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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, 1999 or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to ________.
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: (865) 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 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: $3,017,252
State the aggregate market value of the voting stock held by
nonaffiliates (based on the closing price on March 20, 2000 of $9.00):
$40,774,860.
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 20, 2000): 8,727,897
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 exploration 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 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.
Since 1995 the Company has acquired oil and gas leases on a
total of approximately 45,400 acres, located in Hancock and Claiborne Counties,
Tennessee (collectively, the "Swan Creek Leases or Field").
Effective December 31, 1997, the Company acquired from AFG
Energy, Inc. ("AFG"), a private company, approximately 30,000 acres of leases in
the vicinity of Hays, Kansas (the "Kansas Properties"). Included in the
acquisition which closed on March 5, 1998 are 273 wells, including 208 working
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
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consisted of $3 million in cash and seller financing of $2.5 million. The seller
financing portion of the purchase price has been refinanced by Arvest United
Bank of Edmond, Oklahoma as evidenced by a note dated November 23, 1999 in the
amount of $1,883,650 to be paid in monthly installments of principal and
interest over a three year period.
The Kansas Properties are currently producing approximately
one million cubic feet of gas of natural gas and 400 barrels of oil per day.
Income from the Kansas Properties at the present time is approximately $300,000
per month.
The Company presently has 15 productive natural gas wells and
four 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 4,500 barrels of oil per month are being produced and
sold from the Swan Creek Field. Income from the Swan Creek Field is
approximately $60,000 per month.
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.
History of the Company
The Company was initially organized under the laws of the
State of Utah on April 18, 1916, under the name "Gold Deposit Mining & Milling
Company." The Company was formed for the purpose of mining, reducing and
smelting mineral ores.
On November 10, 1972, the Company conveyed to an unaffiliated
entity substantially all of the Company's assets and the Company ceased all
business operations.
From approximately 1983 to 1991, the operations of the Company
were limited to seeking out the acquisition of assets, property or businesses.
At a special meeting of stockholders held on April 28, 1995,
the Company's stockholders voted:
(i) to approve the execution of an agreement (the "Purchase
Agreement") pursuant to which the Company would acquire certain oil and gas
leases, equipment, securities and
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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 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
5,000 feet of total depth. These wells, once completed, had a 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
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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 with
IRC, the Company acquired the Swan Creek Leases. These leases provide for a
landowner royalty of 12.5%.
The first well drilled by the Company in the Swan Creek Field,
the Gary Patton #1 tested at 6.8 Mmcf of deliverable gas per day, making it the
largest known tested well in the states of Tennessee, Kentucky and Virginia. The
Company now has fifteen productive gas wells and four oil wells for a total of
nineteen wells. See Item 2. Description of Properties.
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 took only 477 Mcf of gas from the Company.
Although Hawkins County Utility District could take gas in greater quantities,
it declined to do so. Pursuant to its original contract, it was not obligated to
purchase any specific amount of gas. The contract with the Hawkins County
Utility District was renegotiated and an Amendment Agreement was entered into on
October 19, 1999 whereby the Hawkins County Utility District committed to take a
minimum of 500 MCF and a maximum of 4,000 MCF of gas per day with an option to
purchase up to an additional 3,000 MCF per day. Pursuant to this Agreement, the
Hawkins County Utility District began purchasing gas from the Company as of
November 2, 1999. Hawkins County has purchased relatively small quantities of
gas the Company has blended from certain wells when such blended gas contains
less than 4% nitrogen. Hawkins County's position is that it is not required to
purchase contract volumes unless the nitrogen content is less than 4%, although
the Company has demonstrated that its gas, with a nitrogen content of
approximately 4.5% is interchangeable with 4% gas. Since November 2, 1999,
Hawkins County Utility District has purchased 3,910 Mcf of gas (Mcf are units of
one thousand cubic feet of gas). The Company stands ready to deliver additional
quantities of gas, but there can be no assurances that Hawkins County will
purchase additional quantities of gas unless the nitrogen content of the gas is
reduced.
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The Company is currently engineering and designing the second
phase ("Phase II") of its pipeline, an additional 28 miles of 12 inch pipeline
which will extend from the terminus of the Company's existing pipeline to an
existing pipeline and meter station at the chemical plant of Eastman Chemical
Company ("Eastman") located in Kingsport, Tennessee. It is estimated that
construction of Phase II of the pipeline will cost approximately $6,000,000 and
will take six to eight months to construct. The Company is attempting to raise
the necessary funds to construct the pipeline through a private placement
offering of Series B Cumulative Convertible Preferred Stock pursuant to Rule 506
of Regulation D. See, Item 6, Management's Discussion and Analysis or Plan of
Operation.
On November 18, 1999, the Company entered into an agreement
with Eastman Chemical Company ("Eastman") which provides that by December 31,
2000 the Company will deliver daily to Eastman's plant in Kingsport a minimum of
the lesser of (i) 5,000 MMBtu's ("MMBtu" means one million British thermal
units) or (ii) forty percent (40%) of the natural gas requirements of Eastman's
plant and a maximum of 15,000 MMBtu's per day. Under the terms of the agreement,
the Company has the option to install facilities to treat the delivered gas so
that the total nonhydrocarbon content of the delivered gas is not greater than
two percent (2%). This will allow the gas to be used in certain processes in the
Eastman plant requiring low levels of nonhydrocarbons. If the Company elects to
perform this option by installing additional facilities, the minimum daily
amount of gas to be purchased by Eastman from the Company will increase to the
lesser of (i)10,000 MMBtu's or (ii) eighty percent (80%) of the natural gas
requirements of Eastman's chemical plant.
On March 27, 2000 the Company and Eastman signed an amendment
to the agreement permitting the Company a further option with respect to the
allowable level of nonhydrocarbons in the delivered gas. This amendment gives
the Company the further option to tender gas without treatment, at a minimum
volume of 10,000 MMBTU's per day, in consideration of which the Company agrees
to accept a price reduction of five cents per MMBTU for the volumes per day
between 5,000 and 10,000 MMBTU's per day under the pricing structure in place
under the original agreement. The reduction of five cents on the second 5,000
MMBTU's per day price is more favorable to the Company than the options existing
under the present contract. This price adjustment, while resulting in a decrease
in revenues from the Eastman contract of approximately $90,000 per year, would
also result in substantially less cost to the Company in meeting the
requirements of the existing contract and allowing the Company to double
Eastman's minimum daily purchase to 10,000 MMBTU's per day. The option provided
under the amendment would have the immediate effect of increasing the minimum
quantity under the original agreement to the higher quantity stated above
without the need for the Company to elect to install some or all of the
treatment facilities as was required under the original agreement. The March 27,
2000 amendment also provides that in the event Eastman determines that the
processes requiring low nitrogen gas fail to operate satisfactorily with the gas
provided to them by the Company pursuant to the amendment, then Eastman may give
written notice to the Company to begin installation of facilities under the
agreement as it existed prior to the amendment and complete same within eighteen
(18) months of such written notice.
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Under the agreement as amended March 27, 2000, Eastman will
pay the Company the index price plus $0.10 for all natural gas quantities up to
5,000 MMBtu's delivered per day, the index price plus $0.05 for all quantities
in excess of 5,000 MMBtu's up to 15,0000 MMBtu's per day and the index price for
all quantities in excess of 15,000 MMBtu's per day. The index price means the
price per MMBtu published in McGraw-Hill's Inside F.E.R.C.'s Gas Market Report
equal to the Henry Hub price index as shown in the table labeled "Market Center
Spot Gas Prices".
The Company will transport and deliver its gas to Eastman
through Phase II of its pipeline. The agreement with Eastman is for a term of
twenty years and will be automatically extended, if the parties agree, for
successive terms of one year. The agreement will commence upon the Company's
completion of construction of Phase II of its pipeline and connection to
Eastman's facilities and commercial operation of that facility is approved.
Pursuant to its agreement with Eastman completion of construction of Phase II of
the pipeline is stated to be made by December 31, 2000. However, Eastman has
agreed to extend the completion date of construction to March 31, 2001. It is
estimated that Phase II of the pipeline will cost approximately $6,000,000 and
will take six to eight months to construct.
On January 25, 2000, the Company's wholly owned subsidiary,
Tengasco Pipeline Corporation ("Tengasco Pipeline"), signed a franchise
agreement to install and operate new natural gas utility service to residential,
commercial and industrial users in Hancock County, Tennessee for the Powell
Valley Utility District. The Powell Valley District has no existing natural gas
facilities and the system to be installed by Tengasco Pipeline will initially
extend to schools and small customers, and will be gradually expanded over time
to serve as many of the 6,900 residents of the County as is economically
possible. Tengasco Pipeline will purchase gas from the Company on behalf of the
District and it will be resold at an average retail price of about $8.00 per
thousand cubic feet. Under the franchise agreement, which has an initial term of
ten years and may be renewed for an additional ten years, Tengasco Pipeline will
receive 95% of the gross proceeds of the sale of gas for its services under the
agreement. Tengasco Pipeline intends to begin installation of the necessary
facilities to begin to serve up to 1,500 residential and industrial consumers in
the City of Sneedville, county seat of Hancock County. Construction will begin
when agreement for base load sales are concluded with the local school district.
The Company's existing eight inch main line from its Swan Creek Field passes
through the city limits of Sneedville and completion of a one-half mile of
interconnecting distribution line from the existing pipeline will be required at
a cost not anticipated to exceed $100,000 and which it is expected can be
constructed within a period of six weeks. At this time, no agreements for base
load sales have been signed and there can be no assurances that such agreements
will be signed and if signed, it is not possible to predict when sales may begin
or what the volumes of gas sold may be.
On March 17, 2000 the Company announced that it had entered
into an agreement with the University of Tennessee-Knoxville ("UTK") related to
its hydrocarbon exploration activities in eastern Tennessee. Two UTK geological
scientists, Professor Robert D. Hatcher, Jr.,
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a University of Tennessee/Oak Ridge National Laboratory Distinguished Scientist
in structural and Appalachian geology, and Dr. Richard T. Williams, Ph. D.,
Associate Professor in geophysics, will provide the Company with assistance in
interpreting the structure of the Swan Creek Field and geophysical data from
that Field. New seismic data will permit better subsurface imaging and more
exact determination of the size of the Swan Creek Field.
A major outgrowth of the Company's relationship with UTK is a
new graduate fellowship, called the Tengasco Fellowship, to be awarded in UTK's
Department of Geological Sciences to an outstanding graduate student interested
in pursuing a career in the petroleum industry. The fellowship will provide a
living allowance and tuition for the student. Two UTK PH. D. students receiving
financial support from the Company have already provided computer generated 3-D
images of the Swan Creek Field. These images have helped outline the subsurface
shape of the hydrocarbon producing zone to allow the Company to better
understand where additional production might be located.
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 one million cubic feet of gas and 400 barrels of oil per day.
Revenues for the Kansas Wells are approximately $300,000 per month.
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 at the
present time, as the Company does not presently have the funds necessary to
perform these projects..
3. The Company's Other Leases
In connection with the Purchase Agreement, the Company
acquired from IRC the following properties:
(i) a 100% working interest in 41 oil and gas leases
on a total of 8,058 acres, more or less, and a 25% working interest on one lease
of 462 acres, more or less, located in Clay County, Kentucky (collectively, the
"Beech Creek Leases"). Each of these leases provided for a landowner royalty of
12.5% of the oil produced and saved from the leased premises or, at the lessee's
option, to pay the market price for such 12.5% royalty. The leases also provided
for a landowner royalty equal to 12.5% of the market price at the well of the
gas sold or used off the premises, except for injection for secondary recovery
of oil. The Beech Creek Leases were also subject to overriding royalties ranging
from 1.25% to 5%.
(ii) a 100% working interest in 5 oil and gas leases
on a total of 741 acres,
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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.
Governmental Regulations
The Company is subject to numerous state and federal
regulations, environmental and otherwise, that may have a substantial negative
effect on its ability to operate at a profit. For a discussion of the risks
involved as a result of such regulations, see, "Effect of Existing or Probable
Governmental Regulations on Business" and "Costs and Effects of Compliance with
Environmental Laws" hereinafter in this section.
Principal Products or Services and Markets
The Company will conduct exploration and production activities
to produce crude oil and natural gas. The principal markets for these
commodities are local refining companies, local utilities and private industry
end users, which purchase the crude oil, and natural gas marketing companies,
which purchase the gas.
In Hancock County, gas production from the Swan Creek Field
can presently be
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delivered through the completed Phase I of the Company's pipeline to the Hawkins
County Gas Utility. The Company has acquired all necessary regulatory approvals
and 100% of necessary property rights for Phase I of the pipeline. The Company's
pipeline will not only service the Company's wells, but, will provide
transportation of gas for small independent producers in the local area as well.
Direct sales could also be made to some local towns, industries and utility
district such as Powell Valley Utility District. 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 completion of Phase II of the pipeline
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 Eott Energy Operations Ltd.
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 March 30, 2000 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 net reserve values in
the Coburn Petroleum Engineering Report were adjusted to take into account the
working interests that have been sold by the Company in various wells in the
Swan Creek Field. The report of Coburn Petroleum Engineering provides that the
net reserves as adjusted of the existing 19 wells in the Swan Creek Field is
over 70.90 Bcf of natural gas with a present-day deliverability of 15 million
cubic feet of natural gas per day and 1.39 million barrels of oil. According to
the Coburn Engineering Report, discounting the net reserve values by 10% results
in a present value as of December 31, 1999 of $116,300,000 before taxes and
$69,780,000 after taxes.
Columbia Engineering based in Oklahoma City, Oklahoma, has
performed a reserve analysis of the Kansas Properties. David F. Yard, a
registered petroleum engineer is the
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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 January 31, 2000. According to the report of
Columbia Engineering, discounting the net reserve values by 10% results in a
present value as of December 31, 1999 of $17,467,719 before taxes and
$10,480,631 after taxes for the Kansas Properties.
Reserve analyses are at best speculative, especially when
based upon limited production; no assurance can be given that the reserves
attributed to these leases exist or will be economically recoverable.
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.
On September 3 , 1999,the Company entered into a farmout
agreement with Miller Petroleum, Inc. ("Miller") for ten wells to be drilled in
the Swan Creek Field with the Company having an option to award up to an
additional ten future wells. All locations are to be mutually agreed upon. Net
revenue will be 81.25% to Miller and the Company will transport Miller's gas for
$.40 per Mcf.
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
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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 prices of the Company's products are controlled by the
world oil market and the United States natural gas market; thus, competitive
pricing behaviors are considered unlikely; however, competition in the oil and
gas exploration industry exists in the form of competition to acquire the most
promising acreage blocks and obtaining the most favorable prices for
transporting the product. Management believes that the Company is
well-positioned in these areas because of the transmission lines that run
through and adjacent to the properties it leases and because it holds relatively
large acreage blocks in what management believes are promising areas.
Sources and Availability of Raw Materials
and Names of Principal Suppliers
Excluding the development of oil and gas reserves and the
production of oil and gas, the Company's operations are not dependent on the
acquisition of any raw materials. See, "Competitive Business Conditions,
Competitive Position in the Industry and Methods of Competition" set forth
above.
Dependence on One or a Few Major Customers
The Company 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
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Farmland Industries in Neodosha, Kansas. There is a limited market in the area
and the only other purchaser of crude oil is Eott Energy Operations Ltd. 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. The amounts of the royalties on each of the Company's
leases may be obtained from the Company.
Need for Governmental Approval of Principal Products or Services
None of the principal products or services offered by the
Company require governmental approval; however, permits are required for
drilling oil or gas wells. See, "Effect of Existing or Probable Governmental
Regulations on Business" below in this section.
Effect of Existing or Probable Governmental Regulations on Business
Exploration and production activities relating to oil and gas
leases are subject to numerous environmental laws, rules and regulations. The
Federal Clean Water Act requires the Company to construct a fresh water
containment barrier between the surface of each drilling site and the underlying
water table. This involves the insertion of a seven-inch diameter steel casing
into each well, with cement on the outside of the casing. The Company has fully
complied with this environmental regulation, the cost of which 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
12
<PAGE>
may in certain circumstances impose "strict liability," rendering a corporation
liable for environmental damages without regard to negligence or fault on the
part of such corporation. Such laws and regulations may expose the Company to
liability for the conduct of operations or conditions caused by others, or for
acts of the Company which were in compliance with all applicable laws at the
time such acts were performed. The modification of existing laws or regulations
or the adoption of new laws or regulations relating to environmental matters
could have a material adverse effect on the Company's operations. In addition,
the Company's existing and proposed operations could result in liability for
fires, blowouts, oil spills, discharge of hazardous materials into surface and
subsurface aquifers and other environmental damage, any one of which could
result in personal injury, loss of life, property damage or destruction or
suspension of operations.
The Company believes it is presently in compliance with all
applicable federal, state or local environmental laws, rules or regulations;
however, continued compliance (or failure to comply) and future legislation may
have an adverse impact on the Company's present and contemplated business
operations.
The Company's 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 conducting
seismic surveys on the lease blocks. This work will be performed by the
Company's full time geologist and will not have a material cost of anything more
than his standard salary. See, "Number of Total Employees and Number of
Full-Time Employees" set forth below in this section.
13
<PAGE>
Cost and Effects of Compliance With Environmental Laws
See, "Effect of Existing or Probable Governmental Regulations
on Business" set forth above in this section.
Number of Total Employees and Number of Full-Time Employees
The Company presently has thirty-four full time employees and
no part-time employees.
The Company has hired a full-time geologist at a salary of
$60,000 per year. His duties for the Company include: surface and sub-surface
geology, log correlation, surface and sub-surface mapping, field 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 45,400
acres in Hancock and Claiborne Counties in Tennessee. The initial terms of these
leases vary from one to five years. Many of them can be extended at the option
of the Company by payment of annual rent. Some of them will terminate unless the
Company has commenced drilling. However, the Company does not anticipate any
difficulty in continuing the Swan Creek Leases. See "Description of Business" -
"General" above.
One of the Company's Directors, Shigemi Morita, has a 25%
working interest on a turnkey basis in ten of the Company's existing wells, a
50% working interest in one of the Company's other existing wells and a 12.5%
working interest in another of the Company's existing wells. An individual who
is not an affiliate of the Company purchased 25% working interests in two other
wells, the Stephon Lawson No. 1 and the Patton No. 1. All of these wells are
located in the Swan Creek Field. See Item 12 - Certain Relationships and Related
Transactions.
The Company has also entered into a farmout agreement with
Miller Petroleum, Inc. ("Miller") for ten wells to be drilled in the Swan Creek
Field with the Company having an option to award up to an additional ten future
wells. All locations are to be mutually agreed upon. Net revenue will be 81.25%
to Miller and the Company's subsidiary Tengasco Pipeline will transport Miller's
gas for $.40 per Mcf.The Company reserves all offset locations to wells drilled
under the farmout agreement. Two wells have been drilled under the farmout
agreement, the
14
<PAGE>
Lange No. 1 and the Woodrow Davis No. 1. The Company obtained an additional 50%
working interest in the Woodrow Davis No. 1 from Miller in addition to its right
under the farmout agreement.
Other than the working interests described or referred to in
this Item, the Company retains all other working interests in wells drilled or
to be drilled in the Swan Creek Field.
Working interest owners in oil and gas wells are entitled to
market their respective shares of production to purchasers other than purchasers
with whom the Company has contracted. Absent such contractual arrangements being
made by the working interest owners, the Company is authorized but is not
required to provide a market for oil or gas attributable to working interest
owners' production. At this time, the Company has not agreed to market gas for
any working interest owner. If the Company does agree to market gas for working
interest owners to the Company's customers, the Company will have to agree, at
that time, to the terms of such marketing arrangements and it is possible that
as a result of such arrangements, the Company's revenues from such customers may
be correspondingly reduced. If the working interest owners make their own
arrangements to market their natural gas to other end users along the pipeline
which have been served by East Tennessee Natural Gas, an interstate pipeline,
such gas would be transported through the Company's wholly owned subsidiary
Tengasco Pipeline at published tariff rates, currently $0.40 per MMBTU. If the
working interest owners do not market their production, either independently or
through the Company, then their interest will be treated as not yet produced and
will be balanced either when marketing arrangements are made by such working
interest owners or when the well ceases to produce in accordance with customary
industry practice.
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, an office
in Hays, Kansas at a rental of $500 per month and an office in New York City at
a rental of $2,600 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.
Tests to date on the completed wells on the Swan Creek Leases
indicate
15
<PAGE>
substantial potential for future deliverability. Based upon engineering reports,
management believes that the wells drilled to date have a life expectancy of
approximately 25 years on a declining basis.
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 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
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 sought to recover the sum of $500,000
loaned to the Company which was part of a $1,000,000 bridge loan transaction.
The loan by Wallington Investments, Ltd. ("Wallington") was evidenced by a
promissory note and the action brought by Wallington was based upon that note.
The Company, for no additional consideration other than the loan, issued
warrants to Wallington to purchase 100,000 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. Pursuant to the settlement
the Company paid Wallington the sum of $581,625 which represents 90% of the
amount of the monies loaned to the Company by Wallington together with interest
thereon at 10% from the date of the loan. As part of the settlement, the
warrants held by Wallington were deemed null and void and unenforceable and all
of the liens granted to Wallington as security for its loan to the Company were
released.
2. The Company filed an action in Chancery Court for Knox
County, Tennessee entitled, Tengasco, Inc., Plaintiff v. Theodore Scallan,
Thieme Fonds, Ulrich Hocker and
16
<PAGE>
Wallington, Investments, Ltd., Case No. 133620-2 against Wallington Investments,
Ltd. ("Wallington") and two other lenders, Ulrich Hocker ("Hocker") and Thieme
Fonds who had loaned the Company the aforementioned bridge loan in the aggregate
amount of $1,000,000, as well as Theodore Scallan, the Company's former
President, to invalidate the warrants which were issued to those lenders in
connection with and as consideration for that bridge loan. This action was
discontinued against Wallington Investments, Ltd. and Ulrich Hocker as part of
the Company's settlement of actions brought against it by those two parties in
New York to recover the sums they had loaned the Company and to enforce the
warrants issued to them (See no. 1 above). In addition, the Company recently
settled this action and the counterclaims asserted by Thieme Fonds against the
Company to recover the sum of $250,000 it had loaned the Company as part of the
$1,000,000 bridge loan and to enforce the warrants it had obtained in connection
with the loan on the same terms it had settled the Hocker and Wallington
actions. The Company paid Thieme Fonds the sum of $298,812.49 which represents
90% of the amount of the monies loaned to the Company by Thieme together with
interest thereon at 10% from the date of the loan. As part of the settlement,
the warrants held by Thieme Fonds were deemed null and void and unenforceable
and all of the liens granted to Thieme Fonds as security for its loan to the
Company were released.
3. 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.
17
<PAGE>
4. 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 filed an answer and counterclaim against OMI
seeking damages for breach of contract. The action was recently settled.
Pursuant to the settlement, OMI paid the Company the sum of $40,000 and the
parties released all claims against each other.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of the Company was held
on August 31, 1999.
(b) The first item voted on was a proposal to authorize an
amendment to the Company's By-Laws to increase the maximum number of Directors
of the Company from seven (7) to ten (10). The results of the voting were as
follows:
5,472,595 votes for the resolution,
676,093 votes against and
41,992 votes abstained.
A majority of the votes cast at the meeting having voted for
the resolution, the resolution was duly passed.
(c) The next item of business was the election of Directors.
Joseph E. Armstrong, Benton L. Becker, John A. Clendening, Neal F. Harding, John
L. Kidde, Shigemi Morita, Malcolm E. Ratliff and Allen J. Sweeny 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: 6,204,285 votes
for Joseph E. Armstrong and 58,565 withheld; 5,635,466 votes for Benton L.
Becker and 627,384 withheld; 6,199,434 votes for John A. Clendening and 63,416
withheld; 6,202,535 votes for Neal F. Harding and 60,315 withheld; 6,204,125
votes for John L. Kidde and 58,725 withheld; 6,206,975 votes for Shigemi Morita
and 55,875 withheld; 6,206,335 votes for Malcolm E. Ratliff and 56,515 withheld;
and, 6,208,435 votes for Allen J. Sweeney and 54,415 withheld.
18
<PAGE>
(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 1999. The results of the voting were as follows:
6,216,522 votes for the resolution,
4,050 votes against and
42,278 votes abstained.
A majority of the votes cast at the meeting having voted for
the resolution, the resolution was duly passed.
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 was listed on the OTC Bulletin
Board of the NASD from March 31, 1994 through December 20, 1999 under the symbol
TNGO. On December 10, 1999, the American Stock Exchange ("AMEX") approved the
application of the Company to have its common stock listed on the AMEX. Trading
of the Company's common stock on the AMEX commenced on December 21, 1999 under
the symbol TGC.
The range of high and low bid prices for shares of common
stock of the Company during the fiscal years ended December 31, 1998 and
December 31, 1999 are set forth below.
Bid
---
High Low
---- ---
For the Quarters Ending
March 31, 1999 6.875 4.50
June 30, 1999 10.125 5.50
September 30, 1999 9.125 5.75
December 31, 1999 14.375 3.50
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<PAGE>
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 5.375
These bid prices were obtained from the National Quotation
Bureau, Inc. ("NQB") and do not necessarily reflect actual transactions, retail
markups, mark downs or commissions. The transactions include inter-dealer
transactions.
Holders
As of March 20, 2000, the number of shareholders of record of
the Company's common stock was 443, and management believes that there are
approximately 1,700 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 tables provide 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
<TABLE>
<CAPTION>
Name of Owner Date Number of Aggregate
Acquired Shares Consideration
<S> <C> <C> <C>
DeMunnick, Jeffrey 3/15/97 4,000 1
Arzonetti, Walter C. 4/22/97 88,493 1
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C>
Harding, Neil 5/21/97 100,000 2
Moffett, William A. 6/25/97 72,603 1
Carter, Robert M 6/30/97 7,329 1
McCown, Michael 6/30/97 50,000 1
Lautzenhiser, Stephen 8/19/97 800 $ 4,832.00
Steuer, Joseph, Jr. 8/19/97 1,703 $ 9,996.61
Day, Christopher 8/22/97 482 $ 2,966.11
Gray, Edward W.T. 8/22/97 80,515 $ 500,000.00
Gerding, James A. 8/26/97 20,000 $ 140,000.00
Gillis, Wayne H. 8/26/97 14,286 $ 100,000.00
Strickland, Thomas Jr. 8/26/97 200 $ 1,174.00
Thurman, Shawn Lee 8/26/97 219 $ 1,495.00
Habbersett, William C. TTEE UTD
9/1/94 8/27/97 2,197 $ 15,005.51
Kail, Wilbert L. 9/2/97 1,000 $ 6,650.00
Burleson, Elizabeth E. 9/15/97 500 $ 3,895.00
Kamer, John P. 9/22/97 400 $ 2,976.00
Habbersett, William C. TTEE UTD
9/1/94 9/24/97 1,500 $ 11,550.00
Hampton, Earl 9/24/97 500 $ 3,850.00
Bailey, Gurvin & Margaret 9/25/97 4,500 $ 36,225.00
Milligan, Shirley TTEE TR UA
7/3/90 9/30/97 300 $ 2,415.00
Fortune Hunters Investment Club 10/9/97 201 $ 1,759.00
Vickers, T. Owen 10/9/97 7,584 $ 64,994.88
Angle, Noriko T. 10/10/97 5,714 $ 50,000.00
Harbert, Bill L. 10/10/97 34,286 $ 300,002.50
Lange, Robert A. 10/10/97 1,500 $ 13,345.00
Miller William F., Jr. 10/10/97 3,000 $ 26,250.00
Regions Bank TTEE for the Bobby P.
Lemay Directed IRA 10/10/97 5,656 $ 49,999.99
Stanley Robert J. 10/10/97 11,313 $ 100,006.92
Green, Daryl IRA R/O UTA R/O
UTA 10/13/97 C. Schwab & Co. 10/13/97 5,000 $ 42,000.00
Cates, Dennis 10/14/97 7,000 $ 58,800.00
Jones Michael J. 10/14/97 2,200 $ 20,020.00
Scott, Donald L. 10/14/97 2,220 $ 20,020.00
Scott, Randall L. 10/14/97 2,220 $ 20,020.00
Adams, Stanley & Sharon E. 10/15/97 6,000 $ 53,580.00
Borger, Jeannie 10/15/97 224 $ 2,000.32
Funk, Sharon 10/15/97 5,599 $ 49,999.07
Honeycutt, Robert M. 10/15/97 100 $ 893.00
Jungman, Paul Claude 10/15/97 500 $ 5,000.80
L'Hussier, Harold R. 10/17/97 1,406 $ 15,002.02
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C>
Funk, Frederick 10/20/97 2,158 $ 20,000.00
Kourkournelis, James M. 10/21/97 500 $ 4,815.00
Viam Charitable & Edu. Found., Inc. 10/21/97 11,905 $ 100,000.00
Buck, Frank S. & Martha J. 10/22/97 5,000 $ 47,250.00
STEP, Inc. 10/22/97 2,000 $ 18,200.00
Nishiwaki, Nick S. 10/23/97 21,978 $ 200,000.00
Spoonbill, Inc. 10/23/97 178,024 $ 1,619,949.00
Stewart S. Kent TTEE, UA/TR Dtd
12/29/88 10/23/97 2,500 $ 22,550.00
Knott, Patricia 10/24/97 500 $ 4,550.00
Eggerr & Company 10/28/97 202,380 $1,200,000.00
Jones, Ronald M. 10/28/97 1,500 $ 12,600.00
Thomson, Charles A. 10/29/97 2,000 $ 15,400.00
Ershek, John 11/3/97 5,000 $ 41,100.00
Wilson, Henry A. 11/3/97 585 $ 5,019.30
Arkwright, Richard T. 11/4/97 10,989 $ 99,999.90
Hamac & Co. TTEE Marilyn Himes
Riviere TR 11/5/97 10,582 $ 99,999.90
Emory Clinic Profit Sharing Plan
FBO William J. Casarella 11/6/97 2,646 $ 25,004.70
Gillis, Terry 11/6/97 2,667 $ 24,989.79
Huang, Diedre A. 11/6/97 5,336 $ 49,998.32
Huang, Peter C.R. 11/6/97 16,008 $ 149,994.96
Haung, Stephen 11/6/97 5,336 $ 49,998.32
Nevin, Micah Cole 11/6/97 100 $ 945.00
Reventolow, Richard H. 11/6/97 10,989 $ 99,999.90
Watson, W.N. 11/6/97 534 $ 5,003.58
Leonard, William Curtis 11/7/97 216 $ 2,004.00
Weldon, William Edgar Jr. 11/11/97 506 $ 5,000.00
Weldon, William Edgar, Dr. 11/11/97 2,528 $ 25,000.00
Chandler, Robert A. 11/13/97 500 $ 4,945.00
Gillis, Terry 11/14/97 1,465 $ 15,001.60
Presnell, Joe 11/14/97 2,000 $ 20,480.00
Habbersett, Wm. C. TTEE UTD
9/1/94 11/14/97 1,000 $ 10,240.00
Habbersett, Edith T. TTEE 11/18/97 1,500 $ 16,020.00
Castllas, Arcadio & Renate 11/19/97 9,685 $ 99,997.63
Gerding, Daniel J. 11/21/97 1,000 $ 9,890.00
Hut, Robert A. 12/3/97 4,682 $ 50,000.00
Jones Investment Co. 12/4/97 6,000 $ 50,400.00
Pichiarella, Lawrence, S. 12/8/97 100 $ 1,103.00
Presnell, Joe & Alma 12/8/97 1,000 $ 11,030.00
French, Peter & Grace 12/9/97 2,267 $ 25,000.00
Gerding, Scott J. 12/9/97 1,000 $ 9,890.00
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C> <C>
Keyser, Frank & Mims, Catherrine 12/9/97 443 $ 4,500.00
Malone, Michael & Kimberely 12/9/97 49 $ 500.00
McCarty, Billy E. & Carol J. 12/9/97 99 $ 1,000.00
MSP Enterprises 12/9/97 500 $ 5,515.00
Rich Energy, Inc. 12/9/97 700 $ 6,370.00
Dale, John D. Jr. 12/10/97 4,682 $ 50,000.00
Pichiarella, Lawrence, S. 12/11/97 200 $ 1,960.00
Uy, Camilo 12/11/97 2,500 $ 25,000.00
Nishimura, Joseph, Y 12/16/97 5,192 $ 50,000.00
Pichiarella, Lawrence, S. 12/17/97 100 $ 840.00
Bonham, Elizabeth D. 12/19/97 5,952 $ 50,000.00
Blaker, Barbara & Lloyd 12/26/97 1,120 $ 10,000.00
Myers, Garry D. 12/31/97 1,344 $ 12,000.00
Widmer, Edward J. 12/31/97 500 $ 4,465.00
Habbersett, William C. TTEE UTD
9/1/94 1/5/98 2,303 $ 21,970.62
Hauser, Janice 1/21/98 3,008 $ 20,000.00
Mertins, Janelle 1/21/98 10,000 $ 77,500.00
Spoonbill, Inc. 1/29/98 50,000 $ 350,000.00
Ueshima, Takeshi 2/5/98 6,494 $ 50,000.00
Mobarak, Heather L. 2/12/98 500 $ 4,000.00
Smithers, Charles F., Jr. 2/12/98 6,250 $ 50,000.00
Eisert, Anthony & Marie 2/25/98 2,857 $ 20,000.00
Presnell, Joe 2/25/98 1,000 $ 6,650.00
L'Hussier, Harold 3/3/98 1,594 $ 11,715.90
Esrick, Ralph Trust 3/10/98 1,000 $ 7,170.00
Seevers, Larry 3/10/98 1,504 $ 10,000.00
Weeks, Everette, J. 3/10/98 500 $ 3,590.00
Stern, William TTEE 4/7/98 10,000 $ 70,000.00
Stern, William TTEE 4/9/98 5,000 $ 35,000.00
Morita, Shegemi 4/10/98 7,400 $ 37,000.00
Honeycutt, Robert M. 4/16/98 100 $ 639.00
Astuto, Angelo 4/22/98 500 $ 3,590.00
Astuto, Laura J. 4/22/98 500 $ 3,590.00
Giresi, Mary E. 4/22/98 2,000 $ 14,360.00
Nikovits, John L. 4/22/98 1,000 $ 7,180.00
Pych, Barbara M. 4/22/98 1,000 $ 7,180.00
Pych, Gregory L. 4/22/98 2,000 $ 14,360.00
Pych, Joseph 4/22/98 1,250 $ 8,975.00
Pych Joseph R. 4/22/98 1,000 $ 7,180.00
Pych, Robert F. 4/22/98 1,000 $ 7,180.00
Pych, Cynthia M. 4/24/98 2,000 $ 14,360.00
Presnell, Joe 4/28/98 1,000 $ 6,430.00
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C> <C>
Harbert, Bill L. 4/30/98 40,000 $ 262,800.00
Adams, Stanley & Sharon E. 5/4/98 10,000 $ 71,300.00
Keller, James & Shirley 5/4/98 4,000 $ 28,520.00
Moor, John 5/4/98 1,000 $ 7,130.00
Padron, Ramon 5/13/98 1,000 $ 7,350.00
Fujita, Eiji 5/18/98 21,097 $ 150,000.00
Koshi, Junichiro 5/18/98 2,628 $ 20,000.00
Cajigas, Arthur & Hidako 5/21/98 1,143 $ 10,000.00
Kiryu, Hironori 5/26/98 1,406 $ 10,000.00
Mori, Masahiko 5/28/98 7,032 $ 50,000.00
Synap Corp. 5/29/98 9,143 $ 80,000.00
Fujii, Daisuke 6/1/98 1,406 $ 10,000.00
Ura, Yukari 6/2/98 1,406 $ 10,000.00
Harbert, Bill L. 6/11/98 75,414 $ 497,441.00
Burklow, Jim 6/15/98 1,000 $ 7,780.00
Presnell, Joe 6/15/98 1,000 $ 7,000.00
Carter Daryl M. 7/2/98 1,500 $ 10,500.00
Carter, Maury L. 7/2/98 3,500 $ 24,500.00
Kobayashi, Shungo 7/2/98 1,429 $ 10,000.00
Nagashima, Tsuyoshi 7/22/98 1,429 $ 10,000.00
Kitaoka, Yukiki 7/31/98 1,429 $ 10,000.00
Yoshida, Teruni 7/31/98 1,429 $ 10,000.00
Carvajah, Rose Marie 9/1/98 250 $ 1,750.00
Harris, Rona 9/1/98 500 $ 3,500.00
Mintzer, Dorothy 9/1/98 500 $ 3,500.00
Sherbal, Rose 9/1/98 500 $ 3,500.00
Warhaft, Terri 9/1/98 500 $ 3,500.00
Spoonbill, Inc. 9/2/98 50,000 $ 250,000.00
Harbert, Bill L. 10/22/98 150,200 $ 488,150.00
Stanley, David G. TTEE 12/8/98 5,000 $ 23,750.00
Houlihan, Smith & Co., Inc. 1/4/99 2,143 $ 15,000.00
Spoonbill, Inc. 1/6/99 140,000 $ 700,000.00
Wayne H. Gillis 1/6/99 12,016 $ 39,052.00
Silva, Anthony 1/26/99 20,000 $ 100,000.00
Morita, Shegemi 1/29/99 20,000 $ 100,000.00
Silva, Anthony 3/8/99 22,300 $ 100,350.00
Keeler, Richard & Rita, JTWROS 3/22/99 2,000 $ 9,000.00
Nishiwaki, Nick S. 3/23/99 40,000 $ 180,000.00
Spoonbill, Inc. 3/23/99 20,000 $ 90,000.00
AHS & Associates 3/26/99 5,625 $ 22,500.00
Harbert, Bill L. 4/5/99 125,000 $ 500,000.00
Houlihan, Smith & Co., Inc. 5/24/99 2,000 $ 10,000.00
Nishiwaki, Yasuko 6/30/99 20,000 $ 100,000.00
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C> <C>
Silva, Anthony 8/5/99 50,000 $ 300,000.00
Spoonbill, Inc. 8/5/99 40,000 $ 200,000.00
Nishiwaki Yasuko 8/30/99 20,000 $ 100,000.00
Smithers, Anne H. 9/3/99 4,500 $ 25,020.00
Tanaka Memorial Foundation 9/17/99 9,000 $ 50,040.00
Wenger, Virgil E. 9/20/99 20,000 $ 117,000.00
Artola Company Ltd. 9/20/99 17,986 $ 100,000.00
Spoonbill, Inc. 9/24/99 50,000 $ 250,000.00
Smithers Benefit Plans 10/21/99 11,000 $ 61,000.00
Spoonbill, Inc. 10/25/99 50,000 $ 250,000.00
Spoonbill, Inc. 10/25/99 50,000 $ 250,000.00
Keller, James & Shirley 12/3/99 2,000 $ 7,000.00
Spoonbill, Inc. 12/29/99 50,000 $ 250,000.00
LCMS Foundation 12/30/99 8,200 $ 50,020.00
A.D. Tengo Partnership, LLC 12/30/99 820 $ 5,002.00
Akos, Stephen & Cynthia 12/30/99 820 $ 5,002.00
Stern, William M. TTEE/WMS RLT 12/30/99 820 $ 5,002.00
Stern, William M. TTEE/Gutman #2 12/30/99 820 $ 5,002.00
Cipponeri, Jerome 12/30/99 820 $ 5,002.00
</TABLE>
Series A 8% cumulative Convertible Preferred Stock ($100.00 per share)
<TABLE>
<CAPTION>
Name Date Number of Shares Aggregate
Acquired Consideration
<S> <C> <C> <C>
Harding, Neal 10/30/98 2950 3
Cipponeri, Jerome 10/30/98 500 4
Kenny Vernon & Rosemary 10/30/98 1300 4
Gorman, Robert & Anne 10/30/98 1000 4
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 1000 $ 100,000.00
Stern, William, TTEE
William Stern Rev. Living Tr. DTD
7/7/92 4/13/99 600 $ 60,000.00
Harding, Neal 4/14/99 3035 $ 303,500.00
Herligy Shannon Shay 4/14/99 324 $ 32,400.00
Kenny, Vernon & Rosemary
JT/WROS 4/14/99 1200 $ 120,000.00
Kollinger, Peter TTEE 4/20/99 1020 $ 102,000.00
Colson, William and Anita 6/10/99 710 $ 71,000.00
Harding, Neal 7/30/99 5000 $ 500,000.00
</TABLE>
25
<PAGE>
1 Issued pursuant to Stock Option Agreements adopted by
the Board of Directors granting these persons an
option to purchase "unregisted" and "restricted"
shares of the Company's common stock at a price of
$0.275 per share.
2 Issued as consideration for the granting of a loan in
the amount of $1,000,000.
3 Issued as partial payment of a loan made to the
Company in 1997 by Harding. See, "Item 12 - Certain
Relationships and Related Transactions - Transactions
with Management and Others"
4 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.
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:
(1) The Swan Creek structure is located in an area known as
the Eastern
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<PAGE>
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.
(2) The Company has successfully completed fifteen gas wells
in this area, all of which have been flow tested by metering gas from the wells
through a one-half inch orifice. These tests all verify the presence of a
substantial reservoir of natural gas and/or oil. One of these wells, the Reed #1
tested at 4,800,000 cubic feet of gas per day with a 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. Drilling operations are contingent upon funds
becoming available either as a result of gas sales upon completion of Phase II
of the pipeline or from other sources. The Company is currently engineering and
designing Phase II of its pipeline, an additional 28 miles of 12 inch pipeline,
at a cost of approximately $6,000,000 which will extend from a point near the
terminus of the Company's existing pipeline and connect to an existing pipeline
and meter station at the chemical plant of Eastman Chemical Company ("Eastman")
in Kingsport, Tennessee. The Company recently entered into an agreement with
Eastman to supply substantial amounts of natural gas to Eastman. See,
"Description of Business" for a more detailed statement of the terms of that
agreement. The Tennessee Department of Transportation has granted the Company
the right to lay Phase II of its pipeline along state highway 11 to Kingsport,
Tennessee. At the present time, the Company is capable of producing
substantially more gas than it is able to sell. Completion of Phase II of the
pipeline will allow the Company to deliver its gas to Eastman and sell
substantially more of its natural gas production from the Swan Creek Field. 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 six to eight months. The Company anticipates that its agreement with Eastman
will require Eastman to purchase 10,000 MMBTU of gas per day, to take effect
upon completion of Phase II of its pipeline.
The Company does not presently have the funds needed to enable
it to complete its drilling program and the extension of the pipeline. The
Company is attempting to raise those funds through a private placement offering
(the "Offering") of a minimum of 30,000 and a maximum of 100,000 shares of
Series B Cumulative Convertible Preferred Stock (the "Series B Shares") at a
purchase price of $100 per share pursuant to Rule 506 of Regulation D
promulgated by the Securities and Exchange Commission. The Series B Shares are
being offered through
27
<PAGE>
Southcoast Capital L.L.P. ("Southcoast Capital") pursuant to a written agreement
with the Company on a "best efforts basis." Southcoast Capital will receive
selling commissions of eight percent (8%) of the price of the Series B Shares.
In addition, the Company will issue to Southcoast Capital a warrant (the
"Warrant") to purchase a number of shares of the Company's stock equal to ten
percent (10%) of the total number of shares of the Company's common stock into
which the total number of Series B Shares sold pursuant to the Offering are
convertible. The warrant will be for a term of five years and the price of
shares of common stock subject to the Warrant shall be equal to the conversion
rate for the Series B Shares pursuant to the Offering which is the average
closing price of the Company's common stock for a period of thirty (30) business
days immediately preceding a closing of any sale of securities offered pursuant
to the Offering, but in no event less than $9.00 per share. The Company will
also reimburse Southcoast Capital for its expenses in connection with the
Offering, including the fees and expenses of its legal counsel, provided that,
without the prior agreement of the Company, the aggregate of such expenses shall
not exceed $15,000.
The Company intends to use the proceeds from the Offering of
the Series B Shares to finance construction of Phase II of the pipeline.
However, there can be no assurance that the Company will be able to sell the
Series B Shares, or if does not sell more than the minimum amount of the
Offering, that the proceeds from the Offering will be sufficient to complete the
pipeline. If these funds are not sufficient, the Company will seek additional
financing by other means. Although there can be no assurances that such
financing will be available, the Company believes that it will be able to
procure such financing by means of a bank loan, equity investment or a joint
venture with another company.
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. The aggregate current production from the Kansas properties is
approximately 1.0 million cubic feet of natural gas and 400 barrels of oil per
day. Income from the Kansas properties at the present time is approximately
$300,000 per month. Revenues from the Kansas Properties for the third and fourth
quarters of 1999 continued to increase due to the significant increase in oil
prices during the quarter.
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 major reworking of certain existing
wells is projected to be $1.4 million. Since the Company does not presently have
the funds necessary for major reworking of existing wells and/or for drilling
additional wells, the ability to undertake such efforts is dependent on the
Company obtaining additional debt or equity financing. Management has made the
decision not to undertake such efforts to raise the funds necessary to perform
this work at the present time.
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
28
<PAGE>
Company, instead, will concentrate on the development of its other properties
which management believes have greater economic potential and the acquisition of
other properties.
The Company has no plans, at present, to increase the number
of its employees significantly.
This plan of operation is based upon many variables and
estimates, all of which may change or prove to be other than or different from
information relied upon.
Results of Operations
The Company incurred a net loss of $2,671,923 ($0.34 per share
of common stock) in 1999 compared to a net loss in 1998 of $3,083,638 ($0.42 per
share of common stock).
The Company realized oil and gas revenues of $3,017,252 in
1999 as compared to $2,078,101 in 1998. Revenues in 1999 were offset by
increased production costs and taxes of $2,564,932 compared to $1,943,944 in
1998. These increases in revenues and production costs were attributable
primarily to well workover costs on several wells in Kansas to maintain
production. The increase in revenues was primarily attributable to the increase
in oil prices in 1999, however, oil production in Swan Creek did increase from
11,222 barrels in 1998 to 21,964 barrels in 1999 due to new oil wells drilled in
1999.
Depletion, depreciation and amortization decreased from
$290,030 in 1998 to $233,807 in 1999. This decrease was due to less depletion in
the Kansas Properties.
General and administrative costs increased $570,122 to
$1,942,254 in 1999. The increase was due to the hiring of additional personnel,
increase in engineering services for the pipeline and reserve evaluations and
the increase in geological service for 3-D seismic data needed in the
development of the Swan Creek Field. The additional in-house personnel, while
increasing general and administrative costs, had the effect of substantially
reducing other of the Company's costs. As a result, the Company's public
relations costs of $86,061 in 1999 were $256,742 less than in 1998 and its legal
and accounting costs in 1999 were $444,624 compared to $656,104 in 1998.
Interest expense of $417,497 in 1999 was $157,409 less than
the previous year due to less debt and funding transactions.
The Company did not have any income tax expense in 1999 or
1998 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 is unable to determine that these tax benefits are more
likely than not to be realized.
29
<PAGE>
Liquidity and Capital Resources
During 1999 and 1998, the Company's revenues were insufficient
to fund operations. Accordingly, significant cash was absorbed in the day to day
operations. This trend is expected to continue throughout 2000 and at least
until such time as the Company completes Phase II of its pipeline which it
anticipates completing either by the end of 2000 or the first quarter of 2001.
As of December 31, 1999, the Company had total stockholders'
equity of $7,453,930 on total assets of $15,182,712, however, the Company has a
net working capital deficiency at December 31, 1999 of $1,406,263 as compared to
a net deficiency of $1,929,215 at December 1998.
The Company continues to be in the early stages of its
operating history as it endeavors to expand its operations through the
continuation of its drilling program in the Swan Creek Field and the extension
of Phase II of its pipeline. The Company anticipates that it will require
$6,000,000 to fund the completion of Phase II of the pipeline and another
$6,000,000 to fund the development of the Swan Creek Field and other working
capital requirements. The Company plans to fund these amounts from the proceeds
of its offering of Series B Cumulative Convertible Preferred Stock, from other
future issuances of the Company's common stock, from the sale of oil and gas
interests and from other debt financing from lenders. Management believes that
the Company will be able to obtain the necessary funding to meet its operational
requirements during 2000, to fund future growth and ultimately to attain
profitability. However, there can be no assurances that the Company will obtain
the necessary funding or obtain such funding in a timely manner, in order to
meet its current and future cash requirements. The inability of the Company to
obtain the necessary cash funding on a timely basis would have an unfavorable
effect on the Company's financial condition and would require the Company to
materially reduce the scope of its operating and investing activities.
Net cash used in operating activities amounted to $2,555,003
for 1999, compared to net cash used in the amount of $2,329,325 for 1998,
resulting primarily from the 1999 net loss of $2,671,923, partially offset by
non-cash depletion, depreciation and amortization ($233,807) and non-cash
compensation and services paid by issuance of equity instruments ($204,500).
Changes in working capital items during 1999 absorbed $353,387 in operating cash
flow, reflecting increases in accounts receivable ($386,933) and inventory
($159,455) and partially offset by an increase in accounts payable ($300,342).
Net cash used in investing activities amounted to $1,868,958
for 1999, compared to net cash used in the amount of $6,132,772 for 1998. The
net cash used for investing activities during 1999 was primarily attributable to
additions to oil and gas properties ($1,413,029 in 1999 as compared to
$1,721,770 in 1998) and additions to property and equipment ($256,045 in 1999 as
compared to $203,507 in 1998). The investing activities during 1998 included
$2,990,253 relating to the acquisition of the Kansas Properties and $1,422,242
relating to the construction of Phase I of the pipeline.
30
<PAGE>
Net cash provided by financing activities amounted to
$3,931,357 for 1999 as compared to $4,924,017 for 1998. The primary sources of
financing include proceeds from borrowings ($2,771,722 in 1999 as compared to
$3,557,396 in 1998) and convertible redeemable preferred stock ($1,188,900 in
1999 as compared to $225,000 in 1998). The primary use of cash in financing
activities was the repayment of borrowings ($2,383,605 in 1999 as compared to
$1,831,685 in 1998).
New Accounting Pronouncements
Financial Accounting Standards Board Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and Hedging
Activities", as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. Historically, the Company has not entered into derivative contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of this new standard on January 1, 2001, to
affect its financial statements.
Year 2000 Risks
The Company achieved Year 2000 compliance for all internal
systems and did not suffer any adverse effects with respect thereto. The Company
does not anticipate any such problems in the future. The Company's Year 2000
compliance costs were insignificant and, accordingly, did not have a material
effect on its operating results or financial position.
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
Not applicable.
31
<PAGE>
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.
Date of Initial
Positions Election or
Name Held Designation
- ---- -------- -----------
Joseph E. Armstrong Director 3/13/97
2624 Selma Avenue
Knoxville, TN 37914
Benton L. Becker Director 8/31/99
1497 Lacosta Drive East
Pembrook Pines, FL 33027
John A. Clendening Director 8/31/99
1031 Saint Johns Drive
Maryville, TN 37801
Neal F. Harding Director 8/31/99
2155 So. Ocean Blvd., #PH20
Delray Beach, Florida 33843
John L. Kidde Director 6/19/98
154 Oldchester Road
Essex Fells, N.J. 07021
Shigemi Morita Director 3/13/97
35 Park Avenue
New York, N.Y. 10016
Malcolm E. Ratliff Chairman of the 4/21/98
12608 Avallon Place Board; Chief Executive
Knoxville, TN 37922 Officer
32
<PAGE>
Allen H. Sweeney Director 3/13/97
1400 Oak Tree Drive
Edmund, OK 73003
Terry W. Piesker President 10/19/99
7531 Turnbrook Way
Knoxville, TN 37919
Robert M. Carter President Tengasco 10/19/99
760 Prince George Parish Drive Pipeline Corporation
Knoxville, TN 37922
Harold G. Morris, Jr. Vice-President 10 /19/99
153 Chuniloti Way Finance
Loudon, TN 37774
Cary V. Sorensen Vice President and 07/09 /99
509 Bretton Woods Dr. General Counsel
Knoxville, TN 37919
Mark A. Ruth Chief Financial 12/14/98
104-D Cynthia Lane Officer
Knoxville, TN 37922
Sheila Sloan Treasurer 12/4/96
121 Oostanali Way
Loudon, TN 37774
Elizabeth Wendelken Secretary 12/4/96
8023 Stanley Road
Powell, TN 37849
Section 16(a) Beneficial Ownership Reporting Compliance
In fiscal 1999, Malcolm E. Ratliff, the Company's Chief
Executive Officer and a Director, Shigemi Morita and Allen H. Sweeney, 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 six Form 4 reports and one
Form 5 report involving twenty five transactions. Mr. Morita failed to timely
file a Form 5 report and a Form 4 report involving three transactions. Mr.
Sweeney filed six Form 4 reports in the six months following the dates on which
the transactions he reported took place in those
33
<PAGE>
preceding months, but not within the required first ten days of the following
month as required. Those untimely reports involved twenty eight transactions.
IRC failed to timely file three Form 4 reports involving five transactions.
These deficiencies have all been cured.
Business Experience
Directors
Joseph Earl Armstrong is 42 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.
Benton L. Becker is 62 years old. In 1960 he received a B.A.
degree from the University of Maryland. In 1966 he graduated from the American
University Law School in Washington, D.C. He is currently engaged in the private
practice of law in Coral Gables, Florida and Washington D.C., while regularly
serving as a Distinguished Lecturer on constitutional law at the University of
Miami in Coral Gables, Florida. His past positions include serving as a trial
attorney for the U. S. Department of Justice, the Dade County, Florida State's
Attorney Office and a Professor of Law at the University of Miami School of Law.
During his career Mr. Becker has represented the U.S. House of representatives,
the Republican National Committee and President Gerald R. Ford. In 1976 Mr.
Becker represented Commonwealth Oil and Refining Company of Puerto Rico in a
Federal trial and Appellate action against Texaco, Exxon and Mobil and obtained
a multi-million dollar judgment for Commonwealth Oil. In 1980 he served as Board
Chairman for Appalachian Oil and Gas. From June 5, 1995 to January 30, 1997 he
served as Chairman of the Company's Board of Directors.
Dr. John A. Clendening is 67 years old. He received B.S.
(1958), M.S. (1960) and Ph. D. (1970) degrees in geology from West Virginia
University. He was employed as a Palynologist-Coal Geologist at the West
Virginia Geological Survey from 1960 until 1968. He joined Amoco in 1968 and
remained with Amoco as a senior geological associate until 1972. Dr. Clendening
has served as President and other offices of the American Association of
Stratigraphic Palynologists and the Society of Organic Petrologists. From 1992 -
1998 he was engaged in association with Laird Exploration Co., Inc. of Houston,
Texas, directing exploration and production in south central Kentucky. In 1999
he purchased all the assets of Laird Exploration in south central Kentucky and
operates independently. While with Amoco Dr. Clendening was instrumental in
Amoco's acquisition in the early 1970's of large land acreage holdings in
Northeast Tennessee, based upon his geological studies and recommendations. His
work led directly to the discovery of the Paul Reed # 1 well which has been
tested at 4.7 Mmcf of natural gas per day with proven reserves of 5 Bcf. He
further recognized the area to have great both oil and gas potential and is
credited with discovery of the field which is now known as the
34
<PAGE>
Company's Swan Creek Field.
Neal F. Harding is 57 years old. He received a B.S. degree in
Social Sciences from Campbellsville University in 1964. He is the Chairman and
Chief Executive Officer of the Heritage Companies based in Cocoa Beach, Florida
which are three management companies specializing in the development,
construction and management of more than 6,000 single and multi-family
affordable housing units. Mr. Harding through various different partnerships,
currently owns in excess of 16,000 affordable housing units in Toronto, Canada
and England. Mr. Harding is also the majority shareholder in F & II Development
which owns and operates a semi-public PGA designed 18 hole golf course in
Sikeston, Missouri. Additionally, Mr. Harding is the sole shareholder of Harding
Construction Services, Inc., a real estate company specializing in the
acquisition and development of commercial and residential properties.
John L. Kidde is 65 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-VII, 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.
Shigemi Morita is 67 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 is President of
Morita Properties, Inc., an oil and natural gas investor.
Malcolm E. Ratliff is 53 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. He has served as a Director of the Company since June 19, 1998.
35
<PAGE>
Allen H. Sweeney is 53 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.
Officers
Terry W. Piesker is 48 years old. In 1974, he received a
Bachelor of Science Degree in Education from Emporia State University in
Emporia, Kansas. From 1974 to 1977, he worked for Cities Service Oil Company as
an Engineering Technician and Assistant Production Foreman in Eastern Kansas.
From 1977 to 1978, he was employed by Petroleum, Inc. in Wyoming as Rocky
Mountain District Engineer. In 1977 he moved back to Western Kansas as
Production Foreman for Frontier Oil Company. In 1987, Frontier Oil Company was
purchased by AFG Energy Inc. and he was named General Manager of the Kansas
Properties.. On January 1, 1998, the Company purchased the Kansas Properties
from AFG Energy Inc. and on October 19, 1999, he was appointed President of the
Company by the Board of Directors.
Robert M. Carter is 63 years old. He received a B.A. degree in
Business form the Middle Tennessee State College. For 35 years he 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. He served as President of the Company until he resigned from that
position on October 19,1999. He remains as President of Tengasco Pipeline
Corporation, a wholly owned subsidiary of the Company.
Harold G. Morris, Jr. is 52 years old. In 1970 he received a
B.S. Degree in accounting from St. Peter's College in Jersey City, New Jersey.
He is a member of the National Association of Certified Fraud Examiners. From
1970 to 1975 he worked in New York, New York for Main LaFrentz & Co., Certified
Public Accountants where he was a senior auditor for the firm's largest client,
CPC International, Inc. He was in charge of International Worldwide
Consolidation, along with the translation of multi-national currencies (Asian,
European and Canadian) into dollars. His experience includes audits of many
industries including the audit of Wall Street brokerage firms. From 1975 to 1980
he worked for Foster Wheeler Corporate headquarters in Livingston, New Jersey as
Chief Internal Auditor where he assisted in all corporate mergers and
acquisitions. During this time he was promoted to CEO and CFO of Copeland
Systems, Inc. and then Treasurer/Controller of Chemical Separations Corp. in Oak
Ridge Tennessee, both of which were wholly owned subsidiaries of Foster Wheeler.
From 1980
36
<PAGE>
to 1983, Mr. Morris was Group Controller of Macawber Engineering's U.S. , Japan,
England and Australian operations. From 1985 to 1999 he was Controller/Ass't.
Secretary for W. J. Savage Co., Inc. in Knoxville, Tennessee. He joined the
Company as Vice-President of Finance on October 19, 1999.
Cary V. Sorensen is 51 years old. He is a 1976 graduate of the
University of Texas School of Law and has undergraduate and graduate degrees
form North Texas State University and Catholic University in Washington, D.C.
Prior to joining the Company in July, 1999, he had been continuously engaged in
the practice of law in Houston, Texas relating to the energy industry since
1977, both in private law firms and a corporate law department, most recently
serving for seven years as senior counsel with the litigation department of
Enron Corp. before entering private practice in June, 1996. He has represented
virtually all of the major oil companies headquartered in Houston and all of the
operating subsidiaries of Enron Corp., as well as local distribution companies
and electric utilities in a variety of litigated and administrative cases before
state and federal courts and agencies in five states. These matters involved gas
contracts, gas marketing, exploration and production disputes involving
royalties or operating interests, land titles, oil pipelines and gas pipeline
tariff matters at the state and federal levels, and general operation and
regulation of interstate and intrastate gas pipelines.
Mark A. Ruth is 41 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.
From December 14, 1998 to August 31, 1999 he served as the Company's Chief
Financial Officer. On August 31, 1999 he was elected as a Vice-President of the
Company and on November 8, 1999 he was again appointed as the Company's Chief
Financial Officer.
Sheila F. Sloan is 44 years old. She graduated from South Lake
High School located in St. Clair Shores, Michigan in 1972. From 1981 to 1985 she
worked as a purchasing agent for Sequoyah Land Company located in Madisonville,
Tennessee. From 1990 to 1995 she managed the Form U-3 Weight Loss Centers in
Knoxville, Tennessee. She has been with the Company since January 1996. On
December 4, 1996 she was elected as the Company's Treasurer.
Elizabeth A. Wendelken is 61 years old. Mrs. Wendelken
attended Brooklyn College in Brooklyn, New York from 1964 to 1968. She is a
Certified Legal Assistant. From 1964 to 1980 she was a legal assistant to Eugene
Frederick Roth, Esq., eight years of which were served in the Office of the
United States Attorney for the Southern District of New York (Criminal
Division). From 1980 to 1984, she worked as a tax shelter specialist in the New
York offices of Allegheny & Western Energy Corporation whose headquarters are
located in Charleston, West Virginia. From 1990 to 1996 she was a paralegal at
the law firm of Lockett,
37
<PAGE>
Slovis & Weaver in Knoxville, Tennessee. She joined the Company in June 1996 and
on December 4, 1996 was elected as the Company's Secretary.
Committees
The Company has operating audit and compensation committees.
Messrs. Sweeney, Armstrong and Morita comprise the audit committee and Messrs.
Sweeney, Ratliff and Morita are the members of the compensation committee.
Family Relationships
There are no family relationships between any of the present
directors or executive officers of the Company.
Involvement in Certain Legal Proceeding
To the knowledge of management, during the past five years, no
present or former director, executive officer, affiliate or person nominated to
become a director or an executive officer of the Company:
(1) Filed a petition under the federal bankruptcy laws or any
state insolvency law, nor had a receiver, fiscal agent or
similar officer appointed by a court for the business or
property of such person, or any partnership in which he or she
was a general partner at or within two years before the time
of such filing, or any corporation or business association of
which he or she was an executive officer at or within two
years before the time of such filing;
(2) Was convicted in a criminal proceeding or named subject of
a pending criminal proceeding (excluding traffic violations
and other minor offenses);
(3) Was the subject of any order, judgment or decree, 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
38
<PAGE>
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, 1999, December 31, 1998 and December 31, 1997.
None of the Company's other executive officers earned compensation in excess of
$100,000 per annum for services rendered to the Company in any capacity.
39
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Name and Year Salary ($) Bonus ($)
Principal Position
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Malcolm E. Ratliff, 1999 $ 60,000 $-0-
Chief Executive Officer 1998 $ 60,000 $-0-
1997 $ 9,731 $-0-
James E. Kaiser, 1999 $-0- $-0-
Chief Executive Officer and 1998 $-0- $-0-
General Counsel 1997 $ 6,154 $-0-
- -------------------------------------------------------------------------------
<CAPTION>
--------Long Term Awards--------
--------Awards-----Payouts
Name and Other Annual Restricted Securities Payouts All Other
Principal Position Compensation Stock Underlying Compen-
($) Awards($) Options sation
/SARs(#)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Malcolm E. Ratliff, $500 -0- 50,000 -0- -0-
Chief Executive Officer $500 -0- -0- -0- -0-
$500 -0- -0- -0- -0-
James E. Kaiser, $-0- -0- -0- -0- -0-
Chief Executive Officer and $-0- -0- -0- -0- -0-
General Counsel $-0- -0- -0- -0- -0-
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individualized Grants
- --------------------------------------------------------------------------------------------------------
Name Number of Percent of Total Exercise Expiration
Securities Options/SARs or Base Date
Underlying Granted to Price
Options/SARs Employees in ($/Sh)
Granted (#) Fiscal 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Malcolm E. 50,000 100% $7.00 6/17/00
Ratliff
=========================================================================================================
</TABLE>
AGGREGATE OPTION EXERCISES FOR FISCAL 1999
AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
======================================================
Number of Securities Value(1) of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
December 31, 1999 December 31, 1999
Name Shares Acquired Value ($) Exercisable/ Exercisable/
on Exercise Realized(2) Unexercisable Unexercisable
=================================================================================================================
<S> <C> <C> <C> <C>
Malcolm E. Ratliff -0- -0- 50,000-0- $ 531,125/-0-
=================================================================================================================
</TABLE>
No options were exercised during fiscal year ended December
31, 1999 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.
- --------
(1) Total value of unexercised options is based upon the fair market value
of the Common Stock, $10.625 on December 31, 1999, as reported by The American
Stock Exchange.
(2) Value realized in dollars is based upon the difference between the fair
market value of the Common Stock on the date of exercise, and the exercise price
of the option.
41
<PAGE>
Compensation of Directors
The Board of Directors has resolved to compensate members of
the Board of Directors for attendance at meetings at the rate of $250 per day,
together with direct out-of-pocket expenses incurred in attendance at the
meetings, including travel. 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
The Company has entered into employment contracts with its
Vice-President and General Counsel, Cary V. Sorensen for a period of two years
at an annual salary of $80,000 and its Vice- President-Finance, Harold G.
Morris, Jr. for a period of one year at an annual salary of $65,000. There are
presently no other 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.
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 February 23, 2000 with these computations
being based upon 8,727,897 shares of common stock being outstanding and assumes
the exercise of 850,000 shares vested under options granted by the Company as of
February 23, 2000.
42
<PAGE>
Five Percent Stockholders
<TABLE>
<CAPTION>
Number of Shares Percent of
Name and Address Title Beneficially Owned Class
- ---------------- ----- ------------------ -----
<S> <C> <C> <C>
Industrial Resources Stockholder 3,014,559(3) 34.3%
Corporation
603 Main Ave.
Knoxville, TN 37902
Spoonbill, Inc. Stockholder 715,524 8.2%
Tung Wai Commercial Bldg.
20th Floor
109-111 Gloucester Rd.
Wanchai, Hong Kong
</TABLE>
<TABLE>
<CAPTION>
Number of Shares Percent
Name and Address Title Beneficially Owned of Class
- ---------------- ----- ------------------ --------
<S> <C> <C> <C>
Joseph Earl Armstrong Director 50,000(4) Less than 1%
2624 Selma Avenue
Knoxville, TN 37914
Benton L. Becker Director 93,822(5) 1.1%
1497 Lacosta Drive East
Pembrook Pines, FL 33027
</TABLE>
- --------
(3) Malcolm E. Ratliff, the Chief Executive Officer and Chairman of the
Board of Directors of the Company is the sole owner of the outstanding
securities and President of Industrial Resources Corporation (" IRC").Ownership
of the IRC shares was previously transferred from Malcolm E. Ratliff, due to his
illness, to his father, James Ratliff. In December 1999 ownership of the IRC
shares was transferred back to Malcolm E. Ratliff from his father. Malcolm E.
Ratliff's wife, Linda Ratliff, is the Secretary of IRC. Accordingly, IRC may be
deemed to be an affiliate of the Company. James Ratliff, who is the father of
Malcolm E. Ratliff, is the sole shareholder and President of Ratliff Farms, Inc.
Malcolm E. Ratliff is the Vice-President/Secretary of Ratliff Farms. Malcolm E.
Ratliff has voting control of the shares of the Company owned by Ratliff Farms,
Inc. Accordingly, Ratliff Farms, Inc. may also be deemed to be an affiliate of
the Company. The shares listed here for IRC include 2,402,372 shares owned
directly by IRC, 62,853 shares owned directly and an option to purchase 50,000
shares held by Malcolm E. Ratliff, 469,334 shares owned directly by Ratliff
Farms, Inc. and 30,000 shares owned directly by a trust of which Linda Ratliff
is trustee and the children of Malcolm E. Ratliff are the beneficiaries.
(4) Consists of shares underlying an option.
(5) Consists of 43,822 shares owned directly and an option to purchase
50,000 shares.
43
<PAGE>
<TABLE>
<S> <C> <C> <C>
John A. Clendening Director 67,000(6) Less than 1%
1031 Saint Johns Drive
Maryville, TN 37801
Neal F. Harding Director 417,881(7) 4.6%
2155 So. Ocean Blvd., #PH20
Delray Beach, Florida 33843
John L. Kidde Director 59,000(8) Less than 1%
154 Old Chester Road
Essex Falls, NJ 07021
Shigemi Morita Director 235,141(9) 2.7%
35 Park Avenue
New York, N.Y. 10016
Malcolm E. Ratliff Chief Executive 3,014,559(10) 34.3%
12608 Avallon Place Officer; Chairman
Knoxville, TN 37922 of the Board
</TABLE>
- --------
(6) Consists of 17,000 shares held directly and an option to purchase
50,000 shares.
(7) Consists of 67,881 shares owned directly and options to purchase
350,000 shares. He also owns 10,985 shares of the Company's Series A 8%
Cumulative Convertible Preferred Stock.
(8) Consists of 9,000 shares held directly and an option to purchase 50,000
shares.
(9) Consists of 105,741 shares held directly, 79,400 shares held as an IRA
beneficiary and options to purchase 50,000 shares.
(10) Malcolm E. Ratliff, the Company's Chief Executive Officer and Chairman
of the Board of Directors, is also the sole shareholder and President of
Industrial Resources Corporation ("IRC"). Ownership of the IRC shares was
previously transferred from Malcolm E. Ratliff, due to his illness to his
father, James Ratliff. In December 1999 ownership of the IRC shares was
transferred back to Malcolm E. Ratliff from his father. Linda Ratliff, Malcolm
E. Ratliff's wife, is the Secretary of IRC. James Ratliff, who is the father of
Malcolm E. Ratliff, is the sole shareholder and president of Ratliff Farms, Inc.
Malcolm E. Ratliff is the Vice-President/Secretary of Ratliff Farms, Inc.
Malcolm E. Ratliff has voting control over the shares of the Company owned by
Ratliff Farms, Inc. The shares listed here include 2,402,372 shares owned
directly by IRC, 62,853 shares owned directly and an option to purchase 50,000
shares held by Malcolm E. Ratliff, 469,334 owned directly by Ratliff Farms, Inc.
and 30,000 shares owned directly by a trust of which Linda Ratliff is trustee
and the beneficiaries are the children of Malcolm E. Ratliff (the "Ratliff
Trust").
44
<PAGE>
<TABLE>
<S> <C> <C> <C>
Allen H. Sweeney Director 95,625(11) 1.1%
1400 Oak Tree Drive
Edmund, OK 73003
Terry W. Piesker President 25,000(12) Less than 1%
7531 Turnbrook Way
Knoxville, TN 37919
Robert M. Carter President 32,329(13) Less than 1%
760 Prince Georges Parish Tengasco
Knoxville, TN 37922 Pipeline Corporation
Harold G. Morris, Jr. Vice-President 29,000(14) Less than 1%
153 Chuniloti Way Finance
Loudon, TN 37774
Cary V. Sorensen Vice-President 50,000(15) Less than 1%
509 Bretton Woods Dr. and General Counsel
Knoxville, TN 37919
Mark A. Ruth Chief Financial 25,000(16) Less than 1%
104-D Cynthia Lane Officer
Knoxville, TN 37922
Sheila F. Sloan Treasurer 2,000 Less than 1%
121 Oostanali Way
Loudon, TN 37774
Elizabeth Wendelken Secretary 1,000 Less than 1%
</TABLE>
- --------
(11) Consists of 45,625 shares held indirectly through a company which he
controls and options to purchase 50,000 shares.
(12) Consists of shares underlying an option.
(13) Consists of 7,329 shares held directly and options to purchase 25,000
shares.
(14) Consists of 4,000 shares held directly and an option to purchase
25,000 shares.
(15) Consists of shares underlying an option.
(16) Consists of shares underlying an option.
45
<PAGE>
<TABLE>
<S> <C> <C>
8023 Stanley Road
Powell, TN 37849
All Officers and 4,197,357(17) 43.8%
Directors as a group
</TABLE>
Changes in Control
Except as indicated below, to the knowledge of the Company's
management, there are no present arrangements or pledges of the Company's
securities which may result in a change in control of the Company.
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, who is now a Director of the Company. The loan from
Mr. Harding was used primarily for pipeline construction. Repayment of the loan
from Mr. Harding was guaranteed by IRC, which also granted an option to Mr.
Harding to purchase 300,000 shares of stock of the Company it owned at a price
of $10 per share. One-half of that loan was repaid in January 1998 from existing
cash and the balance was paid in October 1998 by paying Mr. Harding $250,680.56
in cash and issuing to him 2,950 shares of the Company's Series A Shares.
- --------
(17) Consists of shares held directly and indirectly by management, shares
held by IRC, shares held by Ratliff Farms, Inc., shares held by the Ratliff
Trust and 850,000 shares underlying options.
46
<PAGE>
In 1997 and 1998, the Company issued fully paid 25% working
interests in six wells in the Swan Creek Field to Shigemi Morita, one of the
Directors of the Company, for the aggregate amount of $750,000 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 and the balance of $390,000
was paid in cash. Mr. Morita was given an option that if it was determined that
a well(s) at the time of completion of the drilling was not economically
feasible and as such was subsequently plugged and abandoned, he had 30 days,
after written notice from the Company, to convert amounts paid for that well(s)
to restricted shares of the Company's common stock at 70% of its then current
market value. However, all six of the wells in which Mr. Morita has a
participation interest are producing, therefore his options for these wells are
not exercisable.
In 1998, the Company paid Mr. Morita an additional $141,000 in
commissions for private placements of stock.
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. The shares advanced by
Malcolm E. Ratliff were carried as a debt payable to him. Approximately $520,000
of this $800,000 loan was 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 Shares convertible at a price of $5.75 per share. In
1999 the Company converted the debt payable to Malcolm E. Ratliff for the shares
he had advanced on behalf of the Company to common stock by issuing 16,800
shares of common stock in satisfaction of that obligation.
The Company 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 was to provide services
in connection with shareholder relations, press releases, long term financial
planning, corporate reorganizations and financing.
Malcolm E. Ratliff, the Chief Executive Officer and a Director
of the Company, 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 issued a non-recourse promissory note in the amount
of $1.85 million, together with interest at six (6%) percent per annum (the
"Proton Note"). The Proton Note was to be payable out of proceeds of the sale of
the shares. The
47
<PAGE>
370,000 shares were transferred from IRC, an affiliate of Mr. Ratliff, to
Ratliff Farms, Inc., a privately held company solely owned by James Ratliff, the
father of Malcolm E. Ratliff, and were then held in escrow pending the purchase
of these shares by Proton. No shares were sold to Proton under the terms of that
agreement.
The Company subsequently entered into a similar financial
consulting agreement with AM Partners, L.L.C. ("AM Partners") of Houston, Texas
which replaced and superceded its agreement with Proton. As a result, the Proton
agreement was deemed canceled and the 370,000 shares of the Company's stock in
the name of Ratliff Farms, Inc. being held in escrow were transferred back to
Ratliff Farms, Inc. which presently owns 469,334 shares of the Company's common
stock. Malcolm E. Ratliff has voting control over those shares. The agreement
with AM Partners is for a one year period commencing October 1, 1999. Pursuant
to the agreement AM Partners is to provide services in connection with investor
relations, press releases, corporate reorganizations and financing. The Company
is to pay AM Partners $5,000 per month commencing October 1, 1999. In addition,
as part of the agreement with AM Partners, the Proton Note to purchase up to
370,000 shares of the Company's common stock from Malcolm E. Ratliff was
assigned to AM Partners.
In 1999, the Company converted $250,000 of debt together with
accrued interest thereon payable to Malcolm E. Ratliff for a loan he had made to
the Company to 54,000 shares of common stock and $22,000 of debt payable to a
company owned by Allen H. Sweeney, one of the Company's Directors, for
consulting services provided in connection with the preparation of the Company's
business plan to 5,625 shares of common stock.
In 1999, the Company paid Shigemi Morita $218,000 for
commissions on private placements of common stock and consulting services. In
December, 1999, Morita Properties, Inc., an affiliate of Mr. Morita, purchased
for the sum of $625,000 a 25% working interest on a turnkey basis in two wells,
Laura Jean Lawson #1 and Stephen Lawson #2, both of which are in the Swan Creek
Field, and a 50% working interest in a third well, Springdale Land Company #1,
which is a wildcat step-out well located approximately ten miles from existing
production. More recently in January and March 2000, Morita Properties. Inc.
purchased on a turnkey basis a 12.5% working interest in the Stephen Lawson #3
well, a 25% working interest in the Laura Jean Lawson #2 well and a 25% working
interest in the R.D. Helton #2 well, all of which are in the Swan Creek Field.
The purchases of these interests were concluded before the respective wells were
drilled and the purchaser assumed all the attendant risks involved in normal and
customary drilling operations, including the risk of a dry hole. The Company
received fair market value for the interests conveyed and the sale of such
interests was required to raise funds to allow drilling operations to continue.
In 1999, 30,000 shares of the Company's common stock held in
the name of Tracmark, Inc. were transferred to an affiliate, Commonwealth
Resources, Inc. James Ratliff, the father of Malcolm E. Ratliff, is the sole
shareholder of Tracmark, Inc., as Trustee for the Ratliff family. Malcolm E.
Ratliff is Vice-President of Tracmark, Inc. Malcolm E. Ratliff is the sole
shareholder and President of Commonwealth Resources, Inc. and his wife, Linda
Ratliff, is the Secretary/Treasurer of that corporation. Those 30,000 shares
were subsequently transferred from Commonwealth Resources, Inc. to a family
trust of which Linda Ratliff is the trustee and the beneficiaries are the
children of Malcolm E. Ratliff.
48
<PAGE>
In December 1999, ownership of all of the outstanding and
issued shares of IRC, the largest shareholder of the Company's common stock was
transferred from James Ratliff to his son, Malcolm E. Ratliff. Ownership of the
IRC shares had previously been transferred to James Ratliff due to the illness
of Malcom E. Ratliff. IRC presently owns 2,402,372 shares of the Company's
common stock.
Indebtedness of Management
No officer, director or security holder known to the Company
to own of record or beneficially more than 5% of the Company's common stock or
any member of the immediate family of any of the foregoing persons is indebted
to the Company.
Parent of the Issuer
Unless IRC may be deemed to be a parent of the Company, the
Company has no parent.
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 of
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
50
<PAGE>
10.1(c) General Bill of Sale and Promissory Note
10.2(a) Compensation Agreement - M. E. Ratliff
10.2(b) Compensation Agreement - Jeffrey D. Jenson
10.2(c) Compensation Agreement - Leonard W. Burningham
10.3 Agreement with The Natural Gas Utility District of
Hawkins County, Tennessee
10.4 Agreement with Powell Valley Electric Cooperative,
Inc.
10.5 Agreement with Enserch Energy Services, Inc.
16.1 Letter of David T. Thomson, CPA, Regarding Change in
Certifying Accountant
16.2 Letter of Charles M. Stivers, CPA, Regarding Change
in Certifying Accountant
16.3 Letter of Price-Bednar, LLP, CPA, Regarding Change in
Certifying Accountant
23.1 Consent of Charles M. Stivers, CPA
23.2 Consent of David T. Thomson, CPA
23.3 Consent of BDO Seidman, LLP
23.4 Consent of Robson & Miller, LLP
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.
51
<PAGE>
(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.
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 thEast 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)
(v) Annual Report on Form 10-KSB, Date of Report, April 14, 1999
Exhibit Number and Description
3.9 Amendment to the Corporate Charter dated June 24,
1998
3.10 Amendment to the Corporate Charter dated October 30,
1998
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
52
<PAGE>
on Form SE pursuant to continuing hardship granted by
Office of EDGAR Policy)
(vi) Current Report on Form 8-K, Date of Report, October 18, 1999:
Exhibit Number and Description
10.9 Amendment Agreement dated October 19, 1999 between
Tengasco, Inc. and The Natural Gas Utility District
of Hawkins County, Tennessee
(vii) Current Report on Form 8-KA, Date of Report, November 18, 1999:
Exhibit Number and Description
10.10 Natural Gas Sales Agreement dated November 18, 1999
between Tengasco, Inc. and Eastman Chemical Company
The following exhibits are filed herewith:
3.11 Amendment to the Corporate Charter filed March 17 ,
2000
10.11 Agreement between A.M. Partners L.L.C. and Tengasco,
Inc. dated October 6, 1999
10.12 Agreement between Southcoast Capital L.L.C. and
Tengasco, Inc. dated February 25, 2000
10.13 Franchise Agreement between Powell Valley Utility
District and Tengasco, Inc. dated January 25, 2000
10.14 Amendment Agreement between Eastman Chemical Company
and Tengasco, Inc. dated March 27, 2000
99.12 Coburn Engineering Report dated March 30, 2000 (Paper
copy filed on Form SE pursuant to continuing hardship
granted by Office of EDGAR Policy)
99.13 Columbia Engineering Report dated January 31, 2000
(Paper copy filed on Form SE pursuant to continuing
hardship granted by Office of EDGAR Policy)
21 List of Subsidiaries
<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 10, 2000
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 Chief Executive Officer; April 10, 2000
- --------------------- Chairman of the Board
Malcolm E. Ratliff Of Directors
s/Joseph Earl Armstrong Director April 10, 2000
- -------------------
Joseph Earl Armstrong
s/Benton L. Becker Director April 10, 2000
- -------------------
Benton L. Becker
s/John A. Clendening Director April 10, 2000
- -------------------
John A. Clendening
<PAGE>
s/Neal F. Harding Director April 10, 2000
- -------------------
Neal F. Harding
s/John L. Kidde Director April 12, 2000
- ----------------------
John L. Kidde
s/Shigemi Morita Director April 10, 2000
- ----------------------
Shigemi Morita
s/Allen H. Sweeney Director April 12, 2000
- -------------------
Allen H. Sweeney
s/Terry W. Piesker President April 10, 2000
- ----------------------
Terry W. Piesker
s/Mark A. Ruth Principal Financial April 10, 2000
- ---------------------- and Accounting Officer
Mark A. Ruth
55
<PAGE>
Tengasco, Inc.
Consolidated Financial Statements
Years Ended December 31, 1999 and 1998
<PAGE>
Tengasco, Inc.
Contents
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance sheets F-3-F-4
Statements of loss F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7-F-8
Notes to financial statements F-9-F-31
<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, 1999 and 1998, 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the years then ended in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
Atlanta, Georgia
February 18, 2000
F-2
<PAGE>
Tengasco, Inc.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
Assets (Notes 7 and 8)
Current
Cash and cash equivalents $ 420,590 $ 913,194
Accounts receivable 533,983 147,050
Inventory 259,753 100,298
- --------------------------------------------------------------------------------
Total current assets 1,214,326 1,160,542
Oil and gas properties, net (on the basis
of full cost accounting) (Note 4) 8,444,036 7,747,655
Pipeline facilities under construction, at cost
(Note 5) 4,212,842 4,019,209
Other property and equipment, net (Note 6) 574,895 461,009
Restricted cash (Note 1) 625,000 -
Other 111,613 137,362
- --------------------------------------------------------------------------------
$15,182,712 $13,525,777
================================================================================
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Tengasco, Inc.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31, 1999 1998
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Due to AFG Energy, Inc. (Note 2) $ - $ 953,895
Notes payable (Note 7) 750,000 1,000,000
Loans payable to affiliates (Note 3) - 413,800
Current maturities of long-term debt (Note 8) 1,025,085 89,135
Accounts payable - trade 651,909 351,567
Accrued liabilities 193,595 281,360
- -------------------------------------------------------------------------------
Total current liabilities 2,620,589 3,089,757
Due to AFG Energy, Inc. (Note 2) - 976,207
Long term debt, less current maturities (Note 8) 3,119,293 2,214,723
- -------------------------------------------------------------------------------
Total liabilities 5,739,882 6,280,687
- -------------------------------------------------------------------------------
Preferred stock, $.0001 par value; authorized
25,000,000 shares:
Series A 8% cumulative, convertible, mandatorily
redeemable; 19,889 and 8,000 shares outstanding; 1,988,900 800,000
redemption value $1,988,900 and $800,000
Series B 8% cumulative, convertible, mandatorily
redeemable; - -
no shares outstanding
- -------------------------------------------------------------------------------
Stockholders' equity (Notes 7 and 10)
Common stock, $.001 par value; authorized
50,000,000 shares, 8,533 7,644
issued and outstanding 8,532,882 and 7,644,212
Common stock to be issued (Note 11) - 700,000
Additional paid-in capital 20,732,759 16,796,038
Unamortized stock option awards - (162,500)
Deficit (13,287,362) (10,496,092)
- -------------------------------------------------------------------------------
7,453,930 6,845,090
Due from stockholder (Note 11) - (400,000)
- -------------------------------------------------------------------------------
Total stockholders' equity 7,453,930 6,445,090
- -------------------------------------------------------------------------------
F-4
<PAGE>
Tengasco, Inc.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
$ 15,182,712 $ 13,525,777
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Tengasco, Inc.
Consolidated Statements of Loss
- --------------------------------------------------------------------------------
Years ended December 31, 1999 1998
- -------------------------------------------------------------------------------
Oil and gas revenues $ 3,017,252 $ 2,078,101
- -------------------------------------------------------------------------------
Costs and expenses
Production costs and taxes 2,564,932 1,943,944
Depletion, depreciation and amortization 233,807 290,030
General and administrative costs 1,942,254 1,372,132
Interest expense 417,497 574,906
Public relations 86,061 342,803
Legal and accounting 444,624 656,104
Realized (gain) on sale of investments - (18,180)
- -------------------------------------------------------------------------------
Total costs and expenses 5,689,175 5,161,739
- -------------------------------------------------------------------------------
Net loss (2,671,923) (3,083,638)
Dividends on preferred stock 119,347 -
- -------------------------------------------------------------------------------
Net loss available to common stockholders $(2,791,270) $(3,083,638)
- -------------------------------------------------------------------------------
Net loss available to common stockholders per share
Basis and diluted $ $
(0.34) (0.42)
- -------------------------------------------------------------------------------
Weighted average shares outstanding 8,149,900 7,348,632
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Tengasco, Inc.
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unamortized
Common Stock Common Additional stock
---------------------------- stock paid-in option
Shares Amount issuable capital awards Deficit
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 7,029,835 $7,029 $ $13,470,446 $(63,540) $ (7,412,454)
-
Net loss - - - - - (3,083,638)
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 6,000 6 - 39,714 - -
compensation
Stock issued for services 3,016 3 - 20,637 -
Other - - - (64,000) - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 7,644,212 7,644 700,000 16,796,038 (162,500) (10,496,092)
Net loss - - - - - (2,671,923)
Common stock issued on conversion
of debt 83,100 83 - 508,917 - -
Common stock issued for exercised
options 20,000 20 - 9,980 - -
Stock option awards and
amortization, net - - - - 162,500 -
-
Common stock issued in private
placements, net of related expense 775,802 776 (700,000) 3,471,722 - -
Stock issued for services 9,768 10 - 41,214 -
Payment of dividends on convertible
redeemable preferred stock - - - - - (119,347)
Other - - - (95,112) - -
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
Tengasco, Inc.
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 8,532,882 $8,533 $ - $20,732,759 $ - $(13,287,362)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Tengasco, Inc.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Years ended December 31, 1999 1998
- -------------------------------------------------------------------------------
Operating activities
Net loss $(2,671,923) $(3,083,638)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization 233,807 290,030
Compensation and services paid in stock options
and warrants and common stock 204,500 286,400
Interest expense paid by issuance of
payable to affiliate - 163,800
Amortization of loan fees paid by issuance of
common stock 32,000 -
Amortization of deferred publicity costs - 240,000
Changes in assets and liabilities:
Accounts receivable (386,933) (147,050)
Inventory (159,455) 39,955
Accounts payable 300,342 (175,831)
Accrued liabilities (107,341) 24,771
Other - 32,238
- -------------------------------------------------------------------------------
Net cash used in operating activities (2,555,003) (2,329,325)
- -------------------------------------------------------------------------------
Investing activities
Additions to property and equipment (256,045) (203,507)
Net additions to oil and gas properties (1,413,029) (1,721,770)
Proceeds on sale of oil and gas interests 625,000 205,000
Additions to pipeline facilities under construction (193,633) (1,422,242)
(Increase) decrease in restricted cash (625,000) -
Acquisition of certain assets of AFG Energy, Inc. - (2,990,253)
Other (6,251) -
- -------------------------------------------------------------------------------
Net cash used in investing activities (1,868,958) (6,132,772)
- -------------------------------------------------------------------------------
F-9
<PAGE>
Tengasco, Inc.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Years ended December 31, 1999 1998
- --------------------------------------------------------------------------------
Financing activities
Proceeds from exercise of options 10,000 15,751
Proceeds from borrowings 2,119,023 3,021,555
Repayments of borrowings (2,383,605) (1,831,685)
Net proceeds from issuance of common stock 2,771,722 3,557,396
Proceeds from private placements of convertible
redeemable preferred stock 1,188,900 225,000
Collection of due from stockholder 400,000 -
Payment of commissions on issuance of redeemable
convertible preferred stock (95,112) (64,000)
Dividends on convertible redeemable preferred stock (79,571) -
- --------------------------------------------------------------------------------
Net cash provided by financing activities 3,931,357 4,924,017
- --------------------------------------------------------------------------------
Net change in cash and cash equivalents (492,604) (3,538,080)
Cash and cash equivalents, beginning of year 913,194 4,451,274
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 420,590 $ 913,194
================================================================================
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Organization
Significant
Accounting Tengasco, Inc. (the "Company"), a publicly held
Policies 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 51 mile gas
pipeline as well as other pipelines planned for the
future.
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company, Tengasco Pipeline
Corporation
F-11
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
and Tennessee Land and Mineral, Inc. All significant
intercompany balances and transactions have been
eliminated.
F-12
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Basis of Presentation
The Company's financial statements have been
presented on a going concern basis, which
contemplates the realization of assets and the
satisfaction of liabilities in the normal course of
business. The Company continues to be in the early
stages of its operating history as it endeavors to
expand its operations through the continuation of
its drilling program in the Swan Creek Field and the
extension of Phase II of its pipeline (see Note 5).
The Company anticipates that it will require
$6,000,000 to fund the completion of Phase II of the
pipeline and another $6,000,000 to fund the
development of the Swan Creek Field and other
working capital requirements. The Company plans to
fund these amounts from the proceeds from its
offering of equity securities, from the sale of oil
and gas interests and from other debt financing from
lenders.
Management believes that the Company will be able to
obtain the necessary financing to meet its
operational requirements during 2000, to fund future
growth and ultimately to attain profitability.
However, there can be no assurances that the Company
will obtain the necessary funding or obtain such
funding in a timely manner in order to meet its
current and future cash requirements. The inability
of the Company to obtain the necessary cash funding
on a timely basis would have an unfavorable effect
on the Company's financial condition and would
require the Company to materially reduce the scope
of its operating and investing activities.
Use of 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.
F-13
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
F-14
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
Cash and Cash Equivalents
The Company considers all investments with a
maturity of three months or less when purchased to
be cash equivalents.
Restricted Cash
In 1999 an affiliate of a board member paid the
Company $625,000 for certain oil and gas well
interests. Per agreement with the buyer, this cash
is restricted to use for payments of drilling costs
for the related wells.
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
F-15
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
reserves. Proceeds from all other sales or
dispositions are treated as reductions to
capitalized costs.
F-16
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 (b) the cost of investments in
unevaluated properties excluded from the costs being
amortized. No ceiling writedown was recorded in 1999
or 1998.
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 by December 31, 2000.
F-17
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Accordingly, no depreciation expense has been
recorded for 1999 and 1998 relating to Phase II of
the pipeline facilities.
F-18
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 1999, the Company
had deposits with one financial institution in an
amount which exceeds the federally insured limit by
approximately $1 million.
The Company's primary business activities include
oil and gas sales to several customers in the states
of Tennessee and Kansas. The related trade
receivables subject the Company to a concentration
of credit risk within the oil and gas industry.
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
F-19
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
dilutive potential common shares that were
outstanding during the period. Basic and diluted
loss per share are based upon 8,149,900 shares for
the year ended December 31, 1999 and 7,348,632
shares for the year ended December 31, 1998. There
were 732,967 and 475,827 potential weighted common
shares outstanding during 1999 and 1998 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.
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, which approximate
carrying values.
Derivatives
In 1998, the Company traded in derivative financial
instruments for speculative purposes. Derivative
financial instrument contracts entered into are
comprised of natural gas future and option
contracts. No trades occurred during 1999, and at
December 31, 1999, there were no open positions in
any derivative contracts. Net trading gains of $0
and $18,180 are included in the accompanying
Statements of Loss for the years ended December 31,
1999 and 1998, respectively.
New Accounting Pronouncements
SOP 98-5, "Reporting on the Costs of Start-Up
Activities" requires that the costs of start-up
activities, including organization costs, be
expensed as incurred. This statement is effective
for financial statements issued for fiscal years
beginning after December 15, 1998. The adoption of
SOP 98-5 had no material effect on the Company's
financial statements.
SFAS No. 133, "Accounting for Derivative Instruments
F-20
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
and Hedging Activities," as amended, is effective
for all fiscal years beginning after June 15, 2000.
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. Historically, the Company has not entered
into derivative contracts either to hedge existing
risks or for speculative purposes. The adoption of
the new standard on January 1, 2001 will not affect
the Company's financial statements.
Reclassifications
Certain prior year amounts have been reclassified to
conform with current year presentation.
2. Business On December 18, 1997, the Company entered into an
Acquisition 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 accrued interest at 9.5% per
annum for the period December 1998 to May 1999.
After May 1999, the interest rate became 9.0% per
annum. Monthly interest-only payments were due from
December 1998 to May 1999. Monthly installments of
principal and interest of $138,349 were due from
June 1999 to December 1999 with a balloon payment of
$983,773 due in January 2000. On December 1, 1999,
this note was paid in full from the proceeds of a
new payable (See Note 8). The acquisition has been
accounted for as a purchase and, accordingly, the
F-21
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
purchase price of $5,490,253 has been allocated to
the assets acquired.
3. Related Party In December 1999, the Company sold for aggregate
Transactions consideration of $625,000 a 25% working interest in
two wells and a 50% working interest in a third
well, located in the Swan Creek Field, to a related
party company affiliated with a member of the Board
of Directors.
During 1999, the Company converted $250,000 of debt
together with accrued interest thereon payable to a
major officer/stockholder of the Company for a loan
made to the Company into 54,000 shares of common
stock. In addition, the Company converted $163,800
of non-interest bearing accounts payable to this
office/stockholder into 16,800 shares of common
stock.
F-22
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
During 1999, the Company converted $22,000 of debt
payable to a company owned by a member of the Board
of Directors for consulting services into 5,625
shares of common stock.
During 1999, the Company paid approximately $218,000
in consulting fees and commissions on equity
transactions to a member of the Board of Directors.
During 1998, the Company sold for aggregate
consideration of $500,000 (consisting of $205,000
cash and $295,000 in reduction in commissions
payable) a 25% working interest in four wells,
located in the Swan Creek Field, to a related party
company affiliated with a member of the Board of
Directors.
During 1998, the Company incurred an aggregate of
approximately $141,000 of commissions on private
placements payable to two members of the Board of
Directors.
4. Oil and Gas The following table sets forth information
Properties Properties concerning the Company's oil and gas
properties:
December 31, 1999 1998
----------------------------------------------------
Evaluated $8,752,327 $7,846,793
Unevaluated - 117,508
----------------------------------------------------
8,752,327 7,964,301
Accumulation depreciation, (308,291) (216,646)
depletion and
amortization
----------------------------------------------------
$8,444,036 $7,747,655
====================================================
5. Pipeline Facilities In 1996, the Company began construction of a 51-mile
Under Construction 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.
F-23
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of December 31, 1999, management estimates the
costs to complete Phase II of the pipeline are
approximately $6.0 million.
F-24
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In January 1997, the Company entered into an
agreement with the Tennessee Valley Authority
("TVA") whereby the TVA allows the Company to bury
the pipeline within the TVA's transmission line
rights-of-way. In return for this right, the Company
paid $35,000 plus agreed to annual payments of
approximately $6,200 for 20 years. This agreement
expires in 2017 at which time the parties may renew
the agreement for another 20 year term in
consideration of similar inflation-adjusted payment
terms.
6. Other Property Other property and equipment consisted of the
and Equipment following:
December 31, 1999 1998
----------------------------------------------------
Machinery and equipment $605,069 $337,070
Vehicles 377,208 356,336
Other 63,735 118,593
----------------------------------------------------
1,046,012 811,999
Less accumulated depreciation (471,117) (350,990)
----------------------------------------------------
Other property and equipment $574,895 461,009
- net
====================================================
7. Notes Payable Notes payable consisted of the following:
December 31, 1999 1998
----------------------------------------------------
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 $500,000 $ 500,000
the Company (A), (C).
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),
(C). 250,000 250,000
Note payable, in default,
to an
F-25
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
individual due April 1997
with interest payable
monthly at 10% per annum;
collateralized by all
assets of the Company (A),
(B). - 250,000
----------------------------------------------------
$750,000 $1,000,000
====================================================
In conjunction with the issuance of each of the
notes payable listed above, the Company granted the
lenders detachable stock warrants which enable the
holder to obtain up to 200,000 shares of the
Company's common stock at a price of $5 per share.
(A) These notes were not paid as of their respective
original due dates. In March 1997, the Company filed
a claim against the three lenders and a former
officer of the Company asserting that the Company
did not authorize the issuances of certain stock
warrants related to the borrowings and seeking
rescission of the warrant agreements. The Company
disputed the validity of the stock warrant
agreements based upon certain provisions which were
not authorized by the board of directors. These
claims were ultimately settled as discussed in (B)
and (C) below.
(B) In March 1997, the individual note holder filed
a lawsuit asserting the Company was in default of
the $250,000 note. This action sought the principal
amount, interest, and costs of collection. In March
1999, the parties agreed to a settlement whereby the
Company paid the individual lender approximately
$286,000 of principal and accrued interest as
payment in full for this note. As part of the
settlement, 50,000 warrants to purchase common stock
of the Company that this individual lender held were
deemed null and void and unenforceable.
(C) In January 2000, the respective partners agreed
to settle the disputes. As part of settlement
agreements signed in January 2000, the Company
agreed to pay an aggregate of approximately $865,000
of principal and accrued interest as payment in full
for the remaining notes outstanding as of December
31, 1999. The above-mentioned warrants were deemed
null and void and unenforceable
F-26
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. Long Term Debt Long-term debt consisted of the following:
December 31, 1999 1998
----------------------------------------------------
Note payable to a bank,
with $52,364 principal
payments due monthly
commencing on December 31,
1999 through November 30,
2002. Interest is payable
monthly commencing
December 31, 1999 at prime
plus 1% (9.5% at December
31, 1999) per annum. The
note is guaranteed by a
major share-holder and is
collatalized by
substantially all of the $1,828,327 $ -
Company's assets.
Note payable to an
institution, with $75,000
principal payments due
quarterly beginning
January 1, 2000; remaining
balance 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 1,425,000 1,500,000
per share of common stock.
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 500,000 500,000
common stock.
F-27
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Thirteen individual
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 391,051 303,858
2003, collateralized by
vehicles and equipment.
----------------------------------------------------
Total long term debt 4,144,378 2,303,858
Less current maturities (1,025,085) (89,135)
----------------------------------------------------
Long term debt, less
current maturities $ 3,119,293 $2,214,723
====================================================
The aggregate maturities of long term debt as of
January 1, 2000, are as follows:
Year Amount
----------------------------------------------------
2000 $1,025,085
2001 1,561,105
2002 926,848
2003 620,280
2004 11,060
----------------------------------------------------
$4,144,378
====================================================
9. Commitments The Company is a party to lawsuits in the ordinary
and Contingencies 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.
F-28
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of December 31, 1999, the approximate future
minimum payments to be made under noncancellable
operating leases were:
Year Amount
----------------------------------------------------
2000 $ 98,000
2001 17,000
2002 15,000
2003 10,000
2004 3,000
----------------------------------------------------
$143,000
====================================================
Rent expense was approximately $35,000 and $50,000
for the years ended December 31, 1999 and 1998,
respectively.
10. Convertible In October 1998, the Company's Board of Directors
Redeemable authorized the issuance of 250,000 shares of its
Preferred Stock Series A Convertible Redeemable Preferred Stock
("Series A Preferred Stock") and subsequently the
Company completed the issuance of 5,750 shares of
its Series A 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
Series A Preferred Stock. The Company issued an
additional 2,250 shares of Series A Preferred Stock
in December 1998 for approximately $225,000 which
netted the Company $207,000 after commissions.
In 1999 the Company issued 11,889 shares of Series A
Preferred Stock for $1,988,900, which netted the
Company approximately $1,894,000 after commissions.
In December 1999, the Company's Board of Directors
authorized the issuance of 100,000 shares of Series
B Convertible Redeemable Preferred Stock ("Series B
Preferred Stock"). As of December 31, 1999 no Series
B Preferred Stock had been issued.
The holders of both the Series A and Series B
Preferred
F-29
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Stock are entitled to a cumulative dividend of 8%
per quarter. However, the payment of the dividends
on the Series B Preferred Stock is subordinate to
that of the Series A Preferred Stock. In the event
that the Company does not make any two of six
consecutive quarterly dividend payments, the holders
of the Series A 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 both Series A and B of Preferred Stock are
or will be immediately convertible into shares of
Common Stock. Each $100 liquidation preference share
of preferred stock is convertible at a rate of $5.75
and $9.00 for the Series A and B, respectively, 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 and $9.00 for the
Series A and B, respectively, per share.
The Company may redeem both of the Series A and B
Preferred Shares upon payment of $100 per share plus
any accrued and unpaid dividends. Further, with
respect to the Series A Preferred Stock, commencing
on October 1, 2003 and at each quarterly date
thereafter while the Series A Preferred Stock is
outstanding, the Company is required to redeem
one-twentieth of the maximum number of Series A
Preferred Stock outstanding. With respect to the
Series B Preferred Stock, on the fifth anniversary
after issuance, the Company is required to redeem
all outstanding Series B Preferred Stock.
11. Common Stock to be In 1998, an institution purchased 140,000 shares of
Issued and Due from common stock for $700,000. As of December 31, 1998,
Stockholder 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 as of December 31, 1998. In 1999, the Company
issued the shares and collected the receivable.
F-30
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
F-31
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Stock Options Stock option activity in 1999 and 1998 is summarized
below:
1999 1998
----------------- -----------------
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------------------------------------------
Outstanding,
beginning
of year 375,000 $5.80 460,000 $5.31
Granted 475,000 6.90 150,000 6.50
Exercised (20,000) 5.00 (2,250) 7.00
Expired/canceled (325,000) 5.66 (232,750) 5.00
--------- --------
Outstanding,
end of year 505,000 6.91 375,000 5.80
Exercisable,
end of year 252,083 5.50 325,000 5.62
======================================================
The following table summarizes information about stock
options outstanding at December 31, 1999:
Options Options
Outstanding Exercisable
------------------------------ ----------
Average
Remaining
Exercise Contractual
Price Shares Life Shares
(years)
------------------------------------------- ----------
$6.25 50,000 1.50 12,500
7.00 455,000 0.67 239,583
---------- ----------
Total 505,000 252,083
======================================================
The amount of compensation expense included in general
and administrative costs in the accompanying
consolidated statements of loss was approximately
F-32
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$162,500 and $226,000 for the years ended December
31, 1999 and 1998, respectively.
F-33
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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:
1999 1998
----------------------------------------------------
Net loss
As reported $(2,671,923) $(3,083,638)
Pro forma (3,410,048) (3,356,411)
----------------------------------------------------
Basic and diluted loss
per share
As reported $(0.32) $(0.42)
Pro forma (0.41) (0.46)
----------------------------------------------------
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
1999 and 1998: Expected volatility of 106% for 1999
and 87% for 1998; a risk free interest rate of 6.17%
in 1999 and 6.50% in 1998; and an expected option
life of 1.1 year in 1999 and 1.50 years in 1998.
13. Income Taxes The Company had no taxable income during the years
ended December 31, 1999 and 1998.
F-34
<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:
Year ended December 31, 1999 1998
----------------------------------------------------
Statutory rate 34% 34%
Tax benefit at statutory
rate $(945,000) $(1,048,000)
State income tax benefit (167,000) (185,000)
Nondeductible interest - 100,000
expense
Nondeductible travel and
entertainment 19,000 10,000
Nondeductible compensation
expense 62,000 -
Other 199,000 18,000
Increase in deferred tax
asset valuation allowance 832,000 1,105,000
----------------------------------------------------
Total income tax provision $ - $ -
====================================================
The components of the net deferred tax assets are as
follows:
Year ended December 31, 1999 1998
----------------------------------------------------
Net operating loss $ 4,344,000 $ 3,546,000
carryforward
Capital loss carryforward 263,000 263,000
Employee stock option tax
benefits 124,000 -
Accrued expenses - 90,000
----------------------------------------------------
4,731,000 3,899,000
Valuation allowance (4,731,000) (3,899,000)
----------------------------------------------------
Net deferred taxes $ - $ -
====================================================
The Company recorded a valuation allowance at
December 31, 1999 and 1998 equal to the excess of
deferred tax assets over deferred tax liabilities as
F-35
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
management is unable to determine that these tax
benefits are more likely than not to be realized.
As of December 31, 1999, the Company had net
operating loss carryforwards of approximately
$11,433,000, which will expire between 2010 and
2014, if not utilized.
Additionally, at December 31, 1999, 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.
14. Supplemental Cash The Company paid approximately $479,000 and
Flow Information $328,000 for interest in 1999 and 1998,
respectively. The Company paid $0 for income taxes
in 1999 and 1998.
In 1999, the Company issued 54,000 shares of common
stock to convert a note payable to an officer plus
accrued interest thereon in the approximate amount
of $270,000, which approximated the fair value of
the shares.
In 1999, the Company issued 9,768 shares of common
stock as consideration for approximately $41,000 of
services, which approximated the fair value of the
common stock.
In 1999, the lender of the original balance
$1,500,000 note payable sold $75,000 of this note to
other holders. These holder then converted the notes
into common stock at the rate of $6.25 per share.
In 1998, the Company paid for commissions on certain
private placements of common stock by granting to a
Board member oil and gas properties recorded at an
aggregate historical cost of $295,000.
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
F-36
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
redeemable, convertible preferred stock to
extinguish approximately $575,000 of debt, which
approximated the fair value of the shares.
In 1998, the Company issued a payable to the major
stockholder in the amount of $163,800 as payment for
that stockholder's payment of interest expense in
the same amount on behalf of the Company. The
Company converted the payable into common stock in
1999 at an amount that approximated the fair value
of the shares.
F-37
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. Supplemental Oil and Information with respect to the Company's oil and
Gas Information 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, 1999 and 1998.
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, 1999 and 1998:
1999 1998
-----------------------------------------------------
Property acquisition
Proved $ 13,921 $ 74,613
Unproved 17,265 46,631
Less - proceeds from sales
of properties (625,000) (565,000)
Development costs 1,110,288 1,935,509
-----------------------------------------------------
$ 516,474 $ 1,491,753
=====================================================
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, 1999 1998
-----------------------------------------------------
Revenues $ 3,017,252 $ 2,078,101
Production costs and taxes (2,564,932) (1,943,944)
Depreciation, depletion and
amortization (92,000) (189,227)
-----------------------------------------------------
Income (loss) before income 360,320 (55,070)
F-38
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
taxes
Income taxes - -
----------------------------------------------------
Income (loss) from oil and
gas producing activities $ 360,320 $ (55,070)
====================================================
F-39
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In the presentation above, no deduction has been
made for indirect costs such as corporate overhead
or interest expense. No income taxes are reflected
above due to the Company's tax loss carryforwards.
Oil and Gas Reserves (unaudited)
The following table sets forth the Company's net
proved oil and gas reserves at December 31, 1999 and
1998 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.
Oil (bbls) Gas (Mcf)
----------------------------------------------------
Proved reserves
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
Discoveries and extensions 1,295,685 13,566,161
Revisions of previous
estimates 444,893 15,268,361
Production (137,997) (215,260)
----------------------------------------------------
Balance, December 31, 1999 3,227,203 74,795,287
====================================================
Proved developed producing
reserves at, December 31,
1999 1,688,073 3,248,552
====================================================
Proved developed producing
reserves at, December 31,
1998 (as restated) 715,680 2,647,198
====================================================
F-40
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Of the Company's total proved reserves as of
December 31, 1999 and 1998, approximately 13% and
12%, respectively, were classified as proved
developed producing, 35% and 38%, respectively, were
classified as proved developed non-producing and 52%
and 50%, 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 is presented in the following table:
amounts in thousands
December 31, 1999 1998
----------------------------------------------------
Future cash inflows $252,270 $101,351
Future production costs and
taxes (30,598) (13,625)
Future development costs (5,634) (5,024)
Future income tax expenses (55,090) (17,495)
----------------------------------------------------
Net future cash flows 160,948 65,207
Discount at 10% for timing (60,066) (22,231)
of cash flows
----------------------------------------------------
Discounted future net cash
flows from proved reserves $100,882 $ 42,976
====================================================
F-41
<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 1999 and 1998:
amounts in thousands
1999 1998
----------------------------------------------------
Balance, beginning of year $ 42,976 $ 32,024
Sales, net of production
costs and taxes (452) (134)
Discoveries and extensions 27,394 24,300
Changes in prices and
production costs 27,919 (10,136)
Revisions of quantity
estimates 21,799 (1,793)
Changes in development costs 1,603 (2,411)
Interest factor - accretion 5,329 3,954
of discount
Net change in income taxes (22,869) (2,799)
Changes in future development
costs (2,817) -
Changes in production rates
and other - (29)
----------------------------------------------------
Balance, end of year $100,882 $ 42,976
====================================================
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,
1999 and 1998 were $23.01 and $8.32 per barrel of
oil and $2.38 and $1.90 per mcf of gas,
respectively. No deduction has been made for
depreciation, depletion or any indirect costs such
as general corporate overhead or interest expense.
Operating costs and production taxes are estimated
based on current costs with respect to producing gas
properties. Future development costs are based on
the best estimate of such costs assuming current
economic and operating conditions.
Income tax expense is computed based on applying the
appropriate statutory tax rate to the excess of
future cash
F-42
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
inflows less future production and development costs
over the current tax basis of the properties
involved, less applicable carryforwards, for both
regular and alternative minimum tax.
The future net revenue information assumes no
escalation of costs or prices, except for gas sales
made under terms of contracts which include fixed
and determinable escalation. Future costs and prices
could significantly vary from current amounts and,
accordingly, revisions in the future could be
significant.
F-43
<PAGE>
EXHIBIT 3.11
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 December 7,
1999, pursuant to the 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 B 8%
Cumulative Convertible Preferred Stock," and
WHEREAS, the terms, conditions, voting rights, preferences, limitations
and special rights of the Series B 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 B 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 shared of such series shall be designated as the "Series B 8%
Cumulative Convertible Preferred Stock" (the "Series B Shares") and the number
of shares initially constituting such series shall be 100,000 which may be
issued in whole or fractional shares.
Section 2. Dividends and Distributions:
(a) The holders of Series B 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
<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 the Common
Stock of the Company. The holders of Series B Shares shall not have preference
but shall be entitled to equal dividends or distributions to holders of
subsequent series of preferred stock issued by the Company, if any. However,
dividends or distributions made to holders of Series A 8% Cumulative
Convertible Preferred Stock ("Series A Shares") shall have preference over any
dividends or distributions made to holders of Series B Shares. If the dividends
on the Series B Shares cannot legally be paid in full, dividends shall be paid,
to the maximum permissible extent, to the holders of the Series B Shares, pari
passu. The dividends on the Series B Shares shall accrue from the date of
issuance of each share and shall be payable quarterly with respect to each
calendar quarter on March 31, June 30, September 30 and December 31 of each
year (each a "Dividend Date"),commencing on March 31, 2000, to the holders of
record of the Series B 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 B 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 from each Dividend,
Date, computed on the basis of a 360-day year of twelve 30-day months.
(b) The holders of Series B Shares shall not be entitled to receive any
dividends or other distributions except as provided in this Certificate of
Designation of Series B Shares.
Section 3. Voting Rights
The holders of the Series B Shares shall have no voting rights prior to
the conversion of such shares to the Company's Common Stock.
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 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, holders of
Series A Shares shall have a liquidation preference over holders of Series B
2
<PAGE>
Shares. Holders of Series B Shares shall not have a preference but shall
be entitled to equal liquidation preference with holders of subsequent series
of preferred stock issued by the Company, if any. 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 B 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 B Shares and any
subsequent series of preferred stock issued by the Company. For the purposes
hereof, the term "Liquidation Preference(s)" shall mean $100 per share with
respect to each of the Series B 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 B Shares 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 B Share may, at the option of the holder thereof, be converted at a rate
(the "Conversion Rate") equal to the average closing price of the Company's
common stock for the thirty (30) business days immediately preceding a closing
of any sale of such Series B Shares; however, in no event shall the conversion
rate be less than $9.00 per share, subject to the adjustments described herein.
1. 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 evidence of
indebtedness, shares or other securities convertible into or exchangeable for
Commons 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 B Original Issue Date (as defined herein), other
than shares of Common Stock issued or issuable:
(i) upon conversion of Series B Shares:
(ii) 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;
3
<PAGE>
(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 B Original Issue
Date (as defined herein) and which was disclosed in the Company's filing with
the Securities and Exchange Commission; or
(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 B Original Issue Date" shall mean the date on
which the first Series B Share was issued.
(ii) No Adjustment of Series B Shares 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 B Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date
for the determination of holder 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 an 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 changes 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
4
<PAGE>
against dilution), the Conversion Rate computed upon the original issue thereof
(or upon the occurrence of record date with respect thereto) and any subsequent
adjustment 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
(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 the 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 shares 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 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 then cash,
be computed at the fair value thereof at the time of such issuance, 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.
5
<PAGE>
(B) Options and Convertible Securities. The consideration
per shares 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 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 hereof), the Series B 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 B Shares into Common Stock. The provisions of this
6
<PAGE>
Section 5 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 B Share would otherwise be entitled upon conversion, the
Company shall pay 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) 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 B Shares against impairment.
(e) 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 B 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 B
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 B 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, case or
other property into which the Series B 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 B 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 B 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.
Section 7. Redemption.
(a) All, but not less than all, of the Series B Shares may be
redeemed upon payment of $100 per Series B 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 B Shares provided that (i) the Company's shares of Common Stock shall be
listed for
7
<PAGE>
trading on a national securities exchange, or the American Stock Exchange on the
"Redemption Date" (as hereinafter defined); (ii) the closing sale of the
Company's Common Stock as reported on such national securities exchange or the
American Stock Exchange sha11 have exceeded one hundred and fifty percent (150%)
of the conversion rate set out above for the sixty (60) consecutive trading days
preceding the date of the Redemption Date; and the Company may not under any
circumstances exercise a right to redeem Series B shares within one year from
the closing of the sale of any securities offered pursuant to this offering.
(b) Any notice of redemption ("Redemption Notice") given by the
Company with respect to the Series B 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 B 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 B 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 B
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 B
Shares to be redeemed, or (ii) convert the Series B 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 B Shares shall then have
the absolute right to convert such Series B Shares into Common Stock in
accordance with the provisions of Section 5.
(c) On the Redemption Date, the Company shall pay to the person
whose name appears on the certificate or certificates of the Series B 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.
(d) If the funds of the Company legally available for redemption of
the Series B Shares are insufficient to redeem the total number of Series B
Shares outstanding on the Redemption Date, the Series B Shares shall be redeemed
(on a pro rata basis from the holders of the Series B 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 B Shares.
(e) From and after the Redemption Date, unless there shall have been
a default in payment of the Redemption Price, all rights of the holders of the
Series B Shares (except the right to receive the Redemption Price 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
8
<PAGE>
whatsoever.
Section 8 Mandatory Redemption
(a) On the fifth anniversary after the issuance of the first Series
B Shares (the "Mandatory Redemption Date"), the Company shall redeem all of the
outstanding Series B Shares at a redemption price equal to the Liquidation
Preference as that term is defined herein (the "Mandatory Redemption Price").
(b) At least thirty days prior to the Mandatory Redemption Date,
written notice (the "Mandatory Redemption Notice") shall be mailed, first class
postage, prepaid, by the Company to each holder of record of Series B Shares, at
the address last shown on the records of the Company for such holder, notifying
such holder of the redemption which is to be effected, the Mandatory Redemption
Date, the Mandatory Redemption Price, the place at which payment may be obtained
and calling upon each such holder to surrender to the Company, in the manner and
at the place designated, a certificate or certificates representing the total
number of Series B Shares held by such holder. On or after the Mandatory
Redemption Date, each holder of Series B Shares shall surrender to the Company
the certificate or certificates representing the Series B Shares owned by such
holder as of the Mandatory Redemption Date, in the manner and at the place
designated in the Mandatory Redemption Notice, and thereupon the Mandatory
Redemption Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof and
each surrendered certificate shall be cancelled.
(c) From and after the Mandatory Redemption Date, unless there shall
have been a default in the payment of the Mandatory Redemption Price, all rights
of the holders of shares which have been redeemed (except the right to receive
the, Mandatory Redemption Price without interest upon surrender of the
certificate or certificates representing such shares) 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 9. Forced Conversion
(a) From and after 180 days after a registration statement for the
resale of the Series B Shares filed with the Securities and Exchange Commission
is declared effective, the Company may force all, but not some, of the holders
of Series B Shares to convert such shares to the Company's Common Stock (the
"Forced Conversion") pursuant to Section 5 above at the Conversion Rate as that
term is defined therein, provided, however, that the closing price of the
Company's Common Stock each day during the twenty (20) consecutive business days
prior to such Forced Conversion must be, at least equal to or greater than one
hundred fifty (150%) percent of the Conversion Rate.
(b) At least thirty (30) days prior to the Forced Conversion,
written notice (the "Forced Conversion Notice") shall be mailed, first class
postage prepaid by the Company to each holder, of record of Series B Shares, at
the address last shown on the records of the Company for such holder, notifying
such holder of the forced conversion which is to be effected. On or after the
date of the Forced Conversion, each holder of a Series B Shares shall surrender
to the Company the certificate or certificates representing the specified
percentage of shares of Series B Shares owned by such
9
<PAGE>
holder as of the date of the Forced Conversion in the manner and at the place
designated in the Forced Conversion Notice, and thereupon the Company shall
issue and deliver shares of Common Stock to the holders in the manner and number
as set forth herein.
Section 10. Reacquired Shares.
Any Series B 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 December 7, 1999, 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/ Terry W. Piesker
----------------------
Name: Terry W. Piesker
Title: President
/s/ Elizabeth Wendelken
------------------------
Name: Elizabeth Wendelken
Title: Secretary
10
<PAGE>
A.M. Partners L.L.C.
September 29, 1999
Mr. Michael Ratliff
Chairman and CEO
Tengasco, Inc.
602 Main Street
Suite 500
Knoxville, Tenn. 37902
Dear Mr. Ratliff,
This letter, when, countersigned by you, will evidence the terms and conditions
of the engagement of A M Partners, L.L.C. ("AMP") by Tengasco, Inc. ("TNGO").
AMP will assist TNGO as its financial advisor by performing the following
assignments when requested to do so by TNGO:
1) Preparation of Corporate Presentations for analysis, brokers, and
other interested parties;
2) Organization of road shows for TNGO management including one on one
meetings and lunches for the investment community;
3) Preparation and organization of periodic conference calls for the
investment community;
4) Review and commentary on all TNGO press releases;
5) Review and commentary on all TNGO public filings, e.g. Form lOK and
Form lOQ;
6) Coordination and review of all quarterly and annual financial
forecasts with TNGO's CFO and CEO;
7) Introductions and negotiations on behalf of TNGO with potential
financing sources.
<PAGE>
As compensation for the above services, AMP shall be paid a monthly retainer of
$5,000 no later than the fifth calendar day of each month. In addition, should
TNGO close a transaction with a financing source introduced to TNG0 by AMP, then
AMP shall be paid at closing a transaction fee based on the following schedule:
1) 5% for any secured or unsecured debt financing based on the total
available credit at closing;
2) 8% for any mezzanine financing including preferred or
convertible preferred stock based on the total gross proceeds
committed at closing;
3) 10% for any common equity placement including shares offered by
selling shareholders.
TNGO agrees to reimburse AMP for all out of pocket expenses incurred by any of
its personnel in connection with the services to be performed pursuant to this
Agreement at a time no later than five business days following their submission
to TNGO.
In the event TNGO acquires or is acquired by an entity introduced to TNGO by
AMP, AMP shall receive a fee of 3% calculated on the total enterprise
value of TNGO at closing. Such value shall be the sum, of the total debt of
TNGO, plus the market value of preferred and common equity as calculated on a
full diluted basis. Such fee shall be the responsibility of TNGO at closing.
This agreement supercedes and cancels that certain agreement between TNGO and
Proton Capital L.L.C. ("Proton") dated 12/21/98.
This Agreement shall be deemed to have commenced on October 1, 1999 and shall
continue until October 1, 2000.
Any disputes arising hereunder shall be subject to the laws of the State of
Texas and shall be settled pursuant to binding arbitration.
The undersigned do hereby expressly acknowledge that they are duly authorized to
enter into this Agreement by their respective companies.
If the foregoing is acceptable to you and TNGO, please so evidence by signing in
the space provided on the following page.
We look forward to continuing our work for TNGO as its financial advisor.
<PAGE>
Sincerely yours,
AM Partners L.L.C., by:
/s/ Mark G. Harrington
-----------------------
Mark G. Harrington
Principal
Accepted and Agreed to this sixth day of October, 1999:
Tengusco, Inc.
/s/ Michael Ratliff
---------------------
By: Michael Ratliff
Chairman and CEO
Accepted and Agreed to this sixth day of October, 1999:
Proton Capital, L.L.C.
/s/ Alan Gaines
---------------------
By: Alan Gaines
Principal
<PAGE>
[LOGO]
SOUTHCOAST CAPITAL L.L.C.
February 25, 2000
PRIVATE AND CONFIDENTIAL
Tengasco, Inc.
Medical Arts Building
603 Main Avenue, Suite 500
Knoxville, Tennessee 37902
Attention: Malcolm E. Ratliff,
Chairman and Chief Executive Officer
Re: Engagement of Southcoast Capital L.L.C.
---------------------------------------
Gentlemen:
Representatives of Southcoast Capital L.L.C. ("SCC") and Tengasco, Inc. (the
"Company"), have discussed on a confidential basis, the Company's short-term and
long-term financial and business objectives, goals and needs and the financial
advisory and investment banking services (collectively, "Investment Banking
Services") which SCC can provide to the Company. More specifically, the Company
has requested that SCC assist the Company with a proposed private placement of
convertible preferred stock, although the placement may ultimately consist of
convertible preferred stock, debentures, common stock, warrants or a combination
thereof, all of such securities either individually or collectively being
referred to hereinafter as the "Securities."
Accordingly, the purpose of this letter (this "Agreement") is to confirm and
set forth the following terms and conditions under which SCC will render
Investment Banking Services to the Company based on its understanding of the
Company's current intentions:
1. Engagement. The Company will engage SCC as its exclusive financial advisor
to the Company for the purpose of providing Investment Banking Services
with respect to a private placement of Securities as described herein. In
addition, during the term of its engagement, SCC will provide such other
Investment Banking Services as the officers of the Company may reasonably
request. For purposes hereof, the term "Company" shall include any
subsidiary or affiliate of the Company.
2. Private Placement. The Securities of the Company will be privately offered
and sold in reliance upon certain exemptions from registration under the
Securities Act
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909 Poydras Street Suite 1000 New Orleans, LA 70112 (504) 528-9174 Fax: (504)
523-1925
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of 1933 (the "Securities Act") including Regulation D under the Securities
Act on a "best efforts" basis. The Securities will be sold to persons who
are "accredited investors" (as defined in Rule 506 of Regulation D under
the Securities Act) or persons who are otherwise suitable for such an
investment. The Company, with SCC's assistance, will prepare a disclosure
document to be used in connection with the offer and sale of the
Securities. The disclosure will conform to the Securities Act and the rules
and regulations thereunder, including Regulation D, and applicable state
securities laws. The disclosure document shall be satisfactory in all
material respects to our legal counsel.
3. Offering Price. The offering price for the Securities will be determined by
agreement among the Company, SCC and the investor(s). The aggregate gross
proceeds from the sale of the Securities will be at least $3,000,000,
unless otherwise agreed by SCC and the Company.
4. Compensation. The Company agrees to pay SCC an initial financial advisory
fee of $10,000, payable upon the signing of this Agreement. Such initial
financial advisory fee shall be creditable against any other fees earned by
SCC hereunder. As a placement fee, SCC shall be entitled to an amount of
cash equal to eight percent (8%) of the total gross proceeds resulting from
the placement of the Securities. In addition, the Company shall issue to
SCC a warrant (the "Warrant") to purchase a number of shares of the
Company's Common Stock equal to ten percent (10%) of the total number of
shares of any Common Stock placed hereunder and/or the underlying Common
Stock into which any of the Securities are convertible. The Warrant will be
for a term of five (5) years and the purchase price for shares of Common
Stock subject to the Warrant shall equal for Common Stock placed hereunder,
the price per share at which it is placed and, for convertible securities
placed hereunder, the conversion price per share of Common Stock. If the
Common Stock trades at a 200% premium to the offering or convertible price
for 20 consecutive trading days at any time during the life of the Warrant,
the Company may exercise its call provision to redeem the Warrants for
$0.05 per underlying share of Common Stock. The Company will register the
Common Stock underlying the Warrant when it next files a registration
statement with the Securities and Exchange Commission and keep such
registration statement current and active for such time as the Warrant is
exercisable. The Company also agrees to reimburse SCC for its out of pocket
expenses, including the fees and expenses of SCC's legal counsel, provided
that, without the prior agreement of the Company, the aggregate of such
expenses shall not exceed $15,000.
5. Introduction to Financing Sources. In connection with providing its
services hereunder, SCC will contact and may introduce the Company to
various potential financing sources, (each an "Identified Party"). Before
or within thirty (30) days after introduction of an Identified Party, SCC
will send to the Company a letter confirming the identification of such
party to the Company at which time such Identified Party shall become
subject to, the terms of the Agreement, and SCC shall be entitled to a
placement fee calculated in accordance with paragraph 4 above with
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respect to any financing transaction entered into within one (1) year of
the termination of this Agreement.
6. Terms of Securities. The Securities will have such rights and privileges
concerning, among other things, conversion and redemption rights, interest
rates or dividend rates and voting rights as determined by agreement among
the Company, SCC and the investor(s) who subscribe to purchase the
Securities. The Company will register the common stock (the "Common Stock")
of the Company into which the Securities are convertible ("Underlying
Common Stock") and keep such registration statement current and active for
such time as the Securities are convertible into the underlying Common
Stock.
7. Legal Counsel. The Company's legal counsel will make all required filings
with the various states in which the Securities are offered. In this
regard, the Company will supply SCC's legal counsel with such number of
complete copies of the disclosure document, and all exhibits, as may be
required to be filed. The Company will be responsible for filing a Form D
with the U.S. Securities and Exchange Commission and will provide SCC with
evidence of such filing.
8. Cost and Expenses. The Company will be responsible for and bear all
expenses incurred in connection with the proposed offering, including, but
not limited to, the cost of preparation of the disclosure document and any
supplements or amendments thereto, and all filing fees and costs connected
with the "blue sky" laws of those states in which the offering is to be
made.
9. Due Diligence Investigation. From and after the date of execution and
delivery of this Letter, the Company will continue to afford SCC and its
agents, attorneys and accountants reasonable access to the business records
and properties of the Company and will furnish to SCC all information
concerning its business for the purpose of enabling SCC to make such
financial, accounting, legal or other investigations deemed necessary or
appropriate by SCC.
10. Capitalization. The Company will have authorized sufficient amounts of the
Securities for the offering contemplated herein, including the conversion
of the Securities and the exercise of the Warrant. The Company agrees to
undertake such corporate actions as may be necessary and appropriate to
authorize and consummate the proposed offering, and take such other action
or actions as SCC may reasonable request.
11. Dissemination of Information. The Company will consult with SCC prior to
any public dissemination of any information or documentation regarding the
Company, its affiliates, or its business during the period of the offering
or any term of the offering and will provide SCC with all such material
prior to any dissemination during the term of the offering.
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12. General Conditions. SCC's intentions as expressed herein are subject to the
following further general conditions:
12.1 There shall have been no materially adverse change in the
business or conditions (financial or otherwise) of the Company
or any materially adverse change in the securities market or
any other event or occurrence which, in the sole judgement of
SCC may adversely affect the ability of SCC to proceed with
the offering. SCC shall be satisfied with the Company's
progress as well as its outlook on the future.
12.2 All relevant terms and circumstances relating to a proposed
offering shall be satisfactory to SCC and all legal matters
relating thereto will be satisfactory to its legal counsel.
13. Term and Early Termination of Agreement. The agreement in principle as
stated herein shall continue in effect for a term of one hundred and eighty
(180) days from the date hereof unless earlier terminated by agreement of
the parties or by replacement with the Placement Agreement. Early
termination of the agreement may occur at any time with or without cause by
the Company or SCC and without liability or continuing obligation by either
party to the other (other than for any fees or other compensation earned
and expenses incurred by SCC up to the date of any such termination).
14. Disavowal of Agency. In no event shall SCC or any of its principals or
employees be deemed to be an agent or employee of the Company and shall not
hold themselves out as such.
15. Confidentiality. Except as otherwise agreed to by the Company or as is
required by law or is necessary to complete its engagement hereunder, SCC
will keep confidential all information which is supplied by the Company and
which has not previously entered the public domain, and will not use any
such information for its own benefit except in connection with the matters
undertaken pursuant to the terms of this engagement. At the termination of
this agreement, upon the request of the Company, SCC shall return all
information and copies thereof, furnished by the Company.
16. Reliance upon Information. SCC has and will rely without independent
verification on all information supplied by the Company.
17. Indemnification. THE COMPANY AGREES TO INDEMNIFY AND HOLD SCC HARMLESS
AGAINST AND FROM ANY AND ALL LOSSES, CLAIMS, DAMAGES, OR LIABILITIES, JOINT
OR SEVERAL, TO WHICH SCC MAY BECOME SUBJECT IN CONNECTION WITH THE
TRANSACTIONS REFERRED TO HEREIN UNDER ANY OF THE FEDERAL SECURITIES LAWS,
UNDER ANY OTHER STATUTE, AT COMMON LAW OR OTHERWISE, AND TO REIMBURSE SCC
FOR ANY LEGAL OR OTHER
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EXPENSES (INCLUDING THE COST OF ANY INVESTIGATION AND PREPARATION) INCURRED
BY SCC ARISING OUT OF OR IN CONNECTION WITH ANY ACTION OR CLAIM IN
CONNECTION THEREWITH, WHETHER OR NOT RESULTING IN ANY LIABILITY; PROVIDED,
HOWEVER, THAT THE COMPANY SHALL NOT BE LIABLE IN ANY SUCH CASE TO THE
EXTENT THAT ANY SUCH LOSS, CLAIM, DAMAGE, OR LIABILITY IS FOUND IN A FINAL
JUDGMENT BY A COURT TO HAVE RESULTED FROM SCC'S GROSS NEGLIGENCE, WILLFUL
MISCONDUCT OR BAD FAITH IN PERFORMING SUCH SERVICES. THE INDEMNITY
AGREEMENT IN THIS PARAGRAPH SHALL EXTEND UPON THE SAME TERMS AND CONDITIONS
TO THE OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS OF SCC AND TO EACH PERSON,
IF ANY, WHO MAY BE DEEMED TO CONTROL SCC.
18. Governing Law. This letter and the engagement resulting herefrom shall be
governed by and construed under the laws of the State of Louisiana.
19. Formal Agreement Contemplated. It is understood that, while this Letter is
an agreement in principle to the contents hereof, the legal obligations
between the parties hereto may be set forth more fully in a duly negotiated
and executed Placement Agreement. The Placement Agreement will contain
standard representations and covenants of the Company, including covenants
of indemnity and contribution, and will provide for opinions from counsel
for the Company, all of which shall be to the satisfaction of SCC's legal
counsel.
If the foregoing correctly sets forth our understanding, please sign and return
the enclosed copy of this Agreement. The second copy is for your files.
SOUTH COAST CAPITAL L.L.C.
By: /s/ Stanley E. Ellington, Jr.
------------------------------
Stanley E. Ellington, Jr.,
Managing Director
Accepted and agreed this _____
Day of , 2000.
TENGASCO,INC.
<PAGE>
FRANCHISE AGREEMENT
THIS AGREEMENT between Powell Valley Utility District and Tengasco Pipeline
Corporation.
WHEREAS Tengasco Pipeline Corporation and Powell Valley Utility District
agree to enter into an exclusive agreement to permit Tengasco Pipeline
Corporation ("TPC") to install facilities at TPC's cost and to provide natural
gas utility service through TPC's system to customers, whether residential,
commercial, or industrial within the boundaries of the District. This agreement
is referred to as "Franchise Agreement" and is in the nature of a license
agreement with the District for TPC to provide natural gas service in accordance
with the franchise authority of the District.
The District and TPC agree as follows:
SECTION 1. Definitions. Whenever in this agreement the words or phrases
hereinafter in this section defined are used, they shall have the respective
meanings assigned to them in the following definitions (unless, in the given
instance, the context wherein they are used shall clearly import a different
meaning):
(a) The word "Grantee" shall mean TPC, the corporation to which the
franchise is granted by this agreement, and its lawful successors or assigns.
(b) The word "District" shall mean the Powell Valley Utility District, a
municipality of the State of Tennessee.
(c) The word "Streets" shall mean the public streets, lanes, alleys,
courts, or other public places in the District as they now exist, or as they may
be established at any time during
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the term of this franchise in the District.
(d) The word "District" shall mean the District or any engineer hired by
the District to review any application, filing, or installation made by Grantee
pursuant to this Agreement.
(e) The word "Gas" shall mean natural gas. TPC will provide physical
delivery of natural gas to the District from its system of sufficient quality
for residential purposes and shall have the exclusive right to negotiate and
contract on behalf of the District for the purchase of natural gas by the
District including price, quantity, and quality provisions. TPC may negotiate
and contract for such purchase of natural gas from any source it deems
appropriate and under terms it deems reasonable, including without limitation
Tengasco, Inc., the parent company of TPC. TPC shall not at any time be required
to construct additional pipelines or facilities to connect with any other
physical source of supply other than reserves of Tengasco, Inc. Gas shall be
conclusively presumed to be of sufficient quality for residential purposes
pursuant to this Agreement if the gas meets the following specifications, or is
interchangeable with gas of the following specifications pursuant to Bulletin 36
of the American Gas Association or other industry standard selected in the
reasonable discretion of TPC:
(1) Heating value of not less than 960 BTUs per cubic foot;
(2) Commercially free of dust, hydrocarbon liquids, water, or other
substance which may interfere with the safe operation of the
Facilities;
(3) Containing not more than 2.0 grains sulfur, nor more than 1/4 grain
hydrogen sulfide per one hundred cubic feet;
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(4) Containing not more than 10 ppm by volume of oxygen;
(5) Containing not more than 6% by volume of combined carbon dioxide and
nitrogen;
(6) Containing not more than 7 pounds of entrained water per million cubic
feet at 14.73 psi pressure base and 60(degree)F temperature.
(f) The phrase "Facilities or Equipment" shall mean pipe, pipe line,
tube, main, service, trap, vent, vault, manhole, meter, gauge, regulator, valve,
conduit, appliance, attachment, appurtenance, and any other personal property
located or to be located in, upon, along, across, under or over the streets of
the District and actually used in the distribution of gas in the District.
SECTION 2. That the exclusive right, privilege and franchise, subject to
each and all of the terms and conditions contained in this agreement, be and the
same is hereby granted to TPC, a corporation organized and existing under and by
virtue of the laws of the State of Tennessee, herein referred to as the Grantee,
for the term of ten (10) years from and after the effective date hereof, to lay,
construct, erect, install, operate, maintain, use, repair, or replace in, upon,
along, across, under or over the streets of the District or remove from the
streets of the District its facilities or equipment:
(a) For the purpose of conducting, conveying, transporting, supplying,
distributing and selling gas to the District and its inhabitants for heat, power
and light and any and all other purposes for which gas may be used, and
(b) For the purpose of conducting, conveying and transporting gas through
the District for use outside of the boundaries of the District for heat, power
and light and any and
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all other purposes for which gas may be used.
At the end of the initial ten year term of this agreement, the District
shall have the option to extend this agreement for an additional ten-year term.
If the District exercises its option to extend this agreement for an additional
ten-year term, the District shall own all facilities installed by TPC at the end
of such additional term and Sections 5 and 5.1 hereof shall not apply. TPC shall
transfer ownership of such facilities to the District by appropriate instruments
at that time and the District shall expressly assume all obligations under the
gas purchase contracts whereby TPC purchases or is to purchase gas for supply to
the District. If the District does not exercise its option to extend this
agreement for a second ten-year term, then the District shall be obligated to
purchase the Facilities and the provisions of Sections 5 and 5.1 hereof will
apply at the end of the initial ten-year term.
SECTION 3. TPC will pay to the District as a franchise fee the sum equal
to 5% of the gross sales proceeds received by TPC from sales of all natural gas
sold or transported by TPC and consumed within Hancock County. The remainder of
the gross sales proceeds shall be retained by TPC as compensation for its
services hereunder. TPC will also pay 5% of the gross sales price of gas, if
any, transported by TPC across the distribution facilities to be constructed by
TPC pursuant to this agreement to supply customers of the District (but not any
other part of TPC's system or separate pipeline constructed pursuant to Section
2(b) above through any part of the District and not connected directly to the
Facilities to be constructed hereunder) and sold to any industrial customer
located outside the District.
SECTION 4. All work undertaken or performed, all service rendered, and
all facilities or equipment operated, maintained or used pursuant to the
provisions of this
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franchise shall be the standard required by law, by the orders of the Tennessee
Regulatory Authority of the State of Tennessee, and by any other body or
governmental authority having jurisdiction in the premises. All facilities or
equipment of the Grantee to be laid, constructed, erected, installed or
repaired, in, upon, along, across, under or over the streets of the District, or
removed from the streets of the District pursuant to the provisions of this
franchise, shall be laid, constructed, erected, installed, repaired or removed
in accordance with the rules and regulations of the District now or hereafter
adopted or prescribed with the agreement of TPC which agreement shall not be
unreasonably withheld, except where in conflict with the State law, orders of
the Tennessee Regulatory Authority, or other governmental authority having
jurisdiction in the premises.
SECTION 5. The ownership of the Facilities shall remain in TPC while this
agreement is in effect. The Facilities may be sold by TPC to the District at the
following times and under the following terms: (1) at the sole option of the
District at the end of the initial ten-year term hereof only; (2) by agreement
of TPC at any time during and prior to the end of the initial term; or (3) if
extended for a second ten-year term, by agreement of TPC during and prior to the
end of the second ten-year term. At any time the Facilities are purchased by the
District, the District shall be entitled to purchase and TPC shall be obligated
to sell the Facilities of TPC installed pursuant to this Agreement at the fair
market value of the Facilities. The District shall, at the time of any purchase,
assume all of TPC's gas contracts for gas to supply the District. The fair
market value of the Facilities shall include an element for replacement cost and
going concern value as well as net book value and shall be determined in the
exercise of sole reasonable discretion by TPC. Should the District not agree
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with the fair market value so determined, at the end of the initial term only,
the fair market value at that time only shall be determined by a single
arbitrator in binding arbitration under the Commercial Arbitration Rules of the
American Arbitration Association as then in force, or by any other means of
binding arbitration by one or more arbitrators upon which the parties to this
agreement may specifically agree in writing. In all other instances when fair
market value is to be determined, the fair market value is in the sole
reasonable discretion of TPC.
SECTION 5.1 If the termination of this agreement occurs at the expiration
of the ten year initial term, TPC agrees that the net book value of the
Facilities shall be deemed to have been paid to TPC in the rates charged and
collected, to the extent and only to the extent that such rates charged and
collected have been in excess of TPC's cost of service (gas costs, operating
costs, taxes, interest expense on monies borrowed by TPC to install the
facilities, and return on investment). TPC expressly agrees that any excess of
the fair market value as may be determined by the provisions of Section 5 which
may exceed the net book value deemed paid pursuant to the previous sentence, if
any, maybe paid by promissory note or other obligation of the District as the
District may elect which shall not cause the District to attempt to issue bonds
in any amount which may not be supported by law. Any promissory note or other
obligation for any portion of the fair market value shall be payable for a
period not exceeding five (5) years and at an interest rate of not less than
prime (Wall Street Journal) plus one percent as published most recently prior to
the date of such note, payable monthly, unless TPC agrees to other terms. In
such instance where a promissory note may be given, TPC shall transfer ownership
of the facilities in place to the District, and the District shall secure
payment of any such promissory note or other agreed obligation by a security
interest
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in the facilities so transferred.
SECTION 5.2 All billing and administrative functions in connection with
services hereunder shall be performed by TPC or its designee as agent of the
District. The District shall not be charged any fee for such functions. The
District shall have access at all reasonable times to the books and records of
TPC or its designee insofar as all records of TPC or its designee under this
agreement are concerned in order to verify the accuracy of any computations
required hereunder.
SECTION 6. The Grantee of this franchise shall not lay, construct, erect
or install its facilities or equipment, in, upon, along, across, under or over
the streets of the District until and unless the proposed location of such
facilities or equipment shall have been approved by the District, or such other
officer of the District as the District may direct, and which approval shall not
be unreasonably withheld.
SECTION 7. (a) Before making any opening or excavation in any street, or
before distributing the earth beneath the surface of any street, regardless of
whether the surface thereof is damaged or removed or not, except in case of
emergency, the Grantee shall file with the District a drawing or plan showing
the proposed location, elevation above or below the established grade of the
center line of the street, and the character of its facilities or equipment to
be laid, constructed, erected, installed, used, repaired in, upon, along,
across, under or over the streets of the District, or removed from the streets
of the District for all its facilities except service connections which shall be
furnished within thirty (30) days after installation.
(b) If the proposed location of any facilities or equipment to be
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laid, constructed, erected, used, repaired or replaced by the Grantee in, upon,
along, across, under or over the streets of the District, or removed from the
streets of the District by the Grantee does not interfere (1) with the use of
the streets for the purpose of travel, (2) with any proposed or contemplated use
of the streets by the District either above or below the surface of the street,
for which plans have been prepared, or for which plans are in the course of
preparation, which plans have been authorized by the District, or the
legislative body of the District, (3) with personal property lawfully in, upon,
along, across, under or over the streets, and otherwise complies with this
franchise, and any agreement, rule or regulation of the District in force and
effect at the time of such application, the District shall approve said
application and a permit shall be issued therefor by the proper District
authority.
SECTION 8. The work of laying, constructing, erecting, installing, using,
operating, maintaining, repairing or replacing in, upon, along, across, under or
over the streets of the District, or removing from the streets of the District,
any facilities or equipment of the Grantee, shall be done, performed, or
conducted with the least practicable hindrance of the use of the streets for the
purpose of travel or any other public purpose.
SECTION 9. (a) When any opening or excavation is made, or work done, in,
upon, along, across, under or over the streets, for any purpose whatsoever by
the Grantee, in connection with the exercise of any right or privilege granted
by this franchise, any portion of said streets affected or damaged thereby shall
be restored as promptly as practicable by the Grantee to as useful, safe,
durable and good condition as existed prior to the making of such opening or
such excavation or the doing of such work.
(b) By the acceptance of this franchise, the Grantee agrees that
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after the work of restoring such portion of said street has been completed as
provided in the paragraph above, it will keep such portion of said street so
restored, in as useful, safe, durable and good condition as existed prior to the
making of such opening or excavation or the doing of such work, ordinary wear,
tear and use excepted, for a period of twelve (12) months, if the District
determines that such portion of such street was affected or damaged by such
opening or excavation made, or such work done in, upon, along, across or over
the said street by the Grantee, provided such obligation on the part of the
Grantee shall terminate twelve (12) months after the date of any such original
restoration.
SECTION 10. After any work has been commenced by the Grantee in, upon,
along, across, under or over the streets of the District, pursuant to the
provisions of this franchise, the same shall be prosecuted in good faith and
with due diligence until completed.
SECTION 11. (a) Any pipe, pipe line, tube, main, service, conduit, duct
or other structure laid, constructed, erected, or installed pursuant to the
provisions of this franchise, or any tunnel or bore dug or made in the streets
of the District in connection with the laying, constructions, erection or
installation of the property above mentioned in this section, shall be not less
than thirty (30) inches below the surface of the street or the ground, as the
case may be, when such installation is three (3) inches or over in diameter and
shall be not less than twenty-four (24) inches when such installation is under
three (3) inches in diameter and measured in each instance from said established
grade of the nearest point to said property, tunnel or bore as the case may be.
(b) Where, however, such depths are impracticable due to
extraordinary circumstances, the Grantee shall secure the approval of the
District or other
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duly authorized officer of the District as to the suitable depth or location of
said property, tunnel or bore and the same shall be placed in conformity with
such approved location or depth, and in a manner reasonably satisfactory to the
District or other authorized officer of the District.
(c) All manholes, vaults, traps, catch basins or other
structures, shall be so capped and covered as to be flush with the surface of
the street, and shall not interfere in any way with the use of the streets for
the purpose of travel.
(d) The Grantee shall not lay, construct, erect, or install
in the streets of the District any vent pipe from any vault, manhole or other
structure of the Grantee except in the manner and at the location or locations
prescribed or approved by the District and only in accordance with sound
engineering practices.
SECTION 12. Upon abandonment of any of the facilities or equipment of the
Grantee located above or below the surface of the streets, the Grantee shall
notify the District in writing of such abandonment within twenty (20) days
thereafter; and if such abandoned facilities or equipment will then unreasonably
interfere with the then contemplated use of said street by the District, the
District shall give written notice thereof to the Grantee within twenty (20)
days after receipt of said notice of abandonment and the Grantee shall commence
the removal of same within twenty (20) days after receipt of said notice from
the District and prosecute said work to completion with reasonable diligence and
at its own cost and expense.
SECTION 13. If during the term of this franchise, the District shall
change the grade, width or location of any street, or improve any street in any
manner, including laying of any sewer, storm drain, conduit, water or other
pipe, or construct any pedestrian tunnel
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or other improvement, and, in the opinion of the District such work shall render
necessary any change in the position or location of any facilities or equipment
of the Grantee in the streets including the support thereof while such work is
being done or performed, the Grantee, at its own cost and expense, within twenty
(20) days after written notice from the District so to do, shall begin the work
of doing any and all things to effect such change in position or location in
conformity with such written instructions.
SECTION 14. If the Grantee is dissatisfied with any determination of the
District permitted by the foregoing Sections hereof, it may petition the
District to review the same within ten (10) days after such determination, but
such remedy shall be cumulative and not exclusive.
SECTION 15. The District shall not impose any rental, license fee, charge
or tax upon the Grantee for the rights hereby granted, or the exercise thereof,
that is not uniformly imposed and collected by the District upon the same basis
on all other publicly or privately owned competing public service companies.
SECTION 16. TPC shall maintain a policy of general liability insurance in
the amount of ten million dollars, including umbrella coverage, at all times
this agreement is in effect. The District and the directors of the District
shall be named as additional insureds on such policy.
TPC agrees to provide at its initial cost and expense, for the benefit of
the District a performance bond in the amount of $200,000 guaranteeing its
performance of obligations under this Franchise Agreement, and payable to the
District in the event and to the extent judgment is rendered in a court of
competent jurisdiction that the District has incurred and is entitled to receive
damages as a result of any breach of this agreement by TPC, and to
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maintain that bond in force during the term of this agreement. The District
agrees that because the bond is required and maintained for benefit of the
District and its customers, the annual cost of acquiring and maintaining this
bond shall be either deducted in equal monthly installments from the five
percent of gross proceeds to which the District is entitled under this agreement
until repaid in full to TPC, or collected as an additional charge from consumers
purchasing gas from the District until paid in full and thereafter reimbursed to
TPC, as TPC and the District may agree.
SECTION 17. The Grantee shall use reasonable care and precaution in
laying, constructing, erecting, installing, using, operating, repairing, or
maintaining its facilities and equipment located in, upon, along, across, under
or over the streets of the District to avoid damage or injury to persons or
property; and shall indemnify, defend (including payments of attorneys' fees,
court costs, etc.) and save harmless the District from any and all liability by
reason of damage or injury to persons or property on account of the Grantee's
negligence in such work, provided the District shall have notified the Grantee
in writing of any claims against the District on account thereof in ample time
to enable the Grantee to defend the same.
The Grantee shall furnish the District annually certificate or
certificates evidencing its insurance coverage of the foregoing risks in good
and solvent insurance companies authorized to do business in the State of
Tennessee.
SECTION 18. The Grantee shall run a service pipe to the gas meter serving
all buildings on the lines of its mains, provided a written application is made
by the consumer agreeing to use gas, and provided that the point wherever the
service pipe to the gas meter
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serving the building shall not be more than sixty (60) feet inside the property
line. The Grantee shall also maintain, repair and keep in good condition all of
the service pipes, and keep the same free from all obstruction up to the point
of entrance to the building free of charge to the consumer. The Grantee shall
not be obligated to extend its mains except upon written application therefor by
the prospective consumer upon Grantee's customary forms, agreeing to accept and
pay for service in accordance with Grantee's rules and regulations and tariffs
on file. Grantee shall not in any event be required to install or extend any
mains if in Grantee's reasonable judgment it would be uneconomical to do so.
Nothing contained in this Section 18 shall be construed as limiting or impairing
the authority of the Tennessee Regulatory Authority of the State of Tennessee.
SECTION 19. All gas transmitted, distributed, supplied and sold by the
Grantee under this agreement, shall be furnished and paid for in accordance
with, and subject to, all of the provisions of the applicable rates, and
schedule of charges and such change or changes as may be made in the terms and
conditions of service from time to time.
The District shall have jurisdiction to prescribe and fix rates, charges,
terms and conditions governing the furnishing of said gas service, which shall
be sufficient to yield the Grantee a reasonable return upon the fair value of
its Facilities, including Facilities paid for with either borrowed or invested
capital, used and useful in rendering said service. Because the number of
customers, the purchased volumes, and investment costs are uncertain, the
District agrees that to assure a reasonable return to TPC, the rates prescribed
by the District shall not be less than an average of rates for comparable
service provided by at least three districts adjacent to or near the District to
be selected by TPC, unless TPC agrees in its sole
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discretion to a lesser rate.
SECTION 20. No transfer, assignment or lease, or attempted transfer,
assignment or lease, of this franchise, or of any right, privilege or interest
therein, to any person, firm or corporation shall have any force, effect or
validity unless and until: .
(1) The Grantee shall have duly executed a good and sufficient instrument
making such transfer, assignment or lease, and a duplicate original thereof
shall have been filed in the office of the District.
(2) The transferee, assignee, or lessee shall have duly executed a good
and sufficient instrument accepting such transfer, assignment or lease, and
assuming all the obligations of the Grantee (including without limitation all
gas contracts entered into by TPC for purchase of gas to be supplied to the
District) under this franchise, and an original thereof shall have been filed in
the office of the District.
Nothing contained in this Section 20 shall be construed to apply or
effect in any manner any mortgage, deed of trust, indenture or other instrument
given by the Grantee (or by any person, firm or corporation under a transfer,
assignment or lease made in full accordance with the provisions of this Section)
to secure an issue of bonds or other evidence of indebtedness. However, the
terms of clauses (1) and (2) shall apply to the surviving corporation pursuant
to any statutory merger.
SECTION 21. Any written notice herein required to be given by the
District, or any of its officers or agents, to the Grantee, shall be deemed to
have been duly served if delivered in person to any officer of the Grantee or to
its local agent or manager, or if sent by certified mail to the postal address
of the Grantee, or by facsimile transmission.
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SECTION 22. The use of the singular number herein shall include the
plural, and the use of the plural number shall include the singular.
SECTION 23. This agreement shall become effective and all its terms,
provisions and conditions binding upon both the District and the Grantee fifteen
(15) days after its execution by the District, provided the Board of Directors
of Grantee approves the agreement and Grantee shall within said fifteen (15)
days endorse on the original document its acceptance of this agreement in words
and figures following: "Tengasco Pipeline Corporation hereby accepts this
Agreement this 25th day of January 2000."
POWELL VALLEY UTILITY DISTRICT
January 25, 2000 BY: /s/ illegible
- ------------------ -----------------------------------
Date President
TENGASCO PIPELINE CORPORATION
January 25, 2000 BY: /s/ Robert M. Carter
- ------------------ -----------------------------------
Date President
Tengasco Pipeline Corporation hereby accepts this Agreement this 25th day of
January 2000.
TENGASCO PIPELINE CORPORATION
BY: /s/ Robert M. Carter
--------------------------
President
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[LETTERHEAD OF EASTMAN CHEMICAL COMPANY]
March 27, 2000
Mr. Terry Piesker
Tengasco, Inc.
Medical Arts Bldg.
603 Main Ave., Suite 500
Knoxville, TN 37902
Dear Mr. Piesker:
As we have discussed, Eastman's evaluations indicate that the Polymers
area of our Plant can be operated with natural gas containing nitrogen
up to 5% by volume. However, there are additional costs to Eastman to
utilize gas with this higher nitrogen content. To offset these
additional costs, Eastman proposes to amend the subject Agreement as
follows:
Revise the last sentence of Article 1, Quantity, Section 1.1, to read:
"If Seller and Buyer agree upon option 4.2(b) or 4.2(c) of the General
Terms and Conditions, then "Minimum Volume" means with respect to any
Day, the lesser of i) 10,000 MMBtu's or ii) eighty percent (80%) of the
Natural Gas requirements of Buyer's plant on such Day."
Revise the Appendix, Article A-IV, Quality, Section 4.2, to read:
"4.2 A portion of Buyer's Plant may require natural gas with
Total Nonhydrocarbons (including Nitrogen) below 2% by volume. To
accommodate this separate specification, Seller agrees to provide, at
its expense, one of the following alternatives to Buyer, as determined
by mutual agreement of Buyer and Seller, prior to the beginning of gas
supply:
(a.) Provide and construct separate supply piping from Buyer's
alternate natural gas source to the portion of Buyer's Plant
requiring the lower Total Nonhydrocarbons.
(b.) Installation of a Nitrogen Removal Unit to reduce the Total
Nonhydrocarbons in the Natural Gas to below 2%. The Nitrogen
Removal Unit could be located at Seller's facilities, adjacent to
Buyer's Plant, or in Buyer's Plant.
(c.) Reduce the price as defined in Article 2.3 for all Natural Gas
quantities above 5,000 MMBtu per day up to 10,000 MMBtu per day
to Index Price plus $0.05 per MMBtu."
Our intent is for the price reduction in 4.2(c.) to offset a portion of
Eastman's costs while allowing additional sales volume for Tengasco at less
cost than either alternate 4.2(a.) or 4.2(b.).
<PAGE>
Mr. Terry Piasker
Page 2
Add the following to the Appendix, Article A-IV, Quality,
"4.5 If the portion of Buyers Plant that requires natural gas with Total
Nonhydrocarbons (including Nitrogen) below 2% by volume falls to operate
satisfactorily after selection of 4.2(a.), Buyer may, upon six (6) month's
written notice, request Seller to select option 4.2(a.) or 4.2(b.) and complete
construction and start up of the selected option within eighteen (18) months of
the written notice."
If you are in agreement with these terms please have this letter signed
below on duplicate copies and return one to me for our files.
Very truly yours,
EASTMAN CHEMICAL COMPANY
/s/ S.J. Murff
------------------------------------
S. J. Murff
Director, Olefins Energy Procurement
Accepted BY TENGASCO, INC.
By: /s/ M.E. Ratliff
---------------------------
Name: M.E. Ratliff
---------------------------
Title: C.E.O.
---------------------------
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Exhibit 21
List of Subsidiaries
Name State Of Incorporation
Tengasco Pipeline Corporation Tennessee
Tennessee Land and Mineral Corporation Tennessee
