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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2 - AMENDMENT NO. 3
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)
Mark A. Ruth, 603 Main Avenue, Suite 500,
Knoxville, Tennessee 37902 (423) 523-1124
(Name Address and Telephone number of Agent for Service of Process)
Approximate Date of Proposed Sale to Public: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Title of each class 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
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<S> <C> <C> <C> <C>
Shares of common $1,855,063 $5.375(1) $1,855,063 $574.24
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 March
15, 1999
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TENGASCO, INC.
345,128 Shares of Common Stock, $0.001 par value
This Prospectus relates to the resale of 345,128 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 7.
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 April 21, 1999
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FORWARD LOOKING STATEMENTS
The information contained in this Prospectus includes certain
forward-looking statements, When used in this document, the words budget,
budgeted, anticipate, expects, estimates, believes, goals or projects and
similar expressions are intended to identify forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those projected by such forward-looking statements. Important factors that could
cause actual results to differ materially from those projected in the
forward-looking statements include, but are not limited to, the following
production variances from expectations, volatility of oil and gas prices, the
need to develop and replace its reserves, the substantial capital expenditures
required to fund its operations and the related need to fund such capital
requirements through commercial banks and/or public securities markets,
environmental risks, drilling and operating risks, risks related to exploration
and development drilling, the uncertainty inherent in estimating future oil and
gas production or reserves, uncertainty inherent in litigation, competition,
government regulation, and the ability of the Company to implement its business
strategy, including risks inherent in integrating acquisition operations into
the Company's operations.
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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, 1998 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 Mark A. Ruth, 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, producing and
transporting oil and natural gas in Tennessee and Kansas. The Company leases
producing and non-producing properties with a view toward exploitation and
development. Emphasis is also placed on pipeline and other infrastructure
facilities to provide transportation, processing and tieback services. The
Company utilizes state-of-the-art 3D seismic technology to maximize the recovery
of reserves. The Company's activities in the oil and gas business did not
commence until May 1995 with the acquisition of oil and gas leases in Tennessee
and Kentucky.
Since 1995 the Company has acquired oil and gas leases on a total of
approximately 44,000 acres, located in Hancock and Claiborne Counties, Tennessee
(collectively, the "Swan Creek Leases or Field").
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 Hays, 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. The loan is evidenced by a note which accrues
interest at the 9.5 % per annum for the period from December 1998 to May 1999.
After May 1999, the interest rate becomes 9% per annum. Monthly interest only
payments are due from December 1998 to May 1999. Monthly installments of
principal and interest of $138,349 are due from June 1999 to December 1999.
There is a balloon payment of $983,773 due in January 2000.
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.
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The Company presently has 13 producing natural gas wells and
two producing oil wells in the Swan Creek Field in Tennessee. In July 1998 the
Company completed the first phase ("Phase I") of its pipeline in the Swan Creek
Field, a 23 mile pipeline made of 6 and 8 inch steel pipe running from the Swan
Creek Field into the main city gate of Rogersville, Tennessee. With the
assistance of the Tennessee Valley Authority ("TVA"), the Company was successful
in utilizing TVA's right-of-way along its main power line grid from The Swan
Creek Field to the Hawkins County Utility District located in Rogersville. The
cost of constructing Phase I of the pipeline was approximately $4,000,000. In
addition, approximately 100 barrels of oil per day are being produced and sold
from the Swan Creek Field. Income from the Swan Creek Field is approximately
$25,000 per month.
The Kansas Properties are currently producing approximately
1,005 Mcf (MCF are units of one thousand cubic feet of gas) of natural gas and
378 barrels of oil per day. Income from the Kansas Properties at the present
time is approximately $82,000 per month and after operating expenses, net income
is approximately $34,000 per month.
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 ............. 345,128(1)
Shares of Common Stock outstanding
as of March 15, 1999 ....................... 7,992,016
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 years ended December 31, 1998 and December 31, 1997.
Data relating to the ended December 31, 1998 and 1997 is
derived from Consolidated Financial Statements appearing elsewhere in this
Prospectus. The financial statements for 1998 and 1997 data have 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.
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(1) This includes 300,000 shares issuable to another Selling Shareholder
upon the exercise of an option granted to him by Industrial
Resources Corporation ("IRC") on May 7, 1997 to acquire 300,000
shares of the Company's common stock. The exercise price is $10.00
per share.
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Year ended Year ended
12/31/98 12/31/97
Income Statement Data
Revenue $2,078,101 $0
Costs and other deductions $5,161,739 $4,370,570
Net loss ($3,083,638) ($4,370,570)
Basic and Diluted loss per Share ($0.42) ($0.71)
Balance Sheet Data:
Working Capital ($1,929,215) ($1,774,571)
Total Assets $13,525,777 $14,644,811
Long-Term Liabilities $ 2,214,723 $ 141,215
(less current maturities)
Stockholders' Equity $7,245,090 $6,001,481
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
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been involved in the oil and gas business. Its future success depends upon its
ability to profitably operate its existing wells and to expand its operations
through the continuation of its drilling program in the Swan Creek Field and the
completion of Phase II of its pipeline. The Company does not presently have the
funds to complete its drilling program or its pipeline. There can be no
assurances that it will be able to obtain such funding. Moreover, there can be
no assurances that the Company can, if it so desires, acquire additional oil and
gas producing properties and/or the acquisition of additional oil and gas
leases. The Company also 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
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. Through the year ended December 31, 1998,
the Company has a history of losses and a working capital deficit of $1,929,215.
In addition, the Company requires approximately $5,000,000 to complete Phase II
of its pipeline. Accordingly, the Company's auditors have indicated substantial
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.
Their audit opinion included an explanatory paragraph describing this
uncertainty. See the financial statements set forth hereinafter. Although there
is no assurance that the Company will be able to raise the necessary funds to
complete Phase II of the pipeline, management is engaged in discussions with
several funding sources and anticipates that it will be able to raise the
necessary financing in the near future. Management further believes that once
such funding is in place it will be able to complete Phase II of the pipeline
and it will be well-positioned to shortly have positive cash flow and be
financially stable.
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
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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
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,
particularly in the Swan Creek Field. See "Management's Discussion and Analysis
or Plan of Operation" below. The Company's most recent acquisition was its
acquisition of the Kansas Properties which was effective as of December 31,
1997. Although the Company has no present plans for any further acquisitions at
this time, it may acquire additional oil and gas-producing properties and/or
leases. The Company has not selected any such additional properties and if it
does determine to acquire any additional property it 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 completing its drilling
program for the Swan Creek Leases, completing Phase II of its pipeline,
conducting oil and gas exploration operations and possibly acquiring additional
oil and
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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 decline as they are produced, except to the extent that the Company
conducts revitalization activities, or acquires properties containing proven
reserves, or both. To increase reserves and production, the Company must
continue its development and drilling programs, identify and produce previously
overlooked or by-passed zones and shut-in wells, acquire additional properties
or undertake other replacement activities. The Company's current strategy is to
increase its reserve base, production and cash flow through the development of
its existing oil and gas fields and selective acquisitions of other promising
properties where the Company can utilize new and existing technology. The
Company can give no assurance that its planned revitalization, development and
acquisition activities will result in significant additional reserves or that
the Company will have success in discovering and producing reserves at
economical exploration and development costs. The Company may not be able to
locate geologically satisfactory property, particularly since it will be
competing for such property with other oil and gas companies, most 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
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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
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. Industrial Resources Corp.
("IRC") currently beneficially owns approximately 2,853,823 shares of the common
stock of the Company or approximately 34.1% of its outstanding voting
securities. This amount is based upon 7,992,016 shares being outstanding or
beneficially owned. The shares owned by IRC include 67,519 shares owned
directly, and an option to purchase 50,000 shares held, by Malcolm E. Ratliff,
30,000 shares owned directly by Tracmark, Inc. and 128,700 shares owned directly
by Ratliff Farms, 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 Director of the Company. Malcolm E. Ratliff is the
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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. James
Ratliff is the sole shareholder and President of Ratliff Farms, Inc. Malcolm E.
Ratliff is the Vice-President/Secretary of Ratliff Farms which may also be
deemed an affiliate of the Company. At April 15, 1999, 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
filings. In such event, such sales could have a substantial adverse effect on
any public market that may then exist in the Company's common stock. Purchasers
of shares offered hereby may experience, as a result, substantial difficulty in
selling their shares at satisfactory prices. Sales of any of these shares by IRC
could severely affect the ability of the Company to secure the necessary debt or
equity funding for the Company's proposed business operations. For additional
information concerning the present market for shares of common stock of the
Company, See the caption "Market Price of and Dividends on the Company's Common
Stock and Other Stockholder Matters." For information regarding common stock
ownership of IRC and the Ratliff family, see, "Security Ownership of Certain
Beneficial Owners and Management."
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 with 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 34.1% 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 and a Director, is the son of the owner of a
majority of the outstanding
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shares of IRC. He is also the President 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 business is highly competitive.
In seeking any other suitable oil and gas properties for acquisition, or
drilling rig operators and related personnel and equipment, the Company will be
competing with a number of other companies, including large oil and gas
companies and other independent operators with substantially greater financial
resources. 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
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Company's common stock and, in addition, these regulations could limit the
ability of brokers/dealers to sell the Company's securities and thus the ability
of purchasers of the Company's securities, including the Shares offered hereby,
to sell such securities in the secondary market.
17. Dividends Unlikely. The holders of Common Stock of the
Company are entitled to receive dividends when, as and if declared by the
Company's Board of Directors. The Board does not intend to declare any dividends
in the foreseeable future and earnings, if any, will be used to finance the
requirements of the Company.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale
of Shares by the Selling Shareholders. All of the proceeds from such sales will
be retained by the Selling Shareholders.
DETERMINATION OF PRICE OF SHARES
The price received by the Selling Shareholders will be
determined by prevailing market prices at the time of sale, at prices related to
such prevailing market prices or at negotiated prices.
DILUTION
The Company is not selling any of the Shares offered. As a
result, no dilution will result from the sale of the Shares in 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.
14
<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>
Neal Harding(3) 337,500 4.2% 337,500 0 0
5544 Fairfax St.
Orlando, Fl. 32812
Donald Janda 2,113 * 2,113 0 0
105 14th Ave.
Charles City, IA. 50616
Robert Nicholson 5,515 * 5,515 0 0
5734 Paddington Way
Boca Raton, FL 33486
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
- ------------------------
(2) Applicable percentage of ownership is based upon 7,992,016 shares of
Common Stock of the Company outstanding as of March 15, 1999.
(3) Includes 300,000 shares of common stock issuable upon exercise of an
option granted to this Selling Shareholder by IRC on May 7, 1997. The exercise
price of the option is $10.00 per share.
15
<PAGE>
privately negotiated transactions. Sales of the Shares on the OTC Bulletin Board
may be made by one or more of the following means: (a) block trades in which a
broker-dealer will attempt to sell shares as agent but may position and resell a
portion of the block as principal to facilitate the transactions; (b) purchases
by a broker-dealer as principal and resale by such broker-dealer for its account
pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers; and (d) any other
means permitted by applicable regulations and laws. In addition, any Shares
which qualify for sale pursuant to Rule 144 under the Act may be sold under Rule
144 rather than pursuant to this Prospectus.
Upon the Company being notified by a Selling Shareholder that
any material arrangement has been entered into with a broker-dealer for the sale
of Shares under any circumstances which require the filing of a supplemental
prospectus, a supplemental prospectus will be filed under Rule 424(c) under the
Act setting forth the names of the participating broker-dealers, the number of
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.
1. The Company was named as a defendant in an action commenced
on March 18, 1997 in the Supreme Court of the State of New York, New York County
entitled Ulrich Hocker, Plaintiff v. Tengasco, Inc., Defendant, Index no.
601385/97. In that action the plaintiff sought to recover the sum of $250,000
loaned to the Company which loan was evidenced by a promissory note. The loan
made by the plaintiff was part of a bridge loan to the Company made by three
lenders in the aggregate amount of $1,000,000.
The Company, for no additional consideration other than the
loan, issued warrants to the plaintiff to purchase 50,000 shares of the common
stock of the Company.
The warrants contain an elaborate formula pursuant to which
the exercise price of the warrants would be reduced and the
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<PAGE>
number of shares increased if the price of the Company's stock decreased. This
formula guaranteed that the warrants would continue to retain their value no
matter what happened to the price of the Company's stock.
The action was recently settled. The settlement provides that
the Company shall pay the plaintiff the sum of $286,416.87 which represents 90%
of the amount of the monies loaned to the Company by the plaintiff together with
interest thereon at 10% from the date of the loan. As part of the settlement,
the warrants held by plaintiff will be deemed null and void and unenforceable.
2. The Company filed an action in Chancery Court for Knox
County, Tennessee on March 21, 1997 entitled, Tengasco, Inc., Plaintiff v.
Theodore Scallan, Thieme Fonds, Ulrich Hocker and Wallington, Investments, Ltd.,
Case No. 133620-2 against Ulrich Hocker and two other lenders, Thieme Fonds and
Wallington Investments, Ltd., as well as Theodore Scallan, the Company's former
President, to invalidate the warrants which were issued in connection with and
as consideration for the bridge loan of $1,000,000 made by the lenders to the
Company. (See, description of the Hocker action above). 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.
It is also the position of the Company that the issuance of these warrants to
the lenders and the fees paid to Heiko Thieme, who represented all of the
lenders, constituted usurious interest. The Company has also claimed that it was
fraudulently induced into the loan transaction as a result of several
misrepresentations made by Heiko Thieme. Two of the lender-defendants, Ulrich
Hocker ("Hocker") and Thieme Fonds moved to dismiss the complaint on the ground
that the court lacked jurisdiction over them. The other lender-defendant,
Wallington Investments, Ltd., appeared specially in the action and moved to
dismiss on the ground that it had not been properly served with process. On
March 20, 1999, the Court issued its opinion and order finding that it had
jurisdiction over the defendants and that process had been properly served upon
Wallington Investments, Ltd. The Company now intends to vigorously pursue its
claims. As part of its settlement of the action brought against the Company by
Hocker in New York, the Company has discontinued this action against Hocker. It
is the opinion of management that there is a strong likelihood that the Company
will be successful in this action against the remaining defendants.
3. The Company was recently named as a defendant in an action
commenced in the Supreme Court of the State of New York, New York County
entitled Wallington Investments, Ltd., Plaintiff v. Tengasco, Inc., Defendant,
Index no. 605876/98 In that action the plaintiff seeks to recover the sum of
$500,000 loaned to the Company which was part of the $1,000,000 bridge loan
transaction with Ulrich Hocker ("Hocker") and Thieme Fonds arranged by Heiko
Thieme (See, discussion of the transaction in nos. 1 and 2 above.)
17
<PAGE>
The loan by Wallington Investments, Ltd., like the loan by Hocker, is evidenced
by a promissory note and the action brought by Wallington Investments, Ltd. is
based upon that note. The complaint fails to make any mention of the warrants
which were issued by the Company as part of the consideration for the bridge
loan and which the Company contends renders the amount of interest extracted in
connection with the loan transaction usurious. The Company has filed an answer
to the complaint asserting that the loan transaction and the note sued upon are
void and unenforceable because the warrants issued in connection with the loan
were never validly issued and were not properly authorized by the Company's
Board of Directors. As stated, it is also the position of the Company that the
issuance of these warrants to the lenders and the fees paid to Heiko Thieme, who
represented all of the lenders, constituted usurious interest. The Company has
further claimed that it was fraudulently induced into the loan transaction as a
result of several misrepresentations made by Heiko Thieme. The Company has moved
to have this action stayed pending the outcome of the prior pending action in
Tennessee (See, no. 2 above) since the issues in both cases are the same and the
determination of the prior case will most likely be dispositive of the issues in
this case. In any event, the Company intends to vigorously pursue its defenses
to this action, as well as claims it has against the plaintiff and the other
similarly situated lenders. The Company believes that it will be successful in
defending this action.
4. The Company, its Chief Executive Officer, Malcolm E.
Ratliff, and one of its attorneys, Morton S. Robson, have been named as
defendants in an action commenced in the Supreme Court of the State of New York,
New York County entitled Maureen Coleman, John O. Kohler, Charles Massoud,
Jonathan Sarlin, Von Graffenried A.G. and VPM Verwatungs A.G., Plaintiffs v.
Tengasco, Inc., Morton S. Robson and Malcolm E. Ratliff, Defendants, Index no.
603009/98 In that action, the plaintiffs, shareholders of the Company each of
which purchased restricted shares of the Company's Common Stock, allege that
although they were entitled to sell their shares pursuant to SEC Rule 144 in the
open market, they were precluded from doing so by the defendants' purported
wrongful refusal to remove the restrictive legend from their shares. The
plaintiffs own in the aggregate 35,000 shares of the Company's common stock. The
plaintiffs are seeking damages in an amount equal to the difference between the
amount they would have been able to sell their shares if the plaintiffs had
acted to remove the restrictive legends when requested and the amount they will
receive on the sale of their shares. The plaintiffs are also seeking punitive
damages in an amount they claim to be in excess of $500,000 together with
interest, costs and disbursements of bringing the action, including reasonable
attorneys fees.
The Company believes that there are several substantial
factual and legal issues as to the date on which the shareholders were entitled
to sell their stock pursuant to Rule 144. Management
18
<PAGE>
further believes that the Company did not wrongfully withhold its approval of
the removal of the restrictive legends at the times such removal was requested
by the shareholders. However, in the event the Company is found to have
improperly withheld its permission to remove the restrictive legends from the
shares owned by the shareholders, the Company may be held liable for damages to
the shareholders in an amount equal to the difference between the actual sale
price of such shares and the sales price they would have realized on the date
such restrictive legends should have been permitted to be removed. As this time
it is not possible to ascertain with any certainty what such damages would be.
5. The Company was named as a defendant in an action commenced
in May 1998 in the United States District Court for the Eastern District of
Tennessee entitled Operations Management International, Inc. ("OMI") v.
Tengasco, Inc. The complaint seeks a declaratory judgment declaring a teaming
agreement the Company entered into in March 1997 with OMI to operate, as a
subcontractor, the steam generating facilities at the East Tennessee Technology
Park ("ETTP") in Oak Ridge, Tennessee invalid and unenforceable, or in the
alternative to declare that the Company is in breach of the teaming agreement
thereby rendering it unenforceable. No claim for recovery of money is made
against the Company. The Company has filed an answer and counterclaim against
OMI seeking $10 million in damages for breach of contract. The action is
scheduled for trial in July 1999. As of this date, discovery still has not been
completed. Although it is not possible at this time to predict the outcome of
this action, it is not anticipated that the Company will suffer a money judgment
against it.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS and CONTROL PERSONS
Identification of Directors and Executive Officers
The following table sets forth the names of all current
directors and executive officers of the Company. These persons will serve until
the next annual meeting of stockholders (to be held at such time as the Board of
Directors shall determine) or until their successors are elected or appointed
and qualified, or their prior resignations or terminations.
19
<PAGE>
Date of
Positions Election or
Name Held Designation
- ---- ---- -----------
Joseph E. Armstrong Director 3/13/97
2624 Selma Avenue
Knoxville, TN 37914
John L. Kidde Director 6/19/98
154 Oldchester Road
Essex Fells, N.J. 07021
James B. Kreamer Director 3/13/97
3621 Cabin Creek Road
London, KY 40741
William A. Moffett Director 5/95
29 Chisolm Trail
Santa Fe, NM 87501
Shigemi Morita Director 3/13/97
80 Park Avenue
New York, N.Y. 10016
Allen H. Sweeney Chairman of 3/13/97
1400 Oak Tree Drive the Board of
Edmund, OK 73003 Directors
Malcolm E. Ratliff Director; Chief 4/21/98
12608 Avallon Place Executive Officer
Knoxville, TN 37922
Robert M. Carter President 3/13/98
317 Heathermoor Drive
Knoxville, TN 37922
Mark A. Ruth Chief Financial 12/14/98
104-D Cynthia Lane Officer
Knoxville, TN 37922
Sheila Sloan Treasurer 3/13/97
121 Oostanali Way
Loudon, TN 37774
Elizabeth Wendelken Secretary 3/13/97
8023 Stanley Road
Powell, TN 37849
20
<PAGE>
Business Experience
Joseph Earl Armstrong is 41 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.
John L. Kidde is 60 years old. He received a B.A. Degree from
Princeton University in 1956. From 1969 to 1988 he served as a Director and
Vice-President of Kidde International, Inc. which was engaged in several
businesses in the area of safety, security and business protection. Subsequently
and to date he has acted as President of KDM Development Corporation, an
investment management company. Mr. Kidde is also a Co-Founder and Chairman of
Australasia, Inc., a Pacific Rim investment fund. He is also a Director and
Investment Committee member of Asset Management Advisors, Inc. of Palm Beach,
Florida and an active General Partner in a number of venture capital
partnerships including, Claflin Capital I-V, North American Venture Capital II
and the Opportunity Fund. Mr. Kidde is a Trustee of the Stevens Institute of
Technology and the Open Space Institute in New York.
James B. Kreamer is 59 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 64 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.
Shigemi Morita is 63 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 a
consultant.
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<PAGE>
Malcolm E. Ratliff is 52 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. On June 19, 1998 at the Company's Annual Meeting of Stockholders he was
elected to the Company's Board of Directors.
Allen H. Sweeney is 52 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.
Robert M. Carter is 63 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.
Mark A. Ruth is 40 years old. He is a certified public
accountant with 17 years accounting experience. He received a B.S. degree in
accounting with honors from the University of Tennessee at Knoxville. He has
served as a project controls engineer for Bechtel Jacobs Company, LLC; business
manager and finance officer for Lockheed Martin Energy Systems; settlement
department head and senior accountant for the Federal deposit Insurance
Corporation; senior financial analyst/internal auditor for Phillips Consumer
Electronics Corporation; and, as an auditor for Arthur Andersen and Company.
22
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
In fiscal 1998, Malcolm E. Ratliff, the Company's Chief
Executive Officer and a Director, Shigemi Morita and John L. Kidde, two of the
Company's other Directors, and IRC, which owns more than ten percent (10%) of
the Company's common stock inadvertently failed to timely file certain Form 3, 4
and 5 reports. Mr. Ratliff failed to timely file two Form 4 reports involving
five transactions. Mr. Morita failed to timely file a Form 5 report and two Form
4 reports involving two transactions. Mr. Kidde failed to timely file his Form 3
and 5 reports and one Form 4 report involving one transaction. IRC failed to
timely file three Form 4 reports involving four transactions. These deficiencies
have all been cured.
Committees
The Company has operating audit and compensation committees.
Messers. Sweeney, Armstrong and Morita comprise the audit committee and Messers.
Sweeney, Ratliff and Morita are the members of the compensation committee.
Family Relationships
There are no family relationships between any of the present
directors or executive officers of the Company.
Involvement in Certain Legal Proceeding
To the knowledge of management, during the past five years, no
present or former director, executive officer, affiliate or person nominated to
become a director or an executive officer of the Company:
(1) Filed a petition under the federal bankruptcy laws or any state
insolvency law, nor had a receiver, fiscal agent or similar officer appointed by
a court for the business or property of such person, or any partnership in which
he or she was a general partner at or within two years before the time of such
filing, or any corporation or business association of which he or she was an
executive officer at or within two years before the time of such filing;
(2) Was convicted in a criminal proceeding or named subject of
a pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) Was the subject of any order, judgment or decree,
23
<PAGE>
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 March 15, 1999 with these computations
being based upon 7,992,016 shares of common stock being outstanding and assumes
the exercise of 375,000 shares vested under options granted by the Company as of
March 15, 1999.
Five Percent Stockholders
Percent
Number of Shares of
Name and Address Title Beneficially Owned Class
- ---------------- ----- ------------------ -----
Industrial Resources Stockholder 2,853,823 34.1%
Corporation(4)
- --------------------------
(4) 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 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. James Ratliff is the sole shareholder and President of Ratliff
Farms, Inc. Malcolm E. Ratliff is the Vice-President/Secretary of Ratliff
Farms. The shares listed here for IRC include 67,519 shares owned directly and
an option to purchase 50,000 shares held by Malcolm E. Ratliff, 30,000 shares
owned directly by Tracmark, Inc. and 128,700 shares owned directly by
24
<PAGE>
603 Main Ave.
Knoxville, TN 37902
Spoonbill, Inc. Stockholder 418,024 5.2%
Tung Wai Commercial Bldg.
20th Floor
109-111 Gloucester Rd.
Wanchai, Hong Kong
Directors and Executive Officers
Name and Address Title Shares Beneficially Percent of
- ---------------- ----- ------------------- ----------
Owned Class
----- -----
Joseph Earl Armstrong Director 50,000(5) Less than 1%
2624 Selma Avenue
Knoxville, TN 37914
Robert M. Carter President 98,000(6) 1.21%
317 Heathermoor Drive
Knoxville, TN 37922
John L. Kidde Director 59,0007 Less than 1%
154 Oldchester Road
Essex Falls, NJ 07021
James B. Kreamer Director 50,000(8) Less than 1%
3621 Cabin Creek Rd.
London, KY 40741
William A. Moffett Director 100,000 1.25%
1073 Encantado Drive
Santa Fe, NM 87501
- --------------------------
Ratliff Farms, Inc.
(5) Consists of shares underlying an option.
(6) Consists of 23,000 shares held directly and options to purchase 75,000
shares.
(7) Consists of 9,000 shares held directly and options to purchase 50,000
shares.
(8) Consists of options to purchase shares.
25
<PAGE>
Shigemi Morita Director 171,141(9) 2.13%
80 Park Avenue
New York, N.Y. 10016
Malcolm E. Ratliff Director; 2,853,823(10) 34.1%
12608 Avallon Place Chief
Knoxville, TN 37922 Executive Officer
Mark A. Ruth Chief -0- -0-
104-D Cynthia Lane Financial
Knoxville, TN 37922 Officer
Sheila F. Sloan Treasurer 12,000(11) Less than 1%
121 Oostanali Way
Loudon, TN 37774
Allen H. Sweeney Chairman of 150,500(12) 1.87%
1400 Oak Tree Drive the Board
Edmund, OK 73003
- ------------------------
(9) Consists of 61,741 shares held directly (including 7,000 shares owned
by Morita Poperties, Inc. of which Shigemi Morita is the sole shareholder),
79,400 shares held as an IRA beneficiary and options to purchase 30,000 shares.
(10) Malcolm E. Ratlif, the Company's Chief Executive Officer and a
Director, is President of Industrial Resources Corporation ("IRC"). James
Ratliff, who is the father of Malcolm E. Ratliff, is the sole shareholder 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 sole shareholder and president of Ratliff Farms, Inc. Malcolm E.
Ratliff is the Vice-President/Secretary of Ratliff Farms, Inc. The shares listed
here include 67,519 shares owned directly and an option to purchase 50,000
shares held by Malcolm E. Ratliff, 2,577,604 shares owned directly by IRC,
30,000 shares owned directly by Tracmark, Inc. and 128,700 shares owned directly
by Ratliff Farms, Inc.
(11) Consists of 2,000 shares held directly and options to purchase 10,000
shares.
(12) Consists of 100,500 shares held indirectly through a company which he
controls and options to purchase 50,000 shares.
26
<PAGE>
Elizabeth Wendelken Secretary 11,000(13) Less than 1%
8023 Stanley Road
Powell, TN 37849
All Officers and 3,555,464(14) 42.49%
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 is seventy five
million (75,000,000) shares consisting of fifty million (50,000,000) shares,
designated as Common Stock, at par value of $.001 per share, and twenty five
million (25,000,000) shares, designated as Preferred Stock, at a par value of
$.0001 per share.
Preferred Stock. The Preferred Stock may be issued, from time to time,
by authorization of the Company's Board of Directors in one or more series, with
such designations, preferences and relative, participating, optional or other
rights, qualifications, limitations or restrictions thereof as shall be stated
and expressed in the resolution or resolutions providing for the issuance of
such series adopted by the Board of Directors. The Company's Board of Directors
recently authorized the issuance of a series of a class of convertible preferred
stock designated as Series A 8% Cumulative Convertible Preferred Stock. The
Series A Preferred Shares have the following rights and preferences.
Liquidation Preference The Series A Shares shall have a
liquidation preference of $100 per Series A Share, plus any accrued and unpaid
dividends thereon.
- -----------------------
(13) Consists of 1,000 shares held directly and options to purchase 10,000
shares.
(14) Consists of shares held directly and indirectly by management, shares
held by Industrial Resources Corporation, shares held by Tracmark, Inc.
Ratliff Farms, Inc. and 375,000 shares underlying options.
27
<PAGE>
Dividends The holders of the Series A Shares shall be entitled
to receive a preferential cumulative dividend of 8% of the liquidation
preference per annum, payable quarterly.
Conversion The holders of the Series A Shares have the right
at any time to convert the principal amount of the purchase price of the Series
A Shares into shares of the Company's common stock at a conversion rate of $5.75
per share of Common Stock, subject to adjustment to protect against dilution.
Voting Rights The holders of Series A Shares shall have no
voting rights prior to conversion of the Series A Shares. However, in the event
that the Company shall fail to pay dividends to the holders of the Series A
Shares in any two of six consecutive quarters, the Company shall take such
action as is necessary, within 45 days of such occurrence, to appoint to the
Board of Directors those nominees of the holders of the Series A Shares which
shall constitute a majority of the members of the Company's Board of Directors
and thereafter, the holders of the Series A Shares shall be entitled to nominate
and elect a majority of the Company's Board of Directors in all election until
such time as all accrued and unpaid dividends are paid to the holders of the
Series A Shares.
Redemption The Company may, at any time, in its sole
discretion, upon 30 days written notice, redeem all of the Series A Shares at a
price of $100 per Series A Share, subject to adjustment, plus any accrued
dividends, provided that at the time of such redemption notice, (i) the
Company's shares of Common Stock shall be listed for trading on a national
securities exchange, The NASDAQ National Market System or The NASDAQ SmallCap
Market on the redemption date; (ii) the closing sale price of the Company's
Common Stock as reported on such national securities exchange, The NASDAQ
National Market System or The NASDAQ SmallCap Market shall have exceeded $11.50
for 60 consecutive trading days preceding the date of the redemption notice; and
(iii) the shares of Common Stock issued or issuable upon conversion of the
Series A Shares are subject to an effective registration statement permitting
their resale under the Securities Act. The holders of the Series A Shares shall
be entitled to exercise their conversion option during the thirty days notice
period.
Registration Rights The holders of the Series A Shares are
entitled to certain piggyback registration rights pursuant to which the Company
shall include the shares of Common Stock issuable upon conversion of the Series
A Shares in any registration statement the purpose of which is to register the
resale of its securities under the Securities Act of 1933, as amended, subject
to certain restrictions which may be imposed by the underwriters in the event of
an underwritten offering.
The Company recently issued 5,750 shares of the Series A
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Preferred Stock in connection with an $800,000 loan transaction between the
Company and five individuals in July 1998 and to repay the balance of a loan
made to the Company by an individual in 1997. Both of those transaction are more
fully described below under the heading "Certain Relationships and Related
Transactions - Transactions with Management and Others". The Company may issue
more Preferred Stock from time to time in order to raise funds for the Company's
operations and/or the acquisition of new properties.
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 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
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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
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,
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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.
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.
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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.
History of the Company
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.
On November 10, 1972, the Company conveyed to an unaffiliated
entity substantially all of the Company's assets and the Company ceased all
business operations.
From approximately 1983 to 1991, the operations of the Company
were limited to seeking out the acquisition of assets, property or businesses.
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 and a $450,000 8% promissory note payable to IRC.
The promissory note was converted into 83,799 shares of the Company's common
stock in December 1995;
(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 from "Onasco
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Companies, Inc."to "Tengasco, Inc."; and
(iv) to change the domicile of the Company from the State of
Utah to the State of Tennessee by merging the Company into Tengasco, Inc., a
Tennessee corporation, formed by the Company solely for this purpose.
The Purchase Agreement was duly executed by the Company and
IRC, effective May 2, 1995. The reverse split, name change and change of
domicile became effective on May 4, 1995, the date on which duly executed
Articles of Merger effecting these changes were filed with the Secretary of
State of the State of Tennessee; a certified copy of the Articles of Merger
from the State of Tennessee was filed with the Department of Commerce of the
State of Utah on May 5, 1995. Unless otherwise noted, all subsequent
computations herein retroactively reflect this one for two reverse split.
During 1996, the Company formed Tengasco Pipeline
Corporation, a wholly-owned subsidiary, to manage the construction and
operation of Phase I of its pipeline, as well as other pipelines planned for
the future.
General
1. The Swan Creek Field
Amoco Production Company ("AMOCO") during the late 1970's
and early 1980's, after extensive geological and seismic studies, leased
approximately 50,000 acres of oil and gas leases in the Eastern Overthrust in
the Appalachian Basin, an area now referred to as the Swan Creek Field.
In 1982 AMOCO successfully drilled two significant natural
gas discovery wells in the Swan Creek Field to the Knox Formation at
approximately 6,000 feet of total depth. These wells, once completed, had an
extraordinarily high pressure and volume of deliverability of natural gas;
however, in the mid-1980's a substantial decline in worldwide oil and gas
prices occurred and the high cost of constructing a 23 mile pipeline across
three rugged mountain ranges and crossing the environmentally protected Clinch
River from Sneedville to the closest market in Rogersville, Tennessee was cost
prohibitive.
In 1987, AMOCO farmed out its leases to Eastern American
Energy Company which held the leases until July 1995. The Company became aware
of a law adopted by the Tennessee legislature which enabled the Company to
lease all of AMOCO's prior acreage. The Company filed for a declaratory
judgment as to its right to lease AMOCO's prior acreage. The Company was
ultimately successful in winning all right, title and interest in all of
AMOCO's prior
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leases in a precedent setting Supreme Court case.
In July 1995 after completion of the Purchase Agreement, the
Company acquired the Swan Creek Leases. These leases provide for a landowner
royalty of 12.5%, leaving the Company a net royalty interest of 87.5% in each
lease.
The first well drilled by the Company in the Swan Creek
Field, the Gary Patton #1 tested at 6.5 Mmcf of deliverable gas per day,
making it the largest known tested well in the states of Tennessee, Kentucky
and Virginia. Since then the Company has drilled twelve additional gas wells
at 6,000 feet and two oil wells for a total of fifteen wells. During 1999 and
2000 Tengasco anticipates drilling, completing and producing a total of 50
additional wells with over 100 million cubic feet of deliverability of natural
gas per day.
Having completed Phase I of its pipeline, in July 1998 the
Company began selling gas to Hawkins County Utility District which services
residential, municipal and industrial customers in the Hawkins County area,
pursuant to a written contract entered into on September 26, 1996. During the
period from August 1998 through December 31, 1998 the Company delivered 46,776
Mcf of gas to Hawkins County Utility District.
During the period from January 1, 1999 through March 23,
1999 Hawkins County Utility District has taken only 477 Mcf of gas from the
Company. Although Hawkins County Utility District could take gas in commercial
quantities, it has declined to do so. Pursuant to its contract, it is not
obligated to purchase any specific amount of gas.
The Company does not know if Hawkins County Utility District
will ever take gas in commercial quantities and intends to seek to terminate
its contract with Hawkins County Utility District.
The Company is currently engineering and designing the
second phase ("Phase II") of its pipeline, an additional 20 miles of 12 inch
pipeline which will connect into East Tennessee Natural Gas' main gas
transmission line. This will enable the Company to service communities
throughout Tennessee and the southeastern region of the United States. It is
estimated that Phase II of the pipeline will cost approximately $5,000,000 and
will take six to eight months to construct. (See, "Item 6 - Management's
Discussion and Analysis or Plan of Operation").
2. The Kansas Properties
The Company, as of December 31, 1997 acquired the Kansas
Properties which included 149 producing oil wells and 59 producing
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gas wells in the vicinity of Hays, Kansas and a gathering system including 50
miles of pipeline. The aggregate production for the Kansas Properties at
present is approximately 1,005 Mcf of gas and 378 barrels of oil per day.
Revenues for the Kansas Wells are approximately $82,000 per month with net
income after operating expenses of approximately $34,000.
There are several capital projects that are available in
Kansas which include drilling wells, recompletion of wells and major
workovers. These projects when completed may well increase production in
Kansas. Management, however, has made the decision to not perform this work
until the price of oil has stabilized at $15 or higher. Current prices
recently reached $15 per barrel.
3. The Company's Other Leases
In connection with the Purchase Agreement, the Company
acquired from IRC the following properties:
(i) a 100% working interest in 41 oil and gas
leases on a total of 8,058 acres, more or less, and a 25% working interest on
one lease of 462 acres, more or less, located in Clay County, Kentucky
(collectively, the "Beech Creek Leases"). Each of these leases provided 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 provided 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 Beech Creek Leases were 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 was 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 was 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
was 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.
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All of the above referenced leases have expired and the
Company does not plan to pursue development of these properties since the
Company intends to concentrate on the development of the Swan Creek Leases which
management believes has greater economic potential.
Subsequent to the Purchase Agreement, 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"). The Alabama Leases have expired and the
Company does not intend to pursue the development of these leases for the same
reasons it is not pursuing the development of its other leases that have
expired.
Governmental Regulations
The Company is subject to numerous state and federal
regulations, environmental and otherwise, that may have a substantial negative
effect on its ability to operate at a profit. For a discussion of the risks
involved as a result of such regulations, see, "Effect of Existing or Probable
Governmental Regulations on Business" and "Costs and Effects of Compliance with
Environmental Laws" hereinafter in this section.
Principal Products or Services and Markets
The Company will conduct exploration and production activities
to produce crude oil and natural gas. The principal markets for these
commodities are local refining companies, major natural gas transmission
pipeline companies, local utilities and private industry end users, which
purchase the crude oil, and natural gas pipeline companies, which purchase the
gas.
In Hancock County, gas production from the Swan Creek Field
can presently be delivered through the completed Phase I of the Company's
pipeline to the Hawkins County Gas Utility. The Company has acquired all
necessary regulatory approvals and 100% of necessary property rights for Phase I
of the pipeline. The Company's pipeline will not only service the Company's
wells, but, will provide transportation of gas for small independent producers
in the local area as well. It is anticipated that direct sales could also be
made to some local towns and industries. No assurance can be given that the
Company will be able to produce a sufficient quantity of crude oil or natural
gas or that it will obtain purchasers of gas from the Company in sufficient
quantities to make these operations profitable.
It is anticipated that when Phase II of the pipeline is
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completed that the Company will be able to provide gas to communities throughout
the State of Tennessee and to other areas of the southeastern United States. It
is anticipated that completion of Phase II will permit the Company to sell all
of its daily natural gas production from the Swan Creek Field.
Natural gas from the Kansas Properties is delivered to
Kansas-Nebraska Energy, Inc. in Bushton, Kansas. At present, crude oil is being
trucked and transported through pipelines to the National Cooperative Refining
Association in McPherson, Kansas, 120 miles from Hays. 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. There is a limited market in the area and the only other purchaser of
crude oil is Koch Oil.
Reserve Analyses
Coburn Petroleum Engineering of Tulsa, Oklahoma, has performed
reserve analyses of all 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 no interest in the Company or
IRC, and performed these services at his standard rate ($90 per hour was billed
and paid for these reports). The net reserve values used hereafter were obtained
from a report dated February 9, 1999 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,
volummetric 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. The report of
Coburn Petroleum Engineering provides that the net reserves of the existing 15
wells in the Swan Creek Field is over 50 Bcf of natural gas with a present-day
deliverability of 15 million cubic feet of natural gas per day and 784,033
barrels of oil. According to the Coburn Engineering Report, discounting the net
reserve values by 10% results in a present value as of December 31, 1998 of
$50,320,416 before taxes and $40,580,884 after taxes.
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 nor Mr. Yard has an 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 February 20,
1999. According to the report of Columbia Engineering, discounting the net
reserve values by 10% results in a present
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value as of December 31, 1998 of $2,970,124 before taxes and $2,395,108 after
taxes 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 Tennessee by tank truck
and natural gas is distributed and transported via pipeline.
The Company has no farmout agreements with any entity.
Status of Any Publicly Announced New Product or Service
The Company has publicly announced its agreement with Enserch
Energy Services, Inc. ("Enserch") to market gas provided by that company in
Tennessee and Southeastern United States. As of the current date, Enserch has
not provided any gas to the Company and, as a result, the Company is not
proceeding with that agreement.
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. On May 7, 1998, OMI filed a complaint for declaratory judgment in the
United States District Court for the Eastern District of Tennessee seeking to
declare the teaming agreement as invalid and unenforceable, or in the
alternative to declare that the Company is in breach of the teaming agreement
thereby rendering it unenforceable. The Company has filed an answer and
counterclaim against OMI seeking $10 million in damages for breach of contract.
The action is scheduled for trial in July 1999. As of this date discovery still
has not been completed. (See, "Legal Proceedings").
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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 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, 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.
Its principal competitors in the State of Tennessee are
Ashland Oil and Miller Services. 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
44,000 acres.
There are numerous producers in the area of the Kansas
Properties. Some are larger and some smaller than the Company. 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.
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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 is not presently dependent upon any major
customers for the gas from its Swan Creek Field. However, upon completion of
Phase II of its pipeline, the Company anticipates being dependent upon a few
customers.
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
Hays. 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.
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Effect of Existing or Probable Governmental Regulations on Business
Exploration and production activities relating to oil and gas
leases are subject to numerous environmental laws, rules and regulations. The
Federal Clean Water Act requires the Company to construct a fresh water
containment barrier between the surface of each drilling site and the underlying
water table. This involves the insertion of a seven-inch diameter steel casing
into each well, with cement on the outside of the casing. The cost of compliance
with this environmental regulation is approximately $10,000 per well.
The State of 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 the
requisite amount of bonds on deposit with the State of Tennessee.
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 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
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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 in 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 be performed by the Company's full time geologist
and will not have a material cost of anything more than his standard salary. See
"Number of Total Employees and Number of Full-Time Employees" set forth below in
this section.
Cost and Effects of Compliance With Environmental Laws
See, "Effect of Existing or Probable Governmental Regulations
on Business" set forth above in this section.
Number of Total Employees and Number of Full-Time Employees
The Company presently has twenty-six full-time employees and
no part-time employees.
The Company has hired a full-time geologist at a salary of
$48,000 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
42
<PAGE>
geochemical research) and well-site geology.
MANAGEMENT'S DISCUSSION and ANALYSIS or PLAN of OPERATION
The Company intends to continue its 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 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 thirteen gas wells in
this area, all of which have been flow tested by metering gas from the wells
through one-half inch orifice. These tests all verify the presence of a
substantial reservoir of natural gas and/or oil. One of these wells, the Reed #1
tested at 4,800,000 cubic feet of gas per day with a pressure of 800 psi.
Another well, the Sutton #1 tested at 1,200,000 cubic feet per day with a
pressure of 150 psi. To date, the Company has not drilled any dry wells.
In July 1998, the Company completed Phase I of its 8 inch 23
mile pipeline from the Swan Creek Field to Rogersville, Tennessee. With the
assistance of the Tennessee Valley Authority, the Company was successful in
utilizing TVA's rights-of-way along its main power grid from the Swan Creek
Field to Rogersville, Tennessee.
The Company's plan of operations for the next two years calls
for the drilling of 50 additional wells on the Swan Creek Field at a cost of
approximately $250,000 per well. The Company's future plans also include
completing Phase II of its pipeline to extend its recently completed Phase I a
distance of 20 miles at a cost of approximately $5,000,000 to connect with the
main gas transmission line of East Tennessee Natural Gas. The Tennessee
Department of Transportation has verbally granted the Company the right to lay
Phase II of its pipeline along state highway 11 to Kingsport, Tennessee where
the Company will connect its line with East Tennessee Natural Gas pipeline and
other potential customers. This will allow the Company to sell all of the
natural gas it can produce throughout the southeastern and northeastern United
States. At the present time, the Company is capable of producing substantially
more gas than it is able to sell. The Company
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<PAGE>
estimates that its ultimate deliverability will reach 80 to 100 Mmcf per day or
2.5 to 3.1 Bcf per month once Phase II of its pipeline is completed. The Company
expects to reach this capacity on or about December 31, 2002. The estimated time
from start to finish of construction of Phase II of the Pipeline is six to eight
months.
The Company does not presently have the funds needed to enable
it to complete its drilling program and the extension of the pipeline. There can
be no assurances that all of the funding necessary for the continuation of the
drilling program and the completion of Phase II of the pipeline will become
available. Moreover, no assurance can be given that the Company will be able to
obtain the required rights of way to construct Phase II of its pipeline, and the
completed Phase I of the pipeline will only serve production from a portion of
the Swan Creek Field.
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 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. This financing is evidenced by a note which accrues interest at the 9.5
% per annum for the period from December 1998 to May 1999. After May 1999, the
interest rate becomes 9% per annum. Monthly interest only payments are due from
December 1998 to May 1999. Monthly installments of principal and interest
$138,349 are due from June 1999 to December 1999. There is a balloon payment of
$983,773 due in January 2000. The aggregate current production form the Kansas
Properties is approximately 1,002 Mcf of natural gas and 378 barrels of oil per
day. Income from the Kansas properties at the present time is approximately
$82,000 per month with net income after operating expenses of approximately
$34,000 per month. Revenues from the Kansas Properties for 1998 were
significantly lower than in the prior two years as a result of lower oil and gas
prices.
There are several capital projects that are available in
Kansas which include drilling wells, recompletion of wells and major workovers
to increase current production. These projects when completed may well increase
production in Kansas. However, the cost of reworking certain existing wells is
projected to be $1.4 million. Since the Company does not presently have the
funds necessary to rework existing wells and/or drill additional wells the
ability to undertake such efforts is dependent on the Company obtaining
additional debt or equity financing. Management has made the decision to not
undertake such efforts to raise the funds necessary to perform this work until
the price of oil has stabilized at $15 per barrel or higher. Current prices have
recently reached $15 per barrel.
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<PAGE>
The Company has determined not to pursue the development of
the Beech Creek, Fentress County, Wildcat, Burning Springs and Alabama Leases,
all of which have expired. The Company, instead, will concentrate on the
development of its other properties which management believes have greater
economic potential and the acquisition of other properties.
The Company has no plans, at present, to increase the number
of its employees significantly.
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
The Company incurred a net loss of $3,083,638 ($0.42 per
share) in 1998 compared to a net loss of $4,370,570 ($0.71 per share) in 1997.
The Company realized oil and gas revenues of $2,078,101 in
1998. In 1997 the Company had no revenues. Revenues in 1998 were offset by
increased production costs and taxes of $1,943,944 compared to $3,748 in 1997.
These increases in revenues and production costs were attributable primarily to
the acquisition of the Kansas Properties in 1998.
Depletion, depreciation and amortization increased from
$79,267 in 1997 to $290,030 in 1998 due, again, primarily to the acquisition of
the Kansas Properties.
General and administrative costs decreased $163,709 to
$1,372,132 in 1998. The decrease occurred primarily as a result of cost savings
with respect to the Kansas Properties and the completion of Phase I of the
Pipeline.
Interest expense of $574,906 in 1998 was $1,310,542 less than
the previous year due to less debt and funding transactions.
Public relations costs of $342,803 in 1998 was $52,489 less
than in 1997 as a result of an effort by the Company to cut costs.
Legal and accounting costs in 1998 were $656,104 compared to
$390,297 in 1997. This increase of $265,807 was due primarily to an increase in
costs for auditing services and legal costs for services related to on-going
litigation and a failed private placement.
The Company did not have any income tax expense in 1998 or
1997 due to a net operating loss carryfoward. Deferred tax
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<PAGE>
assets, consisting primarily of these loss carryfowards, have been fully reduced
by a valuation allowance as management considers it unlikely these tax assets
will be realized.
Liquidity
During 1998, as in prior years, revenues from operations were
insufficient to fund the Company's operations. The Company's primary source of
funds during 1998 came from private placements of the Company's restricted
securities in the amount of approximately $3,557,396 and borrowings of
$3,021,555. The Company expects to need approximately $5,000,000 in 1999 to
complete Phase II of its pipeline and $6,000,000 to continue development of its
Swan Creek Field and other working capital requirements. The Company plans to
raise this money from investors and/or lenders. The Company does not expect to
realize positive cash flows from operations until Phase II of its pipeline is
completed which is currently projected to be six to eight months from the start
of construction of the pipeline.
The "Report of Independent Certified Public Accountants" for
December 31, 1998 to the Company's shareholders included a statement that as a
result of the Company's losses from operations, its working capital deficiency
and the requirement of an additional expenditure of approximately $5 million to
complete Phase II of its pipeline there is Asubstantial doubt@ about the
Company's ability to continue as a going concern. Although there is no assurance
that the Company will be able to raise the necessary funds to complete Phase II
of the pipeline, management is engaged in discussions with several funding
sources and anticipates that it will be able to raise the necessary financing in
the near future. Management further believes that once such funding is in place
it will be able to complete Phase II of the pipeline and it will be
well-positioned to shortly have positive cash flow and be financially stable.
New Accounting Pronouncements
Statement of Financial Accounting Standards ("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 did not have an impact on the Company's 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
46
<PAGE>
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. This pronouncement did not
have an impact on the Company's financial statements.
SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" is effective for all fiscal years beginning after June 15,
1999. This statement requires recognition of all derivative contracts as either
assets or liabilities in the balance sheet and the measurement of them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of any
gains or losses on the hedge with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. It is not anticipated that this
pronouncement will have any impact on the Company since the Company does not
have any open derivative contracts and it does not enter into any hedging
transactions.
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 year. 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 believes it has fully achieved Year 2000
compliance for all internal information systems. As such, management believes
that Year 2000 transition of the Company's internal information systems will not
have a material adverse effect on future results. Costs associated with
compliance were immaterial and have been fully incurred.
The Company is in the process of examining key third party
relationships to determine, to the extent practical, the degree of such parties'
Year 2000 compliance. The Company faces risks if key business suppliers, banks,
utilities, transportation providers, communications providers or government
services are not compliant for the Year 2000. In order to mitigate this risk,
the Company is reviewing its options to continue operations using alternative
suppliers, banks, utilities and providers of transportation and communication
services. There can be no guarantee that the measures taken by the Company will
solve the Year 2000 issue of such third parties. If such problems are not solved
by such third parties and the Company can not locate alternative sources as
outlined, this may have a significant adverse impact on the Company.
47
<PAGE>
DESCRIPTION OF PROPERTY
Property Location, Facilities, Size and Nature of Ownership
The Company's Swan Creek Leases are on approximately 44,000
acres in Hancock and Claiborne Counties in Tennessee. The initial terms of these
leases vary 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 the Swan Creek Leases. See "Description of Business" -
"General" above.
The Kansas Properties acquired from AFG contain 138 leases
totaling 32,158 acres in the vicinity of Hays, Kansas. The original term on
these was from 1 to 10 years and in most cases has expired, however, most leases
are still in effect because they are being held by production. The Company
maintains a 100% working interest in most wells. The leases provide for a
landowner royalty of 12.5%. Some wells are subject to an overriding royalty
interest from 0.5% to 9%.
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. The Company also leases a
field office in Sneedville, Tennessee at a rental of $500 per month. The Company
also leases an office in Hays, Kansas at a rental of $500 per month.
In addition, the Company has drilling equipment and vehicles
which it acquired from IRC. All of this equipment is in satisfactory operating
condition. The securities which the Company acquired from IRC were sold during
1996 for $250,000.
Disclosure of Oil and Gas Operations
The Swan Creek Field currently has thirteen completed natural
gas wells and two oil wells. Phase I of the Company's pipeline was completed in
July 1998. In August 1998 the gas wells in the Swan Creek Field were connected
to Phase I of the Company's pipeline. The Company plans to drill an additional
50 wells in the Swan Creek Field. The Company also plans to complete Phase II of
its pipeline which is an additional 20 miles of 12 inch pipeline connecting the
wells in the Swan Creek field to the main gas transmission line of East
Tennessee Natural Gas. This will enable the Company to service communities
throughout Tennessee and the southeastern region of the United States. It is
estimated that Phase II of the pipeline will cost approximately $5,000,000 and
will take six to eight months to construct.
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<PAGE>
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.
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 current production from the Kansas Properties is
approximately 1,002 Mcf of natural gas and 378 barrels of oil per day. Income
from the Kansas properties at the present time is approximately $82,000 per
month with net income after operating expenses of approximately $34,000 per
month. Revenues from the Kansas Properties for 1998 were significantly lower
than in the prior two years as a result of lower oil and gas prices. In light of
currently depressed oil and gas prices, the Company plans to reduce costs by
shutting-in approximately 20 marginally producing wells. When oil and gas prices
recover, the Company plans to increase production by reworking certain existing
wells at a cost of $1.4 million. Management has made the decision not to perform
this work until the price of oil stabilizes at $15 per barrel or higher. Current
prices recently reached $15 per barrel. 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. There can be no
assurances that the Company will be able to obtain such additional or debt
equity financing to do this work even if oil prices rise to this level.
The Company pays ad valorem taxes on its Kansas Properties. It
does not pay any taxes on its Swan Creek Leases. The Company has general
liability insurance for the Kansas Properties and the Swan Creek Field.
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
49
<PAGE>
a material interest.
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.
During 1997 the Company borrowed the sum of $1,000,000 from an
individual, Neal Harding. 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 and the balance was paid in
October 1998 by paying Mr. Harding $250,680.56 in cash and issuing to him 2,950
shares of the Company's Series A 8% Cumulative Convertible Preferred Stock.
The Company has issued fully paid 25% working interests in six
wells in the Swan Creek Field to Shigemi Morita, one of the Directors of the
Company, which were paid for in part by crediting Mr. Morita $360,000 for
placement fees in connection with private placements of the Company's common
stock which occurred during the fourth quarter of 1997 and the first quarter of
1998. Mr. Morita was given an option that if it was determined that a well(s) at
the time of completion of the drilling was not economically feasible and as such
was subsequently plugged and abandoned, he had 30 days, after written notice
from the Company, to convert amounts paid for that well(s) to restricted shares
of the Company's common stock at 70% of its then current market value. However,
all six of the wells in which Mr. Morita has a participation interest are
producing, therefore his options for these wells are not exercisable.
On July 16, 1998, the Company entered into a loan agreement
with five individual investors totaling $800,000. The loans were secured by a
pledge of 118,200 shares of the Company's Common Stock owned by Malcolm E.
Ratliff, the Company's Chief Executive Officer and a Director. The loans bore
interest at the rate of 8% per annum and matured on October 14, 1998. Loan
origination fees consisted of $64,000 in cash to the broker who arranged the
loan and 16,800 shares of the Company's common stock advanced to the lenders and
broker on behalf of the Company by Malcolm E. Ratliff. Approximately $520,000 of
this loan has been repaid by the Company out of proceeds from a Convertible Note
in the amount of $1,500,000 received during October, 1998. The Convertible Note
matures in five years and is convertible into shares of the Company's common
stock at a price of $6.25 per share. In connection with the loan received by the
Company evidenced by the Convertible Note, the Company issued 25,000 shares of
its common stock to the lender as a loan fee. The balance of the
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<PAGE>
$800,000 loans have been satisfied by the issuance to the lenders of 2,800
shares of Series A 8% Cumulative Convertible Preferred Stock convertible at a
price of $5.75 per share.
The Company has entered into a financial consulting agreement
with Proton Capital, LLC ("Proton") of Westport Connecticut, for a two (2) year
period commencing as of January 1, 1999, whereby Proton is to provide services
in connection with shareholder relations, press releases, long term financial
planning, corporate reorganizations and financing. The Company is to pay Proton
$10,000 per month commencing in June 1999, or sooner if financing is procured by
Proton. Further, if the Company enters into a business combination with parties
introduced by Proton, then the Company will pay Proton a finders fee according
to a fee schedule ranging from a fee of five (5%) percent for a business
combination wherein the consideration does not exceed $5 million to a fee of
$320,000 plus two (2%) percent in excess of $7 million where the transaction
consideration is in excess of $7 million.
Malcolm E. Ratliff, the Chief Executive Officer and a Director
of the Company, has entered into an agreement with Proton to sell Proton not
more than 370,000 shares of common stock of the Company at $5.00 per share over
a five (5) year period. Proton has issued a non-recourse promissory note in the
amount of $1.85 million, together with interest at six (6%) percent per annum.
The promissory note is payable out of proceeds of the sale of the shares. The
370,000 shares were transferred from IRC, an affiliate of Mr. Ratliff, to a
privately held company solely owned by James Ratliff, the father of Malcolm E.
Ratliff, and subsequently to Proton. As of the date of this Report, no shares
have been sold by Proton under the terms of this agreement.
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.
Parent of the Issuer
Unless IRC may be deemed to be a parent of the Company, the
Company has no parent.
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MARKET FOR COMMON EQUITY and RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock has been listed on the OTC
Bulletin Board of the NASD since March 31, 1994 under the symbol TNGO.
The range of high and low bid prices for shares of common
stock of the Company during the fiscal years ended December 31, 1997 and 1998
are set forth below.
Bid
High Low
Fiscal Year Ended
December 31, 1998
March 31, 1998 13.12 9.09
June 30, 1998 12.50 9.00
September 30, 1998 9.75 5.75
December 31, 1998 7.12 3.50
Fiscal Year Ended
December 31, 1997
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 8.50
These bid prices were obtained from the National Quotation
Bureau, Inc. ("NQB") and do not necessarily reflect actual transactions, retail
markups, mark downs or commissions. The transactions include inter-dealer
transactions.
Holders
As of December 31, 1998, the number of shareholders of record
of the Company's common stock was 481, and management believes that there are
approximately 1,203 beneficial owners of
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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.
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, 1998, December 31, 1997 and December 31, 1996.
None of the Company's other executive officers earned compensation in excess of
$100,000 per annum for services rendered to the Company in any capacity.
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</TABLE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Awards
-----------------------------------
Annual Compensation Awards Payouts
------------------------------ ------------------------ --------
Other Restricted Securities Payouts All
Name and Year Salary Bonus Annual Stock Underlying Other
Principal Position ($) ($) Compensation Awards Options Compensation
($) ($) /SARs (#)
- ---------------------------- ---- --------- ----- ------------ ----------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Malcolm E. Ratliff, 1998 $60,000 $-0- $500 -0- 50,000 -0- -0-
Chief Executive Officer 1997 $ 9,731 $-0- $500 -0- -0- -0- -0-
1996 $-0- $-0- $500 -0- -0- -0- -0-
James E. Kaiser, 1998 $-0- $-0- $-0- -0- -0- -0- -0-
Chief Executive Officer and 1997 $ 6,154 $-0- $-0- -0- -0- -0- -0-
General Counsel 1996 $20,000 $-0- $-0- -0- -0- -0- -0-
Theodore Scallan, 1998 $-0- $-0- $-0- -0- -0- -0- -0-
Chief Executive Officer and 1997 $-0- $-0- $-0- -0- -0- -0- -0-
President 1996 $53,120 $-0- $-0- 462,250(15) 100,000(16) -0- $20,000(17)
George E. Walter, Jr. 1998 $-0- $-0- $-0- -0- -0- -0- -0-
Chief Executive Officer 1997 $-0- $-0- $-0- -0- -0- -0- -0-
1996 $ 923 $-0- $20,000 -0- -0- -0- -0-
</TABLE>
(15) 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 $6.00, the bid on 11/28/95.
(16) Option has expired.
(17) Termination compensation.
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OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individualized Grants
-------------------------------------------------------------
Number of Percent of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options/SARs Employees in Price Expiration
Name Granted(#) Fiscal 1998 ($/Sh) Date
- -------------- ------------- ---------------- -------- -----------
<S> <C> <C> <C> <C>
Malcolm E. Ratliff 50,000 100% $7.00 6/19/99
</TABLE>
No options were exercised during fiscal year ended December 31, 1998 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.
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. The Directors, however, have waived such fees due to them as of this
date for prior meetings.
Members of the Board of Directors may also be requested to perform
consulting or other professional services for the Company from time to time. The
Board of Directors will set a rate of compensation for such services which may
be no less favorable to the Company than if the services had been performed by
an independent third party contractor. The Board of Directors has reserved to
itself the right to review all directors' claims for compensation on an ad hoc
basis.
Employment Contracts
There are presently no employment contracts relating to any member of
management. However, depending upon the Company's operations and requirements,
the Company may offer long term contracts to directors, executive officers or
key employees in the future.
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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.
Termination of Employment and Change of Control Arrangement
None; not applicable.
CHANGES IN and DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING and FINANCIAL DISCLOSURE
Change from Price-Bednar, LLP, CPA to Charles M. Stivers, 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.
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
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<PAGE>
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, Certified Public Accountant, of Manchester,
Kentucky, who had been engaged to conduct the preparatory on-site audit
activities for Price-Bednar when the other accountant failed to perform
as promised, indicated that he could timely deliver the required audit
report and was promptly engaged to do so by the Board of Directors.
Also, during, the Company's two most recent fiscal years, and since
then, Price-Bednar has not advised the Company that any of the following exist
or are applicable:
(1) That the internal controls necessary for the Company to develop
reliable financial statements do not exist, that information has
come to their attention that has led them to no longer be able
to rely on management's representations, or that has made them
unwilling to be associated with the financial statements prepared
by management;
(2) That the Company needs to expand significantly the scope of its
audit, or that information has come to their attention that if
further investigated may materially impact the fairness or
reliability of a previously issued audit report or the
underlying financial statements or any other financial
presentation, or cause them to be unwilling to rely on
management's representations or be associated with the Company's
financial statements for the foregoing reasons or any other
reason; or
(3) That they have advised the Company that information has come to
their attention that they have concluded materially impacts the
fairness or reliability of either a previously issued report or
the underlying financial statements for the foregoing reasons or
any other reason.
Further, during the Company's two most recent fiscal years and since
then, the Company has not consulted Price-Bednar regarding the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements or any other financial presentation whatsoever.
The Company previously provided Price-Bednar with a copy of the
disclosure herein and advised them to provide the Company with a letter
addressed to the Commission as to whether they agree or disagree with the
disclosures made herein. Price-Bednar's response to the Securities and Exchange
Commission indicated it agreed with these disclosures.
57
<PAGE>
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.
During the Company's two most recent fiscal years, and since then,
Charles M. Stivers has not advised the Company that any of the following exist
or are applicable:
(1) That the internal controls necessary for the Company to develop
reliable financial statements do not exist, that information has
come to his attention that has led him to no longer be able to
rely on management's representations, or that has made him
unwilling to be associated with the financial statements prepared
by management;
(2) That the Company needs to expand significantly the scope of its
audit, or that information has come to his attention that if
further investigated may materially impact the fairness or
reliability of a previously issued audit report or the underlying
financial statements or any other financial presentation, or
cause him to be unwilling to rely on management's representations
or be associated with the Company's financial statements for the
foregoing reasons or any other reason; or
(3) That he has advised the Company that information has come to his
attention that he has concluded materially impacts the fairness
or reliability of either a previously issued report or the
underlying financial statements for the foregoing reasons or any
other reason.
Further, during the Company's two most recent fiscal years and since
then, the Company has not consulted Charles M. Stivers, in his capacity as an
independent certified public accountant, 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
disclosures provided herein and has advised him to provide the Company with a
letter addressed to the Commission as to whether they agree or disagree with the
disclosures made herein. Mr. Stivers' response to the
58
<PAGE>
Securities and Exchange Commission indicated he agreed with these disclosures.
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 as and for the years ended December 31, 1997
and December 31, 1998 included in this Prospectus and in the Registration
Statement have been audited by BDO Seidman, LLP, independent auditors as set
forth in their report, which contains an explanatory paragraph regarding the
Company's ability to continue as a going concern, appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in auditing and accounting.
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.
59
<PAGE>
TABLE OF CONTENTS
Page
Forward Looking Statement.......................................... 2
Available Information ............................................. 3
Prospectus Summary ................................................ 4
The Company ............................................ 4
The Offering ........................................... 6
Summary Financial Data ................................. 6
Risk Factors ...................................................... 7
Use of Proceeds ................................................... 14
Determination of Price of Shares .................................. 14
Dilution .......................................................... 14
Selling Shareholders .............................................. 14
Plan of Distribution .............................................. 15
Legal Proceedings ................................................. 16
Directors, Executive Officers, Promoters and
Control Persons ................................................... 19
Identification of Directors and Officers ............... 19
Business Experience .................................... 21
Section 16(a) Beneficial Ownership
Reporting Compliance.................................... 23
Committees ............................................. 23
Family Relationships ................................... 23
Involvement in Certain Legal Proceedings ............... 23
Security Ownership of Certain Beneficial
Owners and Management ............................................. 24
Security Ownership of Certain Beneficial
Owners .................................................. 24
60
<PAGE>
Changes in Control ...................................... 27
Description of Securities .......................................... 27
Authorized Capital Stock ................................ 27
Indemnification of Directors, Officers,
Employees and Agents ............................................... 29
Description of Business ............................................ 31
Glossary of Terms ....................................... 31
History of the Company .................................. 32
General ................................................. 33
Governmental Regulations ................................ 36
Principal Products or Services and Markets .............. 36
Reserve Analyses ........................................ 37
Distribution Methods of Products or Services ............ 38
Status of Any Publicly Announced
New Product or Service .................................. 38
Competitive Business Conditions, Competitive
Position in the Industry and
Methods of Competition .................................. 39
Sources and Availability of Raw Materials
and Names of Principal Suppliers ........................ 40
Dependence on One or a Few Major Customers .............. 40
Patents, Trademarks, Licenses, Franchises,
Concessions, Royalty Agreements, Labor
Contracts, including Duration ........................... 40
Need for Governmental Approval of Principal
Products or Services .................................... 40
Effect of Existing or Probable Governmental
Regulations on Business ................................. 41
Research and Development ................................ 42
Cost and Effects of Compliance with
Environmental Laws ...................................... 42
61
<PAGE>
Number of Total Employees and
Number of Full-Time Employees....................................... 42
Management's Discussion and Analysis of Plan of Operation................... 43
Results of Operations............................................... 45
Liqudity............................................................ 46
New Accounting Pronouncements....................................... 46
Year 2000 Risks..................................................... 47
Description of Property..................................................... 48
Property Location, Facilities, Size and Nature of Ownership......... 48
Disclosure of Oil and Gas Operations................................ 48
Certain Relationships and Related Transactions.............................. 49
Transactions with Management and Others............................. 49
Indebtedness of Management.......................................... 51
Parent of the Issuer................................................ 51
Market For Common Equity and Related Stockholder Matters.................... 52
Market Information.................................................. 52
Holders............................................................. 52
Dividends........................................................... 53
Executvive Compensation..................................................... 53
Summary Compensation Table.......................................... 54
Option Grants in Last Fiscal Year .................................. 55
Compensation of Directors .......................................... 55
Employment Contracts ............................................... 55
Bonuses and Deferred Compensation .................................. 56
Pension Table ...................................................... 56
62
<PAGE>
Termination of Employment and Change of Control ........ 56
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................... 56
Change from Price-Bednar, LLP, CPA to
Charles M. Stivers, CPA ................................ 56
Change from Charles M. Stivers, CPA to
BDO Seidman, LLP ....................................... 58
Legal Matters ..................................................... 59
Experts ........................................................... 59
Financial Statements .............................................. F-1
Audited Financial Statements for 1998 and 1997 ......... F-1
Audited Statements of Revenues and Direct
Operating Expenses of Properties Acquired
from AFG Energy, Inc. .................................. F-33
Pro Forma Combined Statements of Loss for
Year Ended December 31, 1997 for AFG Energy,
Inc. and Tengasco, Inc. regarding Sale of
Assets from AFG Energy, Inc. ........................... F-41
63
<PAGE>
Tengasco, Inc.
Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
F-1
<PAGE>
Tengasco, Inc.
Contents
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements
Balance sheets F-5
Statements of loss F-6
Statements of stockholders' equity F-7
Statements of cash flows F-8-9
Notes to financial statements F-10-32
F-2
<PAGE>
[Letterhead of BDO Seidman]
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, 1998 and 1997, and the related consolidated
statements of loss, stockholders' equity and cash flows for each of 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, 1998 and 1997, and the results of their operations
and their cash flows for each of 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 as of December 31, 1998 has a working capital deficiency. Further,
management estimates that additional financing of approximately $5.0 million is
required in order for the Company to complete Phase II of its pipeline
facilities under construction. These matters raise substantial doubt about the
ability of the Company to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ BDO Seidman, LLP
Atlanta, Georgia
March 5, 1999
F-3
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Note 8)
Current
Cash and cash equivalents $ 913,194 $ 4,451,274
Accounts receivable 147,050 -
Inventory 100,298 140,253
Prepaid expenses - 270,939
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 1,160,542 4,862,466
Oil and gas properties, net (on the basis
of full cost accounting) (Note 5) 7,747,655 6,872,571
Pipeline facilities under construction, at cost (Note 6) 4,019,209 2,596,967
Other property and equipment, net (Notes 7 and 9) 461,009 302,146
Other 137,362 10,661
- -----------------------------------------------------------------------------------------------------------------------
$13,525,777 $14,644,811
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
Tengasco, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current
Due to AFG Energy, Inc. (Note 3) $ 953,895 $3,552,005
Notes payable (Note 8) 1,000,000 2,007,486
Loans payable to affiliates (Note 4) 413,800 252,398
Current maturities of long-term debt (Note 9) 89,135 41,161
Accounts payable - trade 351,567 527,398
Accrued liabilities 281,360 256,589
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,089,757 6,637,037
Due to AFG Energy, Inc. (Note 3) 976,207 1,865,078
Long term debt, less current maturities (Note 9) 2,214,723 141,215
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 6,280,687 8,643,330
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 6, 8 and 10)
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity (Notes 8 and 11)
Convertible redeemable preferred stock; redemption value
$800,000; 8,000 shares outstanding 800,000 -
Common stock, $.001 par value; authorized 50,000,000 shares,
issued and outstanding 7,644,212 (7,029,835 in 1997) 7,644 7,029
Common stock to be issued (Note 12) 700,000 -
Additional paid-in capital 16,796,038 13,470,446
Unamortized stock option awards (162,500) (63,540)
Accumulated deficit (10,496,092) (7,412,454)
- -----------------------------------------------------------------------------------------------------------------------
7,645,090 6,001,481
Due from stockholder (Note 12) (400,000) -
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 7,245,090 6,001,481
- -----------------------------------------------------------------------------------------------------------------------
$13,525,777 $14,644,811
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Tengasco, Inc.
Consolidated Statements of Loss
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
As restated
(Note 17)
<S> <C> <C>
Oil and gas revenues $2,078,101 $ -
- -----------------------------------------------------------------------------------------------------------------------
Costs and expenses
Production costs and taxes 1,943,944 3,748
Depletion, depreciation and amortization 290,030 79,267
General and administrative costs 1,372,132 1,535,841
Interest expense 574,906 1,885,448
Public relations 342,803 395,292
Legal and accounting 656,104 390,297
Realized (gain) loss on sale of investments (18,180) 80,677
- -----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 5,161,739 4,370,570
- -----------------------------------------------------------------------------------------------------------------------
Net loss $(3,083,638) $(4,370,570)
- -----------------------------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted $(0.42) $(0.71)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Tengasco, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible Unamortized
redeemable Common Additional stock
preferred Common Stock stock paid-in option Accumulated
-------------------------
stock Shares Amount issuable capital awards deficit
- ------------------------------------- ---------- ------------ ------------ -- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ - 5,707,827 $5,708 $ - $ 4,783,369 $(292,186) $(3,041,884)
Common stock issued for
exercised options - 345,414 345 - 94,645 - -
Common stock issued for the
extinguishment of debt (Note 7) - 86,084 86 - 677,829 - -
Stock option awards and
amortization, net - - - - (175,069) 228,646 -
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 (Note 8) - 100,000 100 - 1,024,900 - -
Stock issued for services - 36,000 36 - 462,152 - -
Net loss for the year ended
December 31, 1997 - as - - - - - - (4,370,570)
restated (Note 17)
- ------------------------------------- ---------- ------------ ------------ -- ---------- ------------- ----------- -------------
Balance, December 31, 1997 - 7,029,835 7,029 - 13,470,446 (63,540) (7,412,454)
Issuance of convertible
redeemable preferred stock
(8,000 shares) 800,000 - - - (64,000) - -
Common stock issued for
exercised options - 2,250 2 - 15,748 - -
Stock option awards and
amortization, net - - - - 325,000 (98,960) -
-
Common stock issued for loan fee - 25,000 25 - 127,975 - -
Common stock issued in private
placements, net of related
expense - 578,111 579 - 2,860,518 -
Common stock to be issued in
private placement - - - 700,000 - - -
Common stock issued for
compensation - 6,000 6 - 39,714 - -
Stock issued for services - 3,016 3 - 20,637 -
Net loss for the year ended
December 31, 1998 - - - - - - (3,083,638)
- ------------------------------------- ---------- ------------ ------------ -- ---------- ------------- ----------- -------------
Balance, December 31, 1998 $800,000 7,644,212 $7,644 $700,000 $16,796,038 $(162,500) $(10,496,092)
- ------------------------------------- ---------- ------------ ------------ -- ---------- ------------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Tengasco, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
As restated (Note
17)
<S> <C> <C>
Operating activities
Net loss $(3,083,638) $(4,370,570)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization 290,030 79,267
Compensation and services paid in stock options and
warrants and common stock 286,400 736,183
Interest expense paid by issuance of
payable to affiliate 163,800 -
Amortization of loan fees paid by issuance of
common stock and stock options - 1,293,694
Amortization of imputed value of stock warrants issued
in connection with notes payable - 220,000
Amortization of deferred loan costs - 170,833
Amortization of deferred publicity costs 240,000 -
Changes in assets and liabilities:
Accounts receivable (147,050) 4,658
Inventory 39,955 -
Prepaid expenses and other assets 32,238 (4,125)
Accounts payable (175,831) 180,305
Accrued liabilities 24,771 148,333
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,329,325) (1,541,422)
- -----------------------------------------------------------------------------------------------------------------------
Investing activities
Acquisition of certain assets of AFG Energy, Inc. (2,990,253) -
Additions to property and equipment (203,507) (178,169)
Net additions to oil and gas properties (1,516,770) (545,429)
Proceeds on sale of oil and gas interests - 310,000
Additions to pipeline facilities under construction (1,422,242) (1,709,652)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,132,772) (2,123,250)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
Tengasco, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
As restated
(Note 17)
<S> <C> <C>
Financing activities
Proceeds from exercise of options 15,751 -
Proceeds from borrowings 3,021,555 1,617,924
Repayments of borrowings (1,831,685) (51,478)
Net proceeds from issuance of common stock 3,557,396 6,402,946
Net proceeds from private placements of convertible
redeemable preferred stock 225,000 -
Payment of commissions on issuance of redeemable
convertible preferred stock to extinguish debt (64,000) -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,924,017 7,969,392
- -----------------------------------------------------------------------------------------------------------------------
Net change cash and cash equivalents (3,538,080) 4,304,720
Cash and cash equivalents, beginning of year 4,451,274 146,554
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 913,194 $ 4,451,274
- -----------------------------------------------------------------------------------------------------------------------
</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. The Company
operates as one reportable business
segment based on the similarity of
activities.
During 1996, the Company formed Tengasco
Pipeline Corporation, a wholly-owned
subsidiary, to manage the construction
and operation of a 43 mile gas pipeline
as well as other pipelines planned for
the future.
Consolidation
The consolidated financial statements
include the accounts of the Company,
Tengasco Pipeline Corporation and
Tennessee Land and Mineral, Inc. All
significant intercompany balances and
transactions have been eliminated.
F-10
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
The Company considers all investments
with a maturity of three months or less
when purchased to be cash equivalents.
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 Columbia Engineering,
independent petroleum engineers, for the
Kansas properties, and by Coburn
Petroleum Engineering for the Tennessee
properties.
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
F-11
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
consideration of price changes only to
the extent provided by contractual
arrangements) to estimated future
production of proved oil and gas
reserves, less estimated future
expenditures (based on current costs) to
be incurred in developing and producing
the reserves using a discount factor of
10% and assuming continuation of
existing economic conditions; and
(b) the cost of investments in
unevaluated properties excluded from
the costs being amortized. No ceiling
writedown was recorded in 1998 or 1997.
Pipeline Facilities Under Construction
Pipeline facilities under construction
are carried at cost. The Company will
provide for depreciation of Phase II of
the pipeline facilities using the
straight-line method over the estimated
useful life of the asset once this
section of the pipeline is completed and
placed in service. Phase II is expected
to be completed in 1999. Accordingly, no
depreciation expense has been recorded
for 1998 and 1997 relating to Phase II
of the pipeline facilities.
Other property and Equipment
Other property and equipment are carried
at cost. The Company provides for
depreciation of other property and
equipment using the straight-line method
over the estimated useful lives of the
assets which range from five to seven
years.
Income Taxes
The Company accounts for income taxes
using 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 the FDIC
insurance limit. At December 31, 1998,
the Company had deposits with one
financial institution in an amount which
exceeds the federally insured limit by
approximately $700,000. The Company's
primary business activities include oil
and gas sales to several customers in
the states of Tennessee and Kansas.
F-12
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
The related trade receivables subject
the Company to a concentration of credit
risk within the oil and gas industry.
Loss Per Common Share
Basic loss per share is computed by
dividing loss 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 7,348,632 shares for the year
ended December 31, 1998 and 6,189,293
shares for the year ended December 31,
1997. There were 475,827 and 618,551
potential weighted common shares
outstanding during 1998 and 1997 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.
Accounting Estimates
The accompanying financial statements
are prepared in conformity with
generally accepted accounting principles
which require management to make
estimates and assumptions that affect
the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of
the financial statements and the
reported amounts of revenues and
expenses during the reporting period.
The actual results could differ from
those estimates.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents
and short-term debt approximate cost due
to the short period of time to maturity.
Fair values of long-term debt are based
on quoted market prices or pricing
models using current market rates.
F-13
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
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, 1998, there were no open
positions in any derivative contracts.
Net trading (gains) losses of $(18,180)
and $80,677 are included in the
accompanying Statements of Loss for the
years ended December 31, 1998 and 1997,
respectively.
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. 133, "Accounting for Derivative
Instruments and Hedging Activities" is
effective for all fiscal years beginning
after June 15, 1999. This statement
requires recognition of all derivative
contracts as either assets or
liabilities in the balance sheet and the
measurement of them at fair value. If
certain conditions are met, a derivative
may be specifically designated as a
hedge, the objective of which is to
match the timing of any gains or losses
on the hedge with the recognition of (i)
the changes in the fair value of the
hedged asset or liability that are
attributable to the hedged risk or (ii)
the earnings effect of the hedged
forecasted transaction. For a derivative
not designated as a hedging instrument,
the gain or loss is recognized in income
in the period of change.
F-14
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
Reclassifications
Certain prior year amounts have been
reclassified to conform with current
year presentation.
2. Going Concern The Company has experienced losses
Uncertainty totalling $3,083,638 and $4,370,570 for
the years ended December 31, 1998 and
1997, respectively, and has a working
capital deficit of $1,929,215 at
December 31, 1998. In addition, as of
December 31, 1998, management estimates
that additional expenditures of
approximately $5.0 are required to
complete Phase II of its pipeline
facilities under construction. These
matters raise substantial doubt about
the Company's ability to continue as a
going concern. Management's plans
include raising additional capital in
order to complete the pipeline
facilities and drilling additional oil
and gas wells. 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 On December 18, 1997, the Company
Acquisition entered into an asset purchase
agreement 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 9.5% per annum for
the period from December 1998 to May
1999. After May 1999, the interest rate
becomes 9% per annum. Monthly interest
only payment are due from December 1998
to May 1999. Monthly installments of
principal and interest of $138,349 are
due from June 1999 to December 1999.
There is a balloon payment of $983,773
due in January 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:
F-15
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Amount
-----------------------------------------------------------------------------
<S> <C>
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
-----------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the purchase price
of the Kansas Properties is included in
the Company's consolidated balance
sheet. The results of operations are
included in the consolidated financial
statements for the year ended December
31, 1998.
The unaudited pro forma results of
operations presented below show the
Company's operations for 1997 as though
the acquisition had taken place at the
beginning of the period. 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 the period, or what the
results of operations of the Company
will be in the future.
<TABLE>
<CAPTION>
Year ended December 31, 1997
-----------------------------------------------------------------------------
<S> <C>
Revenues $ 3,430,329
Net loss (3,893,208)
Basic and diluted loss per
common share $ (0.63)
-----------------------------------------------------------------------------
</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. The loan bears interest at
the rate of 10% per annum and is due
on demand. Additionally the Company has
an account payable with no stated
interest rate to the major stockholder
in the amount of $163,800 at December
31, 1998.
In 1998, the Company incurred
approximately $141,000 of consulting
expenses payable to a member of the
Board of Directors.
During 1997, the Company converted
approximately $344,000 and $138,000 of
debt payable to related parties IRC and
Tracmark, respectively, to common stock.
5. Oil and Gas The following table sets forth
Properties information concerning the Company's
oil and gas properties:
<TABLE>
<CAPTION>
December 31, 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Evaluated $7,846,793 $6,823,246
Unevaluated 117,508 76,743
-----------------------------------------------------------------------------
7,964,301 6,899,989
Accumulation depreciation,
depletion and amortization (216,646) (27,418)
-----------------------------------------------------------------------------
$7,747,655 $6,872,571
-----------------------------------------------------------------------------
</TABLE>
Evaluated costs excluded from
amortization at December 31, 1997,
consist of approximately $913,000, of
costs relating to the Company's Swan
Creek development project which was
awaiting the completion of Phase I of a
gas pipeline (Note 6).
6. Pipeline Facilities In 1996, the Company began construction
Under Construction of a 43-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. Phase I, a 23 mile portion
of the pipeline, was completed in 1998.
As of December 31, 1998, management
estimates the costs to complete Phase II
of the pipeline are approximately $5.0
million.
In January 1997, the Company entered
into an agreement with the
F-17
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
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. Other Property Other property and equipment consisted
and Equipment of the following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $337,070 $277,433
Vehicles 356,336 231,228
Other 118,593 44,971
-----------------------------------------------------------------------------
811,999 553,632
Less accumulated depreciation (350,990) (251,486)
-----------------------------------------------------------------------------
Other property and equipment - net $461,009 $302,146
-----------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
8. Notes Payable Notes payable consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Note payable to an individual;
approximately $500,000 paid in each of
January 1998 and July 1998 with interest
paid quarterly at 11% per annum;
collateralized by equipment owned by a
major shareholder of the Company. An
affiliate served 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.
$ - $1,007,486
Note payable, in default, to an
investment company due May 1997 with
interest payable monthly at 10% per
annum; collateralized by a
subordinated security interest in
all assets of the Company (A).
500,000 500,000
Note payable, in default, to an
individual due April 1997 with interest
payable monthly at 10% per annum;
collateralized by all assets
of the Company (A), (B). 250,000 250,000
Note payable, in default, to a company
due April 1997 with interest payable
monthly at 10% per annum; collateralized
by all assets of the Company (A).
250,000 250,000
-----------------------------------------------------------------------------
$1,000,000 $2,007,486
-----------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
In conjunction with the issuance of the
notes payable denoted in (A) and (B)
listed above, the Company granted the
lenders detachable stock warrants which
enable the holder to obtain up to
200,000 shares of the Company's common
stock at a price of $5 per share.
(A) These notes had not been repaid as
of the above noted due dates. As noted
in (C) below, the Company has filed a
claim against the lenders.
(B) In March 1997, the individual note
holder 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. The parties have agreed to a
settlement in principle whereby the
Company would pay the individual lender
approximately $286,000. As part of the
settlement, the 50,000 warrants to
purchase common stock of the Company
that this individual lender holds will
be deemed null and void and
unenforceable.
(C) Also in March 1997, the Company
filed a claim against the three lenders
discussed in (A) and (B) 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, if
the market price of the Company's stock
is below $16 per share.
F-20
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
9. Long Term Debt Long-term debt consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Note payable to an institution, due
October 2003, with interest payable
monthly at 8% per annum. Note is
convertible into Common Stock of the
Company at a rate of $6.25 per share
of Common Stock. $1,500,000 -
Note payable to an individual; entire
principal balance due December 2001,
with interest payable quarterly at 8%
per annum. Note is convertible into
common stock of the Company at a rate of
$5.00 per share of common stock. 500,000 -
11 vehicle and equipment notes having
interest at the rate of 8% to 12% per
annum collateralized by vehicles and
equipment with monthly payments
including interest of $385 to $2,941 due
2000 to 2003, collateralized by vehicles
and equipment. 303,858 182,376
Total long term debt 2,303,858 182,376
Less current maturities (89,135) (41,161)
-----------------------------------------------------------------------------
Long term debt, less current
maturities $2,214,723 $141,215
-----------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
The aggregate maturities of long term
debt for the five years ending December
31, 2003, are as follows:
Year Amount
----------------------------------------
1999 $ 89,135
2000 86,962
2001 584,586
2002 36,187
2003 1,506,988
----------------------------------------
$ 2,303,858
----------------------------------------
10. Commitments The Company is a party to lawsuits in
and Contingencies the ordinary course of its business.
While the damages sought in some of
these actions are material, the Company
does not believe that it is probable
that the outcome of any individual
action will have a material adverse
effect, or that it is likely that
adverse outcomes of individually
insignificant actions will be sufficient
enough, in number or magnitude, to have
a material adverse effect in the
aggregate.
As of December 31, 1998, the approximate
future minimum payments to be made under
noncancellable operating leases were:
Year Amount
----------------------------------------
1999 $ 86,000
2000 69,000
2001 14,000
2002 12,000
2003 7,000
----------------------------------------
$ 188,000
----------------------------------------
Rent expense was approximately $50,000
and $60,000 for the years ended December
31, 1998 and 1997, respectively.
F-22
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
11. Convertible The Company is authorized to issue
Redeemable 25,000,000 shares of preferred stock,
Preferred Stock with $.0001 par value.
In October 1998, the Company completed
the issuance of 5,750 shares of its
Convertible Redeemable Preferred Stock
to extinguish $575,000 of notes payable.
The Company paid $46,000 on commissions
on the placement of the 5,750 shares of
Preferred Stock. The Company issued an
additional 2,250 shares of Preferred
Stock in December 1998 for approximately
$225,000 which netted the Company
$207,000 after commissions.
The Preferred Stock is entitled to a
cumulative dividend of 8% per quarter.
In the event that the Company does not
make any two of six consecutive
quarterly dividend payments, the holders
of the Preferred Stock may appoint those
directors which would constitute of
majority of the Board of Directors. In
such a scenario, the holders of the
Preferred Shares would be entitled to
elect a majority of the Board of
Directors until all accrued and unpaid
dividends have been paid.
Shares of the Redeemable Preferred Stock
are immediately convertible into shares
of Common Stock. Each $100 liquidation
preference share of preferred stock and
a rate of $5.75 per share of common
stock. The conversion rate is subject to
downward adjustment if the Company
subsequently issues shares of common
stock for consideration less than $5.75
per share.
The Company may redeem the Preferred
Shares upon payment of $100 per share
plus any accrued and unpaid dividends.
12. Common Stock to be In 1998, an institution purchased
Issued and Due from 140,000 shares of common stock for
Stockholder $700,000. As of December 31, 1998, the
stockholder owed the Company $400,000
for the stock purchase. Additionally,
as of December 31, 1998, the Company
had not issued the shares. The entire
$700,000 is included as common stock to
be issued on the accompanying
consolidated balance sheet.
F-23
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
13. Stock Options Changes that occurred in options
outstanding in 1998 and 1997 are
summarized below:
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding,
beginning
of year 460,000 $5.31 1,202,420 $3.30
Granted 150,000 6.50 230,000 5.00
Exercised (2,250) 7.00 (345,414) 0.28
Expired/canceled (232,750) 5.00 (627,006) 5.36
Outstanding,
end of year 375,000 5.80 460,000 5.31
Exercisable,
end of year 325,000 5.62 354,583 5.44
------------------------------------------------------------------------------
<CAPTION>
The following table summarizes
information about stock options
outstanding at December 31, 1998:
Options
Options Outstanding Exercisable
--------------------------------------------- -----------------
Average
Remaining
Contractual
Exercise Life
Price Shares (years) Shares
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$5.00 225,000 0.33 225,000
7.00 150,000 1.28 100,000
------- -------
Total 375,000 325,000
----------------------------------------------------------------------------
</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: expected
volatility of 54%; a risk-free interest
rate of 5.76% and an expected option
life of 1.25 years. No options were
granted to non-employees in 1998.
F-24
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
The amount of compensation expense
included in general and administrative
costs in the accompanying consolidated
statements of loss was approximately
$226,000 and $220,000 for the years
ended December 31, 1998 and 1997,
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:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Net loss
As reported $(3,083,638) $(4,370,570)
Pro forma (3,356,411) (4,507,821)
-----------------------------------------------------------------------------
Basic and diluted loss per share
As reported $ (0.42) $ (0.71)
Pro forma (0.46) (0.73)
-----------------------------------------------------------------------------
</TABLE>
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 1998
and 1997: Expected volatility of 87% for
1998 and 54% for 1997; a risk free
interest rate of 6.50% in 1998 and 5.76%
in 1997; and an expected option life of
1.50 years in 1998 and 1.25 years in
1997.
14. Income Taxes The Company had no taxable income during
the years ended December 31, 1998
and 1997.
F-25
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
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:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Statutory rate 34% 34%
Tax (benefit) at statutory rate $(1,048,000) $(1,486,000)
State income tax (benefit) (185,000) (248,000)
Nondeductible interest expense 100,000 126,000
Other 28,000 (9,000)
Increase in deferred tax asset
valuation allowance 1,105,000 1,617,000
-----------------------------------------------------------------------------
Total income tax provision $ - $ -
-----------------------------------------------------------------------------
The components of the net deferred tax
assets and liabilities are as follows:
Year ended December 31, 1998 1997
-----------------------------------------------------------------------------
Net operating loss carryforward $3,546,000 $ 2,381,000
Capital loss carryforward 263,000 270,000
Accrued expenses 90,000 323,000
-----------------------------------------------------------------------------
3,899,000 2,974,000
Valuation allowance (3,899,000) (2,794,000)
-----------------------------------------------------------------------------
- 180,000
-----------------------------------------------------------------------------
Deferred tax liability:
Oil and gas properties - 155,000
Property and equipment - 25,000
-----------------------------------------------------------------------------
- 180,000
-----------------------------------------------------------------------------
Net deferred taxes $ - $ -
-----------------------------------------------------------------------------
</TABLE>
The Company recorded a valuation
allowance at December 31, 1998 and 1997
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.
F-26
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
As of December 31, 1998, the Company had
net operating loss carryforwards of
approximately $8,864,000 which will
expire, if not utilized, as follows:
Year Amount
----------------------------------------
2010 $ 587,000
2011 1,399,000
2012 4,067,000
2013 2,811,000
----------------------------------------
Total $8,864,000
----------------------------------------
Additionally, at December 31, 1998, the
Company had capital loss carryforwards
of approximately $657,000 which will
expire, if not offset against capital
gains, as follows: 2001- $576,000,
2002-$81,000.
15. Supplemental Cash The Company paid approximately $328,000
Flow Information and $282,000 for interest in 1998 and
1997, respectively. The Company paid $0
for income taxes in 1998 and 1997.
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.
In 1998, the Company paid for
commissions on certain private
placements of common stock by granting
to the brokers oil and gas properties
recorded at an aggregate historical cost
of $396,300.
In 1998, the Company issued 25,000
shares of common stock with a fair value
of approximately $128,000 to an
institutional lender as a loan fee.
In 1998, the Company issued 5,750 shares
of redeemable, convertible preferred
stock to extinguish approximately
$575,000 of debt, which approximated the
fair value of the shares.
In 1998, the Company issued a payable to
the major stockholder in the amount of
$163,800 as payment for that
stockholder's payment of interest
expense in the same amount on behalf of
the Company.
F-27
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
16. 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
both Coburn Petroleum Engineering and
Columbia Engineering, independent
petroleum engineers, as of December 31,
1998 and 1997.
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, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Property acquisition
Proved $ 74,613 $5,406,080
Unproved 46,631 50,424
Less - proceeds from sales of
properties (565,000) (310,000)
Development costs 1,935,509 438,924
-----------------------------------------------------------------------------
$1,491,753 $5,585,428
-----------------------------------------------------------------------------
</TABLE>
F-28
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 2,078,101 $ -
Production costs and taxes (1,943,944) (3,748)
Depreciation, depletion and
amortization (189,227) (44,673)
-----------------------------------------------------------------------------
Loss before income taxes (55,070) (48,421)
Income taxes - -
-----------------------------------------------------------------------------
Loss from oil and gas
producing activities $ (55,070) $(48,421)
-----------------------------------------------------------------------------
</TABLE>
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.
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, 1998 and 1997
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.
Reserves are measured in barrels (bbls)
in the case of oil, and units of one
thousand cubic feet (MCF) in the case of
gas.
F-29
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Oil (bbls) Gas (Mcf)
-----------------------------------------------------------------------------
<S> <C> <C>
Proved reserves
Balance, January 1, 1997 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
Discoveries and extensions 480,168 23,046,923
Revisions of previous estimates (787,982) 2,930,005
Production (150,077) (418,524)
-----------------------------------------------------------------------------
Balance, December 31, 1998 1,624,622 46,176,025
-----------------------------------------------------------------------------
Proved developed producing
reserves at, December 31, 1998 1,195,988 45,217,588
-----------------------------------------------------------------------------
Proved developed producing
reserves at, December 31, 1997 1,277,707 1,284,980
-----------------------------------------------------------------------------
</TABLE>
Of the Company's total proved reserves
as of December 31, 1998 and 1997,
approximately 39% and 27%, respectively,
were classified as proved developed
producing, 11% and 34%, respectively,
were classified as proved developed
non-producing and 50% and 39%,
respectively, 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, 1998 and 1997 is presented in the
following table:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Future cash inflows $101,349,850 $ 87,493,504
Future production costs and taxes (13,624,916) (21,813,667)
Future development costs (5,023,550) (2,873,550)
Future income tax expenses (17,494,835) (12,918,485)
-----------------------------------------------------------------------------
Net future cash flows 65,206,549 49,887,802
Discount at 10% for timing of cash flows (22,230,557) (17,864,113)
-----------------------------------------------------------------------------
Discounted future net cash flows from
proved reserves $ 42,975,992 $ 32,023,689
-----------------------------------------------------------------------------
</TABLE>
F-30
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
The following table sets forth the
changes in the standardized measure of
discounted future net cash flows from
proved reserves during 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $32,023,689 $30,378,513
Sales, net of production costs
and taxes (134,157) 3,748
Acquisition of proved reserves - 10,351,389
Discoveries and extensions 24,299,945 1,984,106
Changes in prices and
production costs (10,136,203) (13,640,812)
Revisions of quantity estimates (1,793,040) (8,576,161)
Changes in development costs (2,411,493) 3,882,741
Net change in income taxes (2,799,046) 3,454,082
Interest factor - accretion of discount 3,953,919 4,134,810
Changes in production rates
and other (27,622) 51,273
-----------------------------------------------------------------------------
Balance, end of year $42,975,992 $32,023,689
-----------------------------------------------------------------------------
</TABLE>
The acquisition of proved reserves in
1997 relates to the Kansas Properties.
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, 1998 and 1997 were $8.32
and $16.53 per barrel of oil and $1.90
and $2.57 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.
F-31
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
Income tax expense is computed based on
applying the appropriate statutory tax
rate to the excess of future cash
inflows less future production and
development costs over the current tax
basis of the properties involved, less
applicable carryforwards, for both
regular and alternative minimum tax.
The future net revenue information
assumes no escalation of costs or
prices, except for gas sales made under
terms of contracts which include fixed
and determinable escalation. Future
costs and prices could significantly
vary from current amounts and,
accordingly, revisions in the future
could be significant.
17. Restatement of 1997 The Company has restated the 1997
Financial Statements financial statements to reflect changes
to amounts recorded for interest
expense and additional paid-in capital
relative to the issuance of 86,084
shares of common stock to extinguish
approximately $484,000 of debt. The
value assigned to shares issued was
consistent with the value received in
the private placement of shares with
third parties.
With respect to the 1997 financial
statements, the restatement resulted in
the recording of additional interest
expense of $193,694 which increased the
net loss by $193,694 ($0.04 basic and
diluted loss per common share). The
restatement has no effect on total
stockholders' equity or on net cash used
in operating activities.
These matters are summarized in the
table below:
<TABLE>
<CAPTION>
Year ended December 31, 1997
-----------------------------------------------------------------------------
<S> <C>
Net loss as originally stated: $(4,176,876)
Adjustment: (193,694)
-----------------------------------------------------------------------------
Net loss as restated: $(4,370,570)
-----------------------------------------------------------------------------
Basic and diluted loss per common share:
Net loss per share as originally stated: $(0.67)
Adjustment: (0.04)
-----------------------------------------------------------------------------
Net loss per share, as restated $(0.71)
-----------------------------------------------------------------------------
</TABLE>
F-32
<PAGE>
Kansas Properties
- --------------------------------------------------------------------------------
Statements of Revenues and
Direct Operating Expenses
Years Ended December 31, 1997 and 1996
F-33
<PAGE>
Kansas Properties
Contents
- --------------------------------------------------------------------------------
Independent Auditors' Report 2
Financial Statements
Statements of revenues and direct 3
operating expenses
Notes to financial statements 4-7
F-34
<PAGE>
Independent Auditors' Report
Board of Directors
Tengasco, Inc.
Knoxville, Tennessee
We have audited the accompanying statements of revenues and direct operating
expenses of the properties acquired by Tengasco, Inc. from AFG Energy, Inc.
("the Kansas Properties") for the years ended December 31, 1997 and 1996. These
financial statements are the responsibility of AFG Energy, Inc. Our
responsibility is to express an opinion on the 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying financial statements were prepared on the basis discussed in
Note 1 and are for the purpose of complying with certain rules and regulations
of the Securities and Exchange Commission ("SEC") for inclusion in certain SEC
regulatory reports and filings of Tengasco, Inc. and are not intended to be a
complete presentation of the revenues and expenses of the Kansas Properties.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the revenues and direct operating expenses of the Kansas
Properties for the years ended December 31, 1997 and 1996, in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Atlanta, Georgia
March 12, 1998
F-35
<PAGE>
Kansas Properties
Statements of Revenues and
Direct Operating Expenses
- --------------------------------------------------------------------------------
Year ended December 31, 1997 1996
- --------------------------------------------------------------------------------
Revenues
Oil $ 2,687,816 $ 2,378,882
Gas 742,513 789,613
- --------------------------------------------------------------------------------
Total revenues 3,430,329 3,168,495
Direct operating expenses (2,207,201) (1,936,272)
- --------------------------------------------------------------------------------
Revenues in excess of direct operating expenses $ 1,223,128 $ 1,232,223
================================================================================
See accompanying notes to financial statements.
F-36
<PAGE>
Kansas Properties
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Basis of Presentation Pursuant to an agreement effective
December 31, 1997, Tengasco, Inc.
acquired AFG Energy, Inc.'s interest in
certain producing oil and gas properties
located in the state of Kansas ("the
Kansas Properties"). The acquisition has
been accounted for as a purchase and the
results of operations for the Kansas
Properties will be included in
Tengasco's results of operations
beginning January 1, 1998.
The accompanying statements of revenues
and direct operating expenses ("the
Historical Statements") were prepared
from the historical accounting records
of AFG Energy, Inc. The Historical
Statements are presented using accrual
basis, successful efforts accounting for
oil and gas activities, in accordance
with generally accepted accounting
principles.
Gross revenues and direct operating
expenses included herein are not
necessarily representative of future
operations. Additionally, the Historical
Statements do not include depreciation,
depletion and amortization,
administrative and general expenses,
interest expenses, or Federal and state
income taxes.
Complete financial statements, including
a balance sheet, are not presented as
the Kansas Properties were not
maintained as a separate business unit,
and assets, liabilities or indirect
operating costs applicable to the Kansas
Properties were not segregated.
Accordingly, it is not practicable to
identify all assets, liabilities or
indirect operating costs applicable to
the Kansas Properties.
2. Supplemental Oil and Estimated Quantities of Proved Oil and
Gas Information Gas Reserves (Unaudited)
(Unaudited)
The reserve information presented below
is based on the December 31, 1997
reserve report prepared by an
independent petroleum engineer. The
December 31, 1996 and 1995 information
has been computed by adjusting the
December 31, 1997 reserve report for
production and known purchases.
F-37
<PAGE>
Kansas Properties
Notes to Financial Statements
- --------------------------------------------------------------------------------
Proved reserves are estimated quantities
of crude oil, natural gas and natural
gas liquids which geological and
engineering data demonstrate with
reasonable certainty to be recoverable
in future years from known reservoirs
under existing economic and operating
conditions. Proved developed reserves
are those which are expected to be
recovered through existing wells with
existing equipment and operating
methods.
Below are the net quantities of proved
reserves and proved developed reserves
for the Kansas Properties:
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf)
----------------------------------------------------------------------------
<S> <C> <C>
Proved reserves at December
31, 1995 1,466,489 3,439,692
Production (114,660) (432,753)
Acquisition of proved reserves 674,154 869
----------------------------------------------------------------------------
Proved reserves at December
31, 1996 2,025,983 3,007,808
Production (141,535) (353,558)
----------------------------------------------------------------------------
Proved reserves at December
31, 1997 1,884,448 2,654,250
----------------------------------------------------------------------------
Proved developed producing
reserves at December 31, 1997 1,277,707 1,384,980
----------------------------------------------------------------------------
Proved developed producing
reserves at December 31, 1996 1,419,244 1,738,539
----------------------------------------------------------------------------
</TABLE>
Standardized Measure of Discounted
Future Net Cash Flows (Unaudited)
The Standardized Measure of Discounted
Future Net Cash Flows Relating to Proved
Oil and Gas Reserves ("the Standardized
Measure") is a disclosure requirement
under Statement of Financial Accounting
Standards No. 69. The Standardized
Measure does not purport to present the
fair market value of the proved oil and
gas reserves. This would require
consideration of expected future
economic and operating conditions, which
are not taken into account in
calculating the Standardized Measure.
F-38
<PAGE>
Kansas Properties
Notes to Financial Statements
- --------------------------------------------------------------------------------
Under the Standardized Measure, 1997 and
1996 future cash inflows were estimated
by applying December 31, 1997 and 1996
prices, respectively, adjusted for fixed
and determinable escalations, to the
estimated future production of proved
reserves. Future cash inflows for 1997
and 1996 were reduced by estimated
future production, development and
dismantlement costs based on 1997 and
1996 year-end costs, respectively, to
determine pre-tax cash inflows. Future
net cash inflows were discounted using a
10% annual discount rate to arrive at
the Standardized Measure. No deduction
has been made for general and
administrative expenses, interest
expense, provisions for depreciation,
depletion or amortization, or taxes on
income.
The following Standardized Measure and
changes in the Standardized Measure are
based on the reserve estimate performed
as of December 31, 1997, using
appropriate year-end prices and costs.
Set forth below is the Standardized
Measure (before income taxes) relating
to proved oil and gas reserves at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------------
<S> <C> <C>
Future cash inflows $ 36,523,378 $ 55,344,098
Future production costs and
taxes (18,128,184) (18,854,868)
Future development costs (1,336,050) (1,855,550)
----------------------------------------------------------------------------
Future net cash inflows 17,059,144 34,633,680
Discount at 10% for timing of
cash flows (6,707,755) (15,597,754)
----------------------------------------------------------------------------
Standardized Measure (before income
taxes) of discounted future net cash
flows $ 10,351,389 $ 19,035,926
----------------------------------------------------------------------------
</TABLE>
F-39
<PAGE>
Kansas Properties
Notes to Financial Statements
- --------------------------------------------------------------------------------
The Standardized Measure of discounted
future net cash flows is based on the
following oil and gas prices at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------------
<S> <C> <C>
Oil (per Bbl) $16.48 $22.70
Gas (Mcf) 2.06 3.11
----------------------------------------------------------------------------
The following table sets forth the
changes in the Standardized Measure
(before income taxes) during 1997 and
1996:
1997 1996
----------------------------------------------------------------------------
Standardized Measure (before
income taxes), beginning of
year $19,035,926 $ 7,195,410
Sales, net of production costs
and taxes (1,223,128) (1,232,223)
Acquisition of proved reserves - 5,409,784
Changes in prices and
production costs (9,269,527) 6,936,079
Interest factor - accretion of
discount 1,903,593 719,541
Changes in production rates
and other (95,475) 7,335
----------------------------------------------------------------------------
Standardized Measure (before
income taxes), end of year $10,351,389 $19,035,926
----------------------------------------------------------------------------
</TABLE>
F-40
<PAGE>
Tengasco, Inc. and
The Kansas Properties
- --------------------------------------------------------------------------------
Pro Forma Combined Statement of Loss
Year Ended December 31, 1997
F-41
<PAGE>
Tengasco, Inc. and
The Kansas Properties
Contents
- --------------------------------------------------------------------------------
Financial Statement
Pro forma combined statement of loss (unaudited) 2
Notes to pro forma financial statement 3-7
F-42
<PAGE>
Tengasco, Inc. and
The Kansas Properties
Pro Forma Combined Statement of Loss (Unaudited)
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Kansas Pro Forma Pro Forma
Tengasco, Inc. Properties Adjustments Combined
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Oil $ $ 2,687,816 $ $ 2,687,816
- -
Gas - 742,513 - 742,513
-----------------------------------------------------------------------------------------------------------------
Total revenues - 3,430,329 - 3,430,329
-----------------------------------------------------------------------------------------------------------------
Cost and expenses
Production costs and taxes 3,748 2,207,201 - 2,210,949
Depletion, depreciation and
amortization 79,267 - 531,233 610,500
General and administrative costs 1,535,841 - 40,000 1,575,841
Interest expense 1,885,448 - 174,533 2,059,981
Public relations 395,292 - - 395,292
Legal and accounting 390,297 - - 390,297
Realized loss on sale of investments 80,677 - - 80,677
-----------------------------------------------------------------------------------------------------------------
Total costs and expenses 4,370,570 2,207,201 745,766 7,323,537
-----------------------------------------------------------------------------------------------------------------
Net income (loss) (4,370,570) 1,223,128 (745,766) (3,893,208)
-----------------------------------------------------------------------------------------------------------------
Basic and diluted loss per
common share $(0.71) $(0.63)
-----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to pro forma financial statement.
F-43
<PAGE>
Tengasco, Inc. and
The Kansas Properties
Notes to Pro Forma Financial Statement
(Unaudited)
- --------------------------------------------------------------------------------
The unaudited pro forma combined
statement of loss for the year ended
December 31, 1997 gives effect to the
acquisition by Tengasco, Inc. of certain
producing oil and gas properties located
in the state of Kansas ("the Kansas
Properties") as if the acquisition,
accounted for as a purchase, had
occurred on January 1, 1997. The pro
forma information is based on the
historical consolidated financial
statements of Tengasco, Inc. and the
historical statement of revenues and
direct operating expenses of the Kansas
Properties for the year ended December
31, 1997, after giving effect to the
acquisition and the assumptions and
adjustments in the accompanying notes to
the pro forma financial statement.
The pro forma financial statement has
been prepared by Tengasco, Inc. based
upon the historical statement of
revenues and direct operating expenses
of the Kansas Properties (included
elsewhere in the Form 10-KSB). The pro
forma financial statement may not be
indicative of the results that actually
would have occurred if the combination
had been effective on the dates
indicated or which may be obtained in
the future. The pro forma financial
statement should be read in conjunction
with the audited consolidated financial
statements of Tengasco, Inc. and the
audited statement of revenues and direct
operating expenses of the Kansas
Properties.
Basis of Presentation Tengasco, Inc. follows the full cost
method of accounting for oil and gas
properties. 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. 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 capitalized oil and gas properties,
less accumulated depletion, depreciation
and amortization and related income
taxes, 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 to estimated
future production of proved oil and gas
reserves, less estimated future
expenditures (based on current costs) to
be incurred in developing and producing
the
F-44
<PAGE>
Tengasco, Inc. and
The Kansas Properties
Notes to Pro Forma Financial Statement
(Unaudited)
- --------------------------------------------------------------------------------
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.
The accompanying pro forma combined
statement of loss for the year ended
December 31, 1997 was prepared using the
full cost method of accounting in
conformity with generally accepted
accounting principles.
Pro Forma Adjustments The following pro forma adjustments are
made to reflect additional costs which
would have been incurred by Tengasco,
Inc. had the Kansas Properties been
acquired as of January 1, 1997 and are
reflected in the accompanying pro forma
combined statement of loss for the year
ended December 31, 1997:
<TABLE>
<CAPTION>
Amount
-----------------------------------------------------------------------------
<S> <C>
Additional depletion, depreciation and
amortization $531,233
Interest expense on the acquisition note
payable 174,533
Additional general and administrative
expenses 40,000
-----------------------------------------------------------------------------
$745,766
-----------------------------------------------------------------------------
</TABLE>
Pro Forma Supplemental Oil and Gas Pro Forma Estimated Combined
Information (Unaudited) Quantities of Proved Oil and Gas
Reserves (Unaudited)
The pro forma combined reserve
information presented below is based on
the December 31, 1997 reserve reports
prepared by Coburn Petroleum Engineering
and Columbia Engineering, independent
petroleum engineering firms. The January
1, 1997 information has been computed by
adjusting the December 31, 1997 reserve
reports for production and known
purchases.
The following table sets forth the
combined net proved oil and gas reserves
at December 31, 1997 and the pro forma
changes in the combined net proved oil
and gas reserves for the year then
ended. Proved reserves are estimated
quantities of crude oil, natural gas and
natural gas liquids in which geological
and
F-45
<PAGE>
Tengasco, Inc. and
The Kansas Properties
Notes to Pro Forma Financial Statement
(Unaudited)
- --------------------------------------------------------------------------------
engineering data demonstrate with
reasonable certainty to be recoverable
in 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 the estimates of reserves will
change as future production and
development information becomes
available and revisions in these
estimates could be significant.
<TABLE>
<CAPTION>
Oil (Bbls) Gas (Mcf)
----------------------------------------------------------------------------
<S> <C> <C>
Proved reserves at January 1, 1997 2,127,548 25,575,163
Discoveries and extensions 198,065 75,476
Revisions of previous estimates (101,565) (4,679,460)
Production (141,535) (353,558)
----------------------------------------------------------------------------
Proved reserves at December 31, 1997 2,082,513 20,617,621
----------------------------------------------------------------------------
</TABLE>
Pro Forma Standardized Measure of
Discounted Future Net Cash Flows
(Unaudited)
The following table sets forth the pro
forma standardized measure of discounted
future net cash flows from the combined
proved oil and gas reserves of Tengasco,
Inc. and the Kansas Properties at
December 31, 1997 as if the acquisition
of the Kansas Properties had occurred on
January 1, 1997. The standardized
measure of discounted future net cash
flows does not purport to present the
fair market value of the proved oil and
gas reserves as this would require
consideration of expected future
economic and operating conditions, which
are not taken into account in the
calculation.
F-46
<PAGE>
Tengasco, Inc. and
The Kansas Properties
Notes to Pro Forma Financial Statement
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount
<S> <C>
----------------------------------------------------------------------------
Future cash inflows $ 87,493,504
Future production costs and taxes (21,813,667)
Future development costs (2,873,550)
Future income tax expenses (12,918,485)
----------------------------------------------------------------------------
Net cash flows 49,887,802
Discount at 10% for timing of cash flows (17,864,113)
----------------------------------------------------------------------------
Discounted future net cash flows from
proved reserves $ 32,023,689
----------------------------------------------------------------------------
The following table sets forth the
pro forma changes in the
standardized measure of discounted
future net cash flows from
combined proved reserves during
1997:
Amount
-----------------------------------------------------------------------------
Balance, January 1, 1997 $44,731,424
Sales, net of production costs and taxes (1,219,380)
Discoveries and extensions 1,984,106
Changes in prices and production costs (22,910,339)
Revisions of quantity estimates (8,576,161)
Changes in development costs 3,882,741
Net change in income taxes 8,137,097
Interest factor - accretion of discount 6,038,403
Changes in production rates and other (44,202)
-----------------------------------------------------------------------------
Balance, December 31, 1997 $32,023,689
-----------------------------------------------------------------------------
</TABLE>
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 were $16.53
per barrel of oil and $2.57 per
mcf of gas. No deduction has been
made for depletion, depreciation
and amortization or any indirect
costs such as general corporate
overhead or interest expense.
F-47
<PAGE>
Tengasco, Inc. and
The Kansas Properties
Notes to Pro Forma Financial Statement
(Unaudited)
- --------------------------------------------------------------------------------
Operating costs and production
taxes are estimated based on
current costs with respect to
producing oil and 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 net cash flows less
future production and development
costs over the tax basis of the
properties involved, less
applicable carryforwards, for both
regular and alternative minimum
tax.
The future net revenue information
assumes no escalation of costs or
prices, except to 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-48
<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:
Common Stock
Number
Date Of Aggregate
Name of Owner Acquired Shares Consideration
Arzonetti, Walter C. 4/22/97 88,493 2
Brockman, Jeff 7/29/96 10,000 2
8/29/96 62,329 2
Carter, Robert M. 6/15/96 15,671 2
8/26/96 2,000 2
6/30/97 7,329 2
DeMunnik, Jeffrey 5/29/96 16,664 2
3/15/97 4,000 2
Grabill, Kelly S. 7/29/96 12,500 2
Harding, Neil 5/21/97 100,000 3
Industrial Resources 3/29/96 76,557 1
Corporation 4/10/96 87,709 1
Estate of Raymond E. Johnson 4/3/96 10,000 2
Johnson, Mike 3/26/96 10,000 2
Manhoff, Charles, N. 4/10/96 88,356 2
Mattei, Joseph B. 4/19/96 37,000 2
McCown, Michael 6/30/97 50,000 2
Moffett, William A. 4/23/96 37,397 2
6/25/97 72,603 2
Ratliff, Russell 3/29/96 37,534 2
Sweeney, Allen 12/31/96 33,151 2
Walter, James C. 3/22/96 35,616 2
II-3
<PAGE>
Adams, Stanley & Sharon E. 10/15/97 6,000 53,580.00
Adams, Stanley & Sharon E. 05/04/98 10,000 71,300.00
Angle, Noriko T. 10/10/97 5,714 50,000.00
Arkwright, Richard T. 11/04/97 10,989 99,999.90
Astuto, Angelo 04/22/98 500 3,590.00
Astuto, Laura J. 04/22/98 500 3,590.00
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
Burklow, Jim 06/15/98 1,000 7,780.00
Burleson, Elizabeth E., 09/15/97 500 3,895.00
Rev. Tr DTD 5/6/93
Cajigas, Arthur & Hidako 05/21/98 1,143 10,000.00
Carter, Daryl M. 07/02/98 1,500 10,500.00
Carter, Maury L. 07/02/98 3,500 24,500.00
Carvajah, Rose Marie 09/01/98 250 1,750.00
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
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
II-4
<PAGE>
Ershek, John 11/03/97 5,000 41,100.00
Esrick, Ralph Trust 03/10/98 1,000 7,170.00
Evans, William 9/5/96 12,121 100,000.00
Fortune Hunters Investment 10/09/97 201 1,759.00
Club
French, Peter & Grace 12/09/97 2,267 25,000.00
Fujii, Daisuke 06/01/98 1,406 10,000.00
Fujita, Eiji 05/18/98 21,097 150,000.00
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
Giresi, Mary E. 4/22/98 2,000 14,360.00
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
Harbert, Bill L. 04/30/98 40,000 262,800.00
Harbert, Bill L. 06/11/98 75,414 497,441.00
Harbert, Bill L. 10/22/98 150,200 488,150.00
Harris, Rona 09/01/98 500 3,500.00
Honeycutt, Robert M. 10/15/97 100 893.00
Honeycutt, Robert M. 04/16/98 100 639.00
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
Donald Janda 9/5/96 2,131 17,580.00
Robert Janda 9/5/96 22,730 187,520.00
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
Keller, James & Shirley 05/04/98 4,000 28,520.00
Keyser, Frank & Mims, 12/09/97 443 4,500.00
Catherine
Kiryu, Hironori 05/26/98 1,406 10,000.00
II-6
<PAGE>
Kitaoka, Yukiko 07/31/98 1,429 10,000.00
Knott, Patricia 10/24/97 500 4,550.00
Kobayashi, Shungo 07/02/98 1,429 10,000.00
Koshi, Junichiro 05/18/98 2,628 20,000.00
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
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
Mintzer, Dorothy 09/01/98 500 3,500.00
Mobarak, Heather L. 02/12/98 500 4,000.00
Moor, John 05/04/98 1,000 7,130.00
Morita, Shegemi 04/10/98 7,400 37,000.00
Mori, Masahiko 05/28/98 7,032 50,000.00
MSP Enterprises 12/09/97 500 5,515.00
Myers, Garry D. 12/31/97 1,344 12,000.00
Nagashima, Tsuyoshi 07/22/98 1,429 10,000.00
Nevin, Micah Cole 11/06/97 100 945.00
Nikovits, John L. 04/22/98 1,000 7,180.00
Nishimura, Joseph Y. 12/16/97 5,192 50,000.00
II-7
<PAGE>
Nishiwaki, Nick S. 10/23/97 21,978 200,000.00
Padron, Ramon 05/13/98 1,000 7,350.00
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
Presnell, Joe 04/28/98 1,000 6,430.00
Presnell, Joe 06/15/98 1,000 7,000.00
Pych, Barbara M. 04/22/98 1,000 7,180.00
Pych, Cynthia M. 04/24/98 2,000 14,360.00
Pych, Gregory L. 04/22/98 2,000 14,360.00
Pych, Joseph 04/22/98 1,250 8,975.00
Pych, Joseph R. 04/22/98 1,000 7,180.00
Pych, Robert F. 04/22/98 1,000 7,180.00
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
Sherbal, Rose 09/01/98 500 3,500.00
Silva, Anthony 01/26/99 20,000 100,000.00
Silva, Anthony 03/08/99 22,300 100,350.00
II-8
<PAGE>
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
Spoonbill, Inc. 09/02/98 50,000 250,000.00
Spoonbill, Inc. 01/06/99 140,000 700,000.00
Stanley, David G, TTEE. 12/08/98 5,000 23,750.00
Stanley, Robert J. 10/10/97 11,313 100,006.92
STEP, Inc. 10/22/97 2,000 18,200.00
Stern, William TTEE 4/7/98 10,000 70,000.00
Stern, William TTEE 4/9/98 5,000 35,000.00
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
Synap Corp. 05/29/98 9,143 80,000.00
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
Ura, Yukari 06/02/98 1,406 10,000.00
Uy, 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
Warhaft, Terri 09/01/98 500 3,500.00
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
II-9
<PAGE>
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
Yoshida, Teruni 07/31/98 1,429 10,000.00
TOTAL 1,492,893 10,584,623.92
Series A 8% Cumulative Convertible Preferred Stock ($100.00 per share)
Number
Date Of Aggregate
Name of Owner Acquired Shares Consideration
- ------------- -------- ------ -------------
Harding, Neal 10/30/98 2,950 4
Cipponeri, Jerome 10/30/98 500 5
Kenny, Vernon & Rosemary 10/30/98 1,300 5
Gorman, Robert & Anne 10/30/98 1,000 5
Cregan, John D. 10/30/98 500 $ 50,000.00
Stern, William M., TTEE 10/30/98 750 75,000.00
Hall, Kelly 12/30/98 1,000 100,000.00
1 Issued in consideration of the cancellation of debt owed by the
Company to IRC. See, "Description of Business" - "Business
Development" above.
2 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.
3 Issued as consideration for the granting of a loan in the amount of
$1,000,000.
4 Issued as partial payment of a loan made to Company in 1997 by
Harding. See,"Certain Relationships and Related Transactions -
Transactions with Management and Others"
5 Issued as partial payment of loans made to the Company in July 1998 by
the above shareholders. See, "Certain Relationships and Related
Transactions - Transactions with Management and Others"
II-10
<PAGE>
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
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)
II-11
<PAGE>
changing the Company's domicile and effecting reverse split)
3.9 Amendment to the Corporate Charter dated June 24, 1998
3.10 Amendment to the Corporate Charter dated October 30, 1998
5.1 Opinion of Robson & Miller, LLP
10.1(a) Purchase Agreement with IRC
10.1(b) Amendment to Purchase Agreement with IRC
10.1(c) General Bill of Sale and Promissory Note
10.2(a) Compensation Agreement - M. E. Ratliff
10.2(b) Compensation Agreement - Jeffrey D. Jenson
10.2(c) Compensation Agreement - Leonard W. Burningham, Esq.
10.3 Agreement with The Natural Gas Utility District of Hawkins
County, Tennessee
10.4 Agreement with Powell Valley Electric Cooperative, Inc.
10.5 Agreement with Enserch Energy Services, Inc.
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
II-12
<PAGE>
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 (Paper copy filed
on Form SE pursuant to continuing hardship granted by Office of
EDGAR Policy)
99.10 Coburn Engineering Report dated February 9, 1999 (Paper copy
filed on Form SE pursuant to continuing hardship granted by
Office of EDGAR Policy)
99.11 Columbia Engineering Report dated February 20, 1999 (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
II-13
<PAGE>
illegible. The best available copy thereof has been filed with
the Commission and copies may be obtained from the principal
executive offices of the Company at no charge.
ITEM 28 - UNDERTAKINGS
The Company hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to the Registration Statement
to:
(i) Include any prospectus required by
Section 10(a)(3) of the Act;
(ii) Reflect in the Prospectus any facts or
events which individually or together represent a fundamental change in the
information in the Registration Statement; and
(iii) Include any additional or changed
material information on the plan of distribution.
(2) That, for the purpose of determining any
liability under the Act, treat each post-effective amendment as a new
registration statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
The Company hereby undertakes:
(1) For determining any liability under the Act,
treat the information omitted from the form prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company under Rule 424(b)(1) or (4) or 497(n) under the
Act as part of the Registration Statement as of the time the Commission declared
it effective.
(2) For determining liability under the Act, treat
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.
II-14
<PAGE>
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-15
<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 21st day of
April, 1999.
Tengasco, Inc.
By: s/Malcolm E. Ratliff
-------------------------------------------
Malcolm E. Ratliff
Chief Executive Officer
In accordance with the requirements of the Securities Act of
1933, this registration statement has been signed by the following persons in
the capacities and on the dates stated.
Signature Title Date
s/Malcolm E. Ratliff Director; Chief April 21, 1999
- ------------------------ Executive Officer
Malcolm E. Ratliff
s/Allen H. Sweeney Chairman of the Board April 21, 1999
- ------------------------ of Directors
Allen H. Sweeney
s/Joseph Earl Armstrong Director April 21, 1999
- ------------------------
Joseph Earl Armstrong
s/John L. Kidde Director April 21, 1999
- ------------------------
John L. Kidde
s/James B. Kreamer Director April 21, 1999
- ------------------------
James B. Kreamer
s/William A. Moffett Director April 21, 1999
- ------------------------
William A. Moffett
II-16
<PAGE>
s/Shigemi Morita Director April 21, 1999
- ------------------------
Shigemi Morita
s/Robert M. Carter President April 21, 1999
- ------------------------
Robert M. Carter
s/Mark A. Ruth Principal Financial April 14, 1999
- ------------------------ and Accounting
Mark A. Ruth Officer
s/Sheila F. Sloan Treasurer April 21, 1999
- ------------------------
Sheila F. Sloan
s/Elizabeth Wendelken Secretary April 21, 1999
- ------------------------
Elizabeth Wendelken
II-17
<PAGE>
EXHIBIT 3.9
<PAGE>
ARTICLES OF AMENDMENT TO THE CHARTER
OF
TENGASCO, INC.
- -------------------------------------------------------------------------------
Pursuant to the provisions of Section 48-20-106 of the Tennessee
Business Corporation Act, the undersigned corporation adopts the following
articles of amendment to its charter:
1. The name of the corporation is TENGASCO, INC.
- -------------------------------------------------------------------------------
2. The text of each amendment adopted is:
SEE ATTACHED
3. The corporation is a for-profit corporation.
4. The manner (if not set forth in the amendment) for implementation of
any exchange, reclassification, or cancellation of issued shares is as follows:
NOT APPLICABBLE
5. The amendment was duly adopted on JUNE 19, 1998 by (the shareholders).
[NOTE: Please strike the choices which do not apply to this amendment.]
---
6. If the amendment is not to be effective when these articles are filed
by the Secretary of State, the date/time it will be effective is
_________________________, 19_____________ (date) ______________________ (time).
[NOTE: The delayed effective date shall not be later then the 90th day after the
date this document is filed by the Secretary of State.]
JUNE 24, 1998 TENGASCO, INC.
- ---------------------------------- ------------------------------
Signature Date Name of Corporation
General Counsel /s/ Wesley M. Baker
- ---------------------------------- ------------------------------
Signer's Capacity Signature
WESLEY M. BAKER
------------------------------
Name (typed or printed)
<PAGE>
AMENDMENT TO PARAGRAPH 2 OF
THE CORPORATE CHARTER OF
TENGASCO, INC.
2. The aggregate number of shares which the Corporation shall have
authority to issue is seventy-five million (75,000,000) shares consisting of
fifty million (50,000,000) shares, designated as Common Stock, at par value
of $.001 per share, and twenty-five million (25,000,000) shares, designated as
Preferred Stock, at a par value of $.0001 per share.
(1) Common Stock
(a) Dividends. The holders of shares of Common Stock shall be
entitled to receive, when and as declared by the Board of Directors, out of the
assets of tbe Corporation legally available therefor, such dividends as may be
declared from time to time by the Board of Directors.
(b) Liquidation. Subject to the rights of any other class or series of
stock, the holders of shares of Common Stock shall be entitled to receive all
the assets of the Corporation available for distribution to shareholders in the
event of the voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, ratably, in proportion to the number of shares of Common
Stock held by them. Neither the merger or consolidation of the Corporation into
or with any other corporation, nor the merger or consolidation of any other
corporation into or with the Corporation, nor the sale, lease, exchange or
other disposition (for cash, shares of stock, securities or other
consideration) of all or substantially all the assets of the Corporation shall
be deemed to be a dissolution, liquidation or winding up, voluntary or
involuntary, of the Corporation.
(c) Redemption. Common Stock shall not be subject to redemption.
(d) Voting. Subject to the rights of any other class or series of
stock and the provisions of the laws of the State of Tennessee governing
business corporations, voting rights shall be vested exclusively in the holders
of Common Stock. Each holder of Common Stock shall have one vote in respect of
each share of such stock held.
(2) Preferred Stock.
The Preferred Stock may be issued, from time to time, in one or more
series, with such designations, preferences and relative, participating,
optional or other rights, qualifications, limitations or restrictions thereof
as shall be stated and expressed in the resolution or resolutions providing for
the issue of such series which shall be adopted by the Board of Directors from
time to time, pursuant to the authority herein given, a copy of which
resolution or resolutions shall have been set forth in a Certificate made,
executed, acknowledged, filed and recorded in the manner required by the laws
of the State of Tennessee in order to make the same effective. Each series shall
consist of such number of shares as shall be stated and expressed in such
resolution or resolutions providing for the issuance of the stock of such
series. All shares of any one series of Preferred Stock shall be alike in every
particular. The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(a) the number of shares constituting that series and the distinctive
designation of that series;
(b) whether the holders of shares of that series shall be entitled to
receive dividends and, if so, the rates of such dividends, conditions under
which and times such dividends may be declared or paid, any preference of any
such dividends to, and the relation to, the dividends payable on any other
class or classes of stock or any other series of the same class and whether
dividends shall be cumulative or noncumulative and, if cumulative, from which
date or dates;
(c) whether the holders of shares of that series shall have voting rights
in addition to the voting rights provided by law and, if so, the terms of such
voting rights;
<PAGE>
(d) whether shares of that series shall have conversion or exchange
privileges into or for, at the option of either the holder or the Corporation
or upon the happening of a specified event, shares of any other class or
classes or of any other series of the same or other class or classes of stock
of the Corporation and, if so, the terms and conditions of such conversion or
exchange, including provision for adjustment of the conversion or exchange rate
in such events as the Board of Directors shall determine;
(e) whether shares of that series shall be redeemable and, if so, the
terms and conditions of such redemption, including the date or dates upon or
afler which they shall be redeemable and the amount per share payable in case
of redemption, which amount may vary under different conditions and at
different redemption dates;
(f) whether shares of that series shall be subject to the operation of a
retirement or sinking fund and, if so subject, the extent to and the manner in
which it shall be applied to the purchase or redemption of the shares of that
series, and the terms and provisions relative to the operation thereof;
(g) the rights of shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation and any
preference of any such rights to, and the relation to, the rights in respect
thereto of any class or classes of stock or any other series of the same class;
and
(h) whether shares of that series shall be subject or entitled to any
other preferences, and the other relative, participating, optional or other
special rights and qualifications, limitations or restrictions of shares of
that series and, if so, the terms thereof.
<PAGE>
EXHIBIT 3.10
<PAGE>
ARTICLES OF AMENDMENT BY BOARD OF DIRECTORS
TO THE CHARTER OF
TENGASCO, INC.
- ------------------------------------------------------------------------------
Pursuant to the provisions of Section 48-16-102 of the Tennessee Business
Company Act, the undersigned Company executes the following Certificate of
Amendment to its Charter.
1. The name of the Company is Tengasco, Inc. (the "Company").
2. The following resolution, establishing and designating a series of
shares and fixing and determining the relative rights and preferences
thereof was duly adopted by the Board of Directors of the Company on
October 27, 1998, pursuant to authority vested in it by the Charter of
the Company:
WHEREAS, the Charter of the Company presently authorizes the issuance
of 25,000,000 shares of Preferred Stock, $.0001 par value per share, in one or
more series upon terms and conditions that are to be designated by the Board of
Directors; and
WHEREAS, in order to accommodate a business purpose deemed proper by
the Board of Directors, the Board of Directors does hereby seek to provide for
the designation of a segment of the Company's Preferred Stock as "Series A 8%
Cumulative Convertible Preferred Stock;" and
WHEREAS, the terms, conditions, voting rights, preferences,
limitations and special rights of the Series A 8% Cumulative Convertible
Preferred Stock in their entirety are as provided herein.
NOW, THEREFORE, be it:
RESOLVED, that a series of the class of authorized Preferred Stock,
$.0001 par value per share, of the Company hereinafter designated "Series A 8%
Cumulative Convertible Preferred Stock," be hereby created, and that the
designation and amount thereof and the voting powers, preferences and relative,
participating and other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof are as follows:
Section 1. Designation and Amount.
The shares of such series shall be designated as the "Series A 8%
Cumulative Convertible Preferred Stock " (the "Series A Shares") and the number
of shares initially constituting such series shall be 250,000 which may be
issued in whole or fractional shares.
Section 2. Dividends and Distributions.
(a) The holders of Series A Shares shall be entitled to receive
dividends at a rate of eight percent (8%) of the liquidation preference of $100
per share per annum, which shall be fully
1
<PAGE>
cumulative, prior and in preference to any declaration or payment of any
dividend (payable other than in shares of common stock, $.0001 par value per
share, of the Company (the "Common Stock")) or other distribution on any other
class or series of Preferred Stock or the Common Stock of the Company. If the
dividends on the Series A Shares cannot legally be paid in full, dividends
shall be paid, to the maximum permissible extent, to the holders of the Series
A Shares, parri passu. The dividends on the Series A Shares shall accrue from
the date of issuance of each share and shall be payable quarterly with respect
to each calendar quarter on the fifteenth day of November, February, May and
August of each year (each a "Dividend Date"), commencing on November 15, 1998,
to the holders of record of the Series A Shares on the first day of the month
for each Dividend Date (each, a "Record Date"), except that if any such date is
a Saturday, Sunday or legal holiday (a "Non-Business Day") then such dividend
shall be payable on the next day that is not a Saturday, Sunday or legal
holiday on which banks in the State of Tennessee are permitted to be closed (a
"Business Day"). The dividends on the Series A Shares shall be payable only
when, as and if declared by the Board of Directors out of funds legally
available therefor. The amount of dividends payable for any period that is
shorter or longer than 30 days shall be computed on the basis of a 360-day year
of twelve 30-day months. All accrued but unpaid dividends shall accrue interest
after each Dividend Date at a rate of eight percent (8%) per annum (compounded
on a quarterly basis) from each Dividend Date, computed on the basis of a
360-day year of twelve 30-day months.
(b) The holders of Series A Shares shall not be entitled to receive
any dividends or other distributions except as provided in this Certificate of
Designation of Series A Shares.
Section 3. Voting Rights.
(a) Except as provided in paragraph (b) and by applicable law, the
holders of the Series A Shares shall have no voting rights.
(b) If the Company shall fail to pay dividends in any two of six
consecutive quarters, the Company shall take such action as is necessary,
within 45 days of such occurrence, to appoint to the Board of Directors those
nominees of the holders of Series A Shares which shall constitute a majority of
the members of the Board of Directors and thereafter, the holders of the Series
A Shares shall be entitled to nominate and elect a majority of the members of
the Board of Directors in all elections of directors until all accrued and
unpaid dividends shall have been paid.
Section 4. Liquidation, Dissolution, Winding Up or Certain
Mergers or Consolidations.
If the Company shall adopt a plan of liquidation or of dissolution, or
commence a voluntary case under the federal bankruptcy laws or any other
applicable state or federal bankruptcy, insolvency or similar law, or consent
to the entry of an order for relief in any involuntary case under such law or
to the appointment of a receiver, liquidator, assignee, custodian, trustee or
sequestrator (or similar official) of the Company or of any substantial part of
its property, or make an assignment for the benefit of its creditors, or admit
in writing its inability to pay its debts generally as they become due and on
account of such event the Company shall liquidate, dissolve or wind up, or upon
any other liquidation, dissolution or winding up of the
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Company, or engage in a merger, plan of reorganization or consolidation in
which the Company is not the surviving Company, then and in that event, no
distribution shall be made to the holders of shares of capital stock, unless,
prior thereto, the holders of the Series A Shares shall have first received an
amount in cash or equivalent value in securities or other consideration equal
to the "Liquidation Preferences" thereof. If upon any liquidation, dissolution,
winding up, merger, plan of reorganization or consolidation, the amount so
payable or distributable does not equal or exceed the "Liquidation Preferences"
of the Series A Shares, then, and in that event, the amount of cash so payable,
and amount of securities or other consideration so distributable, shall be
shared ratably among the holders of the Series A Shares. For the purposes
hereof, the term "Liquidation Preference(s)" shall mean $100 per share with
respect to each of the Series A Shares, plus any and all accrued unpaid
dividends thereon.
Section 5. Conversion.
(a) Right To Convert: Subject to the provisions for adjustment
hereinafter set forth, each Series A Share shall be convertible in the manner
hereinafter set forth into fully paid and nonassessable shares of Common Stock.
Commencing upon issuance, the Liquidation Preference ($100 per share) of each
Series A Share may, at the option of the holder thereof, be converted at a rate
(the "Conversion Rate") equal to $5.75 per share of Common Stock.
(b) Adjustments to Conversion Rate:
(i) The following definitions shall apply for purposes of
this Section:
(A) "Options" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(B) "Convertible Securities" shall mean any
evidences of indebtedness, shares or other securities convertible into or
exchangeable for Common Stock.
(C) "Additional Shares of Common Stock" shall mean
all shares of Common Stock issued (or, pursuant to Section 5(b)(iii), deemed
to be issued) by the Company after the Series A Original Issue Date (as
defined herein), other than shares of Common Stock issued or issuable:
(i) upon conversion of Series A Shares;
(ii) in a transaction described in
Section 5(b)(vi);
(iii) pursuant to a stock grant, option
plan or purchase plan, other employee stock incentive program or agreement
approved by the Board of Directors;
(iv) pursuant to the terms of any stock
grant, option, warrant, employment agreement or other written obligation,
agreement or commitment to which the Company was a party as of the Series A
Original Issue Date (as defined herein) and which was disclosed in the
Company's filings with the Securities and Exchange Commission; or
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<PAGE>
(v) by way of dividend or other
distribution on shares of Common Stock excluded from the definition of
Additional Shares of Common Stock by the foregoing clauses (i), (ii) (iii) or
(iv).
(D) "Series A Original Issue Date" shall mean the
date on which the first Series A Share was issued.
(ii) No Adjustment of Series A Share Conversion Rate: No
adjustment in the Conversion Rate shall be made in respect of the issuance of
Additional Shares of Common Stock unless the consideration per share for an
Additional Share of Common Stock issued or deemed to be issued by the Company
is less than the Conversion Rate in effect on the date of, and immediately
prior to, such issue.
(iii) Deemed Issue of Additional Shares of Common Stock:
(A) Options and Convertible Securities: In the
event the Company at any time or from time to time after the Series A Original
Issue Date shall issue any Options or Convertible Securities or shall fix a
record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the
maximum number of shares of Common Stock issuable upon the exercise of such
Options or, in the case of Convertible Securities and Options therefor, the
exercise of such Options and conversion or exchange of such Convertible
Securities shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue or, in case such a record date shall have been fixed, as
of the close of business on such record date, provided that Additional Shares
of Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Section 5(b)(v) hereof) of such
Additional Shares of Common Stock would be less than the Conversion Rate in
effect on the date of and immediately prior to such issue, or such record date,
as the case may be, and provided further that in any such case in which
Additional Shares of Common Stock are deemed to be issued:
(i) except as provided in Section
5(b)(iii)(A)(ii) hereof, no further adjustment in the Conversion Rate shall be
made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(ii) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any change in the consideration payable to the Company, or change in the number
of shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof (other than under or by reason of provisions designed to protect
against dilution), the Conversion Rate computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto) and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities; and
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<PAGE>
(iii) no readjustment pursuant to clause
(ii) above shall have the effect of increasing the Conversion Rate to an amount
which exceeds the lower of (1) the Conversion Rate on the original adjustment
date or (2) the Conversion Rate that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date.
(iv) Adjustment of Conversion Rate Upon Issuance of
Additional Shares of Common Stock: In the event the Company shall issue
Additional Shares of Common Stock without consideration or for a consideration
per share less than the Conversion Rate in effect on the date of and
immediately prior to such issue, then and in each such event the Conversion
Rate shall be reduced to a price (calculated to the nearest cent) determined by
multiplying such Conversion Rate by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issue plus the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of Additional Shares
of Common Stock so issued would purchase at such Conversion Rate; and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of such Additional Shares of
Common Stock so issued.
(v) Determination of Consideration. For purposes of this
Section, the consideration received by the Company for the issuance of any
Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property: Such consideration shall:
(i) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Company;
(ii) insofar as it consists of property
other than cash, be computed at the fair value thereof at the time of such
issue, as determined by the Board of Directors in the good faith exercise of
its reasonable business judgment; and
(iii) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other
assets of the Company for consideration which covers both, be the proportion of
such consideration so received, computed as provided in clauses (i) and (ii)
above, as determined by the Board of Directors in the good faith exercise of
its reasonable business judgment.
(B) Options and Convertible Securities. The
consideration per share received by the Company for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 5(b)(iii)(A), relating to
Options and Convertible Securities, shall be determined by dividing
(i) the total amount, if any, received or
receivable by the Company as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
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<PAGE>
consideration) payable to the Company upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such Convertible
Securities, by
(ii) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of
such Convertible Securities.
(vi) Other Adjustments.
(A) Subdivisions, Combinations, or Consolidations of
Common Stock: In the event the outstanding shares of Common Stock shall be
subdivided, combined or consolidated, by stock split, stock dividend,
combination or like event, into a greater or lesser number of shares of Common
Stock, the Conversion Rate in effect immediately prior to such subdivision,
combination, consolidation or stock dividend shall, concurrently with the
effectiveness of such subdivision, combination or consolidation, be
proportionately adjusted.
(B) Reclassifications: In the case, at any time
after the date hereof, of any capital reorganization or any reclassification of
the stock of the Company (other than as a result of a stock dividend or
subdivision, split-up or combination of shares), or the consolidation or merger
of the Company with or into another person (other than a consolidation or
Merger (i) in which the Company is the continuing entity and which does not
result in any change in the Common Stock or (ii) which is treated as a
liquidation pursuant to Section 4(a) hereof), the Series A Shares shall, after
such reorganization, reclassification, consolidation or merger be convertible
into the kind and number of shares of stock or other securities or property of
the Company or otherwise to which such holder would have been entitled if
immediately prior to such reorganization, reclassification, consolidation or
merger such holder had converted its Series A Shares into Common Stock. The
provisions of this Section 5(b)(vi) shall similarly apply to successive
reorganizations, reclassifications, consolidations or mergers.
(c) Fractional Shares. In lieu of any fractional shares to which the
holder of a Series A Share would otherwise be entitled upon conversion, the
Company shall pay cash equal to such fraction multiplied by the fair market
value of one share of Common Stock as determined by the Board of Directors in
the good faith exercise of its reasonable business judgment.
(d) Miscellaneous:
(i) All calculations under this Section 5 shall be made to
the nearest cent or to the nearest one hundredth (1/100) of a share,
as the case may be.
(ii) The holders of at least 50% of the outstanding Series A
Shares shall have the right to challenge any determination by the
Board of Directors of fair market value pursuant to this Section 5, in
which case such determination of fair market value shall be made by an
6
<PAGE>
independent appraiser selected jointly by the Board of Directors and
the challenging parties, the cost of such appraisal to be borne
equally by the Company and the challenging parties.
(iii) No adjustment in the Conversion Rate need be made if
such adjustment would result in a change in such Conversion Rate of
less than $0.01. Any adjustment of less than $0.01 which is not made
shall be carried forward and shall be made at the time of and together
with any subsequent adjustment which, on a cumulative basis, amounts
to an adjustment of $0.01 or more in the Conversion Rate.
(e) No Impairment. The Company will not, through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 5 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series A Shares against impairment.
(f) Reservation of Stock Issuable Upon Conversion. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the Series A Shares, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding Series A
Shares. If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then outstanding
Series A Shares, the Company will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
Section 6. Reports as to Adjustments.
Whenever the Conversion Rate or the type of securities, cash or other
property into which the Series A Shares may be converted is adjusted as
provided in Section 5 hereof, the Company shall promptly mail to the holders of
record of the outstanding Series A Shares at their respective addresses as the
same shall appear in the Company's stock records, a notice stating that the
Conversion Rate has been adjusted and setting forth the new number of shares of
Common Stock (or describing the new stock, securities, cash or other property)
into which each Series A Share is convertible as a result of such adjustment, a
brief statement of the facts requiring such adjustment and the computation
thereof and when such adjustment became effective.
7
<PAGE>
Section 7. Redemption.
(a) All, but not less than all, of the Series A Shares may be redeemed
upon payment of $100 per Series A Share, plus accrued and unpaid dividends
thereon (the "Redemption Price"), at any time by the Company at its sole
discretion upon thirty (30) days' written notice to the holders of the Series A
Shares provided that: (i) the Company's shares of Common Stock shall be listed
for trading on a national securities exchange, the NASDAQ National Market
System or the NASDAQ SmallCap Market on the "Redemption Date" (as hereinafter
defined); (ii) the closing sale of the Company's Common Stock as reported on
such national securities exchange, NASDAQ National Market System or the NASDAQ
SmallCap Market shall have exceeded $11.50 for the sixty (60) consecutive
trading days preceding the date of the "Redemption Notice" (as hereinafter
defined); and (iii) the shares of Common Stock issuable upon conversion of the
Series A Shares shall be subject to an effective registration statement
permitting their resale under the Securities Act of 1933, as amended.
(b) Notwithstanding the foregoing, one twentieth of the maximum number
of Series A Shares shall be redeemed, on January 1, April 1, July 1 and October
1 of each year while the Series A Shares remain outstanding, commencing on
October 1, 2003.
(c) Any notice of redemption ("Redemption Notice") given by the
Company with respect to the Series A Shares shall be delivered by mail, first
class postage prepaid, to each holder of record (at the close of business on
the business day preceding the day on which notice is given) of the Series A
Shares, at the address last shown on the records of the Company for such holder
or given by the holder to the Company, for the purpose of notifying such holder
of the redemption to be effected. The Redemption Notice shall specify a date
(the "Redemption Date") not earlier than 30 days after the mailing of the
Redemption Notice on which the Series A Shares then outstanding shall be
redeemed and the place at which payment may be obtained, which shall be the
principal offices of the Company. The Redemption Notice shall call upon each
holder of Series A Shares to either (i) surrender to the Company, in the manner
and at the place designated, such holder's certificate or certificates
representing the Series A Shares to be redeemed or (ii) convert the Series A
Shares into Common Stock prior to the Redemption Date in accordance with the
provisions of Section 5 above. If the Company elects to redeem shares pursuant
to this Section 7 and defaults or fails to perform its redemption obligations
pursuant to this Section 7 in connection therewith, the holders of the Series A
Shares shall then have the absolute right to convert such Series A Shares into
Common Stock in accordance with the provisions of Section 5.
(d) On the Redemption Date, the Company shall pay by cash or wire
transfer of immediately available funds to the person whose name appears on the
certificate or certificates of the Series A Shares that (i) shall not have been
converted pursuant to Section 5 hereof and (ii) shall have been surrendered to
the Company in the manner and at the place designated in the Redemption Notice,
the Redemption Value, and thereupon each surrendered certificate shall be
canceled.
(e) If the funds of the Company legally available for redemption of
the Series A Shares are insufficient to redeem the total number of Series A
Shares outstanding on the Redemption Date, the Series A Shares shall be
redeemed (on a pro rata basis from the holders of the Series A
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<PAGE>
Shares, from time to time), to the extent the Company is legally permitted to
do so, and the redemption obligations of the Company hereunder will be a
continuing obligation until the Company's redemption of all of the Series A
Shares.
(f) From and after the Redemption Date, unless there shall have been a
default in payment of the Redemption Value, all rights of the holders of the
Series A Shares (except the right to receive the Redemption Value subsequent to
the Redemption Date upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Company or be deemed to be outstanding for any
purpose whatsoever.
Section 8. Reacquired Shares.
Any Series A Shares converted, purchased or otherwise acquired by the
Company in any manner whatsoever shall be retired and canceled promptly after
the acquisition thereof, and, if necessary to provide for the lawful purchase
of such shares, the capital represented by such shares shall be reduced in
accordance with the Tennessee Business Company Act. All such shares shall upon
their cancellation become authorized but unissued shares of Preferred Stock,
$.0001 par value, of the Company and may be reissued as part of another series
of Preferred Stock, $.0001 par value, of the Company.
The resolution was adopted by the Board of Directors by written
consent as of October 27, 1998, at which a quorum was present throughout.
3. The Charter of the Company is amended so that the designation and
number of shares of each class and series acted upon in the
resolution, and the relative rights, preferences and imitations of
each such class and series are as stated in the resolution.
Tengasco, Inc.
/s/ Robert M. Carter
-----------------------------
Name: Robert M. Carter
Title: President
/s/ Elizabeth Wendelken
------------------------------
Name: Elizabeth Wendelken
Title: Secretary
9
<PAGE>
EXHIBIT 5.1 and 23.4
<PAGE>
[LETTERHEAD OF ROBSON & MILLER, LLP]
April 20, 1999
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 345,128 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>
[LETTERHEAD OF ROBSON & MILLER, LLP]
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Robson & Miller, LLP
----------------------------------
Robson & Miller, LLP
<PAGE>
EXHIBIT 23.1
<PAGE>
[LETTERHEAD OF CHARLES M. STIVERS]
April 21, 1999
Securities and Exchange Commission
45 Fifth Street
Washington, D.C. 20549
Gentlemen:
We have read the statements made by Tengasco, Inc. in Amended Form SB-2,
which we understand will be filed with the Commission, with respect to the
change in accountants from Price-Bednar, LLP to our firm and thereafter, from
our firm to DBO Seidman LLP. We agree with the statements concerning our firm in
such Amended Form SB-2.
Further, I consent to the reference to me under the captions "Experts" and
"Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure" and to the use of my report for the year ended December 31, 1995 in
the Amended Registration Statement (Form SB-2) of Tengasco, Inc.
/s/ Charles M. Stivers, CPA
------------------------------------
Charles M. Stivers, CPA
<PAGE>
EXHIBIT 23.3
<PAGE>
Consent of Independent Certified Public Accountants
Tengasco, Inc.
Knoxville, Tennessee
We hereby consent to the use in the Prospectus constituting a part
of this Registration Statement of our report dated March 5, 1999 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
April 27, 1999
<PAGE>
EXHIBIT 23.5
<PAGE>
[LETTERHEAD OF COBURN PETROLEUM ENGINEERING]
April 21, 1999
Securities and Exchange Commission
459 Fifth Street
Washington, D.C. 70549
Gentlemen:
I consent to the use of our engineering report in an amendment SB-2 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/pk
<PAGE>
EXHIBIT 23.6
<PAGE>
[LETTERHEAD OF COLUMBIA ENGINEERING]
April 21, 1999
Securities and Exchange Commission
459 Fifth Street
Washington, D.C. 70549
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 F. Yard, P.E.
- -----------------------------
David F. Yard, P.E.
Columbia Engineering
