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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB
(Mark one)
/X/ Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998 or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
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Commission File No. 0-20975
TENGASCO, INC.
(Name of small business issuer in its charter)
Tennessee 87-0267438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
603 Main Avenue, Knoxville, Tennessee 37902
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (423) 523-1124.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value per share.
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days: Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $2,078,101
State the aggregate market value of the voting stock held by
nonaffiliates (based on the closing price on March 15, 1999 of $5.375):
$25,209,567.
State the number of shares outstanding of the registrant's $.001 par
value common stock as of the close of business on the latest practicable date
(March 15, 1999): 7,992,016
Documents Incorporated By Reference: None.
Transitional Small Business Disclosure Format (check one): Yes [ ]
No [X]
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FORWARD LOOKING STATEMENTS
The information contained in this Report in certain instances
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 for construction of pipelines and the drilling of
wells 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.
PART I
ITEM 1. BUSINESS.
Business Development.
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
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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 note
evidencing the loan accrues interest at the rate of 9.5% per annum for the
period 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 $953,773 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.
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.
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,
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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
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
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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 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
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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 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 moved to the $15 per barrel range. Current prices are in the
$10 per barrel range.
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%
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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.
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.
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
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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
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
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net reserve values by 10% results in a present value as of December 31, 1998,
before taxes, of $50,320,416.
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%, before taxes, results in a present value as of December
31, 1998 of $2,970,124 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.
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.
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
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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, "Item 3 - Legal Proceedings").
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.
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The prices of the Company's products are controlled by the
world oil market and the United States natural gas market; thus, competitive
pricing behaviors are considered unlikely; however, competition in the oil and
gas exploration industry exists in the form of competition to acquire the most
promising acreage blocks and obtaining the most favorable prices for
transporting the product. Management believes that the Company is
well-positioned in these areas because of the transmission lines that run
through and adjacent to the properties it leases and because it holds relatively
large acreage blocks in what management believes are promising areas.
Sources and Availability of Raw Materials and Names of Principal
Suppliers
Excluding the development of oil and gas reserves and
the production of oil and gas, the Company's operations are not dependent on
the acquisition of any raw materials. (See, Item 1 - Business - Competitive
Business Conditions, Competitive Position in the Industry and Methods of
Competition").
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, "Item 1 Business - General").
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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, "Item 1 - Business
- - Effect of Existing or Probable Governmental Regulations on
Business").
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
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addition, the Company's existing and proposed operations could result in
liability for fires, blowouts, oil spills, discharge of hazardous materials into
surface and subsurface aquifers and other environmental damage, any one of which
could result in personal injury, loss of life, property damage or destruction or
suspension of operations.
The Company believes it is presently in compliance with all
applicable federal, state or local environmental laws, rules or regulations;
however, continued compliance (or failure to comply) and future legislation may
have an adverse impact on the Company's present and contemplated business
operations.
At Board of Directors' meetings held June 6 and 7, 1995, the
Board of Directors adopted resolutions to form an Environmental Response Policy
and Emergency Action Response Policy Program. A plan was recently adopted which
provides for the erection of signs at each well and at strategic locations along
the pipeline containing telephone numbers of the Company's office and the home
telephone numbers of key personnel. A list will be maintained at the Company's
office and at the home of key personnel listing phone numbers for fire, police,
emergency services and Company employees who will be needed to deal with
emergencies.
The foregoing is only a brief summary of some of the existing
environmental laws, rules and regulations to which the Company's business
operations are subject, and there are many others, the effects of which could
have an adverse impact on the Company. Future legislation in this area will no
doubt be enacted and revisions will be made in current laws. No assurance can be
given as to what effect these present and future laws, rules and regulations
will have on the Company's current and future operations.
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, "Item 1 - Business - Number of Total Employees and Number of Full-Time
Employees").
Number of Total Employees and Number of Full-Time Employees
The Company presently has twenty-six full-time
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employees and no part-time employee.
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 geochemical research) and well-site
geology.
ITEM 2. 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, "Item 1 - Business -
General").
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
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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.
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. (See, Item 1 Business
- - Reserve Analysis").
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 has moved to the $15 per barrel range. Current
prices are in the $10 per barrel range. 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.
ITEM 3 - LEGAL PROCEEDINGS
Except as described hereafter, the Company is not a
party to any pending material legal proceeding. To the knowledge
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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 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
15
<PAGE>
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.) 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.
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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 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
17
<PAGE>
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.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of the Company was held
on June 19, 1998.
(b) Joseph E. Armstrong, John L. Kidde, James B. Kreamer,
William A. Moffett, Shigemi Morita, Malcolm E. Ratliff and Allen H. Sweeney were
elected as Directors of the Company for a term of one year or until their
successors were elected and qualified. The results of voting were as follows:
5,218,674 votes for Joseph E. Armstrong and 12,450 withheld; 5,219,874 votes for
John L. Kidde and 11,250 withheld; 4,990,650 votes for James B. Kreamer and
240,474 withheld; 4,991,650 votes for William A. Moffett and 239,474 withheld;
5,221,674 votes for Shigemi Morita and 9,450 withheld; 5,210,474 votes for
Malcolm E. Ratliff and 20,650 withheld; and, 5,221,674 votes for Allen H.
Sweeney and 9,450 withheld.
(c) The next item of business was the proposal to authorize an
amendment to the Company's Corporate Charter creating 25,000,000 shares of a new
class of stock, preferred stock, $.0001 par value per share, the rights,
privileges and preferences of which are to be determined by the Board of
Directors without additional stockholder approval. The results of the voting
were as follows:
4,686,220 votes for the resolution,
110,867 votes against and
17,328 votes abstained.
A majority of the votes cast at the meeting having voted for
the resolution, the resolution was duly passed.
(d) The next item of business was the proposal to ratify the
appointment of BDO Seidman, LLP, the independent certified public accountants of
the Company, for fiscal 1998. The results of the voting were as follows:
5,216,065 votes for the resolution,
9,391 votes against and
5,668 votes abstained.
A majority of the votes cast at the meeting having voted for
the resolution, the resolution was duly passed.
18
<PAGE>
No other matters were voted on at the meeting.
PART II
ITEM 5 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
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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 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.
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
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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
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
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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
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
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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
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
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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
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
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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
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
25
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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
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
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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
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
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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, "Item 12 - 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, "Item 12 - Certain
Relationships and Related Transactions - Transactions with
Management and Others"
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.
28
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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 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
29
<PAGE>
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. The note evidencing this financing accrues interest at the rate of 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 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.
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 moved to the $15 per barrel range. Current prices are in
the $10 per barrel range.
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.
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<PAGE>
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 $342,203 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 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.
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<PAGE>
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 Company's auditors, BDO Seidman, LLP, have stated in the
"Report of Independent Certified Public Accountants" for December 31, 1998 to
the Company's shareholders 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 "substantial 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 statements establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. This pronouncement did not
have an impact on the Company's financial statements.
32
<PAGE>
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.
ITEM 7 FINANCIAL STATEMENTS
The financial statements and supplementary data commence on
page F-1.
ITEM 8 CHANGES IN AND DISAGREEMENT 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
33
<PAGE>
accountant to complete certain preparatory on-site audit activities for
preliminary review by Price-Bednar. These services were not timely provided by
the other accountant. Also, many of the records of IRC were unavailable, and,
Price-Bednar required a number of these records to be reconstructed prior to its
completion of the audit. During the week of May 20, 1996, the Company was
advised that the principal accountant of Price-Bednar, who was responsible for
the Company's audit, would be out of town for the following week, and it became
clear that Price-Bednar would not be able to complete the audit for at least
three weeks, because certain information requested by them had not yet been
provided by the Company. Price-Bednar was terminated by the President, effective
June 7, 1996, and Charles M. Stivers, 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
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<PAGE>
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.
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
35
<PAGE>
(3) That he has advised the Company that information has come to
his attention that he has concluded materially impacts the
fairness or reliability of either a previously issued 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 Securities and Exchange
Commission indicated he agreed with these disclosures.
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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.
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<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
Knoxville, TN 37922 Officer
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
The Company's Board of Directors met 16 times in 1998.
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<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.
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.
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<PAGE>
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.
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
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<PAGE>
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.
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
40
<PAGE>
subject of a pending criminal proceeding (excluding traffic violations and other
minor offenses);
(3) Was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining him or her from or otherwise
limiting his or her involvement in any type of business, securities or banking
activities;
(4) Was found by a court of competent jurisdiction in a civil
action, by the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated any federal or state securities law, and the
judgment in such civil action or finding by the Securities and Exchange
Commission has not been subsequently reversed, suspended, or vacated.
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
$100,000 per annum for services rendered to the Company in any capacity.
41
<PAGE>
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
Name and Other Annual
Principal Position Year Salary ($) Bonus ($) Compensation ($)
<S> <C> <C> <C> <C>
Malcolm E. Ratliff, 1998 $ 60,000 $-0- $500
Chief Executive Officer 1997 $ 9,731 $-0- $500
1996 $-0- $-0- $500
James E. Kaiser, 1998 $-0- $-0- $-0-
Chief Executive Officer and 1997 $ 6,154 $-0- $-0-
General Counsel 1996 $20,000 $-0- $-0-
Theodore Scallan, 1998 -0- $-0- -0-
Chief Executive Officer and 1997 -0- $-0- -0-
President 1996 $53,120 $-0- -0-
George E. Walter, Jr. 1998 -0- $-0- $-0-
Chief Executive Officer 1997 -0- $-0- $-0-
1996 $ 923 $-0- $20,000
</TABLE>
<TABLE>
<CAPTION>
-----------Long Term Awards-----------
-----------Awards--------------Payouts
Name and Restricted Securities Payouts All Other
Principal Position Stock Underlying Compen-
Awards($) Options sation
/SARs(#)
<S> <C> <C> <C> <C>
Malcolm E. Ratliff, -0- 50,000 -0- -0-
Chief Executive Officer -0- -0- -0- -0-
-0- -0- -0- -0-
James E. Kaiser, -0- -0- -0- -0-
Chief Executive Officer and -0- -0- -0- -0-
General Counsel -0- -0- -0- -0-
Theodore Scallan, -0- -0- -0- -0-
Chief Executive Officer and -0- -0- -0- -0-
President 462,250(1) 100,000(2) -0- $20,000(3)
George E. Walter, Jr. -0- -0- -0- -0-
Chief Executive Officer -0- -0- -0- -0-
-0- -0- -0- -0-
</TABLE>
- --------
(1) 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 $6.00, the
bid on 11/28/95.
(2) Option has expired.
(3) Termination compensation.
42
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individualized Grants
Name Number of Percent of Total Exercise Expiration
Securities Options/SARs or Base Date
Underlying Granted to Price
Options/SARs Employees in ($/Sh)
Granted (#) Fiscal 1998
<S> <C> <C> <C> <C>
Malcolm E. 50,000 100% $7.00 6/19/99
Ratliff
</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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<PAGE>
ITEM 11 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)
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
- --------
(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 Ratliff Farms, Inc.
44
<PAGE>
Directors and Executive Officers
--------------------------------
Shares
Name and Beneficially Percent of
Address Title 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 59,000(7) 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
Shigemi Morita Director 171,141(9) 2.13%
80 Park Avenue
New York, N.Y. 10016
- --------
(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.
(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.
45
<PAGE>
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
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
- --------
(10) Malcolm E. Ratlif, the Company's Chief Executive Officer and a Director, is
also 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.
(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.
46
<PAGE>
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.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
Except as set forth hereafter, there have been no material
transactions, series of similar transactions or currently proposed transactions,
to which the Company or any of its subsidiaries was or is to be a party, in
which the amount involved exceeds $60,000 and in which any director or executive
officer or any security holder who is known to the Company to own of record or
beneficially more than 5% of the Company's common stock, or any member of the
immediate family of any of the foregoing persons, had a material interest.
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 revenues 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
47
<PAGE>
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 $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
48
<PAGE>
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.
Parents of the Issuer
Unless IRC may be deemed to be a parent of the Company by
virtue of its stock ownership, the Company has no parents.
49
<PAGE>
PART IV
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K.
1. Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
2. Financial Statement Schedules:
Schedule II - Accounts Receivable from
Related Parties,
Underwriters, Promoters
and Employees other than
Related Parties
Schedule X - Supplementary Income Statement Information
3. Exhibits.
(a) - The following documents heretofore filed by the Company with the
commission are hereby incorporated by reference herein:
(i) from the Registration Statement on Form 10-SB filed with the Commission
August 7, 1997 (Registration No. 0-29386)
Exhibit Number and Description
3.1 Initial Articles of Incorporation
3.2 Bylaws
3.3 Articles of Amendment dated April 12, 1966
3.4 Articles of Amendment dated July 12, 1984
3.5 Articles of Amendment dated December 18, 1991
3.6 Articles of Amendment dated September 11, 1992
3.7 Articles of Incorporation of the Tennessee
wholly-owned subsidiary
3.8 Articles of Merger and Plan of Merger (taking into
account the formation of the Tennessee
wholly-owned subsidiary for the purpose of
changing the Company's domicile and effecting
reverse split)
5.1 Opinion of Robson & Miller, LLP
10.1(a) Purchase Agreement with IRC
10.1(b) Amendment to Purchase Agreement with IRC
10.1(c) General Bill of Sale and Promissory Note
10.2(a) Compensation Agreement - M. E. Ratliff
10.2(b) Compensation Agreement - Jeffrey D. Jenson
10.2(c) Compensation Agreement - Leonard W. Burningham
10.3 Agreement with The Natural Gas Utility District of
50
<PAGE>
Hawkins County, Tennessee
10.4 Agreement with Powell Valley Electric
Cooperative, Inc.
10.5 Agreement with Enserch Energy Services, Inc.
16.1 Letter of David T. Thomson, CPA, Regarding Change
in Certifying Accountant
16.2 Letter of Charles M. Stivers, CPA, Regarding Change in
Certifying Accountant
16.3 Letter of Price-Bednar, LLP, CPA, Regarding Change
in Certifying Accountant
23.1 Consent of Charles M. Stivers, CPA
23.2 Consent of David T. Thomson, CPA
23.3 Consent of BDO Seidman, LLP
23.4 Consent of Robson & Miller, LLP
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 dated June 18, 1997.
(ii) from Amendment No. 1 to the Registration Statement on Form 10-SB filed with
the Commission December 11, 1997 (Registration No. 0-29386)
Exhibit Number and Description
5.1 Opinion of Robson & Miller, LLP
23.1 Consent of Charles M. Stivers, CPA
23.3 Consent of BDO Seidman, LLP
23.4 Consent of Robson & Miller, LLP
23.5 Consent of Coburn Petroleum Engineering Co.
(iii) Current Report on Form 8-K, Date of Report, February 27, 1998:
Exhibit Number and 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.
(iii) Current Report on Form 8-KA, Date of Report, February 27, 1998:
Exhibit Number and Description
Financial Statements of Business Acquired (AFG
Energy, Inc.) Independent auditor's report, statement
of revenues and direct operating expenses and notes
to financial statements of the properties acquired by
Tengasco, Inc. from AFG Energy, Inc.
51
<PAGE>
Pro Forma Financial Information
Pro forma combined statements of loss for year
ended December 31, 1997 for Tengasco, Inc. from
AFG Energy, Inc.
2.1(a) Exhibit A to Agreement dated December 18, 1997
between AFG Energy, Inc. and Tengasco, Inc.
regarding sale of assets of AFG Energy, Inc.
2.1(a) Exhibit A to Agreement dated December 18, 1997
between AFG Energy, Inc. and Tengasco, Inc.
regarding sale of assets of AFG Energy, Inc.
(iv) Annual Report on Form 10-KSB, Date of Report, April 10, 1998
Exhibit Number and Description
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
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)
The following exhibits are filed herewith:
3.9 Amendment to the Corporate Charter dated June
24, 1998
3.10 Amendment to the Corporate Charter dated October 30,
1998
21 List of Subsidiaries
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)
52
<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 2
Consolidated Financial Statements
Balance sheets 3
Statements of loss 4
Statements of stockholders' equity 5
Statements of cash flows 6-7
Notes to financial statements 8-30
F-2
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Tengasco, Inc.
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheets of Tengasco, Inc.
and subsidiaries as of December 31, 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 Stockholders' Equity
See accompanying notes to consolidated financial statements.
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>
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-9
<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-10
<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.
Cash and Cash Equivalents
The Company considers all investments
with a maturity of three months or less
when purchased to be cash equivalents.
F-11
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
Inventory
Inventory consists primarily of crude
oil in tanks and is carried at the lower
of current market value or cost.
Oil and Gas Properties
The Company follows the full cost method
of accounting for oil and gas property
acquisition, exploration and development
activities. Under this method, all
productive and nonproductive costs
incurred in connection with the
acquisition of, exploration for and
development of oil and gas reserves for
each cost center are capitalized.
Capitalized costs include lease
acquisitions, geological and geophysical
work, delay rentals and the costs of
drilling, completing and equipping oil
and gas wells. Gains or losses are
recognized only upon sales or
dispositions of significant amounts of
oil and gas reserves. Proceeds from all
other sales or dispositions are treated
as reductions to capitalized costs.
The capitalized costs of oil and gas
properties, plus estimated future
development costs relating to proved
reserves and estimated costs of plugging
and abandonment, net of estimated
salvage value, are amortized on the
unit-of-production method based on total
proved reserves. The costs of unproved
properties are excluded from
amortization until the properties are
evaluated, subject to an annual
assessment of whether impairment has
occurred. The costs of significant
development projects awaiting completion
of pipeline facilities are excluded from
amortization until such time as the
pipeline facilities are completed. The
Company's proved gas reserves were
estimated by 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
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
F-12
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
(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. The
related trade receivables subject the
Company to a concentration of credit
risk within the oil and gas industry.
F-13
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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
F-27
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
liabilities as management is unable to
determine that these tax benefits are
more likely than not to be realized.
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
F-28
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TENGASCO, INC.
(Registrant)
By: /s/Malcolm E. Ratliff
------------------------
Malcolm E. Ratliff,
Chief Executive Officer
Dated: April 14, 1999
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in their capacities and on the dates indicated.
Signature Title Date
s/Malcolm E. Ratliff Director; Chief April 14, 1999
- --------------------- Executive Officer
Malcolm E. Ratliff
s/Allen H. Sweeney Chairman of the Board April 14, 1999
- ------------------- of Directors
Allen H. Sweeney
s/Joseph Earl Armstrong Director April 14, 1999
- -----------------------
Joseph Earl Armstrong
s/John L. Kidde Director April 14, 1999
- ---------------
John L. Kidde
s/James B. Kreamer Director April 14, 1999
- ------------------
James B. Kreamer
s/William A. Moffett Director April 14, 1999
- --------------------
William A. Moffett
<PAGE>
s/Shigemi Morita Director April 14, 1999
- ---------------------
Shigemi Morita
s/Robert M. Carter President April 14, 1999
- ----------------------
Robert M. Carter
s/Mark A. Ruth Principal Financial April 14, 1999
- ---------------------- and Accounting
Mark A. Ruth Officer
54
<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
2
<PAGE>
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
3
<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
4
<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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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
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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.
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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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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
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EXHIBIT 21
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Exhbit 21
List of Subsidiaries
Name State of Incorporation
Tengasco Pipeline Corporation Tennessee
Tennessee Land and Mineral Corporation Tennessee
