-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F4HPZmQeZbdM4F+/I+Z+XXv09vTXT1JXHQr6JmAKffyHQSoQRWLPQsjMRP2qUx0C 1GQznaLQiJVVUdIfCOg2Zg== 0000889812-99-001223.txt : 19990416 0000889812-99-001223.hdr.sgml : 19990416 ACCESSION NUMBER: 0000889812-99-001223 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENGASCO INC CENTRAL INDEX KEY: 0001001614 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 870267438 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-29386 FILM NUMBER: 99595268 BUSINESS ADDRESS: STREET 1: 603 MAIN AVE STREET 2: SUITE 500 CITY: KNOXVILLE STATE: TN ZIP: 37902 BUSINESS PHONE: 4235231124 MAIL ADDRESS: STREET 1: 630 MAIN AVENUE STREET 2: SUITE 500 CITY: KNOXVILLE STATE: TN ZIP: 37902 10KSB 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 REPORT ON FORM 10-KSB (Mark one) /X/ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1998 or / / Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . ------------ ---------- Commission File No. 0-20975 TENGASCO, INC. (Name of small business issuer in its charter) Tennessee 87-0267438 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 603 Main Avenue, Knoxville, Tennessee 37902 (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number, including area code: (423) 523-1124. Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share. Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes /X/ No / / Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year: $2,078,101 State the aggregate market value of the voting stock held by nonaffiliates (based on the closing price on March 15, 1999 of $5.375): $25,209,567. State the number of shares outstanding of the registrant's $.001 par value common stock as of the close of business on the latest practicable date (March 15, 1999): 7,992,016 Documents Incorporated By Reference: None. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] FORWARD LOOKING STATEMENTS The information contained in this Report in certain instances includes certain forward-looking statements, When used in this document, the words budget, budgeted, anticipate, expects, estimates, believes, goals or projects and similar expressions are intended to identify forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected by such forward-looking statements. Important factors that could cause actual results to differ materially from those projected in the forward-looking statements include, but are not limited to, the following: production variances from expectations, volatility of oil and gas prices, the need to develop and replace its reserves, the substantial capital expenditures required for construction of pipelines and the drilling of wells and the related need to fund such capital requirements through commercial banks and/or public securities markets, environmental risks, drilling and operating risks, risks related to exploration and development drilling, the uncertainty inherent in estimating future oil and gas production or reserves, uncertainty inherent in litigation, competition, government regulation, and the ability of the Company to implement its business strategy, including risks inherent in integrating acquisition operations into the Company's operations. PART I ITEM 1. BUSINESS. Business Development. The Company is in the business of exploring for, producing and transporting oil and natural gas in Tennessee and Kansas. The Company leases producing and non-producing properties with a view toward exploitation and development. Emphasis is also placed on pipeline and other infrastructure facilities to provide transportation, processing and tieback services. The Company utilizes state-of-the-art 3D seismic technology to maximize the recovery of reserves. The Company's activities in the oil and gas business did not commence until May 1995 with the acquisition of oil and gas leases in Tennessee and Kentucky. Since 1995 the Company has acquired oil and gas leases on a total of approximately 44,000 acres, located in Hancock and Claiborne Counties, Tennessee (collectively, the "Swan Creek Leases or Field"). Effective December 31, 1997, the Company acquired from AFG Energy, Inc. ("AFG"), a private company, approximately 30,000 acres of leases in the vicinity of Hays, Kansas (the "Kansas 1 Properties"). Included in the acquisition which closed on March 5, 1998 are 273 wells, of which 149 are producing oil wells and 59 are producing gas wells, a related 50 mile pipeline and gathering system, 3 compressors and 11 vehicles. The total purchase price of these assets was approximately $5.5 million, which consisted of $3 million in cash and seller financing of $2.5 million. The note evidencing the loan accrues interest at the rate of 9.5% per annum for the period December 1998 to May 1999. After May 1999, the interest rate becomes 9% per annum. Monthly interest only payments are due from December 1998 to May 1999. Monthly installments of principal and interest of $138,349 are due from June 1999 to December 1999. There is a balloon payment of $953,773 due in January 2000. The Company will conduct exploration and production activities to produce crude oil and natural gas. The principal markets for these commodities are local refining companies, major natural gas transmission pipeline companies, local utilities and private industry end-users. The Company presently has 13 producing natural gas wells and two producing oil wells in the Swan Creek Field in Tennessee. In July 1998 the Company completed the first phase ("Phase I") of its pipeline in the Swan Creek Field, a 23 mile pipeline made of 6 and 8 inch steel pipe running from the Swan Creek Field into the main city gate of Rogersville, Tennessee. With the assistance of the Tennessee Valley Authority ("TVA"), the Company was successful in utilizing TVA's right-of-way along its main power line grid from The Swan Creek Field to the Hawkins County Utility District located in Rogersville. The cost of constructing Phase I of the pipeline was approximately $4,000,000. In addition, approximately 100 barrels of oil per day are being produced and sold from the Swan Creek Field. Income from the Swan Creek Field is approximately $25,000 per month. The Kansas Properties are currently producing approximately 1,005 Mcf (MCF are units of one thousand cubic feet of gas) of natural gas and 378 barrels of oil per day. Income from the Kansas Properties at the present time is approximately $82,000 per month and after operating expenses, net income is approximately $34,000 per month. History of the Company The Company was initially organized under the laws of the State of Utah on April 18, 1916, under the name "Gold Deposit Mining & Milling Company." The Company was formed for the purpose of mining, reducing and smelting mineral ores. On November 10, 1972, the Company conveyed to an unaffiliated entity substantially all of the Company's assets and the Company ceased all business operations. From approximately 1983 to 1991, the operations of the Company were limited to seeking out the acquisition of assets, 2 property or businesses. At a special meeting of stockholders held on April 28, 1995, the Company's stockholders voted (i) to approve the execution of an agreement (the "Purchase Agreement") pursuant to which the Company would acquire certain oil and gas leases, equipment, securities and vehicles owned by Industrial Resources Corporation ("IRC"), a Kentucky corporation, in consideration of the issuance of 4,000,000 post-split (as described below) "unregistered" and "restricted" shares of the Company's common stock and a $450,000 8% promissory note payable to IRC. The promissory note was converted into 83,799 shares of the Company's common stock in December 1995; (ii) to amend the Articles of Incorporation of the Company to effect a reverse split of the Company's outstanding $0.001 par value common stock on a basis of one share for two, retaining the par value at $0.001 per share, with appropriate adjustments being made in the additional paid-in capital and stated capital accounts of the Company; (iii) to change the name of the Company from "Onasco Companies, Inc."to "Tengasco, Inc."; and (iv) to change the domicile of the Company from the State of Utah to the State of Tennessee by merging the Company into Tengasco, Inc., a Tennessee corporation, formed by the Company solely for this purpose. The Purchase Agreement was duly executed by the Company and IRC, effective May 2, 1995. The reverse split, name change and change of domicile became effective on May 4, 1995, the date on which duly executed Articles of Merger effecting these changes were filed with the Secretary of State of the State of Tennessee; a certified copy of the Articles of Merger from the State of Tennessee was filed with the Department of Commerce of the State of Utah on May 5, 1995. Unless otherwise noted, all subsequent computations herein retroactively reflect this one for two reverse split. During 1996, the Company formed Tengasco Pipeline Corporation, a wholly-owned subsidiary, to manage the construction and operation of Phase I of its pipeline, as well as other pipelines planned for the future. General 1. The Swan Creek Field Amoco Production Company ("AMOCO") during the late 3 1970's and early 1980's, after extensive geological and seismic studies, leased approximately 50,000 acres of oil and gas leases in the Eastern Overthrust in the Appalachian Basin, an area now referred to as the Swan Creek Field. In 1982 AMOCO successfully drilled two significant natural gas discovery wells in the Swan Creek Field to the Knox Formation at approximately 6,000 feet of total depth. These wells, once completed, had an extraordinarily high pressure and volume of deliverability of natural gas; however, in the mid- 1980's a substantial decline in worldwide oil and gas prices occurred and the high cost of constructing a 23 mile pipeline across three rugged mountain ranges and crossing the environmentally protected Clinch River from Sneedville to the closest market in Rogersville, Tennessee was cost prohibitive. In 1987, AMOCO farmed out its leases to Eastern American Energy Company which held the leases until July 1995. The Company became aware of a law adopted by the Tennessee legislature which enabled the Company to lease all of AMOCO's prior acreage. The Company filed for a declaratory judgment as to its right to lease AMOCO's prior acreage. The Company was ultimately successful in winning all right, title and interest in all of AMOCO's prior leases in a precedent setting Supreme Court case. In July 1995 after completion of the Purchase Agreement, the Company acquired the Swan Creek Leases. These leases provide for a landowner royalty of 12.5%, leaving the Company a net royalty interest of 87.5% in each lease. The first well drilled by the Company in the Swan Creek Field, the Gary Patton #1 tested at 6.5 Mmcf of deliverable gas per day, making it the largest known tested well in the states of Tennessee, Kentucky and Virginia. Since then the Company has drilled twelve additional gas wells at 6,000 feet and two oil wells for a total of fifteen wells. During 1999 and 2000 Tengasco anticipates drilling, completing and producing a total of 50 additional wells with over 100 million cubic feet of deliverability of natural gas per day. Having completed Phase I of its pipeline, in July 1998 the Company began selling gas to Hawkins County Utility District which services residential, municipal and industrial customers in the Hawkins County area, pursuant to a written contract entered into on September 26, 1996. During the period from August 1998 through December 31, 1998 the Company delivered 46,776 Mcf of gas to Hawkins County Utility District. During the period from January 1, 1999 through March 23, 1999 Hawkins County Utility District has taken only 477 Mcf of gas from the Company. Although Hawkins County Utility District 4 could take gas in commercial quantities, it has declined to do so. Pursuant to its contract, it is not obligated to purchase any specific amount of gas. The Company does not know if Hawkins County Utility District will ever take gas in commercial quantities and intends to seek to terminate its contract with Hawkins County Utility District. The Company is currently engineering and designing the second phase ("Phase II") of its pipeline, an additional 20 miles of 12 inch pipeline which will connect into East Tennessee Natural Gas' main gas transmission line. This will enable the Company to service communities throughout Tennessee and the southeastern region of the United States. It is estimated that Phase II of the pipeline will cost approximately $5,000,000 and will take six to eight months to construct. (See, " Item 6 Management's Discussion and Analysis or Plan of Operation"). 2. The Kansas Properties The Company, as of December 31, 1997 acquired the Kansas Properties which included 149 producing oil wells and 59 producing gas wells in the vicinity of Hays, Kansas and a gathering system including 50 miles of pipeline. The aggregate production for the Kansas Properties at present is approximately 1,005 Mcf of gas and 378 barrels of oil per day. Revenues for the Kansas Wells are approximately $82,000 per month with net income after operating expenses of approximately $34,000. There are several capital projects that are available in Kansas which include drilling wells, recompletion of wells and major workovers. These projects when completed may well increase production in Kansas. Management, however, has made the decision to not perform this work until the price of oil has moved to the $15 per barrel range. Current prices are in the $10 per barrel range. 3. The Company's Other Leases In connection with the Purchase Agreement, the Company acquired from IRC the following properties: (i) a 100% working interest in 41 oil and gas leases on a total of 8,058 acres, more or less, and a 25% working interest on one lease of 462 acres, more or less, located in Clay County, Kentucky (collectively, the "Beech Creek Leases"). Each of these leases provided for a landowner royalty of 12.5% of the oil produced and saved from the leased premises or, at the lessee's option, to pay the market price for such 12.5% royalty. The leases also provided for a landowner royalty equal to 12.5% 5 of the market price at the well of the gas sold or used off the premises, except for injection for secondary recovery of oil. The Beech Creek Leases were also subject to overriding royalties ranging from 1.25% to 5%. (ii) a 100% working interest in 5 oil and gas leases on a total of 741 acres, more or less, located in Clay County, Kentucky (collectively, the "Wildcat Leases"). Each of these leases was subject to a 12.5% landowner royalty, on the same terms as the Beech Creek Leases, and a 3.125% overriding royalty. (iii) a 100% working interest in six oil and gas leases on a total of 744 acres, more or less, located in Clay County, Kentucky (collectively, the "Burning Springs Leases"). Each of these leases was subject to a 12.5% landowner royalty, on the same terms as the Beech Creek Leases and the Wildcat Leases, and overriding royalties ranging from 3.125% to 7.5%. (iv) a 100% working interest in nine oil and gas leases on a total of 2,121 acres, more or less, located in Fentress County, Tennessee (collectively, the "Fentress County Leases"). Each of these leases was subject to a 12.5% landowner royalty, on the same terms as the above referenced leases, and a 19% overriding royalty; and a 25% overriding royalty on one existing well. All of the above referenced leases have expired and the Company does not plan to pursue development of these properties since the Company intends to concentrate on the development of the Swan Creek Leases which management believes has greater economic potential. Subsequent to the Purchase Agreement, the Company also acquired a 100% working interest in four oil and gas leases on a total of 1,003.19 acres, more or less, located in Lauderdale County, Alabama (collectively, the "Alabama Leases"). The Alabama Leases have expired and the Company does not intend to pursue the development of these leases for the same reasons it is not pursuing the development of its other leases that have expired. Principal Products or Services and Markets The Company will conduct exploration and production activities to produce crude oil and natural gas. The principal markets for these commodities are local refining companies, major natural gas transmission pipeline companies, local utilities and private industry end users, which purchase the crude oil, and natural gas pipeline companies, which purchase the gas. In Hancock County, gas production from the Swan Creek Field can presently be delivered through the completed Phase I of the Company's pipeline to the Hawkins County Gas Utility. The 6 Company has acquired all necessary regulatory approvals and 100% of necessary property rights for Phase I of the pipeline. The Company's pipeline will not only service the Company's wells, but, will provide transportation of gas for small independent producers in the local area as well. It is anticipated that direct sales could also be made to some local towns and industries. No assurance can be given that the Company will be able to produce a sufficient quantity of crude oil or natural gas or that it will obtain purchasers of gas from the Company in sufficient quantities to make these operations profitable. It is anticipated that when Phase II of the pipeline is completed that the Company will be able to provide gas to communities throughout the State of Tennessee and to other areas of the southeastern United States. It is anticipated that completion of Phase II will permit the Company to sell all of its daily natural gas production from the Swan Creek Field. Natural gas from the Kansas Properties is delivered to Kansas-Nebraska Energy, Inc. in Bushton, Kansas. At present, crude oil is being trucked and transported through pipelines to the National Cooperative Refining Association in McPherson, Kansas, 120 miles from Hays. National Cooperative is solely responsible for transportation of products whether by truck or pipeline. An additional purchaser of the crude oil produced is Farmland Industries in Neodosha. There is a limited market in the area and the only other purchaser of crude oil is Koch Oil. Reserve Analyses Coburn Petroleum Engineering of Tulsa, Oklahoma, has performed reserve analyses of all the Company's productive leases (with the exception of the wells acquired from AFG). R. W. Coburn, a registered petroleum engineer, and the owner of Coburn Petroleum Engineering, has no interest in the Company or IRC, and performed these services at his standard rate ($90 per hour was billed and paid for these reports). The net reserve values used hereafter were obtained from a report dated February 9, 1999 prepared by Coburn Petroleum Engineering. In substance, the report, used estimates of oil and gas reserves based upon standard petroleum engineering methods which include decline curve analysis, volummetric calculations, pressure history, analogy, various correlations and technical judgment. Information for this purpose was obtained from owners of interests in the areas involved, state regulatory agencies, commercial services, outside operators and files of Coburn Petroleum Engineering. The report of Coburn Petroleum Engineering provides that the net reserves of the existing 15 wells in the Swan Creek Field is over 50 Bcf of natural gas with a present-day deliverability of 15 million cubic feet of natural gas per day and 784,033 barrels of oil. According to the Coburn Engineering Report, discounting the 7 net reserve values by 10% results in a present value as of December 31, 1998, before taxes, of $50,320,416. Columbia Engineering based in Oklahoma City, Oklahoma, has performed a reserve analysis of the Kansas Properties. David F. Yard, a registered petroleum engineer is the principal of Columbia Engineering. Neither Columbia Engineering nor Mr. Yard has an interest in the Company or IRC and Mr. Yard performed these services at his standard rate of $75 per hour. The net reserve values used hereafter were obtained from a report dated February 20, 1999. According to the report of Columbia Engineering, discounting the net reserve values by 10%, before taxes, results in a present value as of December 31, 1998 of $2,970,124 for the Kansas Properties. Reserve analyses are at best speculative, especially when based upon limited production; no assurance can be given that the reserves attributed to these leases exist or will be economically recoverable. It is standard in the industry for reserve analyses such as these to be used as a basis for financing of drilling costs. Distribution Methods of Products or Services Crude oil is normally distributed in Tennessee by tank truck and natural gas is distributed and transported via pipeline. The Company has no farmout agreements with any entity. Status of Any Publicly Announced New Product or Service The Company has publicly announced its agreement with Enserch Energy Services, Inc. ("Enserch") to market gas provided by that company in Tennessee and Southeastern United States. As of the current date, Enserch has not provided any gas to the Company. In March 1997, the Company signed a teaming agreement with Operations Management International ("OMI") to operate, as a subcontractor, the steam generating facilities at the East Tennessee Technology Park ("ETTP") in Oak Ridge, Tennessee. This is the site of the original Manhattan Project that has been privatized by the United States Department of Energy ("DOE") and currently produces enriched uranium for commercial and military use. OMI is a subsidiary of CH2M Hill, Ltd., an international engineering and operations company. On May 7, 1998, OMI filed a complaint for declaratory judgment in the United States District 8 Court for the Eastern District of Tennessee seeking to declare the teaming agreement as invalid and unenforceable, or in the alternative to declare that the Company is in breach of the teaming agreement thereby rendering it unenforceable. The Company has filed an answer and counterclaim against OMI seeking $10 million in damages for breach of contract. The action is scheduled for trial in July 1999. As of this date discovery still has not been completed. (See, "Item 3 - Legal Proceedings"). Competitive Business Conditions, Competitive Position in the Industry and Methods of Competition The Company's contemplated oil and gas exploration activities in the States of Tennessee and Kansas will be undertaken in a highly competitive and speculative business atmosphere. In seeking any other suitable oil and gas properties for acquisition, the Company will be competing with a number of other companies, including large oil and gas companies and other independent operators with greater financial resources. Management does not believe that the Company's initial competitive position in the oil and gas industry will be significant. Its principal competitors in the State of Tennessee are Ashland Oil and Miller Services. In the area of the Company's pipeline, the Company is in a favorable position since it will own the only pipeline within a 20 mile radius. Within that area, the Company owns leases on approximately 44,000 acres. There are numerous producers in the area of the Kansas Properties. Some are larger and some smaller than the Company. However, management expects that it will be able to sell all the gas and oil the Kansas Properties produce. Management does not foresee any difficulties in procuring drilling rigs or the manpower to run them in the area of its operations. The experience of management has been that in most instances, drilling rigs have only a one or two day waiting period; however, several factors, including increased competition in the area, may limit the availability of drilling rigs, rig operators and related personnel and/or equipment; such an event may have a significant adverse impact on the profitability of the Company's operations. The Company anticipates no difficulty in procuring well drilling permits which are obtained from the Tennessee Oil and Gas Board. They are usually issued within one week of application. The Company generally does not apply for a permit until it is actually ready to commence drilling operations. The Company presently has five well drilling permits for use anywhere in Tennessee. 9 The prices of the Company's products are controlled by the world oil market and the United States natural gas market; thus, competitive pricing behaviors are considered unlikely; however, competition in the oil and gas exploration industry exists in the form of competition to acquire the most promising acreage blocks and obtaining the most favorable prices for transporting the product. Management believes that the Company is well-positioned in these areas because of the transmission lines that run through and adjacent to the properties it leases and because it holds relatively large acreage blocks in what management believes are promising areas. Sources and Availability of Raw Materials and Names of Principal Suppliers Excluding the development of oil and gas reserves and the production of oil and gas, the Company's operations are not dependent on the acquisition of any raw materials. (See, Item 1 - Business - Competitive Business Conditions, Competitive Position in the Industry and Methods of Competition"). Dependence on One or a Few Major Customers The Company is not presently dependent upon any major customers for the gas from its Swan Creek Field. However, upon completion of Phase II of its pipeline, the Company anticipates being dependent upon a few customers. Natural gas from the Kansas Properties is delivered to Kansas-Nebraska Energy, Inc. in Bushton, Kansas. At present, crude oil from the Kansas Properties is being trucked and transported through pipelines to the National Cooperative Refining Association in McPherson, Kansas, 120 miles from Hays. National Cooperative is solely responsible for transportation of products whether by truck or pipeline. An additional purchaser of the crude oil produced is Farmland Industries in Neodosha, Kansas. There is a limited market in the area and the only other purchaser of crude oil is Koch Oil. The Company, however, anticipates that it will be able to sell all of the oil and gas produced from the Kansas Properties. Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, including Duration Royalty agreements relating to oil and gas production are standard in the industry. The amount of the Company's royalty payments varies from lease to lease. (See, "Item 1 Business - General"). 10 Need for Governmental Approval of Principal Products or Services None of the principal products or services offered by the Company require governmental approval; however, permits are required for drilling oil or gas wells. (See, "Item 1 - Business - - Effect of Existing or Probable Governmental Regulations on Business"). Effect of Existing or Probable Governmental Regulations on Business Exploration and production activities relating to oil and gas leases are subject to numerous environmental laws, rules and regulations. The Federal Clean Water Act requires the Company to construct a fresh water containment barrier between the surface of each drilling site and the underlying water table. This involves the insertion of a seven-inch diameter steel casing into each well, with cement on the outside of the casing. The cost of compliance with this environmental regulation is approximately $10,000 per well. The State of Tennessee also requires the posting of a bond to ensure that the Company's wells are properly plugged when abandoned. A separate $2,000 bond is required for each well drilled. The Company currently has the requisite amount of bonds on deposit with the State of Tennessee. As part of the Company's purchase of the Kansas Properties it acquired a statewide permit to drill in Kansas, such permits being applied for and issued within one-two weeks prior to drilling. At the present time, the State of Kansas does not require the posting of a bond either for permitting or to insure that the Company's wells are properly plugged when abandoned. All of the wells in the Kansas Properties have all permits required and are in compliance with the laws of the State of Kansas. The Company's operations are also subject to laws and regulations requiring removal and cleanup of environmental damages under certain circumstances. Laws and regulations protecting the environment have generally become more stringent in recent years, and may in certain circumstances impose "strict liability," rendering a corporation liable for environmental damages without regard to negligence or fault on the part of such corporation. Such laws and regulations may expose the Company to liability for the conduct of operations or conditions caused by others, or for acts of the Company which were in compliance with all applicable laws at the time such acts were performed. The modification of existing laws or regulations or the adoption of new laws or regulations relating to environmental matters could have a material adverse effect on the Company's operations. In 11 addition, the Company's existing and proposed operations could result in liability for fires, blowouts, oil spills, discharge of hazardous materials into surface and subsurface aquifers and other environmental damage, any one of which could result in personal injury, loss of life, property damage or destruction or suspension of operations. The Company believes it is presently in compliance with all applicable federal, state or local environmental laws, rules or regulations; however, continued compliance (or failure to comply) and future legislation may have an adverse impact on the Company's present and contemplated business operations. At Board of Directors' meetings held June 6 and 7, 1995, the Board of Directors adopted resolutions to form an Environmental Response Policy and Emergency Action Response Policy Program. A plan was recently adopted which provides for the erection of signs at each well and at strategic locations along the pipeline containing telephone numbers of the Company's office and the home telephone numbers of key personnel. A list will be maintained at the Company's office and at the home of key personnel listing phone numbers for fire, police, emergency services and Company employees who will be needed to deal with emergencies. The foregoing is only a brief summary of some of the existing environmental laws, rules and regulations to which the Company's business operations are subject, and there are many others, the effects of which could have an adverse impact on the Company. Future legislation in this area will no doubt be enacted and revisions will be made in current laws. No assurance can be given as to what effect these present and future laws, rules and regulations will have on the Company's current and future operations. Research and Development The Company has not expended any material amount in research and development activities during the last two fiscal years. Research done in conjunction with its exploration activities will consist primarily of running radiometric surveys on the lease blocks and conducting geological research on the surface. This work will be performed by the Company's full time geologist and will not have a material cost of anything more than his standard salary. (See, "Item 1 - Business - Number of Total Employees and Number of Full-Time Employees"). Number of Total Employees and Number of Full-Time Employees The Company presently has twenty-six full-time 12 employees and no part-time employee. The Company has hired a full-time geologist at a salary of $48,000 per year. His duties for the Company include: surface and sub-surface geology, log correlation, surface and sub-surface mapping, field--research (i.e., radiometric, gravity, magnetic and geochemical research) and well-site geology. ITEM 2. DESCRIPTION OF PROPERTY Property Location, Facilities, Size and Nature of Ownership The Company's Swan Creek Leases are on approximately 44,000 acres in Hancock and Claiborne Counties in Tennessee. The initial terms of these leases vary from one to four years. Many of them can be extended at the option of the Company by payment of annual rent. Some of them will terminate unless the Company has commenced drilling. However, the Company does not anticipate any difficulty in continuing the Swan Creek Leases. (See, "Item 1 - Business - General"). The Kansas Properties acquired from AFG contain 138 leases totaling 32,158 acres in the vicinity of Hays, Kansas. The original term on these was from 1 to 10 years and in most cases has expired, however, most leases are still in effect because they are being held by production. The Company maintains a 100% working interest in most wells. The leases provide for a landowner royalty of 12.5%. Some wells are subject to an overriding royalty interest from 0.5% to 9%. The Company leases its principal executive offices, consisting of approximately 4,731 square feet located at 603 Main Avenue, Suite 500, Knoxville, Tennessee, at a monthly rent of $3,942.50. The Company also leases a field office in Sneedville, Tennessee at a rental of $500 per month. The Company also leases an office in Hays, Kansas at a rental of $500 per month. In addition, the Company has drilling equipment and vehicles which it acquired from IRC. All of this equipment is in satisfactory operating condition. The securities which the Company acquired from IRC were sold during 1996 for $250,000. Disclosure of Oil and Gas Operations The Swan Creek Field currently has thirteen completed natural gas wells and two oil wells. Phase I of the Company's pipeline was completed in July 1998. In August 1998 the gas wells in the Swan Creek Field were connected to Phase I of the Company's pipeline. The Company plans to drill an additional 50 13 wells in the Swan Creek Field. The Company also plans to complete Phase II of its pipeline which is an additional 20 miles of 12 inch pipeline connecting the wells in the Swan Creek field to the main gas transmission line of East Tennessee Natural Gas. This will enable the Company to service communities throughout Tennessee and the southeastern region of the United States. It is estimated that Phase II of the pipeline will cost approximately $5,000,000 and will take six to eight months to construct. Tests to date on the completed wells on the Swan Creek Leases indicate substantial potential for future deliverability. Based upon engineering reports, management believes that the wells drilled to date have a life expectancy of approximately 37 years on a declining basis. (See, Item 1 Business - - Reserve Analysis"). In connection with its acquisition of all of AFG's assets, the Company acquired 208 working wells in Kansas. Pursuant to the acquisition agreement the Company was entitled to all income from those wells as of January 1, 1998. The aggregate current production from the Kansas Properties is approximately 1,002 Mcf of natural gas and 378 barrels of oil per day. Income from the Kansas properties at the present time is approximately $82,000 per month with net income after operating expenses of approximately $34,000 per month. Revenues from the Kansas Properties for 1998 were significantly lower than in the prior two years as a result of lower oil and gas prices. In light of currently depressed oil and gas prices, the Company plans to reduce costs by shutting-in approximately 20 marginally producing wells. When oil and gas prices recover, the Company plans to increase production by reworking certain existing wells at a cost of $1.4 million. Management has made the decision not to perform this work until the price of oil has moved to the $15 per barrel range. Current prices are in the $10 per barrel range. The Company's ability to rework existing wells and/or drill additional wells in the Kansas Properties is, however, dependent on its obtaining additional debt or equity financing. There can be no assurances that the Company will be able to obtain such additional or debt equity financing to do this work even if oil prices rise to this level. The Company pays ad valorem taxes on its Kansas Properties. It does not pay any taxes on its Swan Creek Leases. The Company has general liability insurance for the Kansas Properties and the Swan Creek Field. ITEM 3 - LEGAL PROCEEDINGS Except as described hereafter, the Company is not a party to any pending material legal proceeding. To the knowledge 14 of management, no federal, state or local governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management, no director, executive officer or affiliate of the Company or owner of record or beneficially of more than 5% of the Company's common stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding. 1. The Company was named as a defendant in an action commenced on March 18, 1997 in the Supreme Court of the State of New York, New York County entitled Ulrich Hocker, Plaintiff v. Tengasco, Inc., Defendant, Index no. 601385/97. In that action the plaintiff sought to recover the sum of $250,000 loaned to the Company which loan was evidenced by a promissory note. The loan made by the plaintiff was part of a bridge loan to the Company made by three lenders in the aggregate amount of $1,000,000. The Company, for no additional consideration other than the loan, issued warrants to the plaintiff to purchase 50,000 shares of the common stock of the Company. The warrants contain an elaborate formula pursuant to which the exercise price of the warrants would be reduced and the number of shares increased if the price of the Company's stock decreased. This formula guaranteed that the warrants would continue to retain their value no matter what happened to the price of the Company's stock. The action was recently settled. The settlement provides that the Company shall pay the plaintiff the sum of $286,416.87 which represents 90% of the amount of the monies loaned to the Company by the plaintiff together with interest thereon at 10% from the date of the loan. As part of the settlement, the warrants held by plaintiff will be deemed null and void and unenforceable. 2. The Company filed an action in Chancery Court for Knox County, Tennessee on March 21, 1997 entitled, Tengasco, Inc., Plaintiff v. Theodore Scallan, Thieme Fonds, Ulrich Hocker and Wallington, Investments, Ltd., Case No. 133620-2 against Ulrich Hocker and two other lenders, Thieme Fonds and Wallington Investments, Ltd., as well as Theodore Scallan, the Company's former President, to invalidate the warrants which were issued in connection with and as consideration for the bridge loan of $1,000,000 made by the lenders to the Company. (See, description of the Hocker action above). It is the position of management that these warrants were never validly issued and are null and void because they were not properly authorized by the Company's Board of Directors. It is also the position of the Company that the issuance of these warrants to the lenders and the fees paid to Heiko Thieme, who represented all of the lenders, constituted usurious interest. The Company has also claimed that it was 15 fraudulently induced into the loan transaction as a result of several misrepresentations made by Heiko Thieme. Two of the lender-defendants, Ulrich Hocker ("Hocker") and Thieme Fonds moved to dismiss the complaint on the ground that the court lacked jurisdiction over them. The other lender-defendant, Wallington Investments, Ltd., appeared specially in the action and moved to dismiss on the ground that it had not been properly served with process. On March 20, 1999, the Court issued its opinion and order finding that it had jurisdiction over the defendants and that process had been properly served upon Wallington Investments, Ltd. The Company now intends to vigorously pursue its claims. As part of its settlement of the action brought against the Company by Hocker in New York, the Company has discontinued this action against Hocker. It is the opinion of management that there is a strong likelihood that the Company will be successful in this action against the remaining defendants. 3. The Company was recently named as a defendant in an action commenced in the Supreme Court of the State of New York, New York County entitled Wallington Investments, Ltd., Plaintiff v. Tengasco, Inc., Defendant, Index no. 605876/98 In that action the plaintiff seeks to recover the sum of $500,000 loaned to the Company which was part of the $1,000,000 bridge loan transaction with Ulrich Hocker ("Hocker") and Thieme Fonds arranged by Heiko Thieme (See, discussion of the transaction in nos. 1 and 2 above.) The loan by Wallington Investments, Ltd., like the loan by Hocker, is evidenced by a promissory note and the action brought by Wallington Investments, Ltd. is based upon that note. The complaint fails to make any mention of the warrants which were issued by the Company as part of the consideration for the bridge loan and which the Company contends renders the amount of interest extracted in connection with the loan transaction usurious. The Company has filed an answer to the complaint asserting that the loan transaction and the note sued upon are void and unenforceable because the warrants issued in connection with the loan were never validly issued and were not properly authorized by the Company's Board of Directors. As stated, it is also the position of the Company that the issuance of these warrants to the lenders and the fees paid to Heiko Thieme, who represented all of the lenders, constituted usurious interest. The Company has further claimed that it was fraudulently induced into the loan transaction as a result of several misrepresentations made by Heiko Thieme. The Company has moved to have this action stayed pending the outcome of the prior pending action in Tennessee (See, no. 2 above) since the issues in both cases are the same and the determination of the prior case will most likely be dispositive of the issues in this case. In any event, the Company intends to vigorously pursue its defenses to this action, as well as claims it has against the plaintiff and the other similarly situated lenders. The Company believes that it will be successful in defending this action. 16 4. The Company, its Chief Executive Officer, Malcolm E. Ratliff, and one of its attorneys, Morton S. Robson, have been named as defendants in an action commenced in the Supreme Court of the State of New York, New York County entitled Maureen Coleman, John O. Kohler, Charles Massoud, Jonathan Sarlin, Von Graffenried A.G. and VPM Verwatungs A.G., Plaintiffs v. Tengasco, Inc., Morton S. Robson and Malcolm E. Ratliff, Defendants, Index no. 603009/98 In that action, the plaintiffs, shareholders of the Company each of which purchased restricted shares of the Company's Common Stock, allege that although they were entitled to sell their shares pursuant to SEC Rule 144 in the open market, they were precluded from doing so by the defendants' purported wrongful refusal to remove the restrictive legend from their shares. The plaintiffs own in the aggregate 35,000 shares of the Company's common stock. The plaintiffs are seeking damages in an amount equal to the difference between the amount they would have been able to sell their shares if the plaintiffs had acted to remove the restrictive legends when requested and the amount they will receive on the sale of their shares. The plaintiffs are also seeking punitive damages in an amount they claim to be in excess of $500,000 together with interest, costs and disbursements of bringing the action, including reasonable attorneys fees. The Company believes that there are several substantial factual and legal issues as to the date on which the shareholders were entitled to sell their stock pursuant to Rule 144. Management further believes that the Company did not wrongfully withhold its approval of the removal of the restrictive legends at the times such removal was requested by the shareholders. However, in the event the Company is found to have improperly withheld its permission to remove the restrictive legends from the shares owned by the shareholders, the Company may be held liable for damages to the shareholders in an amount equal to the difference between the actual sale price of such shares and the sales price they would have realized on the date such restrictive legends should have been permitted to be removed. As this time it is not possible to ascertain with any certainty what such damages would be. 5. The Company was named as a defendant in an action commenced in May 1998 in the United States District Court for the Eastern District of Tennessee entitled Operations Management International, Inc. ("OMI") v. Tengasco, Inc. The complaint seeks a declaratory judgment declaring a teaming agreement the Company entered into in March 1997 with OMI to operate, as a subcontractor, the steam generating facilities at the East Tennessee Technology Park ("ETTP") in Oak Ridge, Tennessee invalid and unenforceable, or in the alternative to declare that the Company is in breach of the teaming agreement thereby rendering it unenforceable. No claim for recovery of money is made against the Company. The Company has filed an answer and counterclaim against OMI seeking $10 million in damages for 17 breach of contract. The action is scheduled for trial in July 1999. As of this date, discovery still has not been completed. Although it is not possible at this time to predict the outcome of this action, it is not anticipated that the Company will suffer a money judgment against it. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of stockholders of the Company was held on June 19, 1998. (b) Joseph E. Armstrong, John L. Kidde, James B. Kreamer, William A. Moffett, Shigemi Morita, Malcolm E. Ratliff and Allen H. Sweeney were elected as Directors of the Company for a term of one year or until their successors were elected and qualified. The results of voting were as follows: 5,218,674 votes for Joseph E. Armstrong and 12,450 withheld; 5,219,874 votes for John L. Kidde and 11,250 withheld; 4,990,650 votes for James B. Kreamer and 240,474 withheld; 4,991,650 votes for William A. Moffett and 239,474 withheld; 5,221,674 votes for Shigemi Morita and 9,450 withheld; 5,210,474 votes for Malcolm E. Ratliff and 20,650 withheld; and, 5,221,674 votes for Allen H. Sweeney and 9,450 withheld. (c) The next item of business was the proposal to authorize an amendment to the Company's Corporate Charter creating 25,000,000 shares of a new class of stock, preferred stock, $.0001 par value per share, the rights, privileges and preferences of which are to be determined by the Board of Directors without additional stockholder approval. The results of the voting were as follows: 4,686,220 votes for the resolution, 110,867 votes against and 17,328 votes abstained. A majority of the votes cast at the meeting having voted for the resolution, the resolution was duly passed. (d) The next item of business was the proposal to ratify the appointment of BDO Seidman, LLP, the independent certified public accountants of the Company, for fiscal 1998. The results of the voting were as follows: 5,216,065 votes for the resolution, 9,391 votes against and 5,668 votes abstained. A majority of the votes cast at the meeting having voted for the resolution, the resolution was duly passed. 18 No other matters were voted on at the meeting. PART II ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The Company's common stock has been listed on the OTC Bulletin Board of the NASD since March 31, 1994 under the symbol TNGO. The range of high and low bid prices for shares of common stock of the Company during the fiscal years ended December 31, 1997 and 1998 are set forth below. Bid High Low Fiscal Year Ended December 31, 1998 March 31, 1998 13.12 9.09 June 30, 1998 12.50 9.00 September 30, 1998 9.75 5.75 December 31, 1998 7.12 3.50 Fiscal Year Ended December 31, 1997 March 31, 1997 17.25 10.00 June 30, 1997 14.50 10.50 September 30, 1997 13.50 8.25 December 31, 1997 16.63 8.50 These bid prices were obtained from the National Quotation Bureau, Inc. ("NQB") and do not necessarily reflect 19 actual transactions, retail markups, mark downs or commissions. The transactions include inter-dealer transactions. Holders As of December 31, 1998, the number of shareholders of record of the Company's common stock was 481, and management believes that there are approximately 1,203 beneficial owners of the Company's common stock. Dividends There are no present material restrictions that limit the ability of the Company to pay dividends on common stock or that are likely to do so in the future. The Company has not paid any dividends with respect to its common stock, and does not intend to pay dividends in the foreseeable future. Recent Sales of Unregistered Securities The following table provides information with respect to the sale of all "unregistered" and "restricted" securities sold by the Company during the past three years, which were not registered under the 1933 Act: Common Stock Number Date Of Aggregate Name of Owner Acquired Shares Consideration - ------------- -------- ------ ------------- Arzonetti, Walter C. 4/22/97 88,493 2 Brockman, Jeff 7/29/96 10,000 2 8/29/96 62,329 2 Carter, Robert M. 6/15/96 15,671 2 8/26/96 2,000 2 6/30/97 7,329 2 DeMunnik, Jeffrey 5/29/96 16,664 2 3/15/97 4,000 2 Grabill, Kelly S. 7/29/96 12,500 2 Harding, Neil 5/21/97 100,000 3 20 Industrial Resources 3/29/96 76,557 1 Corporation 4/10/96 87,709 1 Estate of Raymond E. Johnson 4/3/96 10,000 2 Johnson, Mike 3/26/96 10,000 2 Manhoff, Charles, N. 4/10/96 88,356 2 Mattei, Joseph B. 4/19/96 37,000 2 McCown, Michael 6/30/97 50,000 2 Moffett, William A. 4/23/96 37,397 2 6/25/97 72,603 2 Ratliff, Russell 3/29/96 37,534 2 Sweeney, Allen 12/31/96 33,151 2 Walter, James C. 3/22/96 35,616 2 Adams, Stanley & Sharon E. 10/15/97 6,000 53,580.00 Adams, Stanley & Sharon E. 05/04/98 10,000 71,300.00 Angle, Noriko T. 10/10/97 5,714 50,000.00 Arkwright, Richard T. 11/04/97 10,989 99,999.90 Astuto, Angelo 04/22/98 500 3,590.00 Astuto, Laura J. 04/22/98 500 3,590.00 Bailey, Gurvin & Margaret 09/25/97 4,500 36,225.00 Blaker, Barbara & Lloyd 12/26/97 1,120 10,000.00 Bonham, Elizabeth D. 12/19/97 5,952 50,000.00 Borger, Jeannie 10/15/97 224 2,000.32 Buck, Frank S. & Martha J. 10/22/97 5,000 47,250.00 Burklow, Jim 06/15/98 1,000 7,780.00 Burleson, Elizabeth E., 09/15/97 500 3,895.00 Rev. Tr DTD 5/6/93 Cajigas, Arthur & Hidako 05/21/98 1,143 10,000.00 21 Carter, Daryl M. 07/02/98 1,500 10,500.00 Carter, Maury L. 07/02/98 3,500 24,500.00 Carvajah, Rose Marie 09/01/98 250 1,750.00 Casillas, Arcadio & Renate 11/19/97 9,685 99,997.63 Cates, Dennis 10/14/97 7,000 58,800.00 Chandler, Robert A. 11/13/97 500 4,945.00 Dale, John D., Jr. 12/10/97 4,682 50,000.00 Day, Christopher 08/22/97 482 2,966.11 Egger and Company 10/28/97 202,380 1,700,000.00 Eisert, Anthony & Marie 02/25/98 2,857 20,000.00 Emory Clinic Profit Sharing 11/06/97 2,646 25,004.70 Plan FBO William J. Casarella Ershek, John 11/03/97 5,000 41,100.00 Esrick, Ralph Trust 03/10/98 1,000 7,170.00 Evans, William 9/5/96 12,121 100,000.00 Fortune Hunters Investment 10/09/97 201 1,759.00 Club French, Peter & Grace 12/09/97 2,267 25,000.00 Fujii, Daisuke 06/01/98 1,406 10,000.00 Fujita, Eiji 05//18/98 21,097 150,000.00 Funk, Frederick 10/20/97 2,158 20,000.00 Funk, Sharon 10/15/97 5,599 49,999.07 Gerding, Daniel J. 11/21/97 1,000 9,890.00 Gerding, James A. 08/26/97 20,000 140,000.00 Gerding, Scott J. 12/09/97 1,000 9,890.00 Gillis, Terry 11/06/97 2,667 24,989.79 Gillis, Terry 11/14/97 1,465 15,001.60 22 Gillis, Wayne H. 08/26/97 14,286 100,000.00 Giresi, Mary E. 4/22/98 2,000 14,360.00 Gray, Edward W.T. 08/22/97 80,515 500,000.00 Greene, Daryl, IRA R/O UTA 10/13/97 5,000 42,000.00 Charles Schwab & Co., Inc. Habbersett, Edith T., TTEE 11/18/97 1,500 16,020.00 Habbersett, William C. 08/27/97 2,197 15,005.51 TTEE TR 9/1/94 Habbersett, William C. 09/24/97 1,500 11,550.00 TTEE UTD 9/1/94 Habbersett, William C. 11/14/97 1,000 10,240.00 TTEE UTD 9/1/94 Habbersett, William C. 01/05/98 2,303 21,970.62 TTEE UTD 9/1/94 Hamac & Co., TTEE 11/05/97 10,582 99,999.90 Marillyn Himes Riviere TR Hampton, Earl 09/24/97 500 3,850.00 Harbert, Bill L. 10/10/97 34,286 300,002.50 Harbert, Bill L. 04/30/98 40,000 262,800.00 Harbert, Bill L. 06/11/98 75,414 497,441.00 Harbert, Bill L. 10/22/98 150,200 488,150.00 Harris, Rona 09/01/98 500 3,500.00 Honeycutt, Robert M. 10/15/97 100 893.00 Honeycutt, Robert M. 04/16/98 100 639.00 Houser, Janice 01/21/98 3,008 20,000.00 Huang, Diedre A. 11/06/97 5,336 49,998.32 Huang, Peter C.R. 11/06/97 16,008 149,994.96 Haung, Stephen 11/06/97 5,336 49,998.32 Hut, Robert A. 12/03/97 4,682 50,000.00 23 Donald Janda 9/5/96 2,131 17,580.00 Robert Janda 9/5/96 22,730 187,520.00 Jones Investment Co. 12/04/97 6,000 50,400.00 Jones, Michael J. 10/14/97 2,200 20,020.00 Jones, Ronald M. 10/28/97 1,500 12,600.00 Jungman, Paul Claude 10/15/97 500 5,000.80 Kail, Wilbert L. 09/02/97 1,000 6,650.00 Kamer, John P. 09/22/97 400 2,976.00 Keller, James & Shirley 05/04/98 4,000 28,520.00 Keyser, Frank & Mims, 12/09/97 443 4,500.00 Catherine Kiryu, Hironori 05/26/98 1,406 10,000.00 Kitaoka, Yukiko 07/31/98 1,429 10,000.00 Knott, Patricia 10/24/97 500 4,550.00 Kobayashi, Shungo 07/02/98 1,429 10,000.00 Koshi, Junichiro 05/18/98 2,628 20,000.00 Kourkoumelis, James M. 10/21/97 500 4,815.00 L'Hussier, Harold R. 10/17/97 1,406 15,002.02 L'Hussier, Harold 03/03/08 1,594 11,715.90 Lange, Robert A. 10/10/97 1,500 13,345.00 Lautzenhiser, Stephen 08/19/97 800 4,832.00 Leonard, William Curtis 11/07/97 216 2,004.00 Malone, Michael & Kimberly 12/09/97 49 500.00 McCarty, Billy E. & Carol J. 12/09/97 99 1,000.00 Mertins, Janelle 01/21/98 10,000 77,500.00 Miller, William F., Jr. 10/10/97 3,000 26,250.00 Milligan, Shirley, 09/30/97 300 2,415.00 24 TTEE TR UA 7/3/90 Mintzer, Dorothy 09/01/98 500 3,500.00 Mobarak, Heather L. 02/12/98 500 4,000.00 Moor, John 05/04/98 1,000 7,130.00 Morita, Shegemi 04/10/98 7,400 37,000.00 Mori, Masahiko 05/28/98 7,032 50,000.00 MSP Enterprises 12/09/97 500 5,515.00 Myers, Garry D. 12/31/97 1,344 12,000.00 Nagashima, Tsuyoshi 07/22/98 1,429 10,000.00 Nevin, Micah Cole 11/06/97 100 945.00 Nikovits, John L. 04/22/98 1,000 7,180.00 Nishimura, Joseph Y. 12/16/97 5,192 50,000.00 Nishiwaki, Nick S. 10/23/97 21,978 200,000.00 Padron, Ramon 05/13/98 1,000 7,350.00 Pichiarella, Lawrence S. 12/08/97 100 1,103.00 Pichiarella, Lawrence S. 12/11/97 200 1,960.00 Pichiarella, Lawrence S. 12/17/97 100 840.00 Presnell, Joe 11/14/97 2,000 20,480.00 Presnell, Joe & Alma 12/08/97 1,000 11,030.00 Presnell, Joe 02/25/98 1,000 6,650.00 Presnell, Joe 04/28/98 1,000 6,430.00 Presnell, Joe 06/15/98 1,000 7,000.00 Pych, Barbara M. 04/22/98 1,000 7,180.00 Pych, Cynthia M. 04/24/98 2,000 14,360.00 Pych, Gregory L. 04/22/98 2,000 14,360.00 Pych, Joseph 04/22/98 1,250 8,975.00 25 Pych, Joseph R. 04/22/98 1,000 7,180.00 Pych, Robert F. 04/22/98 1,000 7,180.00 Regions Bank, TTEE for the 10/10/97 5,656 49,999.99 Bobby P. Lemay Directed IRA Reventlow, Richard H. 11/06/97 10,989 99,999.90 Rich Energy, Inc. 12/09/97 700 6,370.00 Scott, Donald L. 10/14/97 2,220 20.020.00 Scott, Randall L. 10/14/97 2,220 20,020.00 Seevers, Larry 03/10/98 1,504 10,000.00 Sherbal, Rose 09/01/98 500 3,500.00 Silva, Anthony 01/26/99 20,000 100,000.00 Silva, Anthony 03/08/99 22,300 100,350.00 Smithers, Charles F., Jr. 02/12/98 6,250 50,000.00 Spoonbill, Inc. 10/23/97 178,024 1,619,949.00 Spoonbill, Inc. 01/29/98 50,000 350,000.00 Spoonbill, Inc. 09/02/98 50,000 250,000.00 Spoonbill, Inc. 01/06/99 140,000 700,000.00 Stanley, David G, TTEE. 12/08/98 5,000 23,750.00 Stanley, Robert J. 10/10/97 11,313 100,006.92 STEP, Inc. 10/22/97 2,000 18,200.00 Stern, William TTEE 4/7/98 10,000 70,000.00 Stern, William TTEE 4/9/98 5,000 35,000.00 Steuer, Joseph Jr. 08/19/97 1,703 9,996.61 Stewart S. Kent, TTEE, 10/23/97 2,500 22,550.00 UA/TR Dtd 12/29/88 Strickland, Thomas, Jr. 08/26/97 200 1,174.00 Synap Corp. 05/29/98 9,143 80,000.00 26 Thomson, Charles A. 10/29/97 2,000 15,400.00 Thurman, Shawn Lee 08/26/97 219 1,495.00 Ueshima, Takeshi 02/05/98 6,494 50,000.00 Ura, Yukari 06/02/98 1,406 10,000.00 Uy, Camilo 12/11/97 2,500 25,000.00 Viam Charitable & Edu. 10/21/97 11,905 100,000.00 Foundation, Inc. Vickers, T. Owen 10/09/97 7,584 64,994.88 Warhaft, Terri 09/01/98 500 3,500.00 Watson, W.N. 11/06/97 534 5,003.58 Weeks, Everette J. 03/10/98 500 3,590.00 Welden, William Edgar, Jr. 11/11/97 506 5,000.00 Welden, William Edgar, Sr. 11/11/97 2,528 25,000.00 Widmer, Edward J. 12/31/97 500 4,465.00 Wilson, Henry A. 11/03/97 585 5,019.30 Yoshida, Teruni 07/31/98 1,429 10,000.00 TOTAL 1,492,893 10,584,623.92 Series A 8% Cumulative Convertible Preferred Stock ($100.00 per share) Number Date Of Aggregate Name of Owner Acquired Shares Consideration - ------------- -------- ------ ------------- Harding, Neal 10/30/98 2,950 4 Cipponeri, Jerome 10/30/98 500 5 Kenny, Vernon & Rosemary 10/30/98 1,300 5 Gorman, Robert & Anne 10/30/98 1,000 5 Cregan, John D. 10/30/98 500 $50,000.00 Stern, William M., TTEE 10/30/98 750 75,000.00 Hall, Kelly 12/30/98 1,000 100,000.00 27 1 Issued in consideration of the cancellation of debt owed by the Company to IRC. See, "Description of Business" - "Business Development" above. 2 Issued pursuant to Stock Option Agreements adopted by the Board of Directors granting these persons an option to purchase "unregistered" and "restricted" shares of the Company's common stock at a price of $0.275 per share. 3 Issued as consideration for the granting of a loan in the amount of $1,000,000. 4 Issued as partial payment of a loan made to Company in 1997 by Harding. See, "Item 12 - Certain Relationships and Related Transactions - Transactions with Management and Others" 5 Issued as partial payment of loans made to the Company in July 1998 by the above shareholders. See, "Item 12 - Certain Relationships and Related Transactions - Transactions with Management and Others" Management believes that all of the foregoing persons were either "accredited investors" as that term is defined under applicable federal and state securities laws, rules and regulations, or were persons who by virtue of background, education and experience who could accurately evaluate the risks and merits attendant to an investment in the securities of the Company. Further, all such persons were provided with access to all material information regarding the Company, prior to the offer or sale of these securities, and each had an opportunity to ask of and receive answers from directors, executive officers, attorneys and accountants for the Company. The offers and sales of the foregoing securities are believed to have been exempt from the registration requirements of Section 5 of the 1933 Act, as amended, pursuant to Section 4(2) thereof, and from similar state securities laws, rules and regulations covering the offer and sale of securities by available state exemptions from such registration. 28 ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The Company intends to continue its drilling program on the Swan Creek leases. The existence of substantial deposits of hydrocarbons (oil and/or gas) in the Swan Creek structure (i.e. the rock formation beneath the surface) is confirmed by the following facts: The Swan Creek structure is located in an area known as the Eastern Overthrust Belt which is an area with numerous faults. A fault is an area where geologic plates overlap. The Eastern Overthrust Belt is geologically similar to the Western Overthrust Belt located in the Rocky Mountains, where there are other oil and gas producing properties. The Company has successfully completed thirteen gas wells in this area, all of which have been flow tested by metering gas from the wells through one-half inch orifice. These tests all verify the presence of a substantial reservoir of natural gas and/or oil. One of these wells, the Reed #1 tested at 4,800,000 cubic feet of gas per day with a pressure of 800 psi. Another well, the Sutton #1 tested at 1,200,000 cubic feet per day with a pressure of 150 psi. To date, the Company has not drilled any dry wells. In July 1998, the Company completed Phase I of its 8 inch 23 mile pipeline from the Swan Creek Field to Rogersville, Tennessee. With the assistance of the Tennessee Valley Authority, the Company was successful in utilizing TVA's rights-of-way along its main power grid from the Swan Creek Field to Rogersville, Tennessee. The Company's plan of operations for the next two years calls for the drilling of 50 additional wells on the Swan Creek Field at a cost of approximately $250,000 per well. The Company's future plans also include completing Phase II of its pipeline to extend its recently completed Phase I a distance of 20 miles at a cost of approximately $5,000,000 to connect with the main gas transmission line of East Tennessee Natural Gas. The Tennessee Department of Transportation has verbally granted the Company the right to lay Phase II of its pipeline along state highway 11 to Kingsport, Tennessee where the Company will connect its line with East Tennessee Natural Gas pipeline and other potential customers. This will allow the Company to sell all of the natural gas it can produce throughout the southeastern and northeastern United States. At the present time, the Company is capable of producing substantially more gas than it is able to sell. The Company estimates that its ultimate deliverability will reach 80 to 100 Mmcf per day or 2.5 to 3.1 Bcf per month once Phase II of its pipeline is completed. The Company expects to reach this capacity on or about December 31, 2002. The estimated time from start to finish of construction of Phase II of the Pipeline is 29 six to eight months. The Company does not presently have the funds needed to enable it to complete its drilling program and the extension of the pipeline. There can be no assurances that all of the funding necessary for the continuation of the drilling program and the completion of Phase II of the pipeline will become available. Moreover, no assurance can be given that the Company will be able to obtain the required rights of way to construct Phase II of its pipeline, and the completed Phase I of the pipeline will only serve production from a portion of the Swan Creek Field. In connection with its acquisition of all of AFG's assets, the Company acquired 208 working wells in Kansas. Pursuant to the acquisition agreement the Company was entitled to all income from those wells as of January 1, 1998. The acquisition was for a total purchase price of approximately $5.5 million, which consisted of $3 million in cash and seller financing of $2.5 million. The note evidencing this financing accrues interest at the rate of 9.5% per annum for the period from December 1998 to May 1999. After May 1999, the interest rate becomes 9% per annum. Monthly interest only payments are due from December 1998 to May 1999. Monthly installments of principal and interest of $138,349 are due from June 1999 to December 1999. There is a balloon payment of $983,773 due in January 2000. The aggregate current production from the Kansas Properties is approximately 1,002 Mcf of natural gas and 378 barrels of oil per day. Income from the Kansas properties at the present time is approximately $82,000 per month with net income after operating expenses of approximately $34,000 per month. Revenues from the Kansas Properties for 1998 were significantly lower than in the prior two years as a result of lower oil and gas prices. There are several capital projects that are available in Kansas which include drilling wells, recompletion of wells and major workovers to increase current production. These projects when completed may well increase production in Kansas. However, the cost of reworking certain existing wells is projected to be $1.4 million. Since the Company does not presently have the funds necessary to rework existing wells and/or drill additional wells the ability to undertake such efforts is dependent on the Company obtaining additional debt or equity financing. Management has made the decision to not undertake such efforts to raise the funds necessary to perform this work until the price of oil has moved to the $15 per barrel range. Current prices are in the $10 per barrel range. The Company has determined not to pursue the development of the Beech Creek, Fentress County, Wildcat, Burning Springs and Alabama Leases, all of which have expired. The Company, instead, will concentrate on the development of its other properties which management believes have greater economic potential and the acquisition of other properties. The Company has no plans, at present, to increase the number of its employees significantly. 30 This plan of operation is based upon many variables and estimates, all of which may change or prove to be other than or different from information relied upon. Results of Operations The Company incurred a net loss of $3,083,638 ($0.42 per share) in 1998 compared to a net loss of $4,370,570 ($0.71 per share) in 1997. The Company realized oil and gas revenues of $2,078,101 in 1998. In 1997 the Company had no revenues. Revenues in 1998 were offset by increased production costs and taxes of $1,943,944 compared to $3,748 in 1997. These increases in revenues and production costs were attributable primarily to the acquisition of the Kansas Properties in 1998. Depletion, depreciation and amortization increased from $79,267 in 1997 to $290,030 in 1998 due, again, primarily to the acquisition of the Kansas Properties. General and administrative costs decreased $163,709 to $1,372,132 in 1998. The decrease occurred primarily as a result of cost savings with respect to the Kansas Properties and the completion of Phase I of the Pipeline. Interest expense of $574,906 in 1998 was $1,310,542 less than the previous year due to less debt and funding transactions. Public relations costs of $342,203 in 1998 was $52,489 less than in 1997 as a result of an effort by the Company to cut costs. Legal and accounting costs in 1998 were $656,104 compared to $390,297 in 1997. This increase of $265,807 was due primarily to an increase in costs for auditing services and legal costs for services related to on-going litigation and a failed private placement. The Company did not have any income tax expense in 1998 or 1997 due to a net operating loss carryfoward. Deferred tax assets, consisting primarily of these loss carryfowards, have been fully reduced by a valuation allowance as management considers it unlikely these tax assets will be realized. Liquidity During 1998, as in prior years, revenues from operations were insufficient to fund the Company's operations. 31 The Company's primary source of funds during 1998 came from private placements of the Company's restricted securities in the amount of approximately $3,557,396 and borrowings of $3,021,555. The Company expects to need approximately $5,000,000 in 1999 to complete Phase II of its pipeline and $6,000,000 to continue development of its Swan Creek Field and other working capital requirements. The Company plans to raise this money from investors and/or lenders. The Company does not expect to realize positive cash flows from operations until Phase II of its pipeline is completed which is currently projected to be six to eight months from the start of construction of the pipeline. The Company's auditors, BDO Seidman, LLP, have stated in the "Report of Independent Certified Public Accountants" for December 31, 1998 to the Company's shareholders that as a result of the Company's losses from operations, its working capital deficiency and the requirement of an additional expenditure of approximately $5 million to complete Phase II of its pipeline there is "substantial doubt" about the Company's ability to continue as a going concern. Although there is no assurance that the Company will be able to raise the necessary funds to complete Phase II of the pipeline, management is engaged in discussions with several funding sources and anticipates that it will be able to raise the necessary financing in the near future. Management further believes that once such funding is in place it will be able to complete Phase II of the pipeline and it will be well-positioned to shortly have positive cash flow and be financially stable. New Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" is effective for years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income, its components and accumulated balances. This pronouncement did not have an impact on the Company's financial statements. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" is effective for years beginning after December 15, 1997. This statements establishes standards for the way that public business enterprises report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This pronouncement did not have an impact on the Company's financial statements. 32 Year 2000 Risks As is the case with other companies using computers in their operations, the Company is faced with the task of addressing the Year 2000 issue during the next year. The Year 2000 issue arises from the widespread use of computer programs that rely on two-digit date codes to perform computations or decision-making functions. The Company believes it has fully achieved Year 2000 compliance for all internal information systems. As such, management believes that Year 2000 transition of the Company's internal information systems will not have a material adverse effect on future results. Costs associated with compliance were immaterial and have been fully incurred. The Company is in the process of examining key third party relationships to determine, to the extent practical, the degree of such parties' Year 2000 compliance. The Company faces risks if key business suppliers, banks, utilities, transportation providers, communications providers or government services are not compliant for the Year 2000. In order to mitigate this risk, the Company is reviewing its options to continue operations using alternative suppliers, banks, utilities and providers of transportation and communication services. There can be no guarantee that the measures taken by the Company will solve the Year 2000 issue of such third parties. If such problems are not solved by such third parties and the Company can not locate alternative sources as outlined, this may have a significant adverse impact on the Company. ITEM 7 FINANCIAL STATEMENTS The financial statements and supplementary data commence on page F-1. ITEM 8 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Change from Price-Bednar, LLP, CPA to Charles M. Stivers, CPA Price-Bednar, LLP, Certified Public Accountants, were engaged as the Company's accountants as of February 22, 1996, to audit the financial statements of the Company for the calendar year ending December 31, 1995. The Company had engaged the services of another 33 accountant to complete certain preparatory on-site audit activities for preliminary review by Price-Bednar. These services were not timely provided by the other accountant. Also, many of the records of IRC were unavailable, and, Price-Bednar required a number of these records to be reconstructed prior to its completion of the audit. During the week of May 20, 1996, the Company was advised that the principal accountant of Price-Bednar, who was responsible for the Company's audit, would be out of town for the following week, and it became clear that Price-Bednar would not be able to complete the audit for at least three weeks, because certain information requested by them had not yet been provided by the Company. Price-Bednar was terminated by the President, effective June 7, 1996, and Charles M. Stivers, Certified Public Accountant, of Manchester, Kentucky, who had been engaged to conduct the preparatory on-site audit activities for Price-Bednar when the other accountant failed to perform as promised, indicated that he could timely deliver the required audit report and was promptly engaged to do so by the Board of Directors. Also, during, the Company's two most recent fiscal years, and since then, Price-Bednar has not advised the Company that any of the following exist or are applicable: (1) That the internal controls necessary for the Company to develop reliable financial statements do not exist, that information has come to their attention that has led them to no longer be able to rely on management's representations, or that has made them unwilling to be associated with the financial statements prepared by management; (2) That the Company needs to expand significantly the scope of its audit, or that information has come to their attention that if further investigated may materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements or any other financial presentation, or cause them to be unwilling to rely on management's representations or be associated with the Company's financial statements for the foregoing reasons or any other reason; or (3) That they have advised the Company that information has come to their attention that they have concluded materially impacts the fairness or reliability of either a previously issued report or the underlying financial statements for the foregoing 34 reasons or any other reason. Further, during the Company's two most recent fiscal years and since then, the Company has not consulted Price-Bednar regarding the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements or any other financial presentation whatsoever. The Company previously provided Price-Bednar with a copy of the disclosure herein and advised them to provide the Company with a letter addressed to the Commission as to whether they agree or disagree with the disclosures made herein. Price-Bednar's response to the Securities and Exchange Commission indicated it agreed with these disclosures. Change from Charles M. Stivers, CPA, to BDO Seidman, LLP On December 15, 1996, the Company terminated Charles M. Stivers, CPA and retained BDO Seidman, LLP to conduct the audit of the Company's financial statements for the year ended December 31, 1996 because it became apparent that Charles M. Stivers, as an individual practitioner, would not be able to perform the required audit on a timely basis. During, the Company's two most recent fiscal years, and since then, Charles M. Stivers has not advised the Company that any of the following exist or are applicable: (1) That the internal controls necessary for the Company to develop reliable financial statements do not exist, that information has come to his attention that has led him to no longer be able to rely on management's representations, or that has made him unwilling to be associated with the financial statements prepared by management; (2) That the Company needs to expand significantly the scope of its audit, or that information has come to his attention that if further investigated may materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements or any other financial presentation, or cause him to be unwilling to rely on management's representations or be associated with the Company's financial statements for the foregoing reasons or any other reason; or 35 (3) That he has advised the Company that information has come to his attention that he has concluded materially impacts the fairness or reliability of either a previously issued report or the underlying financial statements for the foregoing reasons or any other reason. Further, during the Company's two most recent fiscal years and since then, the Company has not consulted Charles M. Stivers, in his capacity as an independent certified public accountant, regarding the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements or any other financial presentation whatsoever. The Company has provided Charles M. Stivers with a copy of the disclosures provided herein and has advised him to provide the Company with a letter addressed to the Commission as to whether they agree or disagree with the disclosures made herein. Mr. Stivers' response to the Securities and Exchange Commission indicated he agreed with these disclosures. PART III ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Identification of Directors and Executive Officers The following table sets forth the names of all current directors and executive officers of the Company. These persons will serve until the next annual meeting of stockholders (to be held at such time as the Board of Directors shall determine) or until their successors are elected or appointed and qualified, or their prior resignations or terminations. 36 Date of Positions Election or Name Held Designation - ---- --------- ----------- Joseph E. Armstrong Director 3/13/97 2624 Selma Avenue Knoxville, TN 37914 John L. Kidde Director 6/19/98 154 Oldchester Road Essex Fells, N.J. 07021 James B. Kreamer Director 3/13/97 3621 Cabin Creek Road London, KY 40741 William A. Moffett Director 5/95 29 Chisolm Trail Santa Fe, NM 87501 Shigemi Morita Director 3/13/97 80 Park Avenue New York, N.Y. 10016 Allen H. Sweeney Chairman of 3/13/97 1400 Oak Tree Drive the Board of Edmund, OK 73003 Directors Malcolm E. Ratliff Director; Chief 4/21/98 12608 Avallon Place Executive Knoxville, TN 37922 Officer Robert M. Carter President 3/13/98 317 Heathermoor Drive Knoxville, TN 37922 Mark A. Ruth Chief Financial 12/14/98 104-D Cynthia Lane Officer Knoxville, TN 37922 Sheila Sloan Treasurer 3/13/97 121 Oostanali Way Loudon, TN 37774 Elizabeth Wendelken Secretary 3/13/97 8023 Stanley Road Powell, TN 37849 The Company's Board of Directors met 16 times in 1998. 37 Section 16(a) Beneficial Ownership Reporting Compliance In fiscal 1998, Malcolm E. Ratliff, the Company's Chief Executive Officer and a Director, Shigemi Morita and John L. Kidde, two of the Company's other Directors, and IRC, which owns more than ten percent (10%) of the Company's common stock inadvertently failed to timely file certain Form 3, 4 and 5 reports. Mr. Ratliff failed to timely file two Form 4 reports involving five transactions. Mr. Morita failed to timely file a Form 5 report and two Form 4 reports involving two transactions. Mr. Kidde failed to timely file his Form 3 and 5 reports and one Form 4 report involving one transaction. IRC failed to timely file three Form 4 reports involving four transactions. These deficiencies have all been cured. Business Experience Joseph Earl Armstrong is 41 years old and a resident of Knoxville, Tennessee. He is a graduate of the University of Tennessee and Morristown College where he received a Bachelor of Science Degree in Business Administration. From 1988 to the present, he has been an elected State Representative for Legislative District 15 in Tennessee. From 1994 to the present he has been in charge of government relations for the Atlanta Life Insurance Co. From 1981 to 1994 he was a District Manager for the Atlanta Life Insurance Co. John L. Kidde is 60 years old. He received a B.A. Degree from Princeton University in 1956. From 1969 to 1988 he served as a Director and Vice-President of Kidde International, Inc. which was engaged in several businesses in the area of safety, security and business protection. Subsequently and to date he has acted as President of KDM Development Corporation, an investment management company. Mr. Kidde is also a Co-Founder and Chairman of Australasia, Inc., a Pacific Rim investment fund. He is also a Director and Investment Committee member of Asset Management Advisors, Inc. of Palm Beach, Florida and an active General Partner in a number of venture capital partnerships including, Claflin Capital I-V, North American Venture Capital II and the Opportunity Fund. Mr. Kidde is a Trustee of the Stevens Institute of Technology and the Open Space Institute in New York. James B. Kreamer is 59 years old. He earned a Degree in Business from the University of Kansas in 1963. He has been the owner of several business enterprises. In 1982, he purchased a seat on the Kansas City Board of Trade where he served on several committees working on the development of futures trading. Since 1979, he has been engaged in the oil and gas business as an investor. He currently serves as a member of the Board of Directors of Panaco, Inc., a NASDAQ energy company. 38 William A. Moffett is 64 years old. He received a BS Degree in Geological Engineering from Oklahoma University in 1956. From 1977 to 1982, he was Operations Manager for Esso Exploration and Production in the United Kingdom. From 1982 to 1984, he was General Production Manager for Intercol (an affiliate of Exxon in Colombia). From 1984 to 1991 he was CEO for Stan Vac Indonesia, a joint Exxon/Mobil affiliate. Shigemi Morita is 63 years old. He received an A.B. Degree from Elon College in North Carolina. From 1969 to 1996 he was the President and CEO of Morita & Co., an insurance agency specializing in insurance for Japanese companies doing business in the United States. In 1996, Morita & Co., Inc. was acquired by Tokio Marine Management, Inc., Mitsubishi International Corporation in New York and Mitsubishi International, Ltd. in Tokyo. He remains as a consultant. Malcolm E. Ratliff is 52 years old. He attended the University of Mississippi from 1965 to 1967. He has been involved in the oil and gas business since 1974, initially as a roustabout and then developing oil and gas leases. In 1992 he was involved with personal investments. In 1993 and 1994 he experienced serious health problems which prevented him from working. In April 1995, he became associated with the Company and, after its merger with Onasco, he served as a consultant to the Company's Board of Directors. From March 13, 1997 until March 13, 1998 when he resigned for health reasons, he was the Chief Executive Officer of the Company, and until his resignation on March 13, 1998, he was also acting as interim President of the Company as the result of the death, on September 19, 1997, of Daniel Follmer, the Company's President. On April 21, 1998 at the request of the Company's Board of Directors, Mr. Ratliff agreed to return to the management of the Company as its Chief Executive Officer. On June 19, 1998 at the Company's Annual Meeting of Stockholders he was elected to the Company's Board of Directors. Allen H. Sweeney is 52 years old. He received an MBA in finance from Oklahoma City University in 1972 and a Bachelor Degree in Accounting from Oklahoma State University in 1969. From 1978 to 1980, he served as Treasurer and CEO of Phoenix Resources Company. From 1980 to 1981, he served as Vice-President-Finance for Plains Resources, Inc. From 1982 to 1984, he was Vice- President-Finance for Wildcat Mud, Inc. From 1984 to 1992 he operated an independent consulting service under the name of AHS and Associates, Inc. Since 1992, he has served as Director and President of Columbia Production Company and Mid-America Waste Management, Inc. Robert M. Carter is 63 years old. He received a B.A. degree in Business form the Middle Tennessee State College. For 39 35 years was an owner of Carter Lumber & Building Supply Company and Carter Warehouse in Loudon County, Tennessee. He has been with the Company since 1995 and during that time has been involved in all phases of the Company's business including pipeline construction, leasing financing and the negotiation of acquisitions. Mr. Carter was elected Vice-President of the Company in March, 1996, as Executive Vice-President in April 1997 and on March 13, 1998 he was elected as President of the Company. Mark A. Ruth is 40 years old. He is a certified public accountant with 17 years accounting experience. He received a B.S. degree in accounting with honors from the University of Tennessee at Knoxville. He has served as a project controls engineer for Bechtel Jacobs Company, LLC; business manager and finance officer for Lockheed Martin Energy Systems; settlement department head and senior accountant for the Federal deposit Insurance Corporation; senior financial analyst/internal auditor for Phillips Consumer Electronics Corporation; and, as an auditor for Arthur Andersen and Company. Committees The Company has operating audit and compensation committees. Messers. Sweeney, Armstrong and Morita comprise the audit committee and Messers. Sweeney, Ratliff and Morita are the members of the compensation committee. Family Relationships There are no family relationships between any of the present directors or executive officers of the Company. Involvement in Certain Legal Proceeding To the knowledge of management, during the past five years, no present or former director, executive officer, affiliate or person nominated to become a director or an executive officer of the Company: (1) Filed a petition under the federal bankruptcy laws or any state insolvency law, nor had a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he or she was a general partner at or within two years before the time of such filing, or any corporation or business association of which he or she was an executive officer at or within two years before the time of such filing; (2) Was convicted in a criminal proceeding or named 40 subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) Was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from or otherwise limiting his or her involvement in any type of business, securities or banking activities; (4) Was found by a court of competent jurisdiction in a civil action, by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the Securities and Exchange Commission has not been subsequently reversed, suspended, or vacated. ITEM 10 EXECUTIVE COMPENSATION The following table sets forth a summary of all compensation awarded to, earned or paid to, the Company's Chief Executive Officer during fiscal years ended December 31, 1998, December 31, 1997 and December 31, 1996. None of the Company's other executive officers earned compensation in excess of $100,000 per annum for services rendered to the Company in any capacity. 41 Summary Compensation Table Annual Compensation
Name and Other Annual Principal Position Year Salary ($) Bonus ($) Compensation ($) Malcolm E. Ratliff, 1998 $ 60,000 $-0- $500 Chief Executive Officer 1997 $ 9,731 $-0- $500 1996 $-0- $-0- $500 James E. Kaiser, 1998 $-0- $-0- $-0- Chief Executive Officer and 1997 $ 6,154 $-0- $-0- General Counsel 1996 $20,000 $-0- $-0- Theodore Scallan, 1998 -0- $-0- -0- Chief Executive Officer and 1997 -0- $-0- -0- President 1996 $53,120 $-0- -0- George E. Walter, Jr. 1998 -0- $-0- $-0- Chief Executive Officer 1997 -0- $-0- $-0- 1996 $ 923 $-0- $20,000
-----------Long Term Awards----------- -----------Awards--------------Payouts Name and Restricted Securities Payouts All Other Principal Position Stock Underlying Compen- Awards($) Options sation /SARs(#) Malcolm E. Ratliff, -0- 50,000 -0- -0- Chief Executive Officer -0- -0- -0- -0- -0- -0- -0- -0- James E. Kaiser, -0- -0- -0- -0- Chief Executive Officer and -0- -0- -0- -0- General Counsel -0- -0- -0- -0- Theodore Scallan, -0- -0- -0- -0- Chief Executive Officer and -0- -0- -0- -0- President 462,250(1) 100,000(2) -0- $20,000(3) George E. Walter, Jr. -0- -0- -0- -0- Chief Executive Officer -0- -0- -0- -0- -0- -0- -0- -0-
- -------- (1) Represents shares transferred from majority shareholder, based upon closing price of $6.25 on 7/28/95, closing price of $7.25 on 8/31/95 and $6.00, the bid on 11/28/95. (2) Option has expired. (3) Termination compensation. 42 OPTION GRANTS IN LAST FISCAL YEAR
Individualized Grants Name Number of Percent of Total Exercise Expiration Securities Options/SARs or Base Date Underlying Granted to Price Options/SARs Employees in ($/Sh) Granted (#) Fiscal 1998 Malcolm E. 50,000 100% $7.00 6/19/99 Ratliff
No options were exercised during fiscal year ended December 31, 1998 by the Chief Executive Officer. None of the Company's other executive officers earned compensation in excess of $100,000 per annum for services rendered to the Company in any capacity. The Company does not presently have a pension or similar plan for its directors, executive officers or employees. Management intends to adopt a 401(k) plan and full liability insurance for directors and executive officers and a health insurance plan for employees in the near future. Compensation of Directors The Board of Directors has resolved to compensate members of the Board of Directors for attendance at meetings at the rate of $250 per day, together with direct out-of-pocket expenses incurred in attendance at the meetings, including travel. The Directors, however, have waived such fees due to them as of this date for prior meetings. Members of the Board of Directors may also be requested to perform consulting or other professional services for the Company from time to time. The Board of Directors will set a rate of compensation for such services which may be no less favorable to the Company than if the services had been performed by an independent third party contractor. The Board of Directors has reserved to itself the right to review all directors' claims for compensation on an ad hoc basis. Employment Contracts There are presently no employment contracts relating to any member of management. However, depending upon the Company's operations and requirements, the Company may offer long term contracts to directors, executive officers or key employees in the future. 43 ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners The following tables set forth the share holdings of the Company's directors and executive officers and those persons who own more than 5% of the Company's common stock as of March 15, 1999 with these computations being based upon 7,992,016 shares of common stock being outstanding and assumes the exercise of 375,000 shares vested under options granted by the Company as of March 15, 1999. Five Percent Stockholders Percent Number of Shares of Name and Address Title Beneficially Owned Class - ---------------- ----- ------------------ ------- Industrial Resources Stockholder 2,853,823 34.1% Corporation(4) 603 Main Ave. Knoxville, TN 37902 Spoonbill, Inc. Stockholder 418,024 5.2% Tung Wai Commercial Bldg. 20th Floor 109-111 Gloucester Rd. Wanchai, Hong Kong - -------- (4) James Ratliff is the sole owner of the outstanding securities of Industrial Resources Corporation ("IRC"), and, accordingly, he may be deemed to be an affiliate of the Company. James Ratliff is also the father of Malcolm E. Ratliff, the Company's Chief Executive Officer and a Director. Malcolm E. Ratliff is the President of IRC and his wife, Linda Ratliff, is the Secretary of IRC. Tracmark, Inc., is a corporation, the sole shareholder of which is James Ratliff, as Trustee for the Ratliff Family. James Ratliff is the President, Malcolm E. Ratliff is the Vice-President and Linda Ratliff is the Secretary-Treasurer of Tracmark, Inc. which may also be deemed an affiliate of the Company. James Ratliff is the sole shareholder and President of Ratliff Farms, Inc. Malcolm E. Ratliff is the Vice-President/Secretary of Ratliff Farms. The shares listed here for IRC include 67,519 shares owned directly and an option to purchase 50,000 shares held by Malcolm E. Ratliff, 30,000 shares owned directly by Tracmark, Inc. and 128,700 shares owned directly by Ratliff Farms, Inc. 44 Directors and Executive Officers -------------------------------- Shares Name and Beneficially Percent of Address Title Owned Class - -------- ----- ------------ ---------- Joseph Earl Armstrong Director 50,000(5) Less than 1% 2624 Selma Avenue Knoxville, TN 37914 Robert M. Carter President 98,000(6) 1.21% 317 Heathermoor Drive Knoxville, TN 37922 John L. Kidde Director 59,000(7) Less than 1% 154 Oldchester Road Essex Falls, NJ 07021 James B. Kreamer Director 50,000(8) Less than 1% 3621 Cabin Creek Rd. London, KY 40741 William A. Moffett Director 100,000 1.25% 1073 Encantado Drive Santa Fe, NM 87501 Shigemi Morita Director 171,141(9) 2.13% 80 Park Avenue New York, N.Y. 10016 - -------- (5) Consists of shares underlying an option. (6) Consists of 23,000 shares held directly and options to purchase 75,000 shares. (7) Consists of 9,000 shares held directly and options to purchase 50,000 shares. (8) Consists of options to purchase shares. (9) Consists of 61,741 shares held directly (including 7,000 shares owned by Morita Poperties, Inc. of which Shigemi Morita is the sole shareholder), 79,400 shares held as an IRA beneficiary and options to purchase 30,000 shares. 45 Malcolm E. Ratliff Director; 2,853,823(10) 34.1% 12608 Avallon Place Chief Knoxville, TN 37922 Executive Officer Mark A. Ruth Chief -0- -0- 104-D Cynthia Lane Financial Knoxville, TN 37922 Officer Sheila F. Sloan Treasurer 12,000(11) Less than 1% 121 Oostanali Way Loudon, TN 37774 Allen H. Sweeney Chairman of 150,500(12) 1.87% 1400 Oak Tree Drive the Board Edmund, OK 73003 Elizabeth Wendelken Secretary 11,000(13) Less than 1% 8023 Stanley Road Powell, TN 37849 All Officers and 3,555,464(14) 42.49% Directors as a Group - -------- (10) Malcolm E. Ratlif, the Company's Chief Executive Officer and a Director, is also President of Industrial Resources Corporation ("IRC"). James Ratliff, who is the father of Malcolm E. Ratliff, is the sole shareholder of IRC and Linda Ratliff, the wife of Malcolm E. Ratliff, is the Secretary of IRC. Malcolm E. Ratliff is also Vice-President of Tracmark, Inc., a corporation whose sole stockholder is James Ratliff as Trustee for the Ratliff Family. James Ratliff is the sole shareholder and president of Ratliff Farms, Inc. Malcolm E. Ratliff is the Vice- President/Secretary of Ratliff Farms, Inc. The shares listed here include 67,519 shares owned directly and an option to purchase 50,000 shares held by Malcolm E. Ratliff, 2,577,604 shares owned directly by IRC, 30,000 shares owned directly by Tracmark, Inc. and 128,700 shares owned directly by Ratliff Farms, Inc. (11) Consists of 2,000 shares held directly and options to purchase 10,000 shares. (12) Consists of 100,500 shares held indirectly through a company which he controls and options to purchase 50,000 shares. (13) Consists of 1,000 shares held directly and options to purchase 10,000 shares. (14) Consists of shares held directly and indirectly by management, shares held by Industrial Resources Corporation, shares held by Tracmark, Inc. Ratliff Farms, Inc. and 375,000 shares underlying options. 46 Changes in Control Except as indicated below, to the knowledge of the Company's management, there are no present arrangements or pledges of the Company's securities which may result in a change in control of the Company. ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with Management and Others Except as set forth hereafter, there have been no material transactions, series of similar transactions or currently proposed transactions, to which the Company or any of its subsidiaries was or is to be a party, in which the amount involved exceeds $60,000 and in which any director or executive officer or any security holder who is known to the Company to own of record or beneficially more than 5% of the Company's common stock, or any member of the immediate family of any of the foregoing persons, had a material interest. During 1997, the Company converted $333,719 of debt payable to IRC to 59,328 shares of common stock, $12,398 of debt payable to Malcolm E. Ratliff to 2,204 shares of common stock and $138,105 of debt payable to Tracmark, Inc. to 24,552 shares of common stock. Those obligations arose from loans to the Company by IRC, Malcolm E. Ratliff and Tracmark, Inc. During 1997 the Company borrowed the sum of $1,000,000 from an individual, Neal Harding. The loan from Mr. Harding was used primarily for pipeline construction. Repayment of the loan from Mr. Harding was guaranteed by IRC, which also granted an option to Mr. Harding to purchase 300,000 shares of stock of the Company it owned at a price of $10 per share. One-half of that loan was repaid in January 1998 from existing cash revenues and the balance was paid in October 1998 by paying Mr. Harding $250,680.56 in cash and issuing to him 2,950 shares of the Company's Series A 8% Cumulative Convertible Preferred Stock. The Company has issued fully paid 25% working interests in six wells in the Swan Creek Field to Shigemi Morita, one of the Directors of the Company, which were paid for in part by crediting Mr. Morita $360,000 for placement fees in connection with private placements of the Company's common stock which occurred during the fourth quarter of 1997 and the first quarter of 1998. Mr. Morita was given an option that if it was determined that a well(s) at the time of completion of the drilling was not economically feasible and as such was subsequently plugged and abandoned, he had 30 days, after written notice from the Company, to convert amounts paid for that 47 well(s) to restricted shares of the Company's common stock at 70% of its then current market value. However, all six of the wells in which Mr. Morita has a participation interest are producing, therefore his options for these wells are not exercisable. On July 16, 1998, the Company entered into a loan agreement with five individual investors totaling $800,000. The loans were secured by a pledge of 118,200 shares of the Company's Common Stock owned by Malcolm E. Ratliff, the Company's Chief Executive Officer and a Director. The loans bore interest at the rate of 8% per annum and matured on October 14, 1998. Loan origination fees consisted of $64,000 in cash to the broker who arranged the loan and 16,800 shares of the Company's common stock advanced to the lenders and broker on behalf of the Company by Malcolm E. Ratliff. Approximately $520,000 of this loan has been repaid by the Company out of proceeds from a Convertible Note in the amount of $1,500,000 received during October, 1998. The Convertible Note matures in five years and is convertible into shares of the Company's common stock at a price of $6.25 per share. In connection with the loan received by the Company evidenced by the Convertible Note, the Company issued 25,000 shares of its common stock to the lender as a loan fee. The balance of the $800,000 loans have been satisfied by the issuance to the lenders of 2,800 shares of Series A 8% Cumulative Convertible Preferred Stock convertible at a price of $5.75 per share. The Company has entered into a financial consulting agreement with Proton Capital, LLC ("Proton") of Westport Connecticut, for a two (2) year period commencing as of January 1, 1999, whereby Proton is to provide services in connection with shareholder relations, press releases, long term financial planning, corporate reorganizations and financing. The Company is to pay Proton $10,000 per month commencing in June 1999, or sooner if financing is procured by Proton. Further, if the Company enters into a business combination with parties introduced by Proton, then the Company will pay Proton a finders fee according to a fee schedule ranging from a fee of five (5%) percent for a business combination wherein the consideration does not exceed $5 million to a fee of $320,000 plus two (2%) percent in excess of $7 million where the transaction consideration is in excess of $7 million. Malcolm E. Ratliff, the Chief Executive Officer and a Director of the Company, has entered into an agreement with Proton to sell Proton not more than 370,000 shares of common stock of the Company at $5.00 per share over a five (5) year period. Proton has issued a non-recourse promissory note in the amount of $1.85 million, together with interest at six (6%) percent per annum. The promissory note is payable out of proceeds of the sale of the shares. The 370,000 shares were transferred from IRC, an affiliate of Mr. Ratliff, to a privately held company solely owned by James Ratliff, the father of Malcolm E. Ratliff, and subsequently to Proton. As of the date of this Report, no shares have been sold by Proton under the terms of this 48 agreement. Indebtedness of Management No officer, director or security holder known to the Company to own of record or beneficially more than 5% of the Company's common stock or any member of the immediate family of any of the foregoing persons is indebted to the Company. Parents of the Issuer Unless IRC may be deemed to be a parent of the Company by virtue of its stock ownership, the Company has no parents. 49 PART IV ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K. 1. Financial Statements: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows 2. Financial Statement Schedules: Schedule II - Accounts Receivable from Related Parties, Underwriters, Promoters and Employees other than Related Parties Schedule X - Supplementary Income Statement Information 3. Exhibits. (a) - The following documents heretofore filed by the Company with the commission are hereby incorporated by reference herein: (i) from the Registration Statement on Form 10-SB filed with the Commission August 7, 1997 (Registration No. 0-29386) Exhibit Number and Description 3.1 Initial Articles of Incorporation 3.2 Bylaws 3.3 Articles of Amendment dated April 12, 1966 3.4 Articles of Amendment dated July 12, 1984 3.5 Articles of Amendment dated December 18, 1991 3.6 Articles of Amendment dated September 11, 1992 3.7 Articles of Incorporation of the Tennessee wholly-owned subsidiary 3.8 Articles of Merger and Plan of Merger (taking into account the formation of the Tennessee wholly-owned subsidiary for the purpose of changing the Company's domicile and effecting reverse split) 5.1 Opinion of Robson & Miller, LLP 10.1(a) Purchase Agreement with IRC 10.1(b) Amendment to Purchase Agreement with IRC 10.1(c) General Bill of Sale and Promissory Note 10.2(a) Compensation Agreement - M. E. Ratliff 10.2(b) Compensation Agreement - Jeffrey D. Jenson 10.2(c) Compensation Agreement - Leonard W. Burningham 10.3 Agreement with The Natural Gas Utility District of 50 Hawkins County, Tennessee 10.4 Agreement with Powell Valley Electric Cooperative, Inc. 10.5 Agreement with Enserch Energy Services, Inc. 16.1 Letter of David T. Thomson, CPA, Regarding Change in Certifying Accountant 16.2 Letter of Charles M. Stivers, CPA, Regarding Change in Certifying Accountant 16.3 Letter of Price-Bednar, LLP, CPA, Regarding Change in Certifying Accountant 23.1 Consent of Charles M. Stivers, CPA 23.2 Consent of David T. Thomson, CPA 23.3 Consent of BDO Seidman, LLP 23.4 Consent of Robson & Miller, LLP 99.1 Beech Creek Lease Schedule 99.2 Wildcat Lease Schedule 99.3 Burning Springs Lease Schedule 99.4 Fentress County Lease Schedule 99.5 Swan Creek Lease Schedule 99.6 Alabama Lease Schedule 99.7 Coburn Engineering Report dated June 18, 1997. (ii) from Amendment No. 1 to the Registration Statement on Form 10-SB filed with the Commission December 11, 1997 (Registration No. 0-29386) Exhibit Number and Description 5.1 Opinion of Robson & Miller, LLP 23.1 Consent of Charles M. Stivers, CPA 23.3 Consent of BDO Seidman, LLP 23.4 Consent of Robson & Miller, LLP 23.5 Consent of Coburn Petroleum Engineering Co. (iii) Current Report on Form 8-K, Date of Report, February 27, 1998: Exhibit Number and Description 2.1 Plan of Acquisition. Agreement dated December 18, 1997 between AFG Energy, Inc. and Tengasco, Inc. regarding sale of assets of AFG Energy, Inc. (iii) Current Report on Form 8-KA, Date of Report, February 27, 1998: Exhibit Number and Description Financial Statements of Business Acquired (AFG Energy, Inc.) Independent auditor's report, statement of revenues and direct operating expenses and notes to financial statements of the properties acquired by Tengasco, Inc. from AFG Energy, Inc. 51 Pro Forma Financial Information Pro forma combined statements of loss for year ended December 31, 1997 for Tengasco, Inc. from AFG Energy, Inc. 2.1(a) Exhibit A to Agreement dated December 18, 1997 between AFG Energy, Inc. and Tengasco, Inc. regarding sale of assets of AFG Energy, Inc. 2.1(a) Exhibit A to Agreement dated December 18, 1997 between AFG Energy, Inc. and Tengasco, Inc. regarding sale of assets of AFG Energy, Inc. (iv) Annual Report on Form 10-KSB, Date of Report, April 10, 1998 Exhibit Number and Description 10.6 Teaming Agreement between Operations Management International, Inc. and Tengasco, Inc. dated March 12, 1997 10.7 Agreement for Transition Services between Operations Management International, Inc. and Tengasco, Inc. regarding the East Tennessee Technology Park 99.8 Coburn Engineering Report dated February 18, 1997 (Paper copy filed on Form SE pursuant to continuing hardship granted by Office of EDGAR Policy) 99.9 Columbia Engineering Report dated March 2, 1997 (Paper copy filed on Form SE pursuant to continuing hardship granted by Office of EDGAR Policy) The following exhibits are filed herewith: 3.9 Amendment to the Corporate Charter dated June 24, 1998 3.10 Amendment to the Corporate Charter dated October 30, 1998 21 List of Subsidiaries 99.10 Coburn Engineering Report dated February 9, 1999 (Paper copy filed on Form SE pursuant to continuing hardship granted by Office of EDGAR Policy) 99.11 Columbia Engineering Report dated February 20, 1999 (Paper copy filed on Form SE pursuant to continuing hardship granted by Office of EDGAR Policy) 52 Tengasco, Inc. Consolidated Financial Statements Years Ended December 31, 1998 and 1997 F-1 Tengasco, Inc. Contents Report of Independent Certified Public Accountants 2 Consolidated Financial Statements Balance sheets 3 Statements of loss 4 Statements of stockholders' equity 5 Statements of cash flows 6-7 Notes to financial statements 8-30 F-2 Report of Independent Certified Public Accountants Board of Directors Tengasco, Inc. Knoxville, Tennessee We have audited the accompanying consolidated balance sheets of Tengasco, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of loss, stockholders' equity and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tengasco, Inc. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and as of December 31, 1998 has a working capital deficiency. Further, management estimates that additional financing of approximately $5.0 million is required in order for the Company to complete Phase II of its pipeline facilities under construction. These matters raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. s/ BDO Seidman, LLP Atlanta, Georgia March 5, 1999 F-3
December 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Assets (Note 8) Current Cash and cash equivalents $ 913,194 $ 4,451,274 Accounts receivable 147,050 - Inventory 100,298 140,253 Prepaid expenses - 270,939 - ----------------------------------------------------------------------------------------------------------------------- Total current assets 1,160,542 4,862,466 Oil and gas properties, net (on the basis of full cost accounting) (Note 5) 7,747,655 6,872,571 Pipeline facilities under construction, at cost (Note 6) 4,019,209 2,596,967 Other property and equipment, net (Notes 7 and 9) 461,009 302,146 Other 137,362 10,661 - ----------------------------------------------------------------------------------------------------------------------- $13,525,777 $14,644,811 - -----------------------------------------------------------------------------------------------------------------------
F-4 Tengasco, Inc. Consolidated Balance Sheets
December 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current Due to AFG Energy, Inc. (Note 3) $ 953,895 $3,552,005 Notes payable (Note 8) 1,000,000 2,007,486 Loans payable to affiliates (Note 4) 413,800 252,398 Current maturities of long-term debt (Note 9) 89,135 41,161 Accounts payable - trade 351,567 527,398 Accrued liabilities 281,360 256,589 - ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 3,089,757 6,637,037 Due to AFG Energy, Inc. (Note 3) 976,207 1,865,078 Long term debt, less current maturities (Note 9) 2,214,723 141,215 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 6,280,687 8,643,330 - ----------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 6, 8 and 10) - ----------------------------------------------------------------------------------------------------------------------- Stockholders' equity (Notes 8 and 11) Convertible redeemable preferred stock; redemption value $800,000; 8,000 shares outstanding 800,000 - Common stock, $.001 par value; authorized 50,000,000 shares, issued and outstanding 7,644,212 (7,029,835 in 1997) 7,644 7,029 Common stock to be issued (Note 12) 700,000 - Additional paid-in capital 16,796,038 13,470,446 Unamortized stock option awards (162,500) (63,540) Accumulated deficit (10,496,092) (7,412,454) - ----------------------------------------------------------------------------------------------------------------------- 7,645,090 6,001,481 Due from stockholder (Note 12) (400,000) - - ----------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 7,245,090 6,001,481 - ----------------------------------------------------------------------------------------------------------------------- $13,525,777 $14,644,811 - -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5 Tengasco, Inc. Consolidated Statements of Loss
Years ended December 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- As restated (Note 17) Oil and gas revenues $2,078,101 $ - - ----------------------------------------------------------------------------------------------------------------------- Costs and expenses Production costs and taxes 1,943,944 3,748 Depletion, depreciation and amortization 290,030 79,267 General and administrative costs 1,372,132 1,535,841 Interest expense 574,906 1,885,448 Public relations 342,803 395,292 Legal and accounting 656,104 390,297 Realized (gain) loss on sale of investments (18,180) 80,677 - ----------------------------------------------------------------------------------------------------------------------- Total costs and expenses 5,161,739 4,370,570 - ----------------------------------------------------------------------------------------------------------------------- Net loss $(3,083,638) $(4,370,570) - ----------------------------------------------------------------------------------------------------------------------- Net loss per share - basic and diluted $(0.42) $(0.71) - -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-6 Tengasco, Inc. Consolidated Statements of Stockholders' Equity
Convertible Unamortized redeemable Common Additional stock preferred Common Stock stock paid-in option Accumulated ------------------------- stock Shares Amount issuable capital awards deficit - ------------------------------------- ---------- ------------ ------------ -- ---------- ------------- ----------- ------------- Balance, December 31, 1996 $ - 5,707,827 $5,708 $ - $ 4,783,369 $(292,186) $(3,041,884) Common stock issued for exercised options - 345,414 345 - 94,645 - - Common stock issued for the extinguishment of debt (Note 7) - 86,084 86 - 677,829 - - Stock option awards and amortization, net - - - - (175,069) 228,646 - Common stock options granted to non-employees - - - - 295,419 - - Common stock issued in private placements - 754,510 754 - 6,307,201 - - Stock issued for loan origination fee (Note 8) - 100,000 100 - 1,024,900 - - Stock issued for services - 36,000 36 - 462,152 - - Net loss for the year ended December 31, 1997 - as - - - - - - (4,370,570) restated (Note 17) - ------------------------------------- ---------- ------------ ------------ -- ---------- ------------- ----------- ------------- Balance, December 31, 1997 - 7,029,835 7,029 - 13,470,446 (63,540) (7,412,454) Issuance of convertible redeemable preferred stock (8,000 shares) 800,000 - - - (64,000) - - Common stock issued for exercised options - 2,250 2 - 15,748 - - Stock option awards and amortization, net - - - - 325,000 (98,960) - - Common stock issued for loan fee - 25,000 25 - 127,975 - - Common stock issued in private placements, net of related expense - 578,111 579 - 2,860,518 - Common stock to be issued in private placement - - - 700,000 - - - Common stock issued for compensation - 6,000 6 - 39,714 - - Stock issued for services - 3,016 3 - 20,637 - Net loss for the year ended December 31, 1998 - - - - - - (3,083,638) - ------------------------------------- ---------- ------------ ------------ -- ---------- ------------- ----------- ------------- Balance, December 31, 1998 $800,000 7,644,212 $7,644 $700,000 $16,796,038 $(162,500) $(10,496,092) - ------------------------------------- ---------- ------------ ------------ -- ---------- ------------- ----------- -------------
See accompanying notes to consolidated financial statements. F-7 Tengasco, Inc. Consolidated Statements of Stockholders' Equity See accompanying notes to consolidated financial statements. F-8 Tengasco, Inc. Consolidated Statements of Cash Flows
Years ended December 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- As restated (Note 17) Operating activities Net loss $(3,083,638) $(4,370,570) Adjustments to reconcile net loss to net cash used in operating activities: Depletion, depreciation and amortization 290,030 79,267 Compensation and services paid in stock options and warrants and common stock 286,400 736,183 Interest expense paid by issuance of payable to affiliate 163,800 - Amortization of loan fees paid by issuance of common stock and stock options - 1,293,694 Amortization of imputed value of stock warrants issued in connection with notes payable - 220,000 Amortization of deferred loan costs - 170,833 Amortization of deferred publicity costs 240,000 - Changes in assets and liabilities: Accounts receivable (147,050) 4,658 Inventory 39,955 - Prepaid expenses and other assets 32,238 (4,125) Accounts payable (175,831) 180,305 Accrued liabilities 24,771 148,333 - ----------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (2,329,325) (1,541,422) - ----------------------------------------------------------------------------------------------------------------------- Investing activities Acquisition of certain assets of AFG Energy, Inc. (2,990,253) - Additions to property and equipment (203,507) (178,169) Net additions to oil and gas properties (1,516,770) (545,429) Proceeds on sale of oil and gas interests - 310,000 Additions to pipeline facilities under construction (1,422,242) (1,709,652) - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (6,132,772) (2,123,250) - -----------------------------------------------------------------------------------------------------------------------
F-9 Tengasco, Inc. Consolidated Statements of Cash Flows
Years ended December 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- As restated (Note 17) Financing activities Proceeds from exercise of options 15,751 - Proceeds from borrowings 3,021,555 1,617,924 Repayments of borrowings (1,831,685) (51,478) Net proceeds from issuance of common stock 3,557,396 6,402,946 Net proceeds from private placements of convertible redeemable preferred stock 225,000 - Payment of commissions on issuance of redeemable convertible preferred stock to extinguish debt (64,000) - - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 4,924,017 7,969,392 - ----------------------------------------------------------------------------------------------------------------------- Net change cash and cash equivalents (3,538,080) 4,304,720 Cash and cash equivalents, beginning of year 4,451,274 146,554 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 913,194 $ 4,451,274 - -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-10 Tengasco, Inc. Notes to Consolidated Financial Statements 1. Summary of Organization Significant Accounting Policies Tengasco, Inc. (the "Company"), a publicly held corporation, was organized under the laws of the State of Utah on April 18, 1916, as Gold Deposit Mining and Milling Company. The Company subsequently changed its name to Onasco Companies, Inc. Effective May 2, 1995, Industrial Resources Corporation, a Kentucky corporation ("IRC"), acquired voting control of the Company in exchange for approximately 60% of the assets of IRC. Accordingly, the assets acquired, which included certain oil and gas leases, equipment, marketable securities and vehicles, were recorded at IRC's historical cost. The transaction was accomplished through the Company's issuance of 4,000,000 shares of its' common stock and a $450,000, 8% promissory note payable to IRC. The promissory note was converted into 83,799 shares of Tengasco, Inc. common stock in December 1995. The Company changed its domicile from the State of Utah to the State of Tennessee on May 5, 1995 and its name was changed from "Onasco Companies, Inc." to "Tengasco, Inc." The Company's principal business consists of oil and gas exploration, production and related property management in the Appalachian region of eastern Tennessee and in the state of Kansas. The Company's corporate offices are in Knoxville, Tennessee. The Company operates as one reportable business segment based on the similarity of activities. During 1996, the Company formed Tengasco Pipeline Corporation, a wholly-owned subsidiary, to manage the construction and operation of a 43 mile gas pipeline as well as other pipelines planned for the future. Consolidation The consolidated financial statements include the accounts of the Company, Tengasco Pipeline Corporation and Tennessee Land and Mineral, Inc. All significant intercompany balances and transactions have been eliminated. Cash and Cash Equivalents The Company considers all investments with a maturity of three months or less when purchased to be cash equivalents. F-11 Tengasco, Inc. Notes to Consolidated Financial Statements Inventory Inventory consists primarily of crude oil in tanks and is carried at the lower of current market value or cost. Oil and Gas Properties The Company follows the full cost method of accounting for oil and gas property acquisition, exploration and development activities. Under this method, all productive and nonproductive costs incurred in connection with the acquisition of, exploration for and development of oil and gas reserves for each cost center are capitalized. Capitalized costs include lease acquisitions, geological and geophysical work, delay rentals and the costs of drilling, completing and equipping oil and gas wells. Gains or losses are recognized only upon sales or dispositions of significant amounts of oil and gas reserves. Proceeds from all other sales or dispositions are treated as reductions to capitalized costs. The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated costs of plugging and abandonment, net of estimated salvage value, are amortized on the unit-of-production method based on total proved reserves. The costs of unproved properties are excluded from amortization until the properties are evaluated, subject to an annual assessment of whether impairment has occurred. The costs of significant development projects awaiting completion of pipeline facilities are excluded from amortization until such time as the pipeline facilities are completed. The Company's proved gas reserves were estimated by Columbia Engineering, independent petroleum engineers, for the Kansas properties, and by Coburn Petroleum Engineering for the Tennessee properties. The capitalized oil and gas property and pipeline costs, less accumulated depreciation, depletion and amortization and related deferred income taxes, if any, are generally limited to an amount (the ceiling limitation) equal to the sum of: (a) the present value of estimated future net revenues computed by applying current prices in effect as of the balance sheet date (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves, less estimated future expenditures (based on current costs) to be incurred in developing and producing the reserves using a discount factor of 10% and assuming continuation of existing economic conditions; and F-12 Tengasco, Inc. Notes to Consolidated Financial Statements (b) the cost of investments in unevaluated properties excluded from the costs being amortized. No ceiling writedown was recorded in 1998 or 1997. Pipeline Facilities Under Construction Pipeline facilities under construction are carried at cost. The Company will provide for depreciation of Phase II of the pipeline facilities using the straight-line method over the estimated useful life of the asset once this section of the pipeline is completed and placed in service. Phase II is expected to be completed in 1999. Accordingly, no depreciation expense has been recorded for 1998 and 1997 relating to Phase II of the pipeline facilities. Other property and Equipment Other property and equipment are carried at cost. The Company provides for depreciation of other property and equipment using the straight-line method over the estimated useful lives of the assets which range from five to seven years. Income Taxes The Company accounts for income taxes using the "liability method." Accordingly, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. At times, such cash in banks is in excess of the FDIC insurance limit. At December 31, 1998, the Company had deposits with one financial institution in an amount which exceeds the federally insured limit by approximately $700,000. The Company's primary business activities include oil and gas sales to several customers in the states of Tennessee and Kansas. The related trade receivables subject the Company to a concentration of credit risk within the oil and gas industry. F-13 Tengasco, Inc. Notes to Consolidated Financial Statements Loss Per Common Share Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of shares outstanding during each year. Shares issued during the year are weighted for the portion of the year that they were outstanding. Diluted loss per share is calculated in a manner consistent with that of basic loss per share while giving effect to all dilutive potential common shares that were outstanding during the period. Basic and diluted loss per share are based upon 7,348,632 shares for the year ended December 31, 1998 and 6,189,293 shares for the year ended December 31, 1997. There were 475,827 and 618,551 potential weighted common shares outstanding during 1998 and 1997 related to common stock options and warrants. These shares were not included in the computation of the diluted loss per share amount because the Company was in a net loss position and, thus, any potential common shares were anti-dilutive. Accounting Estimates The accompanying financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The actual results could differ from those estimates. Fair Values of Financial Instruments Fair values of cash and cash equivalents and short-term debt approximate cost due to the short period of time to maturity. Fair values of long-term debt are based on quoted market prices or pricing models using current market rates. F-14 Tengasco, Inc. Notes to Consolidated Financial Statements Derivatives Beginning in December 1997, the Company began trading in derivative financial instruments for speculative purposes. Derivative financial instrument contracts entered into are comprised of natural gas future and option contracts. At December 31, 1998, there were no open positions in any derivative contracts. Net trading (gains) losses of $(18,180) and $80,677 are included in the accompanying Statements of Loss for the years ended December 31, 1998 and 1997, respectively. Significant Risks and Uncertainties The Company's operations are subject to all of the environmental and operational risks normally associated with the oil and gas industry. The Company maintains insurance that is customary in the industry; however, there are certain risks for which the Company does not maintain full insurance coverage. The occurrence of a significant event that is not fully covered by insurance could have a significant adverse effect on the Company's financial position. New Accounting Pronouncements SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" is effective for all fiscal years beginning after June 15, 1999. This statement requires recognition of all derivative contracts as either assets or liabilities in the balance sheet and the measurement of them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of any gains or losses on the hedge with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. F-15 Tengasco, Inc. Notes to Consolidated Financial Statements Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. 2. Going Concern The Company has experienced losses Uncertainty totalling $3,083,638 and $4,370,570 for the years ended December 31, 1998 and 1997, respectively, and has a working capital deficit of $1,929,215 at December 31, 1998. In addition, as of December 31, 1998, management estimates that additional expenditures of approximately $5.0 are required to complete Phase II of its pipeline facilities under construction. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans include raising additional capital in order to complete the pipeline facilities and drilling additional oil and gas wells. The accompanying financial statements do not include any adjustments relating to the recoverability and classifications of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. 3. Business On December 18, 1997, the Company Acquisition entered into an asset purchase agreement in which certain producing oil and gas properties and inventory located in the state of Kansas ("the Kansas Properties") were acquired from AFG Energy, Inc. ("AFG"). The agreement, which was effective as of December 31, 1997, closed on March 5, 1998, whereby the Company paid $2,990,253 in cash and entered into a note payable agreement with AFG in the amount of $2,500,000. The note will accrue interest at 9.5% per annum for the period from December 1998 to May 1999. After May 1999, the interest rate becomes 9% per annum. Monthly interest only payment are due from December 1998 to May 1999. Monthly installments of principal and interest of $138,349 are due from June 1999 to December 1999. There is a balloon payment of $983,773 due in January 2000. The acquisition has been accounted for as a purchase and, accordingly, the purchase price of $5,490,253 has been allocated to the assets acquired based on the estimated fair values at the date of acquisition as follows: F-16 Tengasco, Inc. Notes to Consolidated Financial Statements
Amount ----------------------------------------------------------------------------- Inventory - oil in tanks $ 140,253 ----------------------------------------------------------------------------- Oil and gas properties Leasehold costs 3,745,000 Lease and well equipment 1,284,000 Pipeline 321,000 ----------------------------------------------------------------------------- Total oil and gas properties 5,350,000 ----------------------------------------------------------------------------- $5,490,253 -----------------------------------------------------------------------------
At December 31, 1997, the purchase price of the Kansas Properties is included in the Company's consolidated balance sheet. The results of operations are included in the consolidated financial statements for the year ended December 31, 1998. The unaudited pro forma results of operations presented below show the Company's operations for 1997 as though the acquisition had taken place at the beginning of the period. The pro forma results have been prepared for comparative purposes only, and are not necessarily indicative of what the actual results of operations would have been had the acquisition occurred at the beginning of the period, or what the results of operations of the Company will be in the future.
Year ended December 31, 1997 ----------------------------------------------------------------------------- Revenues $ 3,430,329 Net loss (3,893,208) Basic and diluted loss per common share $ (0.63) -----------------------------------------------------------------------------
F-17 Tengasco, Inc. Notes to Consolidated Financial Statements 4. Related Party The Company has a loan payable to a Transactions major stockholder in the amount of $250,000. The loan bears interest at the rate of 10% per annum and is due on demand. Additionally the Company has an account payable with no stated interest rate to the major stockholder in the amount of $163,800 at December 31, 1998. In 1998, the Company incurred approximately $141,000 of consulting expenses payable to a member of the Board of Directors. During 1997, the Company converted approximately $344,000 and $138,000 of debt payable to related parties IRC and Tracmark, respectively, to common stock. 5. Oil and Gas The following table sets forth Properties information concerning the Company's oil and gas properties:
December 31, 1998 1997 ----------------------------------------------------------------------------- Evaluated $7,846,793 $6,823,246 Unevaluated 117,508 76,743 ----------------------------------------------------------------------------- 7,964,301 6,899,989 Accumulation depreciation, depletion and amortization (216,646) (27,418) ----------------------------------------------------------------------------- $7,747,655 $6,872,571 -----------------------------------------------------------------------------
Evaluated costs excluded from amortization at December 31, 1997, consist of approximately $913,000, of costs relating to the Company's Swan Creek development project which was awaiting the completion of Phase I of a gas pipeline (Note 6). 6. Pipeline Facilities In 1996, the Company began construction Under Construction of a 43-mile gas pipeline which will (1) connect the Swan Creek development project to a gas purchaser and (2) enable the Company to develop gas transmission business opportunities in the future. Phase I, a 23 mile portion of the pipeline, was completed in 1998. As of December 31, 1998, management estimates the costs to complete Phase II of the pipeline are approximately $5.0 million. In January 1997, the Company entered into an agreement with the F-18 Tengasco, Inc. Notes to Consolidated Financial Statements Tennessee Valley Authority ("TVA") whereby the TVA allows the Company to bury the pipeline within the TVA's transmission line rights-of-way. In return for this right, the Company paid $35,000 plus agreed to annual payments of approximately $6,200 for 20 years. This agreement expires in 2017 at which time the parties may renew the agreement for another 20 year term in consideration of similar inflation-adjusted payment terms. 7. Other Property Other property and equipment consisted and Equipment of the following:
1998 1997 ----------------------------------------------------------------------------- Machinery and equipment $337,070 $277,433 Vehicles 356,336 231,228 Other 118,593 44,971 ----------------------------------------------------------------------------- 811,999 553,632 Less accumulated depreciation (350,990) (251,486) ----------------------------------------------------------------------------- Other property and equipment - net $461,009 $302,146 -----------------------------------------------------------------------------
F-19 Tengasco, Inc. Notes to Consolidated Financial Statements 8. Notes Payable Notes payable consisted of the following:
1998 1997 ----------------------------------------------------------------------------- Note payable to an individual; approximately $500,000 paid in each of January 1998 and July 1998 with interest paid quarterly at 11% per annum; collateralized by equipment owned by a major shareholder of the Company. An affiliate served as guarantor on the loan. The Company provided the lender with 100,000 shares of common stock as a loan origination fee. In conjunction with the loan agreement, the lender has an option to purchase 300,000 shares of the Company's common stock from IRC. $ - $1,007,486 Note payable, in default, to an investment company due May 1997 with interest payable monthly at 10% per annum; collateralized by a subordinated security interest in all assets of the Company (A). 500,000 500,000 Note payable, in default, to an individual due April 1997 with interest payable monthly at 10% per annum; collateralized by all assets of the Company (A), (B). 250,000 250,000 Note payable, in default, to a company due April 1997 with interest payable monthly at 10% per annum; collateralized by all assets of the Company (A). 250,000 250,000 ----------------------------------------------------------------------------- $1,000,000 $2,007,486 -----------------------------------------------------------------------------
F-20 Tengasco, Inc. Notes to Consolidated Financial Statements In conjunction with the issuance of the notes payable denoted in (A) and (B) listed above, the Company granted the lenders detachable stock warrants which enable the holder to obtain up to 200,000 shares of the Company's common stock at a price of $5 per share. (A) These notes had not been repaid as of the above noted due dates. As noted in (C) below, the Company has filed a claim against the lenders. (B) In March 1997, the individual note holder filed a lawsuit asserting the Company was in default of the $250,000 note. This action seeks the principal amount, interest, and costs of collection. The parties have agreed to a settlement in principle whereby the Company would pay the individual lender approximately $286,000. As part of the settlement, the 50,000 warrants to purchase common stock of the Company that this individual lender holds will be deemed null and void and unenforceable. (C) Also in March 1997, the Company filed a claim against the three lenders discussed in (A) and (B) above and a former officer of the Company asserting that the Company did not authorize the issuances of certain stock warrants related to the borrowings and seeking rescission of the warrant agreements. The Company is disputing the validity of the stock warrant agreements based upon certain provisions which were not authorized by the board of directors. If the Company is unsuccessful in its attempt to rescind these stock warrant agreements, these provisions could result in the lenders obtaining additional shares and a potential controlling interest, as the stock warrant agreements provide for the granting of increasing amounts of shares, at pro-rata reduced prices, if the market price of the Company's stock is below $16 per share. F-21 Tengasco, Inc. Notes to Consolidated Financial Statements 9. Long Term Debt Long-term debt consisted of the following:
1998 1997 ----------------------------------------------------------------------------- Note payable to an institution, due October 2003, with interest payable monthly at 8% per annum. Note is convertible into Common Stock of the Company at a rate of $6.25 per share of Common Stock. $1,500,000 - Note payable to an individual; entire principal balance due December 2001, with interest payable quarterly at 8% per annum. Note is convertible into common stock of the Company at a rate of $5.00 per share of common stock. 500,000 - 11 vehicle and equipment notes having interest at the rate of 8% to 12% per annum collateralized by vehicles and equipment with monthly payments including interest of $385 to $2,941 due 2000 to 2003, collateralized by vehicles and equipment. 303,858 182,376 Total long term debt 2,303,858 182,376 Less current maturities (89,135) (41,161) ----------------------------------------------------------------------------- Long term debt, less current maturities $2,214,723 $141,215 -----------------------------------------------------------------------------
F-22 Tengasco, Inc. Notes to Consolidated Financial Statements The aggregate maturities of long term debt for the five years ending December 31, 2003, are as follows: Year Amount ---------------------------------------- 1999 $ 89,135 2000 86,962 2001 584,586 2002 36,187 2003 1,506,988 ---------------------------------------- $ 2,303,858 ---------------------------------------- 10. Commitments The Company is a party to lawsuits in and Contingencies the ordinary course of its business. While the damages sought in some of these actions are material, the Company does not believe that it is probable that the outcome of any individual action will have a material adverse effect, or that it is likely that adverse outcomes of individually insignificant actions will be sufficient enough, in number or magnitude, to have a material adverse effect in the aggregate. As of December 31, 1998, the approximate future minimum payments to be made under noncancellable operating leases were: Year Amount ---------------------------------------- 1999 $ 86,000 2000 69,000 2001 14,000 2002 12,000 2003 7,000 ---------------------------------------- $ 188,000 ---------------------------------------- Rent expense was approximately $50,000 and $60,000 for the years ended December 31, 1998 and 1997, respectively. F-23 Tengasco, Inc. Notes to Consolidated Financial Statements 11. Convertible The Company is authorized to issue Redeemable 25,000,000 shares of preferred stock, Preferred Stock with $.0001 par value. In October 1998, the Company completed the issuance of 5,750 shares of its Convertible Redeemable Preferred Stock to extinguish $575,000 of notes payable. The Company paid $46,000 on commissions on the placement of the 5,750 shares of Preferred Stock. The Company issued an additional 2,250 shares of Preferred Stock in December 1998 for approximately $225,000 which netted the Company $207,000 after commissions. The Preferred Stock is entitled to a cumulative dividend of 8% per quarter. In the event that the Company does not make any two of six consecutive quarterly dividend payments, the holders of the Preferred Stock may appoint those directors which would constitute of majority of the Board of Directors. In such a scenario, the holders of the Preferred Shares would be entitled to elect a majority of the Board of Directors until all accrued and unpaid dividends have been paid. Shares of the Redeemable Preferred Stock are immediately convertible into shares of Common Stock. Each $100 liquidation preference share of preferred stock and a rate of $5.75 per share of common stock. The conversion rate is subject to downward adjustment if the Company subsequently issues shares of common stock for consideration less than $5.75 per share. The Company may redeem the Preferred Shares upon payment of $100 per share plus any accrued and unpaid dividends. 12. Common Stock to be In 1998, an institution purchased Issued and Due from 140,000 shares of common stock for Stockholder $700,000. As of December 31, 1998, the stockholder owed the Company $400,000 for the stock purchase. Additionally, as of December 31, 1998, the Company had not issued the shares. The entire $700,000 is included as common stock to be issued on the accompanying consolidated balance sheet. F-24 Tengasco, Inc. Notes to Consolidated Financial Statements 13. Stock Options Changes that occurred in options outstanding in 1998 and 1997 are summarized below:
1998 1997 ------------------------- ------------------------ Average Average Exercise Exercise Shares Price Shares Price ------------------------------------------------------------------------------ Outstanding, beginning of year 460,000 $5.31 1,202,420 $3.30 Granted 150,000 6.50 230,000 5.00 Exercised (2,250) 7.00 (345,414) 0.28 Expired/canceled (232,750) 5.00 (627,006) 5.36 Outstanding, end of year 375,000 5.80 460,000 5.31 Exercisable, end of year 325,000 5.62 354,583 5.44 ------------------------------------------------------------------------------ The following table summarizes information about stock options outstanding at December 31, 1998: Options Options Outstanding Exercisable --------------------------------------------- ----------------- Average Remaining Contractual Exercise Life Price Shares (years) Shares ---------------------------------------------------------------------------- $5.00 225,000 0.33 225,000 7.00 150,000 1.28 100,000 ------- ------- Total 375,000 325,000 ----------------------------------------------------------------------------
The fair value of stock options used to compute compensation expense to non-employees is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 1997: expected volatility of 54%; a risk-free interest rate of 5.76% and an expected option life of 1.25 years. No options were granted to non-employees in 1998. F-25 Tengasco, Inc. Notes to Consolidated Financial Statements The amount of compensation expense included in general and administrative costs in the accompanying consolidated statements of loss was approximately $226,000 and $220,000 for the years ended December 31, 1998 and 1997, respectively. Statement of Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for Stock-Based Compensation" was implemented in January 1996. As permitted by SFAS 123, the Company has continued to account for stock compensation to employees by applying the provisions of Accounting Principles Board Opinion No. 25. If the accounting provisions of SFAS 123 had been adopted, net loss and loss per share would have been as follows:
1998 1997 ----------------------------------------------------------------------------- Net loss As reported $(3,083,638) $(4,370,570) Pro forma (3,356,411) (4,507,821) ----------------------------------------------------------------------------- Basic and diluted loss per share As reported $ (0.42) $ (0.71) Pro forma (0.46) (0.73) -----------------------------------------------------------------------------
For employees, the fair value of stock options used to compute pro forma net loss and loss per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 1998 and 1997: Expected volatility of 87% for 1998 and 54% for 1997; a risk free interest rate of 6.50% in 1998 and 5.76% in 1997; and an expected option life of 1.50 years in 1998 and 1.25 years in 1997. 14. Income Taxes The Company had no taxable income during the years ended December 31, 1998 and 1997. F-26 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, 1998 1997 ----------------------------------------------------------------------------- Statutory rate 34% 34% Tax (benefit) at statutory rate $(1,048,000) $(1,486,000) State income tax (benefit) (185,000) (248,000) Nondeductible interest expense 100,000 126,000 Other 28,000 (9,000) Increase in deferred tax asset valuation allowance 1,105,000 1,617,000 ----------------------------------------------------------------------------- Total income tax provision $ - $ - ----------------------------------------------------------------------------- The components of the net deferred tax assets and liabilities are as follows: Year ended December 31, 1998 1997 ----------------------------------------------------------------------------- Net operating loss carryforward $3,546,000 $ 2,381,000 Capital loss carryforward 263,000 270,000 Accrued expenses 90,000 323,000 ----------------------------------------------------------------------------- 3,899,000 2,974,000 Valuation allowance (3,899,000) (2,794,000) ----------------------------------------------------------------------------- - 180,000 ----------------------------------------------------------------------------- Deferred tax liability: Oil and gas properties - 155,000 Property and equipment - 25,000 ----------------------------------------------------------------------------- - 180,000 ----------------------------------------------------------------------------- Net deferred taxes $ - $ - -----------------------------------------------------------------------------
The Company recorded a valuation allowance at December 31, 1998 and 1997 equal to the excess of deferred tax assets over deferred tax F-27 Tengasco, Inc. Notes to Consolidated Financial Statements liabilities as management is unable to determine that these tax benefits are more likely than not to be realized. As of December 31, 1998, the Company had net operating loss carryforwards of approximately $8,864,000 which will expire, if not utilized, as follows: Year Amount ---------------------------------------- 2010 $ 587,000 2011 1,399,000 2012 4,067,000 2013 2,811,000 ---------------------------------------- Total $ 8,864,000 ---------------------------------------- Additionally, at December 31, 1998, the Company had capital loss carryforwards of approximately $657,000 which will expire, if not offset against capital gains, as follows: 2001- $576,000, 2002-$81,000. 15. Supplemental Cash The Company paid approximately $328,000 Flow Information and $282,000 for interest in 1998 and 1997, respectively. The Company paid $0 for income taxes in 1998 and 1997. In 1997, the Company issued 86,084 shares of common stock to extinguish approximately $484,000 of debt, which approximated the fair value of the shares. In 1998, the Company paid for commissions on certain private placements of common stock by granting to the brokers oil and gas properties recorded at an aggregate historical cost of $396,300. In 1998, the Company issued 25,000 shares of common stock with a fair value of approximately $128,000 to an institutional lender as a loan fee. In 1998, the Company issued 5,750 shares of redeemable, convertible preferred stock to extinguish approximately $575,000 of debt, which approximated the fair value of the shares. In 1998, the Company issued a payable to the major stockholder in F-28 Tengasco, Inc. Notes to Consolidated Financial Statements the amount of $163,800 as payment for that stockholder's payment of interest expense in the same amount on behalf of the Company. F-29 Tengasco, Inc. Notes to Consolidated Financial Statements 16. Supplemental Oil and Information with respect to the Gas Information Company's oil and gas producing activities is presented in the following tables. Estimates of reserve quantities, as well as future production and discounted cash flows before income taxes, were determined by both Coburn Petroleum Engineering and Columbia Engineering, independent petroleum engineers, as of December 31, 1998 and 1997. Oil and Gas Related Costs The following table sets forth information concerning costs related to the Company's oil and gas property acquisition, exploration and development activities in the United States during the years ended December 31, 1998 and 1997:
1998 1997 ----------------------------------------------------------------------------- Property acquisition Proved $ 74,613 $5,406,080 Unproved 46,631 50,424 Less - proceeds from sales of properties (565,000) (310,000) Development costs 1,935,509 438,924 ----------------------------------------------------------------------------- $1,491,753 $5,585,428 -----------------------------------------------------------------------------
F-30 Tengasco, Inc. Notes to Consolidated Financial Statements Results of Operations from Oil and Gas Producing Activities The following table sets forth the Company's results of operations from oil and gas producing activities for the years ended December 31, 1998 and 1997:
1998 1997 ----------------------------------------------------------------------------- Revenues $ 2,078,101 $ - Production costs and taxes (1,943,944) (3,748) Depreciation, depletion and amortization (189,227) (44,673) ----------------------------------------------------------------------------- Loss before income taxes (55,070) (48,421) Income taxes - - ----------------------------------------------------------------------------- Loss from oil and gas producing activities $ (55,070) $(48,421) -----------------------------------------------------------------------------
In the presentation above, no deduction has been made for indirect costs such as corporate overhead or interest expense. No income taxes are reflected above due to the Company's tax loss carryforwards. The Company had no production of oil or gas during 1997. Oil and Gas Reserves (unaudited) The following table sets forth the Company's net proved oil and gas reserves at December 31, 1998 and 1997 and the changes in net proved oil and gas reserves for the years then ended. Proved reserves represent the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in the future years from known reservoirs under existing economic and operating conditions. The reserve information indicated below requires substantial judgment on the part of the reserve engineers, resulting in estimates which are not subject to precise determination. Accordingly, it is expected that the estimates of reserves will change as future production and development information becomes available and that revisions in these estimates could be significant. Reserves are measured in barrels (bbls) in the case of oil, and units of one thousand cubic feet (MCF) in the case of gas. F-31 Tengasco, Inc. Notes to Consolidated Financial Statements
Oil (bbls) Gas (Mcf) ----------------------------------------------------------------------------- Proved reserves Balance, January 1, 1997 101,565 22,567,355 Discoveries and extensions 198,065 75,476 Acquisition of proved reserves 1,884,448 2,654,250 Revisions of previous estimates (101,565) (4,679,460) Production - - ----------------------------------------------------------------------------- Balance, December 31, 1997 2,082,513 20,617,621 Discoveries and extensions 480,168 23,046,923 Revisions of previous estimates (787,982) 2,930,005 Production (150,077) (418,524) ----------------------------------------------------------------------------- Balance, December 31, 1998 1,624,622 46,176,025 ----------------------------------------------------------------------------- Proved developed producing reserves at, December 31, 1998 1,195,988 45,217,588 ----------------------------------------------------------------------------- Proved developed producing reserves at, December 31, 1997 1,277,707 1,284,980 -----------------------------------------------------------------------------
Of the Company's total proved reserves as of December 31, 1998 and 1997, approximately 39% and 27%, respectively, were classified as proved developed producing, 11% and 34%, respectively, were classified as proved developed non-producing and 50% and 39%, respectively, were classified as proved undeveloped. All of the Company's reserves are located in the continental United States. Standardized Measure of Discounted Future Net Cash Flows (unaudited) The standardized measure of discounted future net cash flows from the Company's proved oil and gas reserves at December 31, 1998 and 1997 is presented in the following table:
1998 1997 ----------------------------------------------------------------------------- Future cash inflows $101,349,850 $ 87,493,504 Future production costs and taxes (13,624,916) (21,813,667) Future development costs (5,023,550) (2,873,550) Future income tax expenses (17,494,835) (12,918,485) ----------------------------------------------------------------------------- Net future cash flows 65,206,549 49,887,802 Discount at 10% for timing of cash flows (22,230,557) (17,864,113) ----------------------------------------------------------------------------- Discounted future net cash flows from proved reserves $ 42,975,992 $ 32,023,689 -----------------------------------------------------------------------------
F-32 Tengasco, Inc. Notes to Consolidated Financial Statements The following table sets forth the changes in the standardized measure of discounted future net cash flows from proved reserves during 1998 and 1997:
1998 1997 ----------------------------------------------------------------------------- Balance, beginning of year $32,023,689 $30,378,513 Sales, net of production costs and taxes (134,157) 3,748 Acquisition of proved reserves - 10,351,389 Discoveries and extensions 24,299,945 1,984,106 Changes in prices and production costs (10,136,203) (13,640,812) Revisions of quantity estimates (1,793,040) (8,576,161) Changes in development costs (2,411,493) 3,882,741 Net change in income taxes (2,799,046) 3,454,082 Interest factor - accretion of discount 3,953,919 4,134,810 Changes in production rates and other (27,622) 51,273 ----------------------------------------------------------------------------- Balance, end of year $42,975,992 $32,023,689 -----------------------------------------------------------------------------
The acquisition of proved reserves in 1997 relates to the Kansas Properties. Estimated future net cash flows represent an estimate of future net revenues from the production of proved reserves using current sales prices, along with estimates of the operating costs, production taxes and future development and abandonment costs (less salvage value) necessary to produce such reserves. The average prices used at December 31, 1998 and 1997 were $8.32 and $16.53 per barrel of oil and $1.90 and $2.57 per mcf of gas, respectively. No deduction has been made for depreciation, depletion or any indirect costs such as general corporate overhead or interest expense. Operating costs and production taxes are estimated based on current costs with respect to producing gas properties. Future development costs are based on the best estimate of such costs assuming current economic and operating conditions. F-33 Tengasco, Inc. Notes to Consolidated Financial Statements Income tax expense is computed based on applying the appropriate statutory tax rate to the excess of future cash inflows less future production and development costs over the current tax basis of the properties involved, less applicable carryforwards, for both regular and alternative minimum tax. The future net revenue information assumes no escalation of costs or prices, except for gas sales made under terms of contracts which include fixed and determinable escalation. Future costs and prices could significantly vary from current amounts and, accordingly, revisions in the future could be significant. 17. Restatement of 1997 The Company has restated the 1997 Financial Statements financial statements to reflect changes to amounts recorded for interest expense and additional paid-in capital relative to the issuance of 86,084 shares of common stock to extinguish approximately $484,000 of debt. The value assigned to shares issued was consistent with the value received in the private placement of shares with third parties. With respect to the 1997 financial statements, the restatement resulted in the recording of additional interest expense of $193,694 which increased the net loss by $193,694 ($0.04 basic and diluted loss per common share). The restatement has no effect on total stockholders' equity or on net cash used in operating activities. These matters are summarized in the table below:
Year ended December 31, 1997 ----------------------------------------------------------------------------- Net loss as originally stated: $(4,176,876) Adjustment: (193,694) ----------------------------------------------------------------------------- Net loss as restated: $(4,370,570) ----------------------------------------------------------------------------- Basic and diluted loss per common share: Net loss per share as originally stated: $(0.67) Adjustment: (0.04) ----------------------------------------------------------------------------- Net loss per share, as restated $(0.71) -----------------------------------------------------------------------------
F-34 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TENGASCO, INC. (Registrant) By: /s/Malcolm E. Ratliff ------------------------ Malcolm E. Ratliff, Chief Executive Officer Dated: April 14, 1999 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities and on the dates indicated. Signature Title Date s/Malcolm E. Ratliff Director; Chief April 14, 1999 - --------------------- Executive Officer Malcolm E. Ratliff s/Allen H. Sweeney Chairman of the Board April 14, 1999 - ------------------- of Directors Allen H. Sweeney s/Joseph Earl Armstrong Director April 14, 1999 - ----------------------- Joseph Earl Armstrong s/John L. Kidde Director April 14, 1999 - --------------- John L. Kidde s/James B. Kreamer Director April 14, 1999 - ------------------ James B. Kreamer s/William A. Moffett Director April 14, 1999 - -------------------- William A. Moffett s/Shigemi Morita Director April 14, 1999 - --------------------- Shigemi Morita s/Robert M. Carter President April 14, 1999 - ---------------------- Robert M. Carter s/Mark A. Ruth Principal Financial April 14, 1999 - ---------------------- and Accounting Mark A. Ruth Officer 54 EX-3.9 2 ARTICLES OF AMENDMENT TO THE CHARTER EXHIBIT 3.9 ARTICLES OF AMENDMENT TO THE CHARTER OF TENGASCO, INC. - ------------------------------------------------------------------------------- Pursuant to the provisions of Section 48-20-106 of the Tennessee Business Corporation Act, the undersigned corporation adopts the following articles of amendment to its charter: 1. The name of the corporation is TENGASCO, INC. - ------------------------------------------------------------------------------- 2. The text of each amendment adopted is: SEE ATTACHED 3. The corporation is a for-profit corporation. 4. The manner (if not set forth in the amendment) for implementation of any exchange, reclassification, or cancellation of issued shares is as follows: NOT APPLICABBLE 5. The amendment was duly adopted on JUNE 19, 1998 by (the shareholders). [NOTE: Please strike the choices which do not apply to this amendment.] --- 6. If the amendment is not to be effective when these articles are filed by the Secretary of State, the date/time it will be effective is _________________________, 19_____________ (date) ______________________ (time). [NOTE: The delayed effective date shall not be later then the 90th day after the date this document is filed by the Secretary of State.] JUNE 24, 1998 TENGASCO, INC. - ---------------------------------- ------------------------------ Signature Date Name of Corporation General Counsel /s/ Wesley M. Baker - ---------------------------------- ------------------------------ Signer's Capacity Signature WESLEY M. BAKER ------------------------------ Name (typed or printed) AMENDMENT TO PARAGRAPH 2 OF THE CORPORATE CHARTER OF TENGASCO, INC. 2. The aggregate number of shares which the Corporation shall have authority to issue is seventy-five million (75,000,000) shares consisting of fifty million (50,000,000) shares, designated as Common Stock, at par value of $.001 per share, and twenty-five million (25,000,000) shares, designated as Preferred Stock, at a par value of $.0001 per share. (1) Common Stock (a) Dividends. The holders of shares of Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of the assets of tbe Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. (b) Liquidation. Subject to the rights of any other class or series of stock, the holders of shares of Common Stock shall be entitled to receive all the assets of the Corporation available for distribution to shareholders in the event of the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, ratably, in proportion to the number of shares of Common Stock held by them. Neither the merger or consolidation of the Corporation into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Corporation, nor the sale, lease, exchange or other disposition (for cash, shares of stock, securities or other consideration) of all or substantially all the assets of the Corporation shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, of the Corporation. (c) Redemption. Common Stock shall not be subject to redemption. (d) Voting. Subject to the rights of any other class or series of stock and the provisions of the laws of the State of Tennessee governing business corporations, voting rights shall be vested exclusively in the holders of Common Stock. Each holder of Common Stock shall have one vote in respect of each share of such stock held. (2) Preferred Stock. The Preferred Stock may be issued, from time to time, in one or more series, with such designations, preferences and relative, participating, optional or other rights, qualifications, limitations or restrictions thereof as shall be stated and expressed in the resolution or resolutions providing for the issue of such series which shall be adopted by the Board of Directors from time to time, pursuant to the authority herein given, a copy of which resolution or resolutions shall have been set forth in a Certificate made, executed, acknowledged, filed and recorded in the manner required by the laws of the State of Tennessee in order to make the same effective. Each series shall consist of such number of shares as shall be stated and expressed in such resolution or resolutions providing for the issuance of the stock of such series. All shares of any one series of Preferred Stock shall be alike in every particular. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) the number of shares constituting that series and the distinctive designation of that series; (b) whether the holders of shares of that series shall be entitled to receive dividends and, if so, the rates of such dividends, conditions under which and times such dividends may be declared or paid, any preference of any such dividends to, and the relation to, the dividends payable on any other class or classes of stock or any other series of the same class and whether dividends shall be cumulative or noncumulative and, if cumulative, from which date or dates; (c) whether the holders of shares of that series shall have voting rights in addition to the voting rights provided by law and, if so, the terms of such voting rights; (d) whether shares of that series shall have conversion or exchange privileges into or for, at the option of either the holder or the Corporation or upon the happening of a specified event, shares of any other class or classes or of any other series of the same or other class or classes of stock of the Corporation and, if so, the terms and conditions of such conversion or exchange, including provision for adjustment of the conversion or exchange rate in such events as the Board of Directors shall determine; (e) whether shares of that series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon or afler which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) whether shares of that series shall be subject to the operation of a retirement or sinking fund and, if so subject, the extent to and the manner in which it shall be applied to the purchase or redemption of the shares of that series, and the terms and provisions relative to the operation thereof; (g) the rights of shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation and any preference of any such rights to, and the relation to, the rights in respect thereto of any class or classes of stock or any other series of the same class; and (h) whether shares of that series shall be subject or entitled to any other preferences, and the other relative, participating, optional or other special rights and qualifications, limitations or restrictions of shares of that series and, if so, the terms thereof. EX-3.10 3 ARTICLES OF AMENDMENT BY BOARD OF DIRECTORS EXHIBIT 3.10 ARTICLES OF AMENDMENT BY BOARD OF DIRECTORS TO THE CHARTER OF TENGASCO, INC. - ------------------------------------------------------------------------------ Pursuant to the provisions of Section 48-16-102 of the Tennessee Business Company Act, the undersigned Company executes the following Certificate of Amendment to its Charter. 1. The name of the Company is Tengasco, Inc. (the "Company"). 2. The following resolution, establishing and designating a series of shares and fixing and determining the relative rights and preferences thereof was duly adopted by the Board of Directors of the Company on October 27, 1998, pursuant to authority vested in it by the Charter of the Company: WHEREAS, the Charter of the Company presently authorizes the issuance of 25,000,000 shares of Preferred Stock, $.0001 par value per share, in one or more series upon terms and conditions that are to be designated by the Board of Directors; and WHEREAS, in order to accommodate a business purpose deemed proper by the Board of Directors, the Board of Directors does hereby seek to provide for the designation of a segment of the Company's Preferred Stock as "Series A 8% Cumulative Convertible Preferred Stock;" and WHEREAS, the terms, conditions, voting rights, preferences, limitations and special rights of the Series A 8% Cumulative Convertible Preferred Stock in their entirety are as provided herein. NOW, THEREFORE, be it: RESOLVED, that a series of the class of authorized Preferred Stock, $.0001 par value per share, of the Company hereinafter designated "Series A 8% Cumulative Convertible Preferred Stock," be hereby created, and that the designation and amount thereof and the voting powers, preferences and relative, participating and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as the "Series A 8% Cumulative Convertible Preferred Stock " (the "Series A Shares") and the number of shares initially constituting such series shall be 250,000 which may be issued in whole or fractional shares. Section 2. Dividends and Distributions. (a) The holders of Series A Shares shall be entitled to receive dividends at a rate of eight percent (8%) of the liquidation preference of $100 per share per annum, which shall be fully 1 cumulative, prior and in preference to any declaration or payment of any dividend (payable other than in shares of common stock, $.0001 par value per share, of the Company (the "Common Stock")) or other distribution on any other class or series of Preferred Stock or the Common Stock of the Company. If the dividends on the Series A Shares cannot legally be paid in full, dividends shall be paid, to the maximum permissible extent, to the holders of the Series A Shares, parri passu. The dividends on the Series A Shares shall accrue from the date of issuance of each share and shall be payable quarterly with respect to each calendar quarter on the fifteenth day of November, February, May and August of each year (each a "Dividend Date"), commencing on November 15, 1998, to the holders of record of the Series A Shares on the first day of the month for each Dividend Date (each, a "Record Date"), except that if any such date is a Saturday, Sunday or legal holiday (a "Non-Business Day") then such dividend shall be payable on the next day that is not a Saturday, Sunday or legal holiday on which banks in the State of Tennessee are permitted to be closed (a "Business Day"). The dividends on the Series A Shares shall be payable only when, as and if declared by the Board of Directors out of funds legally available therefor. The amount of dividends payable for any period that is shorter or longer than 30 days shall be computed on the basis of a 360-day year of twelve 30-day months. All accrued but unpaid dividends shall accrue interest after each Dividend Date at a rate of eight percent (8%) per annum (compounded on a quarterly basis) from each Dividend Date, computed on the basis of a 360-day year of twelve 30-day months. (b) The holders of Series A Shares shall not be entitled to receive any dividends or other distributions except as provided in this Certificate of Designation of Series A Shares. Section 3. Voting Rights. (a) Except as provided in paragraph (b) and by applicable law, the holders of the Series A Shares shall have no voting rights. (b) If the Company shall fail to pay dividends in any two of six consecutive quarters, the Company shall take such action as is necessary, within 45 days of such occurrence, to appoint to the Board of Directors those nominees of the holders of Series A Shares which shall constitute a majority of the members of the Board of Directors and thereafter, the holders of the Series A Shares shall be entitled to nominate and elect a majority of the members of the Board of Directors in all elections of directors until all accrued and unpaid dividends shall have been paid. Section 4. Liquidation, Dissolution, Winding Up or Certain Mergers or Consolidations. If the Company shall adopt a plan of liquidation or of dissolution, or commence a voluntary case under the federal bankruptcy laws or any other applicable state or federal bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in any involuntary case under such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Company or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due and on account of such event the Company shall liquidate, dissolve or wind up, or upon any other liquidation, dissolution or winding up of the 2 Company, or engage in a merger, plan of reorganization or consolidation in which the Company is not the surviving Company, then and in that event, no distribution shall be made to the holders of shares of capital stock, unless, prior thereto, the holders of the Series A Shares shall have first received an amount in cash or equivalent value in securities or other consideration equal to the "Liquidation Preferences" thereof. If upon any liquidation, dissolution, winding up, merger, plan of reorganization or consolidation, the amount so payable or distributable does not equal or exceed the "Liquidation Preferences" of the Series A Shares, then, and in that event, the amount of cash so payable, and amount of securities or other consideration so distributable, shall be shared ratably among the holders of the Series A Shares. For the purposes hereof, the term "Liquidation Preference(s)" shall mean $100 per share with respect to each of the Series A Shares, plus any and all accrued unpaid dividends thereon. Section 5. Conversion. (a) Right To Convert: Subject to the provisions for adjustment hereinafter set forth, each Series A Share shall be convertible in the manner hereinafter set forth into fully paid and nonassessable shares of Common Stock. Commencing upon issuance, the Liquidation Preference ($100 per share) of each Series A Share may, at the option of the holder thereof, be converted at a rate (the "Conversion Rate") equal to $5.75 per share of Common Stock. (b) Adjustments to Conversion Rate: (i) The following definitions shall apply for purposes of this Section: (A) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities convertible into or exchangeable for Common Stock. (C) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5(b)(iii), deemed to be issued) by the Company after the Series A Original Issue Date (as defined herein), other than shares of Common Stock issued or issuable: (i) upon conversion of Series A Shares; (ii) in a transaction described in Section 5(b)(vi); (iii) pursuant to a stock grant, option plan or purchase plan, other employee stock incentive program or agreement approved by the Board of Directors; (iv) pursuant to the terms of any stock grant, option, warrant, employment agreement or other written obligation, agreement or commitment to which the Company was a party as of the Series A Original Issue Date (as defined herein) and which was disclosed in the Company's filings with the Securities and Exchange Commission; or 3 (v) by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (i), (ii) (iii) or (iv). (D) "Series A Original Issue Date" shall mean the date on which the first Series A Share was issued. (ii) No Adjustment of Series A Share Conversion Rate: No adjustment in the Conversion Rate shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Company is less than the Conversion Rate in effect on the date of, and immediately prior to, such issue. (iii) Deemed Issue of Additional Shares of Common Stock: (A) Options and Convertible Securities: In the event the Company at any time or from time to time after the Series A Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the exercise of such Options and conversion or exchange of such Convertible Securities shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(b)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Rate in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (i) except as provided in Section 5(b)(iii)(A)(ii) hereof, no further adjustment in the Conversion Rate shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (ii) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any change in the consideration payable to the Company, or change in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (other than under or by reason of provisions designed to protect against dilution), the Conversion Rate computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; and 4 (iii) no readjustment pursuant to clause (ii) above shall have the effect of increasing the Conversion Rate to an amount which exceeds the lower of (1) the Conversion Rate on the original adjustment date or (2) the Conversion Rate that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Conversion Rate Upon Issuance of Additional Shares of Common Stock: In the event the Company shall issue Additional Shares of Common Stock without consideration or for a consideration per share less than the Conversion Rate in effect on the date of and immediately prior to such issue, then and in each such event the Conversion Rate shall be reduced to a price (calculated to the nearest cent) determined by multiplying such Conversion Rate by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Rate; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued. (v) Determination of Consideration. For purposes of this Section, the consideration received by the Company for the issuance of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (i) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Company; (ii) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment; and (iii) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Company for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (i) and (ii) above, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment. (B) Options and Convertible Securities. The consideration per share received by the Company for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(b)(iii)(A), relating to Options and Convertible Securities, shall be determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such 5 consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Other Adjustments. (A) Subdivisions, Combinations, or Consolidations of Common Stock: In the event the outstanding shares of Common Stock shall be subdivided, combined or consolidated, by stock split, stock dividend, combination or like event, into a greater or lesser number of shares of Common Stock, the Conversion Rate in effect immediately prior to such subdivision, combination, consolidation or stock dividend shall, concurrently with the effectiveness of such subdivision, combination or consolidation, be proportionately adjusted. (B) Reclassifications: In the case, at any time after the date hereof, of any capital reorganization or any reclassification of the stock of the Company (other than as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Company with or into another person (other than a consolidation or Merger (i) in which the Company is the continuing entity and which does not result in any change in the Common Stock or (ii) which is treated as a liquidation pursuant to Section 4(a) hereof), the Series A Shares shall, after such reorganization, reclassification, consolidation or merger be convertible into the kind and number of shares of stock or other securities or property of the Company or otherwise to which such holder would have been entitled if immediately prior to such reorganization, reclassification, consolidation or merger such holder had converted its Series A Shares into Common Stock. The provisions of this Section 5(b)(vi) shall similarly apply to successive reorganizations, reclassifications, consolidations or mergers. (c) Fractional Shares. In lieu of any fractional shares to which the holder of a Series A Share would otherwise be entitled upon conversion, the Company shall pay cash equal to such fraction multiplied by the fair market value of one share of Common Stock as determined by the Board of Directors in the good faith exercise of its reasonable business judgment. (d) Miscellaneous: (i) All calculations under this Section 5 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be. (ii) The holders of at least 50% of the outstanding Series A Shares shall have the right to challenge any determination by the Board of Directors of fair market value pursuant to this Section 5, in which case such determination of fair market value shall be made by an 6 independent appraiser selected jointly by the Board of Directors and the challenging parties, the cost of such appraisal to be borne equally by the Company and the challenging parties. (iii) No adjustment in the Conversion Rate need be made if such adjustment would result in a change in such Conversion Rate of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in the Conversion Rate. (e) No Impairment. The Company will not, through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Shares against impairment. (f) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Series A Shares, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series A Shares. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding Series A Shares, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Section 6. Reports as to Adjustments. Whenever the Conversion Rate or the type of securities, cash or other property into which the Series A Shares may be converted is adjusted as provided in Section 5 hereof, the Company shall promptly mail to the holders of record of the outstanding Series A Shares at their respective addresses as the same shall appear in the Company's stock records, a notice stating that the Conversion Rate has been adjusted and setting forth the new number of shares of Common Stock (or describing the new stock, securities, cash or other property) into which each Series A Share is convertible as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment became effective. 7 Section 7. Redemption. (a) All, but not less than all, of the Series A Shares may be redeemed upon payment of $100 per Series A Share, plus accrued and unpaid dividends thereon (the "Redemption Price"), at any time by the Company at its sole discretion upon thirty (30) days' written notice to the holders of the Series A Shares provided that: (i) the Company's shares of Common Stock shall be listed for trading on a national securities exchange, the NASDAQ National Market System or the NASDAQ SmallCap Market on the "Redemption Date" (as hereinafter defined); (ii) the closing sale of the Company's Common Stock as reported on such national securities exchange, NASDAQ National Market System or the NASDAQ SmallCap Market shall have exceeded $11.50 for the sixty (60) consecutive trading days preceding the date of the "Redemption Notice" (as hereinafter defined); and (iii) the shares of Common Stock issuable upon conversion of the Series A Shares shall be subject to an effective registration statement permitting their resale under the Securities Act of 1933, as amended. (b) Notwithstanding the foregoing, one twentieth of the maximum number of Series A Shares shall be redeemed, on January 1, April 1, July 1 and October 1 of each year while the Series A Shares remain outstanding, commencing on October 1, 2003. (c) Any notice of redemption ("Redemption Notice") given by the Company with respect to the Series A Shares shall be delivered by mail, first class postage prepaid, to each holder of record (at the close of business on the business day preceding the day on which notice is given) of the Series A Shares, at the address last shown on the records of the Company for such holder or given by the holder to the Company, for the purpose of notifying such holder of the redemption to be effected. The Redemption Notice shall specify a date (the "Redemption Date") not earlier than 30 days after the mailing of the Redemption Notice on which the Series A Shares then outstanding shall be redeemed and the place at which payment may be obtained, which shall be the principal offices of the Company. The Redemption Notice shall call upon each holder of Series A Shares to either (i) surrender to the Company, in the manner and at the place designated, such holder's certificate or certificates representing the Series A Shares to be redeemed or (ii) convert the Series A Shares into Common Stock prior to the Redemption Date in accordance with the provisions of Section 5 above. If the Company elects to redeem shares pursuant to this Section 7 and defaults or fails to perform its redemption obligations pursuant to this Section 7 in connection therewith, the holders of the Series A Shares shall then have the absolute right to convert such Series A Shares into Common Stock in accordance with the provisions of Section 5. (d) On the Redemption Date, the Company shall pay by cash or wire transfer of immediately available funds to the person whose name appears on the certificate or certificates of the Series A Shares that (i) shall not have been converted pursuant to Section 5 hereof and (ii) shall have been surrendered to the Company in the manner and at the place designated in the Redemption Notice, the Redemption Value, and thereupon each surrendered certificate shall be canceled. (e) If the funds of the Company legally available for redemption of the Series A Shares are insufficient to redeem the total number of Series A Shares outstanding on the Redemption Date, the Series A Shares shall be redeemed (on a pro rata basis from the holders of the Series A 8 Shares, from time to time), to the extent the Company is legally permitted to do so, and the redemption obligations of the Company hereunder will be a continuing obligation until the Company's redemption of all of the Series A Shares. (f) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Value, all rights of the holders of the Series A Shares (except the right to receive the Redemption Value subsequent to the Redemption Date upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. Section 8. Reacquired Shares. Any Series A Shares converted, purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof, and, if necessary to provide for the lawful purchase of such shares, the capital represented by such shares shall be reduced in accordance with the Tennessee Business Company Act. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, $.0001 par value, of the Company and may be reissued as part of another series of Preferred Stock, $.0001 par value, of the Company. The resolution was adopted by the Board of Directors by written consent as of October 27, 1998, at which a quorum was present throughout. 3. The Charter of the Company is amended so that the designation and number of shares of each class and series acted upon in the resolution, and the relative rights, preferences and imitations of each such class and series are as stated in the resolution. Tengasco, Inc. /s/ Robert M. Carter ----------------------------- Name: Robert M. Carter Title: President /s/ Elizabeth Wendelken ------------------------------ Name: Elizabeth Wendelken Title: Secretary 9 EX-21 4 LIST OF SUBSIDIARIES EXHIBIT 21 Exhbit 21 List of Subsidiaries Name State of Incorporation Tengasco Pipeline Corporation Tennessee Tennessee Land and Mineral Corporation Tennessee -----END PRIVACY-ENHANCED MESSAGE-----