable in 23 installments of $79,500 plus a final
payment of approximately $984,000 in February 2000.
Disclosure of Oil and Gas Operations
On May 2, 1995, upon the execution of the Purchase Agreement
with IRC, the Company acquired the rights to certain oil and gas leases in the
State of Kentucky (the "Beech Creek Leases," "Wildcat Leases" and "Burning
Springs Leases") and the State of Tennessee (then "Fentress County Leases").
Subsequently, the Company also acquired additional acreage in Tennessee (the
"Swan Creek Leases") and in Alabama (the "Alabama Leases"). See "Description of
Business" - "Business Development" and "General" above.
The Company was not engaged in the business of oil and gas
exploration and development prior to the date of the IRC Purchase Agreement.
IRC, the entity from which the Company acquired certain of these properties,
drilled four wells on the Beech Creek Leases in the past three years. All of
these wells are capable of producing gas in paying quantities, according to
tests run on the wells. IRC also drilled a well on one of the Fentress County
Leases; this well is currently shut in and awaiting a workover.
Eleven wells on the Burning Springs leases are currently
shut-in. There are two completed wells on the Swan Creek leases, the Reed #1 and
the Sutton #1, which discovered and proved the structure in the early 1980s.
These wells have recently tested at 4,800,000 and 1,200,000 cubic feet of gas
per day. The Company has drilled three additional wells in 1996. Development of
the Swan Creek Field will require the completion of the pipeline to deliver gas
to a transmission company with the tie-in point being located 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.
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In connection with its acquisition of all of AFG's assets, the
Company acquired 208 working wells in Kansas. Pursuant to the acquisition
agreement the Company was entitled to all income from those wells as of January
1, 1998. The aggregate production form the Kansas Properties is approximately
28,400 mcf of gas and 15,000 barrels of oil per month. Historically, the Kansas
Properties have produced approximately $3.4 million in net annual revenues.
However, revenues from the Kansas Properties for the first quarter of 1998 were
approximately $610,000 which is lower that in the prior two years as a result of
lower oil and gas prices. The Company expects to increase current production by
reworking certain existing wells at a projected cost of $1.4 million. The
Company's ability to rework existing wells and/or drill additional wells in the
Kansas Properties is, however, dependent on its obtaining additional debt or
equity financing.
The Company does not pay any taxes on its leased property and
does not carry any insurance on the vacant land.
The Alabama Leases have no existing wells. These leases are
"wildcat" explorations and there is no immediate plan to acquire additional
leases in the area or to begin an exploration program.
No estimate of total, proved net oil or gas reserves has been
filed with or included in reports to any federal authority since the beginning
of the Company's last fiscal year.
The Company is currently not a party to any contract or
agreement obligating it to provide a fixed and determinable quantity of oil or
gas in the future, but anticipates entering into such contracts for delivery of
gas commencing as early as December, 1997.
CERTAIN RELATIONSHIPS and RELATED TRANSACTIONS
Transactions with Management and Others
Except as set forth hereafter, there have been no material
transactions, series of similar transactions or currently proposed transactions,
to which the Company or any of its subsidiaries was or is to be a party, in
which the amount involved exceeds $60,000 and in which any director or executive
officer or any security holder who is known to the Company to own of record or
beneficially more than 5% of the Company's common stock, or any member of the
immediate family of any of the foregoing persons, had a material interest.
At the Company's inception, the Board of Directors
authorized the issuance of 600,000 shares of its then $0.10 par
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<PAGE>
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 common stock to certain
directors and executive officers in consideration of cash and services rendered
of an aggregate value of $7,500.
At a special meeting of the Board of Directors held April 11,
1995, the Board of Directors adopted resolutions providing for the granting of
options to purchase "unregistered" and "restricted" shares of common stock of
the Company to certain directors, executive officers and consultants whose
service was to commence on the closing of a Purchase Agreement then being
negotiated with Industrial Resources Corporation, a Kentucky corporation
("IRC"). See, "Executive Compensation" - "Other Compensation" below.
At a special meeting of stockholders held on April 28, 1995,
the Company's stockholders voted to approve the execution of the Purchase
Agreement pursuant to which the Company would acquire certain oil and gas
leases, equipment, securities and vehicles owned by IRC, in consideration of the
issuance of 4,000,000 post-split (as described below) "unregistered" and
"restricted" shares of the Company's common stock.
Thereafter, the Purchase Agreement was amended to provide for
the sale of certain additional assets for a price of $450,000 paid by the
execution by the Company of a promissory note in that amount.
The assets acquired by the Company pursuant to the Purchase
Agreement, as amended, consisted of machinery and equipment, vehicles, computer
equipment, furniture and fixtures, well equipment, land leases, intangible
drilling costs and stock of United Petroleum Corp., a public company. The book
value of these assets was $1,752,000 at the time of the acquisition. The
4,000,000 shares of the Company's stock given as consideration for those assets
had a market value, at that time, of $1,000,000 based upon a bid price of $.25
as reported by the National Quotation Bureau. The total cost of these assets to
the Company, including the $450,000 note, was $1,450,000. IRC may be deemed to
have been an affiliate. The Company believes that the terms of the Purchase
Agreement were at least as favorable as those it could have received from an
unaffiliated party.
On May 2, 1995, in connection with the execution of the
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<PAGE>
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 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 is an
affiliate, may not be sold except in compliance with Rule 144 of 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
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<PAGE>
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
relationships, existing or planned, between the Company or any of its
subsidiaries and any director or executive officer or any security holder who is
known to the Company to own of record or beneficially more than 5% of the
Company's common stock, or any member of the immediate family of any of the
foregoing persons.
During 1995, the Company converted $882,112.25 of debt payable
to IRC to 164,366 shares of common stock. The debt included a promissory note
for $450,000 which was given to IRC, along with 4,000,000 shares of common stock
as the purchase price for approximately $1,752,000 of assets consisting of
property, plant and equipment, oil and gas leases and marketable securities.
During 1996, the Company converted $992,000 of debt payable to
IRC to 101,146 shares of common stock and $114,712 of debt payable to Malcolm E.
Ratliff to 13,320 shares of common stock. Both obligations arose from loans to
the Company by IRC and Malcolm E. Ratliff.
During 1997, the Company converted $333,719 of debt payable to
IRC to 59,328 shares of common stock, $12,398 of debt payable to Malcolm E.
Ratliff to 2,204 shares of common stock and $138,105 of debt payable to
Tracmark, Inc. to 24,552 shares of common stock. Those obligations arose from
loans to the Company by IRC, Malcolm E. Ratliff and Tracmark, Inc.
The Company is currently drilling two additional wells in the
Swan Creek field with funds advanced on a participation basis by a director and
a third-party. The arrangement provides for the participants to receive a fully
paid 25% working interest in the respective wells. If, however, it is determined
that a well(s) is no longer economically feasible and as such is plugged and
abandoned, the above parties have the option to convert the amounts paid to
restricted common shares of the Company at 70% of the then current market value.
Repayment of the $1,000,000 loan from Mr. Harding was
guaranteed by IRC, which also granted an option to Mr. Harding to
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<PAGE>
purchase 300,000 shares of stock of the Company at a price of $10 per share.
Indebtedness of Management
No officer, director or security holder known to the Company
to own of record or beneficially more than 5% of the Company's common stock or
any member of the immediate family of any of the foregoing persons is indebted
to the Company.
Parents of the Issuer
Unless IRC may be deemed to be a parent of the Company, the
Company has no parents.
Transactions with Promoters
With the exception of the Compensation Agreements of Malcolm
E. Ratliff and Jeffrey D. Jenson, and the issuance of "unregistered" and
"restricted" shares of the Company's common stock to IRC, Malcolm E. Ratliff and
Tracmark, Inc. in cancellation of debt, all as outlined under the heading
"Description of Business" - "Business Development" above, and those options
outlined under the caption "Executive Compensation" below, there have been no
material transactions, series of similar transactions, currently proposed
transactions, or series of similar transactions, to which the Company or any of
its subsidiaries was or is to be a party, in which the amount involved exceeds
$60,000 and in which any promoter or founder or any member of the immediate
family of any of the foregoing persons, had a material interest.
MARKET FOR COMMON EQUITY and RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock is listed on the OTC Bulletin Board
of the NASD; however, the market for shares of the Company's common stock was
extremely limited until the closing of the Purchase Agreement with IRC in May of
1995. No assurance can be given that the present market for the Company's common
stock will continue or will be maintained, and the sale of the Company's
unregistered and "restricted" common stock pursuant to Rule 144 by IRC or others
as outlined under the heading "Risk Factors" above, may have a substantial
adverse impact on any such public market. See, "Risk Factors" - "Future Sales of
Common Stock."
The Company's common stock has been listed on the OTC
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<PAGE>
Bulletin Board since the quarter ended March 31, 1994. The high and low bid
prices for shares of common stock of the Company since that period (including
inter-dealer transactions) are as follows:
Quarter ending: High Low
March 31, 1994 (17) 0.25 0.125
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
December 31, 1997 16.63 10.50
March 31, 1998 13.50 9.00
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.
- --------
(17) The high bid price for the quarter ended March 31, 1994 is a trading
price only.
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Holders
As of April 6, 1998, the number of shareholders of record of
the Company's common stock was 482, and management believes that there are
approximately 1,045 beneficial owners of the Company's common stock.
Dividends
There are no present material restrictions that limit the
ability of the Company to pay dividends on common stock or that are likely to do
so in the future. The Company has not paid any dividends with respect to its
common stock, and does not intend to pay dividends in the foreseeable future.
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ITEM 10 EXECUTIVE COMPENSATION
The following table sets forth a summary of all compensation
awarded to, earned or paid to, the Company's Chief Executive Officer during
fiscal years ended December 31, 1997, December 31, 1996 and December 31, 1995.
None of the Company's other executive officers earned compensation in excess of
$100,000 per annum for services rendered to the Company in any capacity.
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<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Name and Year Salary ($) Bonus ($) Other Annual
Principal Position Compensation
($)
<S> <C> <C> <C> <C>
Malcolm E. Ratliff, 1997 $ 9,731 $-0- $500
Chief Executive Officer 1996 $-0- $-0- $500
1995 $-0- $-0- $500
James E. Kaiser, 1997 $ 6,154 $-0- $-0-
Chief Executive Officer and 1996 $20,000 $-0- $-0-
General Counsel 1995 -0- $-0- $-0-
Theodore Scallan, 1997 -0- $-0- -0-
Chief Executive Officer and 1996 $53,120 $-0- -0-
President 1995 $-0- -0-
George E. Walter, Jr. 1997 -0- $-0- $-0-
Chief Executive Officer 1996 $ 923 $-0- $20,000
1995 $ 2,855 $-0- $-0-
<CAPTION>
----------------Long Term Awards------
----------------Awards---------Payouts
Name and Restricted Securities Payouts All Other
Principal Position Stock Underlying Compen-
Awards($) Options sation
/SARs(#)
<S> <C> <C> <C> <C>
Malcolm E. Ratliff, -0- -0- -0- -0-
Chief Executive Officer -0- -0- -0- -0-
-0- -0- -0- -0-
James E. Kaiser, -0- -0- -0- -0-
Chief Executive Officer and -0- -0- -0- -0-
General Counsel -0- -0- -0- -0-
Theodore Scallan, -0- -0- -0- -0-
Chief Executive Officer and 462,25018 100,00020 -0- $20,00021
President 334,50019 -0- -0- -0-
George E. Walter, Jr. -0- -0- -0- -0-
Chief Executive Officer -0- -0- -0- -0-
-0- -0- -0- -0-
</TABLE>
- --------
(18) Represents shares transferred from majority shareholder, based upon
closing price of $6.25 on 7/28/95, closing price of $7.25 on 8/31/95 and $6.00,
the bid on 11/28/95.
(19) Represents shares transferred from majority shareholder at the
closing price of $13.375 on 4/2/96.
(20) Option has expired.
(21) Termination compensation.
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<PAGE>
No options were granted during fiscal year ended December 31,
1997 to the Chief Executive Officer of the Company. None of the Company's other
executive officers earned compensation in excess of $100,000 per annum for
services rendered to the Company in any capacity.
No options were exercised during fiscal year ended December
31, 1997 by the Chief Executive Officer. None of the Company's other executive
officers earned compensation in excess of $100,000 per annum for services
rendered to the Company in any capacity.
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, in the past the Company has granted options 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.
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.
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
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<PAGE>
independent third party contractor. The Board of Directors has reserved to
itself the right to review all directors' claims for compensation on an ad hoc
basis.
Employment Contracts
There are presently no employment contracts relating to any
member of management, however, depending upon the Company's operations and
Requirements, the Company may offer long term contracts to directors, executive
officers or key employees in the future.
Termination of Employment and Change of Control Arrangement
None; not applicable.
CHANGES IN and DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING and FINANCIAL DISCLOSURE
Change from David T. Thomson, CPA to Charles M. Stivers, CPA
David T. Thomson, Certified Public Accountant, of Salt
Lake City, Utah, audited the financial statements of Onasco
Companies, Inc. (the Company's predecessor) for the year ended
December 31, 1994.
Charles M. Stivers, Certified Public Accountant, of
Manchester, Kentucky, was engaged as the Company's accountant on May 4, 1995,
and reviewed interim unaudited financial statements of the Company prepared by
management.
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.
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<PAGE>
Also, during the Company's two most recent fiscal years, and
since then, Mr. Thomson has not advised the Company that any of the following
exist or are applicable:
(1) That the internal controls necessary for the
Company to develop reliable financial statements do
not exist, that information has come to his
attention that has led him to no longer be able to
rely on management's representations, or that has
made him unwilling to be associated with the
financial statements prepared by management,
(2) That the Company needs to expand significantly the
scope of its audit, or that information has come to
his attention that if further investigated may
materially impact the fairness or reliability of a
previously issued audit report or the underlying
financial statements or any other financial
presentation, or cause him to be unwilling to rely
on management's representations or be associated
with the Company's financial statements for the
foregoing reasons or any other reason; or
(3) That he has advised the Company that information
has come to his attention that he has concluded
materially impacts the fairness or reliability of
either a previously issued audit report or the
underlying financial statements for the foregoing
reasons or any other reason.
Further, during the Company's two most recent fiscal years and
since then, the Company has not consulted Mr. Thomson regarding the application
of accounting principles to a specified transaction, either completed or
proposed; or the type of audit opinion that might be rendered on the Company's
financial statements or any other financial presentation whatsoever.
The Company has provided Mr. Thomson with a copy of the
disclosure provided under this caption of the Prospectus, and he has provided
the Company with a letter addressed to the Commission stating that he agrees
with the disclosures made herein.
Change from Charles M. Stivers. CPA. to Price-Bednar, LLP, CPA
Price-Bednar, LLP, Certified Public Accountants, were engaged
as the Company's accountants as of February 22, 1996, to audit the financial
statements of the Company for the calendar year ending December 31, 1995.
There were no disagreements between the Company and Mr.
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<PAGE>
Stivers, whether resolved or not resolved, on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which, if not resolved, would have caused him to make reference to
the subject matter of the disagreement in connection with his unaudited reports.
The unaudited reports of Mr. Stivers did not contain any
adverse opinion or disclaimer of opinion, and were not qualified or modified as
to uncertainty, audit scope or accounting principles.
The decision to change principal accountants was submitted for
approval to the Board of Directors; the change was made to Price-Bednar because
the Company was seeking to find a larger accounting firm with more in-depth
experience in Commission filings.
Also, during the Company's most recent fiscal year, and since
then, Mr. Stivers has not advised the Company that any of the following exist or
are applicable:
(1) That the internal controls necessary for the
Company to develop reliable financial statements do
not exist, that information has come to his
attention that has led him to no longer be able to
rely on management's representations, or that has
made them unwilling to be associated with the
financial statements prepared by management,
(2) That the Company needs to expand significantly the
scope of its audit, or that information has come to
his attention that if further investigated may
materially impact the fairness or reliability of a
previously issued audit report or the underlying
financial statements or any other financial
presentation, or cause him to be unwilling to rely
on management's representations or be associated
with the Company's financial statements for the
foregoing reasons or any other reason; or
(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.
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<PAGE>
The Company has provided Mr. Stivers with a copy of the
disclosure provided under this caption of the Registration Statement, and he has
provided the Company with a letter addressed to the Commission stating that he
agrees with the disclosures made herein.
Change from Price-Bednar, LLP, CPA to Charles M. Stivers, CPA
The Company had engaged the services of another accountant to
complete certain preparatory on-site audit activities for preliminary review by
Price-Bednar. These services were not timely provided by the other accountant.
Also, many of the records of IRC were unavailable, and, Price-Bednar required a
number of these records to be reconstructed prior to its completion of the
audit. During the week of May 20, 1996, the Company was advised that the
principal accountant of Price-Bednar, who was responsible for the Company's
audit, would be out of town for the following week, and it became clear that
Price-Bednar would not be able to complete the audit for at least three weeks,
because certain information requested by them had not yet been provided by the
Company. Price-Bednar was terminated by the President, effective June 7, 1996,
and Charles M. Stivers, CPA, who had been engaged to conduct the preparatory
on-site audit activities for Price-Bednar when the other accountant failed to
perform as promised, indicated that he could timely deliver the required audit
report and was promptly engaged to do so by the Board of Directors.
Also, during, the Company's two most recent fiscal years, and
since then, Price-Bednar has not advised the Company that any of the following
exist or are applicable:
(1) That the internal controls necessary for the
Company to develop reliable financial statements do
not exist, that information has come to their
attention that has led them to no longer be able to
rely on management's representations, or that has
made them unwilling to be associated with the
financial statements prepared by management;
(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
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<PAGE>
concluded materially impacts the fairness or
reliability of either a previously issued report or
the underlying financial statements for the
foregoing reasons or any other reason.
Further, during the Company's two most recent fiscal years and
since then, the Company has not consulted Price-Bednar regarding the application
of accounting principles to a specified transaction, either completed or
proposed; or the type of audit opinion that might be rendered on the Company's
financial statements or any other financial presentation whatsoever.
The Company has provided Price-Bednar with a copy of the
disclosure provided under this caption of the Registration Statement, and it has
provided the Company with a letter addressed to the Commission stating that it
agrees with the disclosures made herein.
Change from Charles M. Stivers, CPA, to BDO Seidman,LLP
On December 15, 1996, the Company terminated Charles M.
Stivers, CPA and retained BDO Seidman, LLP to conduct the audit of the Company's
financial statements for the year ended December 31, 1996 because it became
apparent that Charles M. Stivers, as an individual practitioner, would not be
able to perform the required audit on a timely basis.
The report of Charles M. Stivers for fiscal year ended
December 31, 1995 stated that the Company's recurring losses and net capital
deficiency raised substantial doubts about the Company's ability to continue as
a going concern. It further stated that the financial statements did not include
any adjustments that might result from the outcome of this uncertainty.
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
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<PAGE>
previously issued audit report or the underlying
financial statements or any other financial
presentation, or cause him to be unwilling to rely on
management's representations or be associated with
the Company's financial statements for the
foregoing reasons or any other reason; or
(3) That he has advised the Company that information
has come to his attention that he has concluded
materially impacts the fairness or reliability of
either a previously issued report or the underlying
financial statements for the foregoing reasons or
any other reason.
Further, during the Company's two most recent fiscal years and
since then, the Company has not consulted Charles M. Stivers regarding the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company's financial statements or any other financial presentation
whatsoever.
The Company has provided Charles M. Stivers with a copy of the
disclosure provided under this caption of the Registration Statement, and he has
provided the Company with a letter addressed to the Commission stating that he
agrees with the disclosures made herein.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon
for the Company by the law firm of Robson & Miller, LLP, 666 Third Avenue, New
York, New York 10017, telephone number (212) 949- 1860. Robson & Miller, LLP was
not hired on a contingent basis and is not receiving any interest, direct or
indirect in the Company. Neither Robson & Miller, LLP or any of its partners or
employees is a director, officer, employee, voting trustee, promoter or
underwriter of the Company.
EXPERTS
The financial statements for December 31, 1996 and December
31, 1997 included in this Prospectus and in the Registration Statement have been
audited by BDO Seidman, LLP, Independent certified public accountants, to the
extent and for the periods set forth in their reports, which contain an
explanatory paragraph regarding the Company's ability to continue as a going
concern, appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such reports given
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upon the authority of said firm as experts in auditing and accounting.
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No dealer, salesman or other person has been authorized to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the securities offered by this Prospectus or an offer to sell or a
solicitation of an offer to buy the securities to or from any person in any
jurisdiction in which such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder at any time shall, under
any circumstances, imply that there has been no change in the business or
affairs of the Company since the date hereof or that the information in this
Prospectus herein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
Page
Available Information . . . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . . . 3
The Company . . . . . . . . . . . . . . 3
The Offering . . . . . . . . . . . . . . 5
Summary Financial Data . . . . . . . . . 5
Risk Factors . . . . . . . . . . . . . . . . . . . 6
Use of Proceeds . . . . . . . . . . . . . . . . . . 13
Determination of Price of Shares . . . . . . . . . 13
Dilution . . . . . . . . . . . . . . . . . . . . . 13
Selling Shareholders . . . . . . . . . . . . . . 13
Plan of Distribution . . . . . . . . . . . . . . . 18
Legal Proceedings . . . . . . . . . . . . . . . . 19
Directors, Executive Officers, Promoters and
Control Persons . . . . . . . . . . . . . . . . . 20
Identification of Directors and Officers . 20
72
<PAGE>
Business Experience . . . . . . . . . . . 22
Committees . . . . . . . . . . . . . . . . 23
Family Relationships . . . . . . . . . . . 23
Involvement in Certain Legal Proceedings . . 24
Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . 24
Security Ownership of Certain Beneficial
Owners . . . . . . . . . . . . . . . . . . . 24
Changes in Control . . . . . . . . . . . . . 27
Description of Securities . . . . . . . . . . . . . . 27
Authorized Capital Stock . . . . . . . . . . 27
Indemnification of Directors, Officers,
Employees and Agents . . . . . . . . . . . . . . . . . 28
Description of Business . . . . . . . . . . . . . . . 30
Glossary of Terms . . . . . . . . . . . . . 30
Business Development . . . . . . . . . . . . 30
General . . . . . . . . . . . . . . . . . . 35
Governmental Regulations . . . . . . . . . . 38
Principal Products or Services and Markets . . 38
Reserve Analyses . . . . . . . . . . . . . . . 39
Distribution Methods of Products or Services . 40
Status of Any Publicly Announced
New Product or Service . . . . . . . . . . . . 40
Competitive Business Conditions, Competitive
Position in the Industry and
Methods of Competition . . . . . . . . . . . . 41
Sources and Availability of Raw Materials
and Names of Principal Suppliers . . . . . . 42
Dependence on One or a Few Major Customers . . 42
Patents, Trademarks, Licenses, Franchises,
73
<PAGE>
Concessions, Royalty Agreements, Labor
Contracts, including Duration . . . . . . . . 43
Need for Governmental Approval of Principal
Products or Services . . . . . . . . . . . . . 43
Effect of Existing or Probable Governmental
Regulations on Business . . . . . . . . . . . . 43
Research and Development . . . . . . . . . . . 45
Cost and Effects of Compliance with
Environmental Laws . . . . . . . . . . . . . . 45
Number of Total Employees and
Number of Full-Time Employees . . . . . . . . . 46
Management's Discussion and Analysis of
Plan of Operation . . . . . . . . . . . . . . . . . . . . 46
Other Significant Plans . . . . . . . . . . . . 48
Results of Operations . . . . . . . . . . . . . 49
Liquidity . . . . . . . . . . . . . . . . . . 50
Year 2000 Risks . . . . . . . . . . . . . . . . 52
Description of Property . . . . . . . . . . . . . . . . . 52
Property Location, Facilities, Size and Nature
of Ownership . . . . . . . . . . . . . . . . . 52
Disclosure of Oil and Gas Operations . . . . . . 54
Certain Relationships and Related Transactions . . . . . . 55
Transactions with Management and Others . . . . . 55
Certain Business Relationships . . . . . . . . 58
Indebtedness of Management . . . . . . . . . . 59
Parents of the Issuer . . . . . . . . . . . . . 59
Transactions with Promoters . . . . . . . . . . 59
Market For Common Equity and Related Stockholder Matters . 59
Market Information . . . . . . . . . . . . . . 59
Holders . . . . . . . . . . . . . . . . . . . . 61
74
<PAGE>
Dividends . . . . . . . . . . . . . . . . . . . 61
Executive Compensation . . . . . . . . . . . . . . . . . 62
Compensation . . . . . . . . . . . . . . . . . . 62
Summary Compensation Table . . . . . . . . . . . 63
Bonuses and Deferred Compensation . . . . . . . 64
Compensation Pursuant to Plans . . . . . . . . . 64
Pension Table . . . . . . . . . . . . . . . . . 64
Compensation of Directors . . . . . . . . . . . 64
Employment Contracts . . . . . . . . . . . . . . 65
Termination of Employment and Change of Control . 65
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . 65
Change from David T. Thomson, CPA to
Charles M. Stivers, CPA . . . . . . . . . . . . 65
Change from Charles M. Stivers, CPA, to
Price-Bednar, LLP, CPA . . . . . . . . . . . . . 66
Change from Price-Bednar, LLP, CPA to
Charles M. Stivers, CPA . . . . . . . . . . . . 68
Change from Charles M. Stivers, CPA to
BDO Seidman, LLP . . . . . . . . . . . . . . . . 69
Legal Matters . . . . . . . . . . . . . . . . . . . . . . 70
Experts . . . . . . . . . . . . . . . . . . . . . . . . . 70
Financial Statements . . . . . . . . . . . . . . . . . . . F-1
Audited Financial Statements for 1996 and 1997 . F-1
Unaudited Financial Statements for three months
ended March 31, 1998 . . . . . . . . . . . . . . F-33
75
<PAGE>
Tengasco, Inc.
Consolidated Financial Statements
Years Ended December 31, 1997 and 1996
F-1
<PAGE>
Tengasco, Inc.
Consolidated Financial Statements
Years Ended December 31, 1997 and 1996
F-2
<PAGE>
Tengasco, Inc.
Contents
Report of Independent Certified Public Accountants F-4
Consolidated Financial Statements
Balance sheets F-5
Statements of loss F-7
Statements of stockholders' equity F-8
Statements of cash flows F-9
Notes to financial statements F-10-32
F-3
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Tengasco, Inc.
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheets of Tengasco, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of loss, stockholders' equity and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide 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
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for the years 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, 1997,
management estimates that additional costs of approximately $804,000 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
BDO Seidman, LLP
Atlanta, Georgia
March 12, 1998
F-4
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Note 8)
Current
Cash and cash equivalents (including $25,000 restricted
certificate of deposit in 1997) (Note 3) $ 4,451,274 $ 146,554
Accounts receivable - 4,658
Inventory (Note 3) 140,253 -
Prepaid expenses 270,939 7,463
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 4,862,466 158,675
Oil and gas properties, net (on the basis
of full cost accounting) (Note 5) 6,872,571 1,287,142
Pipeline facilities under construction, at cost (Note 6) 2,596,967 887,315
Property and equipment, net (Notes 7 and 9) 302,146 203,244
Other 10,661 190,845
- -----------------------------------------------------------------------------------------------------------------------
$14,644,811 $2,727,221
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE>
Tengasco, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current
Due to AFG Energy, Inc. (Note 3) $3,552,005 $ -
Notes payable (Note 8) 2,007,486 780,000
Loans payable to affiliates (Note 4) 252,398 48,190
Current maturities of long-term debt (Note 9) 41,161 14,017
Accounts payable - trade 527,398 347,093
Accrued liabilities 256,589 35,086
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,637,037 1,224,386
Due to AFG Energy, Inc. (Note 3) 1,865,078 -
Long term debt, less current maturities (Note 9) 141,215 47,828
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 8,643,330 1,272,214
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 6, 8 and 10)
Stockholders' equity (Notes 8 and 10)
Common stock, $.001 par value; 50,000,000 shares
authorized 7,029 5,708
Additional paid-in capital 13,276,752 4,783,369
Unamortized stock option awards (63,540) (292,186)
Accumulated deficit (7,218,760) (3,041,884)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,001,481 1,455,007
- -----------------------------------------------------------------------------------------------------------------------
$14,644,811 $2,727,221
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Tengasco, Inc.
Consolidated Statements of Loss
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Oil and gas revenues $ - $ 26,253
- -----------------------------------------------------------------------------------------------------------------------
Costs and expenses
Production costs and taxes 3,748 17,138
Depletion, depreciation and amortization 79,267 76,520
General and administrative costs 1,535,841 1,268,771
Interest expense 1,691,754 201,969
Public relations 395,292 34,575
Legal and accounting 390,297 188,344
Realized loss on sale of investments 80,677 -
- -----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 4,176,876 1,787,317
- -----------------------------------------------------------------------------------------------------------------------
Net loss $(4,176,876) $(1,761,064)
- -----------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share $(0.67) $(0.32)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Tengasco, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unamortized
Common Stock Additional stock
------------------------- paid-in option Accumulated
Shares Amount capital awards deficit
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 5,229,300 $5,229 $ 2,425,185 $(130,208) $(1,280,820)
Common stock issued for exercised 327,079 327 90,792 - -
options
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 in 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)
Common stock issued for exercised 345,414 345 94,645 - -
options
Common stock issued for the
extinguishment of debt (Note 4) 86,084 86 484,135 - -
Stock option awards and amortization, - - (175,069) 228,646 -
net
Common stock options granted to
non-employees - - 295,419 - -
Common stock issued in private
placements 754,510 754 6,307,201 - -
Stock issued for loan origination fee 100,000 100 1,024,900 - -
(Note 8)
Stock issued for services 36,000 36 462,152 - -
Net loss for the year ended
December 31, 1997 - - - - (4,176,876)
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 7,029,835 $7,029 $13,276,752 $ (63,540) $(7,218,760)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Tengasco, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net loss $(4,176,876) $(1,761,064)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization 79,267 76,520
Loss on disposal of property and equipment - 3,671
Compensation paid in stock options 736,183 434,886
Amortization of loan fees paid by issuance of
common stock and stock options 1,100,000 -
Amortization of imputed value of stock warrants issued
in connection with notes payable 220,000 110,000
Amortization of deferred loan costs 170,833 56,667
Changes in assets and liabilities:
Accounts receivable 4,658 4,360
Prepaid expenses and other assets (4,125) (2,677)
Accounts payable 180,305 300,171
Accrued liabilities 148,333 13,463
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,541,422) (764,003)
- -----------------------------------------------------------------------------------------------------------------------
Investing activities
Proceeds from sale of marketable equity securities - 250,000
Additions to property and equipment (178,169) (60,754)
Net additions to oil and gas properties (545,429) (744,951)
Proceeds on sale of oil and gas interests 310,000 100,000
Additions to pipeline facilities under construction (1,709,652) (887,315)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,123,250) (1,343,020)
- -----------------------------------------------------------------------------------------------------------------------
Financing activities
Payment of loan costs and other - (238,798)
Proceeds from borrowings 1,617,924 2,156,581
Repayments of borrowings (51,478) (36,727)
Proceeds from issuance of common stock 6,402,946 371,809
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,969,392 2,252,865
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,304,720 145,842
Cash and cash equivalents, beginning of year 146,554 712
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 4,451,274 $ 146,554
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Organization
Significant Accounting
Policies 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.
Effective May 2, 1995, Industrial
Resources Corporation, a Kentucky
corporation ("IRC"), acquired voting
control of the Company in exchange for
approximately 60% of the assets of IRC.
Accordingly, the assets acquired, which
included certain oil and gas leases,
equipment, marketable securities and
vehicles, 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
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 exploration,
production and related property
management in the Appalachian region of
eastern Tennessee and in the state of
Kansas. 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
as well as other pipelines planned for
the future.
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 and Cash Equivalents
The Company considers all investments
with a maturity of three months or less
when purchased to be cash equivalents.
F-10
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Inventory
Inventory consists primarily of crude
oil in tanks and is carried at the lower
of current market value or cost.
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 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 ("Coburn") and Columbia
Engineering, independent petroleum
engineers, as of December 31, 1997 and
by Coburn 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
F-11
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(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 the first quarter of 1998.
Accordingly, no depreciation expense has
been recorded for 1997 and 1996 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 in 1996 consisted
principally of deferred loan costs which
were amortized over the respective loan
terms.
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
Financial instruments which potentially
subject the Company to concentrations of
credit risk consist principally of cash
and accounts receivable. At times, such
cash in banks is in excess of
F-11
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
the FDIC insurance limit. At December
31, 1997, the Company had deposits with
one financial institution in an amount
which exceeds the federally insured
limit by approximately $4 million. The
Company's primary business activities
include oil and gas sales to several
customers in the states of Tennessee and
Kansas. The related trade receivables
subject the Company to a concentration
of credit risk within the oil and gas
industry.
Earnings Per Common Share
In March 1997, the Financial Accounting
Standards Board ("FASB") issued
Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings
Per Share." The new Standard simplifies
the computation of earnings per share
and requires presentation of two
amounts, basic and diluted earnings per
share for all periods presented.
Basic earnings per share is computed by
dividing income available to common
shareholders by the weighted average
number of shares outstanding during each
year. Shares issued during the year are
weighted for the portion of the year
that they were outstanding. Diluted loss
per share is calculated in a manner
consistent with that of basic loss per
share while giving effect to all
dilutive potential common shares that
were outstanding during the period.
Basic and diluted loss per share are
based upon 6,189,293 shares for the year
ended December 31, 1997 and 5,427,247
shares for the year ended December 31,
1996. There were 618,551 and 1,206,800
potential weighted common shares
outstanding during 1997 and 1996 related
to common stock options and warrants.
These shares were not included in the
computation of the diluted per share
amount because the Company was in a net
loss position and, thus, any potential
common shares were anti-dilutive.
The weighted average number of shares
outstanding for the year ended December
31, 1996, as previously presented, has
been restated to comply with the
provisions of Securities Exchange
Commission Staff Accounting Bulletin 98.
Accounting Estimates
The accompanying financial statements
are prepared in conformity with
generally accepted accounting principles
which requires management to make
estimates and assumptions that
F-13
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
Derivatives
Beginning in December 1997, the Company
began trading in derivative financial
instruments for speculative purposes.
Derivative financial instrument
contracts entered into are comprised of
natural gas future and option contracts.
At December 31, 1997, there were no open
positions in any derivative contracts.
Net trading losses of $80,677 are
included in the accompanying Statements
of Loss for the year ended December 31,
1997.
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
SFAS No. 130, "Reporting Comprehensive
Income" is effective for years beginning
after December 15, 1997. This statement
establishes standards for reporting and
display of comprehensive income, its
components and accumulated balances.
This pronouncement is not expected to
have a material impact on the Company's
financial statements when adopted.
F-14
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related
Information" is effective for years
beginning after December 15, 1997. This
statement establishes standards for the
way that public business enterprises
report information about operating
segments in annual financial statements.
It also establishes standards for
related disclosures about products and
services, geographic areas, and major
customers. This pronouncement is not
expected to have a material impact on
the Company's financial statements when
adopted.
Reclassifications
Certain prior year amounts have been
reclassified to conform with current
year presentation.
2. Going Concern The Company has experienced losses
totalling $4,176,876 and $1,761,064 for
the years ended December 31, 1997 and
1996, respectively, and has a working
capital deficit of $1,774,571 at
December 31, 1997. These matters raise
substantial doubt about the Company's
ability to continue as a going concern.
In addition, as of December 31, 1997,
management estimates that additional
costs of approximately $804,000 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, beginning in January 1998,
management expects the Company to incur
positive cash flow from its acquisition
of various oil and gas properties in the
state of Kansas (see Note 3). 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 Business On December 18, 1997, the
Acquisition Company entered into an asset purchase
agreement Acquisition in which certain
producing oil and gas properties and
inventory located in the state of Kansas
("the Kansas Properties") were acquired
from AFG Energy, Inc. ("AFG"). The
agreement, which was effective as of
December 31, 1997, closed on March 5,
1998, whereby the Company paid
$2,990,253 in cash and entered into a
note payable agreement with AFG in the
amount of $2,500,000. The note will
accrue interest at 9% per annum and is
due in 23 monthly installments of
principal and
F-15
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
interest of $79,500 with a balloon
payment of $983,773 due in February,
2000. The acquisition has been accounted
for as a purchase and, accordingly, the
purchase price of $5,490,253 has been
allocated to the assets acquired based
on the estimated fair values at the date
of acquisition as follows:
Amount
----------------------------------------
Inventory - oil in tanks $ 140,253
---------------------------------------
Oil and gas properties
Leasehold costs 3,745,000
Lease and well equipment 1,284,000
Pipeline 321,000
---------------------------------------
Total oil and gas
properties 5,350,000
---------------------------------------
$5,490,253
---------------------------------------
At December 31, 1997, the purchase price
of the Kansas Properties is included in
the Company's consolidated balance
sheet. The results of operations will be
included in the consolidated financial
statements beginning January 1, 1998.
The unaudited pro forma results of
operations presented below show the
Company's operations for 1997 and 1996
as though the acquisition had taken
place at the beginning of each period
presented. The pro forma results have
been prepared for comparative purposes
only, and are not necessarily indicative
of what the actual results of operations
would have been had the acquisition
occurred at the beginning of each period
presented, or what the results of
operations of the Company will be in the
future.
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C>
Revenues $3,430,329 $3,194,748
Net loss (3,699,514) (1,274,607)
Basic and diluted
loss per common share $(0.60) $(0.23)
--------------------------------------------------------------
</TABLE>
F-16
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. Related Party The Company has a loan payable to a
Transactions major stockholder in the amount of
$250,000. Additionally, the Company has
a loan payable to an affiliate in the
amount of $2,398. A major stockholder
of the Company is also a major
stockholder of the affiliate. The loans
bear interest at the rate of 10% per
annum and are due on demand.
During 1997, the Company converted
approximately $334,000 and $138,000 of
debt payable to related parties IRC and
Tracmark, respectively, to common stock.
The Company also converted approximately
$12,000 of debt payable to a major
stockholder to common stock (see Note
14).
During 1996, the Company converted
approximately $1,060,000 of debt payable
to IRC to common stock and common stock
subscribed (see Note 14). The Company
also converted approximately $100,000 of
debt payable to a major stockholder to
common stock subscribed (see Note 14).
5. Oil and Gas The following table sets forth
Properties information concerning the Company's oil
and gas properties at December 31:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Evaluated $6,823,246 $1,288,243
Unevaluated 76,743 26,317
-----------------------------------------------------------------------------
6,899,989 1,314,560
Accumulation depreciation,
depletion and amortization (27,418) (27,418)
-----------------------------------------------------------------------------
$6,872,571 $1,287,142
-----------------------------------------------------------------------------
</TABLE>
Evaluated costs excluded from
amortization at December 31, 1997 and
1996 consist of approximately $913,000
and $730,000, respectively, of costs
relating to the Company's Swan Creek
development project which is awaiting
the completion of a gas pipeline
expected to be completed in the first
quarter of 1998. In addition, evaluated
costs at December 31, 1997 include
approximately $5,350,000 of costs
associated with the acquisition of the
Kansas Properties (see Note 3).
F-17
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Pipeline Facilities Pipeline Facilities During the fourth
Under Contruction 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, 1997, management
estimates the costs to complete the
pipeline are approximately $804,000.
In January 1997, the Company entered
into an agreement with the Tennessee
Valley Authority ("TVA") whereby the TVA
allows 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.
7. Property and Property and equipment consisted of the
Equipment following:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Machinery and equipment $277,433 $245,756
Vehicles 231,228 83,299
Other 44,971 42,113
-----------------------------------------------------------------------------
553,632 371,168
Less accumulated depreciation (251,486) (167,924)
-----------------------------------------------------------------------------
Property and equipment - net $302,146 $203,244
-----------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. Notes Payable Notes payable consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Note payable to an individual;
approximately $500,000 due in each of
January 1998 and July 1998 with interest
payable quarterly at 11% per annum;
collateralized by equipment owned by a
major shareholder of the Company. An
affiliate is serving as guarantor on the
loan. The Company provided the lender
with 100,000 shares of common stock as a
loan origination fee. In conjunction
with the loan agreement, the lender has
an option to purchase 300,000 shares of
the Company's common stock from IRC. In
January 1998, the Company paid $500,000
of principal on this note (A). $1,007,486 $ -
Note payable, in default, to an
investment company due May 1997 with
interest payable monthly at 10% per
annum; less unamortized discount of
$123,750 at December 31, 1996, relating
to stock warrants issued; collateralized
by a subordinated security interest in
all assets of the Company (B). 500,000 376,250
Note payable, in default, to an
individual due April 1997 with interest
payable monthly at 10% per annum; less
unamortized discount of $48,125 at
December 31, 1996, relating to stock
warrants issued; collateralized by all
assets of the Company (B), (C). 250,000 201,875
Note payable, in default, to a company
due April 1997 with interest payable
monthly at 10% per annum; less
unamortized discount of $48,125 at
December 31, 1996, relating to stock
warrants issued; collateralized by all
assets of the Company (B). 250,000 201,875
--------------------------------------------------------------------------------
$2,007,486 $780,000
--------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(A) As of December 31, 1997, the Company
was in violation of a covenant regarding
this loan. As a result, the lender has
the option to declare the remaining note
payable balance immediately due and
payable.
In conjunction with the issuance of the
notes payable denoted in (B) and (C)
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.
(B) These notes had not been repaid as
of the above noted due dates. As noted
in (D) below, the Company has filed a
claim against the lenders.
(C) 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 (D) below.
(D) Also in March 1997, the Company
filed a claim against the three lenders
discussed in (B) and (C) above 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 a 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-20
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9. Long Term Debt Long-term debt consisted of the following:
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
8.75% installment note, payable $861
monthly, including interest, due
September 2002, collateralized by a
vehicle. $ 39,871 $ -
10.5% installment note, payable $789
monthly, including interest, due October
2001, collateralized by a
vehicle. 29,730 -
11% installment note, payable $667
monthly, including interest, due
December 2001, collateralized by a
vehicle. 25,671 30,563
10.0% installment note, payable $503
monthly, including interest, due
September 2002, collateralized by a
vehicle. 22,759 -
9.75% installment note, payable $492
monthly, including interest, due July
2002, collateralized by a vehicle. 21,762 -
9.75% installment note, payable $480
monthly, including interest, due May
2002, collateralized by a vehicle. 20,601 -
10.7% installment note, payable $423
monthly, including interest, due May
2000, collateralized by a vehicle. 10,761 14,466
12% installment note, payable $385
monthly, including interest, due April
2000, collateralized by a vehicle 9,248 12,545
-----------------------------------------------------------------------------
Balance carried forward 180,403 57,574
-----------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance brought forward $180,403 $57,574
-----------------------------------------------------------------------------
Other 1,973 4,271
-----------------------------------------------------------------------------
Total long term debt 182,376 61,845
Less current maturities (41,161) (14,017)
-----------------------------------------------------------------------------
Long term debt, less current
maturities $141,215 $ 47,828
-----------------------------------------------------------------------------
The approximate future maturities of
debt were as follows:
Year Amount
-----------------------------------------------------------------------------
1998 $ 41,161
1999 42,937
2000 41,380
2001 39,919
2002 16,979
-----------------------------------------------------------------------------
$182,376
-----------------------------------------------------------------------------
<CAPTION>
10. Commitments As of December 31, 1997, the future minimum payments to be made under
and Contingencies noncancellable operating leases were:
Year Amount
-----------------------------------------------------------------------------
<S> <C> <C>
1998 $52,590
1999 52,590
2000 52,590
2001 5,280
2002 5,280
-----------------------------------------------------------------------------
$168,330
-----------------------------------------------------------------------------
Rent expense was approximately $60,000
and $54,000 for the years ended December
31, 1997 and 1996, respectively.
</TABLE>
F-22
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At December 31, 1997, the Company owed,
but had not yet issued, certain
individuals an aggregate amount of
46,401 shares of Tengasco, Inc. common
stock, valued at approximately $421,931,
as payment for placement fees in
connection with common stock private
placements which occurred during the
fourth quarter of 1997.
As is the case with other companies
using computers in their operations, the
Company is faced with the task of
addressing the Year 2000 issue during
the next two years. The Year 2000 issue
arises from the widespread use of
computer programs that rely on two-digit
date codes to perform computations or
decision-making functions. The Company
has not yet performed a comprehensive
review of its computer programs to
identify the systems that would be
affected by the Year 2000 issue nor has
it yet reviewed the Company's Year 2000
exposure to customers, distributors,
suppliers and banking institutions.
Management is presently unable to
estimate the costs associated with
modification or replacement of systems
affected by the Year 2000 issue,
however, these costs could be
significant.
11. Stock Options Changes that occurred in options
outstanding in 1997 and 1996 are
summarized below:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding,
beginning
of year 1,202,420 $3.295 1,791,849 $0.483
Granted 230,000 5.000 730,000 5.566
Exercised (345,414) 0.275 (327,079) 0.275
Expired/canceled (627,006) 5.359 (992,350) 0.275
-------- --------
Outstanding,
end of year 460,000 5.314 1,202,420 3.295
Exercisable,
end of year 354,583 5.440 538,805 1.882
------------------------------------------------------------------------------
</TABLE>
F-23
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following table summarizes
information about stock options
outstanding at December 31, 1997
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
--------------------------------------------- -----------------
Average
Remaining
Exercise Contractual
Price Shares Life Shares
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$5.000 355,000 0.48 years 249,792
6.375 105,000 1.27 years 104,791
------- -------
Total 460,000 354,583
----------------------------------------------------------------------------
</TABLE>
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 1997 and 1996: expected
volatility of 54% for both years; a
risk-free interest rate of 5.76% in 1997
and 5.21% in 1996; and an expected
option life of 1.25 years in 1997 and
2.45 years in 1996. The amount of
compensation expense included in general
and administrative costs in the
accompanying consolidated statements of
loss was approximately $220,000 and
$372,000 at December 31, 1997 and 1996,
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:
F-24
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss
As reported $(4,176,876) $(1,761,064)
Pro forma (4,314,127) (1,932,628)
-----------------------------------------------------------------------------
Basic and diluted loss per share
As reported $(0.67) $(0.32)
Pro forma (0.70) (0.36)
-----------------------------------------------------------------------------
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 1997
and 1996: Expected volatility of 54% for
both years; a risk free interest rate of
5.76% in 1997 and 5.52% in 1996; and an
expected option life of 1.25 years in
1997 and 2.72 years in 1996.
12. Income Taxes The Company had no taxable income during
the years ended December 31, 1997
and 1996.
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, 1997 1996
-----------------------------------------------------------------------------
Statutory rate 34% 34%
Tax (benefit) at statutory rate $(1,420,000) $(599,000)
State income tax (benefit) (251,000) (99,000)
Nondeductible interest expense 126,000 -
Other 5,000 3,000
Increase in deferred tax asset
valuation allowance 1,540,000 695,000
-----------------------------------------------------------------------------
Total income tax provision $ - $ -
-----------------------------------------------------------------------------
</TABLE>
F-25
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The components of the net deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net operating loss carryforward $2,304,000 $ 798,000
Capital loss carryforward 270,000 238,000
Accrued expenses 323,000 223,000
-----------------------------------------------------------------------------
2,897,000 1,259,000
Valuation allowance (2,717,000) (1,177,000)
-----------------------------------------------------------------------------
180,000 82,000
-----------------------------------------------------------------------------
Deferred tax liability:
Oil and gas properties 155,000 81,000
Property and equipment 25,000 1,000
-----------------------------------------------------------------------------
180,000 82,000
-----------------------------------------------------------------------------
Net deferred taxes $ - $ -
-----------------------------------------------------------------------------
The Company recorded a valuation
allowance at December 31, 1997 and 1996
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, 1997, the Company had
net operating loss carryforwards for
federal income tax purposes of
approximately $5,760,000 which will
expire, if not utilized, as follows:
Year Amount
-----------------------------------------------------------------------------
2010 $ 546,000
2011 1,378,000
2012 3,836,000
-----------------------------------------------------------------------------
Total $5,760,000
-----------------------------------------------------------------------------
</TABLE>
F-26
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Additionally, at December 31, 1997, the
Company had capital loss carryforwards
of approximately $675,000 which will
expire, if not offset against capital
gains, as follows: 2001-$594,000,
2002-$81,000.
13. Subsequent Events In the first quarter of fiscal 1998,
the Company authorized the granting of
up to 10,000 shares of common stock to
the spouse of a deceased officer of the
Company as a death benefit.
In the first quarter of fiscal 1998, the
Company granted options to purchase
26,167 shares of the Company's common
stock to a director of the Company at a
per share price of $5.00.
14. Supplemental The Company paid approximately $282,000
Disclosure and $26,000 for interest in 1997 and
of Cash Flows 1996, respectively. The Company paid $0
for income taxes in 1997 and 1996.
In 1997, the Company issued 86,084
shares of common stock to extinguish
approximately $484,000 of debt, which
approximated the fair value of the
shares.
The assets acquired and liabilities
incurred in connection with the purchase
of the Kansas Properties have not been
reflected in the accompanying 1997
Statement of Cash Flows as the
transaction, which was effective on
December 31, 1997, did not close until
March 1998 (see Note 3).
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.
F-27
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. Supplemental Oil and Information with respect to the
Gas Information 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 ("Coburn") and by
Columbia Engineering, independent
petroleum engineers, as of December 31,
1997 and by Coburn as of December 31,
1996.
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, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Property acquisition
Proved $5,406,080 $ 78,991
Unproved 50,424 25,274
Less - proceeds from sales of
properties (310,000) (100,000)
Development costs 438,924 673,022
-----------------------------------------------------------------------------
$5,585,428 $ 677,287
-----------------------------------------------------------------------------
</TABLE>
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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ - $ 26,253
Production costs and taxes (3,748) (17,138)
Depreciation, depletion and
amortization (44,673) (52,145)
-----------------------------------------------------------------------------
Results of operations before income
taxes (48,421) (43,030)
Income taxes - -
-----------------------------------------------------------------------------
Results of operations from oil
and gas producing activities $(48,421) $ (43,030)
-----------------------------------------------------------------------------
</TABLE>
F-28
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 year ended December 31, 1996,
the depreciation, depletion and
amortization rate per barrel of oil
equivalent production was $20.16. The
Company had no production of oil or gas
during 1997.
Oil and Gas Reserves (unaudited)
The following table sets forth the
Company's net proved oil and gas
reserves at December 31, 1997 and 1996
and the changes in net proved oil and
gas reserves for the years then ended.
Proved 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.
<TABLE>
<CAPTION>
Oil (bbls) Gas (Mcf)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Proved reserves
Balance, January 1, 1996 101,565 5,336,392
Acquisition of proved reserves - 17,212,571
Revisions of previous estimates - 33,902
Production - (15,510)
-----------------------------------------------------------------------------
Balance, December 31, 1996 101,565 22,567,355
Discoveries and extensions 198,065 75,476
Acquisition of proved reserves 1,884,448 2,654,250
Revisions of previous estimates (101,565) (4,679,460)
Production - -
-----------------------------------------------------------------------------
Balance, December 31, 1997 2,082,513 20,617,621
-----------------------------------------------------------------------------
Proved developed producing
reserves at, December 31, 1997 1,277,707 1,384,980
-----------------------------------------------------------------------------
Proved developed producing reserves
at, December 31, 1996 - -
-----------------------------------------------------------------------------
</TABLE>
F-29
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Of the Company's total proved reserves
as of December 31, 1997, approximately
27% were classified as proved developed
producing, 34% were classified as proved
developed non-producing and 39% were
classified as proved undeveloped. All of
the Company's reserves are located in
the continental United States.
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, 1997 and 1996 is presented in the
following table:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Future cash inflows $ 87,493,504 $ 84,106,507
Future production costs and taxes (21,813,667) (6,219,598)
Future development costs (2,873,550) (5,775,000)
Future income tax expenses (12,918,485) (18,909,520)
-----------------------------------------------------------------------------
Net future cash flows 49,887,802 53,202,389
Discount at 10% for timing of cash flows (17,864,113) (22,823,876)
-----------------------------------------------------------------------------
Discounted future net cash flows from
proved reserves $ 32,023,689 $30,378,513
-----------------------------------------------------------------------------
</TABLE>
The following table sets forth the
changes in the standardized measure of
discounted future net cash flows from
proved reserves during 1997 and 1996:
F-30
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
Balance, beginning of year $ 30,378,513 $ 3,663,462
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Sales, net of production costs
and taxes 3,748 (9,115)
Acquisition of proved reserves 10,351,389 33,874,577
Discoveries and extensions 1,984,106 -
Changes in prices and
production costs (13,640,812) 2,374,267
Revisions of quantity estimates (8,576,161) 42,164
Changes in development costs 3,882,741 -
Net change in income taxes 3,454,082 (9,975,394)
Interest factor - accretion of discount 4,134,810 465,765
Changes in production rates
and other 51,273 (57,213)
-----------------------------------------------------------------------------
Balance, end of year $ 32,023,689 $30,378,513
-----------------------------------------------------------------------------
</TABLE>
The acquisition of proved reserves in
1997 relates to the Kansas Properties
and 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, 1997 and 1996 were $16.53
and $19.10 per barrel of oil and $2.57
and $2.94 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.
F-31
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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-32
<PAGE>
TENGASCO, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
(Unaudited) (Audited)
-------------- -----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 3) $462,441 $4,451,274
Accounts Receivable 226,870 -
Other current assets 350,732 411,192
-------------- -----------------
Total current assets 1,040,043 4,862,466
Oil and gas properties, net (on the basis of full cost 6,856,228 6,872,571
accounting)
Pipeline facilities, at cost 3,420,269 2,596,967
Property and equipment, net 319,828 302,146
Other 10,272 10,661
-------------- -----------------
$11,646,640 $14,644,811
============== =================
</TABLE>
See accompanying notes to consolidated financial statements
F-33
<PAGE>
TENGASCO, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
(Unaudited) (Audited)
----------------- ------------------
<S> <C> <C>
Current liabilities
Notes payable $1,500,000 $2,007,486
Loans payable to affiliates 252,398 252,398
Due to AFG Energy, Inc. (Note 3) 763,375 3,552,005
Current maturities of long-term debt 45,748 41,161
Accounts payable - trade 525,510 527,398
Accrued liabilities 296,149 256,589
----------------- ------------------
Total current liabilities 3,383,180 6,637,037
Due to AFG Energy, Inc.(Note 3) 1,667,125 1,865,078
Long term debt, less current maturities 159,825 141,215
----------------- ------------------
Total liabilities 5,210,130 8,643,330
----------------- ------------------
Stockholders' equity
Common stock , $.001 par value, 50,000,000 shares
authorized 7,159 7,029
Additional paid-in capital 14,043,612 13,276,752
Unamortized stock award (46,047) (63,540)
Accumulated Deficit (7,568,214) (7,218,760)
----------------- ------------------
Total stockholders' equity 6,436,510 6,001,481
$11,646,640 $14,644,811
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements
F-34
<PAGE>
TENGASCO, INC.
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
(Unaudited) (Unaudited)
----------------- ------------------
<S> <C> <C>
Oil and gas revenues $ 610,509 $ -
Costs and other deductions
Production Costs and Taxes 265,487 21,544
Depletion, depreciation and amortization 122,714 16,099
Interest expense 72,716 313,070
General and administrative costs 484,218 310,277
Realized loss on sale of investments 14,828 0
----------------- ------------------
Total costs and other deductions 959,963 660,990
----------------- ------------------
Net loss $ (349,454) $ (660,990)
----------------- ------------------
Basic and diluted loss per common share $ (0.05) $ (0.12)
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements
F-35
<PAGE>
TENGASCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31 1998 1997
----------------- ------------------
<S> <C> <C>
Operating activities
Net loss $ (349,454) $ (660,990)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization 122,714 16,099
Amortization of deferred loan costs 113,750
Amortization of imputed value of stock
warrants issued 165,000
Compensation paid in stock options 45,921 64,169
Changes in assets and liabilities:
Accounts receivable (226,870) 2,097
Other current assets 60,410 (4,709)
Accounts payable (1,888) (71,156)
Accrued liabilities 39,560 (4,918)
Stockholder advances payable - 302,000
----------------- ------------------
Net cash used in operating activities (309,607) (78,658)
----------------- ------------------
Investing activities
Additions to property and equipment (40,819) (39,156)
Additions to oil and gas properties (397,795) (45,789)
Additions to pipeline facilities (823,302) (37,626)
----------------- ------------------
Net cash used in investing activities (1,261,916) (122,571)
----------------- ------------------
Financing activities
Proceeds from borrowings 35,485 36,668
Repayment of amount due AFG Energy, Inc. (2,990,253)
Repayments of borrowings (516,104) (7,004)
Proceeds from issuance of common stock 973,562 28,852
Proceeds from sale of oil and gas properties 80,000
----------------- ------------------
Net cash (used in) provided by financing activities (2,417,310) 58,516
----------------- ------------------
Net decrease in cash and cash
equivalents (3,988,833) (142,713)
Cash and cash equivalents, beginning of period 4,451,274 146,554
----------------- ------------------
Cash and cash equivalents, end of period $ 462,441 $ 3,841
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements
F-36
<PAGE>
TENGASCO, 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 10-QSB and
Item 310 (b) of Regulation S-B. 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 three months ended March 31, 1998 are not necessarily indicative of
results that may be expected for the year ended December 31, 1998. For
further information, refer to the company's consolidated financial
statements and footnotes thereto for the year ended December 31, 1997,
included in Form 10-KSB.
2. During the first quarter of 1998, the Company issued a fully paid 25%
working interest in three wells in the Swan Creek Field to a Director which
were paid for in part by crediting the Director for $235,000 in placement
fees for common stock private placements which occurred during the fourth
quarter of 1997 and the first quarter of 1998. If, however, it is
determined that a well(s) is no longer economically feasible and as such is
subsequently plugged and abandoned, the Director has the option to convert
amounts paid for that well(s) to restricted common shares of Tengasco, Inc.
at 70% of the then current market value.
3. On December 18, 1997, the Company entered into an asset purchase agreement
in which certain producing oil and gas properties located in the state of
Kansas were acquired from A.F.G. Energy, Inc. ("AFG"). The agreement, which
was effective as of December 31, 1997, closed on March 5, 1998. The Company
paid $2,990,253 in cash and entered into a note payable agreement with AFG
in the amount of $2,500,000. The note will accrue interest at 9% per annum
and is due in 23 monthly installments of principal and interest of $79,500
with a balloon payment of $983,773 due in February, 2000. The total note
balance due at March 31, 1998 is $2,430,500 with a current portion payable
of $763,375 and a long term amount of $1,667,125.
4. In accordance with ("SFAS") No. 128, "Earnings Per Share", basic and
diluted loss per share are based on 7,071,506 weighted average shares
outstanding for the quarter ended March 31, 1998 and 5,712,287 weighted
average shares outstanding for the quarter ended March 31, 1997. There were
517,502 and 948,670 potential weighted common shares outstanding at March
31, 1998 and March 31, 1997 respectively related to common stock options
and warrants. These shares were not included in the computation of the
diluted loss per share amount because the Company was in a net loss
position, and, thus, any potential common shares were anti-dilutive.
F-37
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24 - INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 48-18-502 of the Tennessee Business Corporation Act
(the "Act") authorizes a Tennessee corporation to indemnify any director against
liability incurred in a legal proceeding if (i) he or she conducted himself or
herself in good faith; and (ii) he or she reasonably believed that his or her
conduct was in the best interest of the company or, if the conduct was not
undertaken in his or her official capacity, that it was not opposed to the
company's best interests. In the case of a criminal proceeding, the director
must have had no reasonable cause to believe that his or her conduct was
unlawful. A corporation may not indemnify a director under Section 48-18-502 in
connection with a proceeding "by or in the right of the corporation in which the
director was adjudged liable to the corporation" or in connection with any other
proceeding charging improper personal benefit to him or her, in which he or she
was adjudged liable on the basis that he or she improperly received a personal
benefit.
Unless limited by its charter, Section 48-18-503 of the Act
requires a corporation to indemnify a director who was wholly successful, on the
merits or otherwise, in the defense of any proceeding to which he or she was a
party because of his or her role as director against reasonable expenses
incurred in connection with the proceeding. The Company's charter does not
provide any limitations on this right of indemnification.
Pursuant to Section 48-18-504 of the Act, the Company may
advance a director's expenses incurred in defending any proceeding upon receipt
of an undertaking and a statement of the director's good faith belief that he or
she has met the standard of conduct described in Section 48-18-502.
Section 48-18-505 permits a court, upon application of a
director, to order indemnification if it determines that the director is
entitled to mandatory indemnification under Section 48-18-503 or that he or she
is fairly and reasonably entitled to indemnification, whether or not he or she
met the standards set forth in Section 48-18-502.
Section 48-18-506 limits indemnification under Section
48-18-502 to situations in which either (i) the majority of a disinterested
quorum of directors; (ii) independent special legal counsel; or (iii) the
stockholders determine that indemnification
II-1
<PAGE>
is proper under the circumstances.
Unless the corporate charter provides otherwise, Section
48-18-507 extends the rights to indemnification and advancement of expenses to
officers, employees and agents. The Company's corporate charter does not provide
for any limitations on these rights of indemnification.
Regardless of whether a director, officer, employee or agent
has the right to indemnity under Section 48-18-502 or Section 48-18-503, Section
48-18-508 allows the corporation to purchase and maintain insurance on his or
her behalf against liability resulting from his or her corporate role.
Section 48-18-509 provides that the rights to indemnification
and advancement of expenses shall not be deemed exclusive of any other rights
under any bylaw, agreement, stockholder vote or vote of disinterested directors;
however, no indemnification may be made where a final adjudication adverse to
the director establishes his or her liability for breach of the duty of loyalty
to the corporation or its stockholders or for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law.
The Company is seeking bids from insurance companies to
provide Directors' and Executive Officers' Insurance, and has adopted the
provisions of the Act.
ITEM 25 - OTHER EXPENSES OF ISSUANCE and DISTRIBUTION
The following table sets forth the estimated costs and
expenses to be borne by the Company in connection with the Offering described in
the Registration Statement other than underwriting commissions and discounts.
Registration Fee $ 3,268.58
Legal Fees and Expenses $25,000.00
Accounting Fees and Expenses $15,000.00
Printing Expenses $ 500.00
Consulting Fee $ 500.00
Miscellaneous Expense $ 1,000.00
---------
Total $45,268.58
II-2
<PAGE>
ITEM 26 - RECENT SALES OF UNREGISTERED SECURITIES
The following table provides information with respect to the
sale of all "unregistered" and "restricted" securities sold by the Company
during the past three years, which were not registered under the 1933 Act:
Number
Date Of Aggregate
Name of Owner Acquired Shares Consideration
Robert C. Bohannon, Ph.D. 11/8/94 8,750 1
Henry H. Tate, Jr. 11/8/94 3,750 1
Industrial Resources 5/4/95 4,000,000 2
Corporation
M. E. Ratliff 5/15/95 215,000 3
Jeffrey D. Jenson 5/15/95 240,000 3
Leonard W. Burningham, Esq. 5/15/95 50,000 3
Duane S. Jenson 9/29/95 4,000 4
Craig Carpenter 9/29/95 4,000 4
Industrial Resources 3/29/96 76,557 5
Corporation 4/10/96 87,709 5
Allen Sweeney 12/31/96 33,151 6
Russell Ratliff 3/29/96 37,534 6
James C. Walter 3/22/96 35,616 6
Mike Johnson 3/26/96 10,000 6
Estate of Raymond E. Johnson 4/3/96 10,000 6
Charles N. Manhoff 4/10/96 88,356 6
Joseph B. Mattei 4/19/96 37,000 6
William A. Moffett 4/23/96 37,397 6
6/25/97 72,603 6
II-3
<PAGE>
Jeffrey DeMunnik 5/29/96 16,664 6
3/15/97 4,000 6
Robert M. Carter 6/15/96 15,671 6
8/26/96 2,000 6
6/30/97 7,329 6
Kelly S. Grabill 7/29/96 12,500 6
Jeff Brockman 7/29/96 10,000 6
8/29/96 62,329 6
Robert Janda 9/5/96 22,730 $187,520
Donald Janda 9/5/96 2,131 $ 17,580
William Evans 9/5/96 12,121 $100,000
Walter C. Arzonetti 4/22/97 88,493 6
Neil Harding 5/21/97 100,000 7
Michael McCown 6/30/97 50,000 6
Adams, Stanley & Sharon E. 10/15/97 6,000 53,580.00
Angle, Noriko T. 10/10/97 5,714 50,000.00
Arkwright, Richard T. 11/04/97 10,989 99,999.90
Bailey, Gurvin & Margaret 09/25/97 4,500 36,225.00
Blaker, Barbara & Lloyd 12/26/97 1,120 10,000.00
Bonham, Elizabeth D. 12/19/97 5,952 50,000.00
Borger, Jeannie 10/15/97 224 2,000.32
Buck, Frank S. & Martha J. 10/22/97 5,000 47,250.00
Burleson, Elizabeth E., 09/15/97 500 3,895.00
Rev. Tr DTD 5/6/93
Casillas, Arcadio & Renate 11/19/97 9,685 99,997.63
Cates, Dennis 10/14/97 7,000 58,800.00
Chandler, Robert A. 11/13/97 500 4,945.00
Dale, John D., Jr. 12/10/97 4,682 50,000.00
Day, Christopher 08/22/97 482 2,966.11
II-4
<PAGE>
Egger and Company 10/28/97 202,380 1,700,000.00
Eisert, Anthony & Marie 02/25/98 2,857 20,000.00
Emory Clinic Profit Sharing 11/06/97 2,646 25,004.70
Plan FBO William J. Casarella
Ershek, John 11/03/97 5,000 41,100.00
Esrick, Ralph Trust 03/10/98 1,000 7,170.00
Fortune Hunters Investment 10/09/97 201 1,759.00
Club
French, Peter & Grace 12/09/97 2,267 25,000.00
Funk, Frederick 10/20/97 2,158 20,000.00
Funk, Sharon 10/15/97 5,599 49,999.07
Gerding, Daniel J. 11/21/97 1,000 9,890.00
Gerding, James A. 08/26/97 20,000 140,000.00
Gerding, Scott J. 12/09/97 1,000 9,890.00
Gillis, Terry 11/06/97 2,667 24,989.79
Gillis, Terry 11/14/97 1,465 15,001.60
Gillis, Wayne H. 08/26/97 14,286 100,000.00
Gray, Edward W.T. 08/22/97 80,515 500,000.00
Greene, Daryl, IRA R/O UTA 10/13/97 5,000 42,000.00
Charles Schwab & Co., Inc.
Habbersett, Edith T., TTEE 11/18/97 1,500 16,020.00
Habbersett, William C. 08/27/97 2,197 15,005.51
TTEE TR 9/1/94
Habbersett, William C. 09/24/97 1,500 11,550.00
TTEE UTD 9/1/94
Habbersett, William C. 11/14/97 1,000 10,240.00
TTEE UTD 9/1/94
Habbersett, William C. 01/05/98 2,303 21,970.62
TTEE UTD 9/1/94
II-5
<PAGE>
Hamac & Co., TTEE 11/05/97 10,582 99,999.90
Marillyn Himes Riviere TR
Hampton, Earl 09/24/97 500 3,850.00
Harbert, Bill L. 10/10/97 34,286 300,002.50
Honeycutt, Robert M. 10/15/97 100 893.00
Houser, Janice 01/21/98 3,008 20,000.00
Huang, Diedre A. 11/06/97 5,336 49,998.32
Huang, Peter C.R. 11/06/97 16,008 149,994.96
Haung, Stephen 11/06/97 5,336 49,998.32
Hut, Robert A. 12/03/97 4,682 50,000.00
Jones Investment Co. 12/04/97 6,000 50,400.00
Jones, Michael J. 10/14/97 2,200 20,020.00
Jones, Ronald M. 10/28/97 1,500 12,600.00
Jungman, Paul Claude 10/15/97 500 5,000.80
Kail, Wilbert L. 09/02/97 1,000 6,650.00
Kamer, John P. 09/22/97 400 2,976.00
Keyser, Frank & Mims, 12/09/97 443 4,500.00
Catherine
Knott, Patricia 10/24/97 500 4,550.00
Kourkoumelis, James M. 10/21/97 500 4,815.00
L'Hussier, Harold R. 10/17/97 1,406 15,002.02
L'Hussier, Harold 03/03/08 1,594 11,715.90
Lange, Robert A. 10/10/97 1,500 13,345.00
Lautzenhiser, Stephen 08/19/97 800 4,832.00
Leonard, William Curtis 11/07/97 216 2,004.00
Malone, Michael & Kimberly 12/09/97 49 500.00
McCarty, Billy E. & Carol J. 12/09/97 99 1,000.00
II-6
<PAGE>
Mertins, Janelle 01/21/98 10,000 77,500.00
Miller, William F., Jr. 10/10/97 3,000 26,250.00
Milligan, Shirley, 09/30/97 300 2,415.00
TTEE TR UA 7/3/90
Mobarak, Heather L. 02/12/98 500 4,000.00
MSP Enterprises 12/09/97 500 5,515.00
Myers, Garry D. 12/31/97 1,344 12,000.00
Nevin, Micah Cole 11/06/97 100 945.00
Nishimura, Joseph Y. 12/16/97 5,192 50,000.00
Nishiwaki, Nick S. 10/23/97 21,978 200,000.00
Pichiarella, Lawrence S. 12/08/97 100 1,103.00
Pichiarella, Lawrence S. 12/11/97 200 1,960.00
Pichiarella, Lawrence S. 12/17/97 100 840.00
Presnell, Joe 11/14/97 2,000 20,480.00
Presnell, Joe & Alma 12/08/97 1,000 11,030.00
Presnell, Joe 02/25/98 1,000 6,650.00
Regions Bank, TTEE for the 10/10/97 5,656 49,999.99
Bobby P. Lemay Directed IRA
Reventlow, Richard H. 11/06/97 10,989 99,999.90
Rich Energy, Inc. 12/09/97 700 6,370.00
Scott, Donald L. 10/14/97 2,220 20.020.00
Scott, Randall L. 10/14/97 2,220 20,020.00
Seevers, Larry 03/10/98 1,504 10,000.00
Smithers, Charles F., Jr. 02/12/98 6,250 50,000.00
Spoonbill, Inc. 10/23/97 178,024 1,619,949.00
Spoonbill, Inc. 01/29/98 50,000 350,000.00
Stanley, Robert J. 10/10/97 11,313 100,006.92
II-7
<PAGE>
STEP, Inc. 10/22/97 2,000 18,200.00
Steuer, Joseph Jr. 08/19/97 1,703 9,996.61
Stewart S. Kent, TTEE, 10/23/97 2,500 22,550.00
UA/TR Dtd 12/29/88
Strickland, Thomas, Jr. 08/26/97 200 1,174.00
Thomson, Charles A. 10/29/97 2,000 15,400.00
Thurman, Shawn Lee 08/26/97 219 1,495.00
Ueshima, Takeshi 02/05/98 6,494 50,000.00
Uly, Camilo 12/11/97 2,500 25,000.00
Viam Charitable & Edu. 10/21/97 11,905 100,000.00
Foundation, Inc.
Vickers, T. Owen 10/09/97 7,584 64,994.88
Watson, W.N. 11/06/97 534 5,003.58
Weeks, Everette J. 03/10/98 500 3,590.00
Welden, William Edgar, Jr. 11/11/97 506 5,000.00
Welden, William Edgar, Sr. 11/11/97 2,528 25,000.00
Widmer, Edward J. 12/31/97 500 4,465.00
Wilson, Henry A. 11/03/97 585 5,019.30
TOTAL 877,902 7,364,769.92
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.
II-8
<PAGE>
3 Issued in consideration of services rendered to the
Company. See, "Description of Business" - "Business
Development" above. The services related to the
negotiation and consummation of the Purchase
Agreement. The value attributed to the shares would
have been approximately $0.12 per share based upon an
average market price of $0.18 per share discounted
because of the restricted nature of the shares and
the lack of liquidity.
4 Issued in consideration of the conveyance of an Eimco
Caterpillar.
5 Issued in consideration of the cancellation of debt
owed by the Company to IRC. See, "Description of
Business" - "Business Development" above.
6 Issued pursuant to Stock Option Agreements adopted by
the Board of Directors granting these persons an
option to purchase "unregistered" and "restricted"
shares of the Company's common stock at a price of
$0.275 per share. See, "Executive Compensation"
"Restricted Stock Options Table" above.
7 Issued as consideration for the granting of a loan in
the amount of $1,000,000.
Management believes that all of the foregoing persons were
either "accredited investors" as that term is defined under applicable federal
and state securities laws, rules and regulations, or were persons who by virtue
of background, education and experience who could accurately evaluate the risks
and merits attendant to an investment in the securities of the Company. Further,
all such persons were provided with access to all material information regarding
the Company, prior to the offer or sale of these securities, and each had an
opportunity to ask of and receive answers from directors, executive officers,
attorneys and accountants for the Company. The offers and sales of the foregoing
securities are believed to have been exempt from the registration requirements
of Section 5 of the 1933 Act, as amended, pursuant to Section 4(2) thereof, and
from similar state securities laws, rules and regulations covering the offer and
sale of securities by available state exemptions from such registration.
ITEM 27 - EXHIBITS
II-9
<PAGE>
The following exhibits are filed as a part of this
Registration Statement:
Number Description
2.1 Plan of Acquisition. Agreement dated December
18,1997 between AFG Energy, Inc. and Tengasco,
Inc. regarding sale of assets of AFG Energy,
Inc.
3.1 Initial Articles of Incorporation
3.2 Bylaws
3.3 Articles of Amendment dated April 12, 1966
3.4 Articles of Amendment dated July 12, 1984
3.5 Articles of Amendment dated December 18, 1991
3.6 Articles of Amendment dated September 11, 1992
3.7 Articles of Incorporation of the Tennessee
wholly-owned subsidiary **
3.8 Articles of Merger and Plan of Merger
(taking into account the formation of the
Tennessee wholly-owned subsidiary for the
purpose of changing the Company's domicile
and effecting reverse split)
5.1 Opinion of Robson & Miller, LLP
10.1(a) Purchase Agreement with IRC
10.1(b) Amendment to Purchase Agreement with IRC
10.1(c) General Bill of Sale and Promissory Note
10.2(a) Compensation Agreement - M. E. Ratliff
10.2(b) Compensation Agreement - Jeffrey D. Jenson
10.2(c) Compensation Agreement - Leonard W. Burningham, Esq.
10.3 Agreement with The Natural Gas Utility District
of Hawkins County, Tennessee
10.4 Agreement with Powell Valley Electric Cooperative, Inc.
II-10
<PAGE>
10.5 Agreement with Enserch Energy Services, Inc.
10.6 Teaming Agreement between Operations Management
International, Inc. and Tengasco, Inc. dated
March 12, 1997
10.7 Agreement for Transition Services between
Operations Management International, Inc. and
Tengasco, Inc. regarding the East Tennessee
Technology Park
16.1 Letter of David T. Thomson, CPA, Regarding
Change in Certifying Accountant
16.2 Letter of Charles M. Stivers, CPA, Regarding
Change in Certifying Accountant
16.3 Letter of Price-Bednar, LLP, CPA, Regarding
Change in Certifying Accountant
23.1 Consent of Charles M. Stivers, CPA
23.2 Consent of David T. Thomson, CPA
23.3 Consent of BDO Seidman, LLP
23.4 Consent of Robson & Miller, LLP
23.5 Consent of Coburn Petroleum Engineering Co.
23.6 Consent of Columbia Engineering, Inc.
99.1 Beech Creek Lease Schedule
99.2 Wildcat Lease Schedule
99.3 Burning Springs Lease Schedule
99.4 Fentress County Lease Schedule
99.5 Swan Creek Lease Schedule
99.6 Alabama Lease Schedule
99.7 Coburn Engineering Report
99.8 Coburn Engineering Report dated February 18,
1997 (Paper copy filed on Form SE pursuant
to continuing hardship granted by Office of
EDGAR Policy)
99.9 Columbia Engineering Report dated March 2, 1997
II-11
<PAGE>
(Paper copy filed on Form SE pursuant to
continuing hardship granted by Office of
EDGAR Policy)
* Summaries of all exhibits contained within
this Registration Statement are modified in
their entirety by reference to these
Exhibits.
** These are form documents much of which are
substantially handwritten and may be
illegible. The best available copy thereof
has been filed with the Commission and
copies may be obtained from the principal
executive offices of the Company at no
charge.
ITEM 28 - UNDERTAKINGS
The Company hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to the
Registration Statement to:
(i) Include any prospectus required by Section
10(a)(3) of the Act;
(ii) Reflect in the Prospectus any facts or
events which individually or together represent a fundamental
change in the information in the Registration Statement; and
(iii) Include any additional or changed
material information on the plan of distribution.
(2) That, for the purpose of determining any
liability under the Act, treat each post-effective amendment as a new
registration statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of
the offering.
The Company hereby undertakes:
(1) For determining any liability under the Act,
treat the information omitted from the form prospectus filed as
II-12
<PAGE>
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company under Rule 424(b)(1) or (4) or 497(n)
under the Act as part of the Registration Statement as of the time the
Commission declared it effective.
(2) For determining liability under the Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and the offering of the securities as that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised in the opinion of the Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful
defenses of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel that matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the questions whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing of Form SB- 2 and authorized this
registration statement on its behalf by the undersigned, thereunto duly
authorized, in the City of Knoxville, State of Tennessee on the 11th day of May,
1998.
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
s/Malcolm E. Ratliff Chief Executive May 11, 1998
- --------------------- Officer
Malcolm E. Ratliff
s/Allen H. Sweeney Chairman of the Board May 12, 1998
- --------------------- of Directors
Allen H. Sweeney
s/Joseph Earl Armstrong Director May 11, 1998
- ---------------------
Joseph Earl Armstrong
s/James B. Kreamer Director May 11, 1998
- ---------------------
James B. Kreamer
s/William A. Moffett Director May 12, 1998
- ---------------------
William A. Moffett
</TABLE>
II-14
<PAGE>
s/Shigemi Morita Director May 11, 1998
- ---------------------
Shigemi Morita
s/Robert M. Carter President May 11, 1998
- --------------------- Vice-President
Robert M. Carter
s/William F. Stenken Chief Accounting May 11, 1998
- --------------------- Officer
William F. Stenken
s/Sheila F. Sloan Treasurer May 11, 1998
- ---------------------
Sheila F. Sloan
s/Elizabeth Wendelken Secretary May 11, 1998
- ---------------------
Elizabeth Wendelken
II-15
<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
May 8, 1998
Tengasco, Inc.
603 Main Avenue - Suite 500
Knoxville, Tennessee 37902
Re: Tengasco, Inc.
Gentlemen:
We have acted as counsel to Tengasco, Inc., a Tennessee corporation
(the "Company"), in connection with a registration statement on Form SB-2 (the
"Registration Statement") and all amendments thereto, to be filed with the
Securities and Exchange Commission for the purpose of registering an aggregate
of 684,368 shares (the "Shares") of common stock, $.001 par value per share (the
"Common Stock") owned by certain shareholders (collectively the "Selling
Shareholders") of the Company under the Securities Act of 1933, as amended (the
"Act").
As counsel for the Company, we have examined and are familiar with the
Certificate of Incorporation and By-Laws of the Company, and all amendments
thereto. We are also familiar with the form of the Company's stock certificate,
as well as all corporate proceedings taken by the Company in connection with the
authorization of the issuance and acquisition of the Shares by the Selling
Shareholders. Throughout such examination we have assumed the genuineness of
signatures and accuracy and conformity to original documents of all copies of
documents supplied to us. As to questions of fact material to the opinion
expressed herein, we have, when relevant facts were not independently
determinable, relied upon information furnished to us by officers and directors
of the Company or their duly authorized agents or employees.
Based upon the foregoing, it is our opinion that the Shares have been
duly executed and delivered and the consideration therefor duly paid, and such
Shares are validly issued, fully paid and nonassessable and owned by the Selling
Shareholders.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/S/ Robson & Miller, LLP
------------------------
Robson & Miller, LLP
<PAGE>
EXHIBIT 10.6
Confidential
Teaming Agreement
for
A Proposal For
Management, Operation and Maintenance
of
Utility Systems
Department of Energy K25 Site
Oak Ridge, Tennessee
1. Team Members
This AGREEMENT documents the understanding between Operations Management
International, Inc. (OMI) and TenGasCo, Inc. hereinafter referred to as
the Team. The Team agrees to pursue the proposed Management, Operations
and Maintenance of the Utility Systems at the Department of Energy K25
Site, Oak Ridge, Tennessee (Project), anticipated to be implemented by
the Department of Energy in conjunction with the Community Reuse
Organization of East Tennessee within the next six months.
2. Exclusive AGREEEMENT
To preserve the respective concepts and interests of the parties hereto
in seeking to obtain the Project, OMI shall work exclusively with the
other members of the Team with respect to a proposal for the Project.
Likewise TenGasCo agrees to work exclusively with OMI with respect to a
proposal for the Project. At the mutual consent of the Team, additional
members may be added as necessary to satisfy the requirements of the
Project.
3. Confidentiality
Team members intend to share information and contacts which might help
each of the members to pursue and obtain the work. In consideration
of the mutual promises herein, Team employees will not disclose outside
their firms any of the information shared for the purposes of obtaining
the work. During the course of the work, certain technical or financial
information may be exchanged between the firms. Members of the Team
shall identify proprietary information when furnishing it to another
member of the Team by marking it "Confidential-Do Not Disclose". Each
member of the Team shall take reasonable precaution to prevent
disclosure of proprietary information to any person or firm other than
the client. Proprietary information that is exchanged may only be used
by the receiving firm in connection with this Project.
<PAGE>
4. Relationship of Team Members
For purposes of this AGREEMENT, it is anticipated that OMI will be
proposed as the prime contractor with responsibility for overall
contract performance and management. OMI will also directly perform the
management, operation and maintenance of all utility systems except
those specified below.
TenGasCo will be a subcontractor to OMI and will perform the management,
operation and maintenance of the steam plant and distribution system,
the electrical substations and distribution system, and the natural gas
distribution system.
The firms will act as "joint" members of the Team as opposed to a "joint
venture". Nothing in this AGREEMENT shall be deemed to constitute,
create, give effect to, or otherwise recognize a joint venture,
partnership, or formal business entity of any kind, and the rights and
obligations of the parties shall be limited to those described in this
AGREEMENT. Nothing contained herein shall be construed as providing for
the sharing of profits or losses arising out of the efforts on any of
the parties; except as may be provided for in any resultant subcontract
agreed to between the parties. The cooperation of the Team members is
for the purpose of complementing their respective capabilities in
pursuit, and execution of the pursuit, of the Project. No Team member
shall pursue the Project outside of this AGREEMENT, either as a member
of another team or as a separate firm without the written consent of the
other Team members.
5. Management and Team Member Responsibilities
The Team will develop a joint management approach for all Project tasks.
The pursuit efforts will be shared jointly by the Team. OMI will be
responsible for management and preparation of the proposal. Each Team
member will be responsible for the development and specification of the
approach to that portion of the work prosposed to come under its
responsility as set forth in Section 4. Relationship of Team Members.
The Team objective is to perform the work with the management and
technical personnel assembled from each organization. Each major phase
and each technical specialty will be completed by personnel working in
accordance with a mutually determined and agreed staffing plan.
It is understood that these Team roles are subject to the scope of
services ultimately determined to be proposed and to the client's
requirements and approval. If necessary, these roles may be modified, or
additional Team members added, to satisfy the concerns of the Department
of Energy and the Community Reuse Organization of East Tennessee for
achieving successful project execution.
Each Team member shall be responsible for the quality of its work and
the timely execution of the tasks assigned to it. Each member shall
defend, indemnify, and hold harmless each of the other Team members from
all claims, loss, damage or injury caused by, and to the proportionate
extent of, it's negligence or willful misconduct arising
<PAGE>
out of its services on the Project. The obligation to defend, indemnify,
and hold harmless shall survive the termination provisions of this AGREEMENT.
6. Termination
This AGREEMENT will terminated on the happening of the following,
whichever occurs first:
* The Team is not awarded the Project
* All services contracted for by the Team are completed and all
fees are collected and disbursed
* The contract with the client is terminated for any reason
* The mutual consent of all Team members is obtained in writing
* Acquisition of any Team member by another firm
7. AGREEMENT Amendment and Assignment
This AGREEMENT contains the entire understanding between the Team member
and supersedes previous understandings, commitments or agreements,
whether oral or written, with respect to the pursuit and execution of
the work on this Project.
This AGREEMENT may be amended at any time under mutual written agreement
of all the Team members.
The AGREEMENT shall not be assigned by any Team member without the prior
written approval of the other parties. No Team member may assign or
subcontract the services to be performed by itself without the prior
approval of the other party.
8. Signatures
THIS AGREEMENT IS ACCEPTED AND APPROVED ON BEHALF OF EACH TEAM MEMBER
BY THEIR UNDERSIGNED DULY AUTHORIZED OFFICERS.
Operations Management International, Inc. TenGasCo, Inc.
/s/ Jack R. Noble /s/ Robert M. Carter, V.P.
________________________________________ __________________________
Vice President /s/ illegible
________________________________________ __________________________
District/Regional Project Development 3-12-97
________________________________________ __________________________
Date 3-12-97 Date
<PAGE>
EXHIBIT 10.7
Draft
March 16, 1998
AGREEMENT
TRANSITION SERVICES
EAST TENNESSEE TECHNOLOGY PARK
COMMUNITY REUSE ORGANIZATION OF EAST TENNESSEE
This AGREEMENT is made on this day of , 1998, between Operations
Management International, Inc. (OMI), and ( ).
Whereas on , 1998, OMI entered into an agreement (Contract)
with the Community Reuse Organization of East Tennessee (CROET) for the
management, operation, maintenance and rehabilitation of utilities and
infrastructure at the East Tennessee Technology Park (Project); and,
Whereas on , 1998, OMI entered into an agreement with
CROET for t ransition services for the Project as set forth in the
approved Transition Plan (Plan), Exhibit 1; and,
Whereas, OMI intends to enter into an agreement (Subcontract) with
Tengasco for services related to the Project as follows:
1. Stream Plant
2. Stream Distribution
3. Natural Gas Distribution
and,
Whereas OMI desires that Tengasco provide certain transition services
related to the Subcontract;
OMI and Tengasco agree:
1. Tengasco will submit for OMI's approval a detailed scope, budget and
schedule for transition services to be provided.
2. The budget for transition services, when aproved by OMI constitutes a
not-to-exceed amount for this AGREEMENT. Compensation by OMI to Tngo
will be for actual services performed.
3. Compensation rates will be in accordance with rates previously
provided to OMI by Tngo and incorporated into the approved Plan.
4. Tngo will document all transition activities performed under this
AGREEMENT in accordance with documentation procedures established by OMI
for the Plan.
<PAGE>
5. Tngo will submit to OMI a monthly invoice for actual transition
services performed under this AGREEMENT for the previous month,
including supporting documentation.
6. OMI will submit a monthly invoice to CROET for all transition
services performed under the Plan, including services performed under
this AGREEMENT.
7. OMI will pay Tngo within Fifteen (15) days of receipt of payment by
CROET for services performed under this AGREEMENT.
8. Services not specified in the approved scope, budget and schedule are
out-of-scope services and require the prior approval of OMI.
9. Tngo will comply with the Plan, including Section 6.0 TERMS AND
CONDITIONS as it relates to this AGREEMENT, and specifically 6.4
Indemnity, Liability, and Insurance.
10. Tngo will comply with the terms and conditions of the Contract as it
relates to this AGREEMENT.
Both parties indicate their approval of this AGREEMENT by their
signatures below.
Authorized signature: Authorized signature:
/s/ Robert M. Carter
______________________ _______________________
Bernard A. Miller
Chief Operating Officer
OPERATIONS MANAGEMENT
INTERNATIONAL, INC.
<PAGE>
Consent of Independent Certified Public Accountants
Tengasco, Inc.
Knoxville, Tennessee
We hereby consent to the use in the Prospectus constituting
a part of this Registration Statement of our report dated March 12, 1998,
relating to the consolidated financial statements of Tengasco, Inc., which
is contained in that Prospectus. Our report contains an explanatory
paragraph regarding the Company's ability to continue as a going concern.
We also consent to the reference to us under the caption
"Experts" in the Prospectus.
/s/ BDO SEIDMAN, LLP
- ---------------------
BDO SEIDMAN, LLP
Atlanta, Georgia
May 19, 199
<PAGE>
[LETTERHEAD OF PETROLEUM ENGINEERING]
May 14, 1998
Securities and Exchange Commission
459 Fifth Street
Washington, D.C. 20549
Gentlemen:
I consent to the use of our engineering report in an amended SB-2 being
filed by Tengasco, Inc. and to the reference of our firm under the
captions "Experts".
Sincerely,
Coburn Petroleum Engineering
/s/ R.W. Coburn
- ------------------------
R.W. Coburn
Registered Petroleum Engineer
Oklahoma #3449
RWC/ps
408 South Boulder o Suite 808 o Tulsa Oklahoma 74103 o 918-584-2558
Facsimile 918-584-2598
<PAGE>
Letterhead of Columbia Engineering
May 12, 1998
Securities and Exchange Commission
459 Fifth Street
Washington, D.C. 20549
Gentlemen:
I hereby consent to the use of my engineering report in an amended SB-2
being filed by Tengasco, Inc. and to the reference of me or my firm under
the captions "Experts"
Sincerely,
/s/ David E. Yard
- -------------------------------------
David E. Yard, P.E.
Columbia Engineering
