-----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, SjQOohL12fP3yV4/318guDD0e4mKBoqBhuytmEhKoSrtF4Ud4HBYiGD/V4ZKabuI yeT1qLFP1iRmtjHz0Rd5Dw== 0000889812-99-001320.txt : 19990428 0000889812-99-001320.hdr.sgml : 19990428 ACCESSION NUMBER: 0000889812-99-001320 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19990427 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: SB-2/A SEC ACT: SEC FILE NUMBER: 333-07358 FILM NUMBER: 99602288 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 SB-2/A 1 AMENDMENT NO. 3 TO REGISTRATION STATEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM SB-2 - AMENDMENT NO. 3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TENGASCO, INC. (Name of small business issuer in its charter) Tennessee 1381 87-0267438 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
603 Main Avenue, Suite 500, Knoxville, Tennessee 37902 (423) 523-1124 (Address and Telephone number of Principal Executive Offices) 603 Main Avenue, Knoxville, Tennessee 37902 (Address of Principal Place of Business or Intended Place of Business) Mark A. Ruth, 603 Main Avenue, Suite 500, Knoxville, Tennessee 37902 (423) 523-1124 (Name Address and Telephone number of Agent for Service of Process) Approximate Date of Proposed Sale to Public: As soon as practicable after this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE =================================================================================================================== Title of each class Dollar Amount to Proposed Proposed Amount of of securities to be be registered maximum offering maximum Registration Fee registered price per unit aggregate offering price =================================================================================================================== Shares of common $1,855,063 $5.375(1) $1,855,063 $574.24 stock, $0.001 par value ===================================================================================================================
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a) may determine. - ------------------------------ (1) This is the average of the closing bid and ask price of the Company's Common Stock as listed on the OTC Bulletin Board on March 15, 1999 TENGASCO, INC. 345,128 Shares of Common Stock, $0.001 par value This Prospectus relates to the resale of 345,128 shares of common stock, $0.001 par value (the "Shares") owned by certain shareholders (hereinafter collectively referred to as the "Selling Shareholders") of Tengasco, Inc., a Tennessee corporation (the "Company"). The Company will not receive any of the proceeds on the resale of the Shares by the Selling Shareholders. The resale of the Shares of the Selling Shareholders is subject to the requirements of the Securities Act of 1933, as amended (the "Act"). Sales of the Shares or the potential of such sales at any time may have an adverse effect on the market price of the Shares offered hereby. See "Risk Factors". The Shares offered by this Prospectus may be sold from time to time by the Selling Shareholders, or by their transferees. No underwriting arrangements have been entered into by the Selling Shareholders or the Company. The distribution of the Shares by the Selling Shareholders may be effected in one or more transactions that may take place in the over-the-counter market including ordinary broker's transactions, privately negotiated transactions or through sales to one or more dealers for resale of such Shares as principals at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the Selling Shareholders. The Selling Shareholders and intermediaries through whom the Shares may be sold may be deemed "underwriters" within the meaning of the Act with respect to the Shares offered and any profits realized or commissions received may be deemed underwriting compensation. The Company has agreed to indemnify the Selling Shareholders against certain liabilities, including liabilities under the Act. All costs incurred in the registration of the Shares of the Selling Shareholders are being borne by the Company. AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "DILUTION" AND "RISK FACTORS" WHICH BEGIN ON PAGE 7. THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is April 21, 1999 1 FORWARD LOOKING STATEMENTS The information contained in this Prospectus includes certain forward-looking statements, When used in this document, the words budget, budgeted, anticipate, expects, estimates, believes, goals or projects and similar expressions are intended to identify forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected by such forward-looking statements. Important factors that could cause actual results to differ materially from those projected in the forward-looking statements include, but are not limited to, the following production variances from expectations, volatility of oil and gas prices, the need to develop and replace its reserves, the substantial capital expenditures required to fund its operations and the related need to fund such capital requirements through commercial banks and/or public securities markets, environmental risks, drilling and operating risks, risks related to exploration and development drilling, the uncertainty inherent in estimating future oil and gas production or reserves, uncertainty inherent in litigation, competition, government regulation, and the ability of the Company to implement its business strategy, including risks inherent in integrating acquisition operations into the Company's operations. 2 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") Registration Statements on Forms SB-2 and 10-SB (together with all amendments and exhibits thereto the "Registration Statement") under the Securities Act of 1933, as amended, and Form 10-KSB for the year ended December 31, 1998 with respect to the Common Stock offered hereby. This Prospectus does not include all of the information set forth in those Registration Statements pursuant to the Rules and Regulations of the Commission. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, but, such references are materially complete and, in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or Form 10-KSB. The Registration Statement, including schedules and exhibits thereto may be obtained from the principal offices of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549 upon payment of the fee prescribed or may be examined there without charge. As of the date hereof, the Company is a reporting company, as that term is defined under the Securities Acts, and therefore, files reports and other information with the Commission. In addition, the Company will provide, without charge, to its stockholders, upon written or oral request by such stockholder, a copy of any information referred to herein that is incorporated by reference except exhibits to such information that are incorporated by reference unless the exhibits are themselves specifically incorporated by reference. All such requests should be directed to Mark A. Ruth, at Tengasco, Inc., 603 Main Avenue, Knoxville, Tennessee 37902, telephone number (423) 523-1124. The Company is an electronic filer. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of such site is (http://WWW.SEC.GOV) 3 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FACTORS IDENTIFIED UNDER THE HEADING "RISK FACTORS". THE COMPANY The Company is in the business of exploring for, producing and transporting oil and natural gas in Tennessee and Kansas. The Company leases producing and non-producing properties with a view toward exploitation and development. Emphasis is also placed on pipeline and other infrastructure facilities to provide transportation, processing and tieback services. The Company utilizes state-of-the-art 3D seismic technology to maximize the recovery of reserves. The Company's activities in the oil and gas business did not commence until May 1995 with the acquisition of oil and gas leases in Tennessee and Kentucky. Since 1995 the Company has acquired oil and gas leases on a total of approximately 44,000 acres, located in Hancock and Claiborne Counties, Tennessee (collectively, the "Swan Creek Leases or Field"). Effective December 31, 1997, the Company acquired from AFG Energy, Inc. ("AFG"), a private company, approximately 30,000 acres of leases in the vicinity of Hays, Kansas (the "Kansas Properties"). Included in the acquisition which closed on March 5, 1998 are 273 wells, of which 149 are producing oil wells and 59 are producing gas wells, a related 50 mile pipeline and gathering system, 3 compressors and 11 vehicles. The total purchase price of these assets was approximately $5.5 million, which consisted of $3 million in cash and seller financing of $2.5 million. The loan is evidenced by a note which accrues interest at the 9.5 % per annum for the period from December 1998 to May 1999. After May 1999, the interest rate becomes 9% per annum. Monthly interest only payments are due from December 1998 to May 1999. Monthly installments of principal and interest of $138,349 are due from June 1999 to December 1999. There is a balloon payment of $983,773 due in January 2000. The Company will conduct exploration and production activities to produce crude oil and natural gas. The principal markets for these commodities are local refining companies, major natural gas transmission pipeline companies, local utilities and private industry end-users. 4 The Company presently has 13 producing natural gas wells and two producing oil wells in the Swan Creek Field in Tennessee. In July 1998 the Company completed the first phase ("Phase I") of its pipeline in the Swan Creek Field, a 23 mile pipeline made of 6 and 8 inch steel pipe running from the Swan Creek Field into the main city gate of Rogersville, Tennessee. With the assistance of the Tennessee Valley Authority ("TVA"), the Company was successful in utilizing TVA's right-of-way along its main power line grid from The Swan Creek Field to the Hawkins County Utility District located in Rogersville. The cost of constructing Phase I of the pipeline was approximately $4,000,000. In addition, approximately 100 barrels of oil per day are being produced and sold from the Swan Creek Field. Income from the Swan Creek Field is approximately $25,000 per month. The Kansas Properties are currently producing approximately 1,005 Mcf (MCF are units of one thousand cubic feet of gas) of natural gas and 378 barrels of oil per day. Income from the Kansas Properties at the present time is approximately $82,000 per month and after operating expenses, net income is approximately $34,000 per month. A complete discussion of the Company's business is set forth later in this Prospectus under the heading "Description of Business." 5 THE OFFERING Shares of Common Stock Offered ............. 345,128(1) Shares of Common Stock outstanding as of March 15, 1999 ....................... 7,992,016 Use of Proceeds ............................ None of the proceeds will be received by the Company SUMMARY FINANCIAL DATA The following table sets forth certain consolidated financial data of the Company for the years ended December 31, 1998 and December 31, 1997. Data relating to the ended December 31, 1998 and 1997 is derived from Consolidated Financial Statements appearing elsewhere in this Prospectus. The financial statements for 1998 and 1997 data have been audited by BDO Seidman, LLP. The selected consolidated financial data should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements, the notes thereto and the reports thereon included elsewhere in this Prospectus. - ----------------------- (1) This includes 300,000 shares issuable to another Selling Shareholder upon the exercise of an option granted to him by Industrial Resources Corporation ("IRC") on May 7, 1997 to acquire 300,000 shares of the Company's common stock. The exercise price is $10.00 per share. 6 Year ended Year ended 12/31/98 12/31/97 Income Statement Data Revenue $2,078,101 $0 Costs and other deductions $5,161,739 $4,370,570 Net loss ($3,083,638) ($4,370,570) Basic and Diluted loss per Share ($0.42) ($0.71) Balance Sheet Data: Working Capital ($1,929,215) ($1,774,571) Total Assets $13,525,777 $14,644,811 Long-Term Liabilities $ 2,214,723 $ 141,215 (less current maturities) Stockholders' Equity $7,245,090 $6,001,481 RISK FACTORS THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR TOTAL INVESTMENT. PROSPECTIVE INVESTORS OF THE SHARES OFFERED HEREIN SHOULD GIVE CAREFUL CONSIDERATION, IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, TO THE FOLLOWING RISK FACTORS. 1. Limited History. Although the Company was organized in 1916, it must be regarded as being in a formative stage due to its lack of significant business operations during recent years and the fact that it did not acquire any oil or gas leases until 1995. Prior to its acquisition of these leases, the Company had never 7 been involved in the oil and gas business. Its future success depends upon its ability to profitably operate its existing wells and to expand its operations through the continuation of its drilling program in the Swan Creek Field and the completion of Phase II of its pipeline. The Company does not presently have the funds to complete its drilling program or its pipeline. There can be no assurances that it will be able to obtain such funding. Moreover, there can be no assurances that the Company can, if it so desires, acquire additional oil and gas producing properties and/or the acquisition of additional oil and gas leases. The Company also faces the risk that the geology reports on which it relies are inaccurate, that the oil and/or gas reserves are less than anticipated, that it will not have sufficient funds to drill on the property, that it will not be able to market the oil and/or gas due to a lack of a market and that fluctuations in the prices of oil and/or gas will make development of those leases uneconomical. The Company is also subject to all of the risks inherent in attempting to expand a relatively new business venture. These risks include, but are not limited to, possible inability to profitably operate its existing properties or properties to be acquired in the future, the existence of undisclosed actual or contingent liabilities, the inability to fund the requirements of such properties and the inability to acquire additional properties that will have a positive effect on the Company's operations. There can be no assurance that the Company will achieve a level of profitability that will provide a return on invested capital or that will result in an increase in the market value of the Company's securities. See, "Market Price of and Dividends on the Company's Common Equity and Other Stockholder Matters." 2. Going Concern. Through the year ended December 31, 1998, the Company has a history of losses and a working capital deficit of $1,929,215. In addition, the Company requires approximately $5,000,000 to complete Phase II of its pipeline. Accordingly, the Company's auditors have indicated substantial doubts about the Company's ability to continue as a going concern in view of the recurring losses from operations and the Company's working capital deficiency. Their audit opinion included an explanatory paragraph describing this uncertainty. See the financial statements set forth hereinafter. Although there is no assurance that the Company will be able to raise the necessary funds to complete Phase II of the pipeline, management is engaged in discussions with several funding sources and anticipates that it will be able to raise the necessary financing in the near future. Management further believes that once such funding is in place it will be able to complete Phase II of the pipeline and it will be well-positioned to shortly have positive cash flow and be financially stable. 3. Limited Market for Common Stock. Although the Company's common stock is listed on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. (the "NASD"), the 8 market for such shares only commenced in May, 1995, following the acquisition of the oil and gas leases described above, and there can be no assurance that it will continue or be maintained. As a result of the limited market, purchasers of shares offered hereby may have difficulty in effecting sales of their stock and/or obtaining a satisfactory price for those shares. Any market price for shares of common stock of the Company is likely to be very volatile, and factors such as success or lack thereof in drilling, the ability or inability to acquire additional oil and gas producing properties, competition, governmental regulation and fluctuations in operating results may all have a significant effect. In addition, the stock markets generally have experienced, and continue to experience, extreme price and volume fluctuations which have affected the market price of many small capital companies and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions, may adversely affect the market price of the Company's common stock. See,"Market Price of and Dividends on the Company's Common Equity and Other Stockholder Matters." 4. General Economic Risks/Potential Volatility of Stock Price. The Company's current and future business plans are dependent, in large part, on the state of the general economy. Adverse changes in general and local economic conditions may cause high volatility in the market price of the Company's securities and may adversely affect an investment in these securities. Oil and gas prices are extremely volatile and are subject to substantial seasonal, political, world wide supply of oil and gas and other fluctuations and risks, all of which are beyond the Company's control. 5. Future Acquisitions. The Company intends to develop and expand its business, principally by developing its existing oil and gas leases, particularly in the Swan Creek Field. See "Management's Discussion and Analysis or Plan of Operation" below. The Company's most recent acquisition was its acquisition of the Kansas Properties which was effective as of December 31, 1997. Although the Company has no present plans for any further acquisitions at this time, it may acquire additional oil and gas-producing properties and/or leases. The Company has not selected any such additional properties and if it does determine to acquire any additional property it may not be able to locate desirable property and/or it may not be able to provide the funds necessary to acquire additional property. 6. Future Capital Requirements; Uncertainty of Future Funding. The Company presently has limited operating capital. It will require substantial additional funding in order to realize its goals of completing its drilling program for the Swan Creek Leases, completing Phase II of its pipeline, conducting oil and gas exploration operations and possibly acquiring additional oil and 9 gas properties. The Company is currently negotiating with investment banking firms and other entities to raise these funds through equity or debt financing, which may be very difficult for such a highly speculative enterprise. There can be no assurance that such additional funding will be made available to the Company, or if made available, that the terms thereof will be satisfactory to the Company. Furthermore, any equity funding will cause a substantial decrease in the proportional ownership interests of existing stockholders. If such funding is not made available to the Company, the Company will be hampered in its ability to conduct its planned business operations. See "Management's Discussion and Analysis or Plan of Operation". 7. Replacement of Reserves. The Company's future success will depend upon its ability to find, acquire and develop additional oil and gas reserves that are economically recoverable. The proven reserves of the Company will decline as they are produced, except to the extent that the Company conducts revitalization activities, or acquires properties containing proven reserves, or both. To increase reserves and production, the Company must continue its development and drilling programs, identify and produce previously overlooked or by-passed zones and shut-in wells, acquire additional properties or undertake other replacement activities. The Company's current strategy is to increase its reserve base, production and cash flow through the development of its existing oil and gas fields and selective acquisitions of other promising properties where the Company can utilize new and existing technology. The Company can give no assurance that its planned revitalization, development and acquisition activities will result in significant additional reserves or that the Company will have success in discovering and producing reserves at economical exploration and development costs. The Company may not be able to locate geologically satisfactory property, particularly since it will be competing for such property with other oil and gas companies, most of which have much greater financial resources than the Company. Moreover, even if desirable properties are available to the Company, it may not have sufficient funds with which to acquire additional leases. Furthermore, while the Company's revenues may increase if prevailing oil and gas prices increase significantly, the Company's exploration costs for additional reserves may also increase. 8. Uncertainty of Reserve Estimates. Oil and gas reserve estimates and the present value estimates associated therewith are based upon numerous engineering, geological and operational assumptions that generally are derived from limited data. Common assumptions include such matters as the extent and average thickness of a particular reservoir, the average porosity and permeability of the reservoir, the anticipated future production from existing and future wells, future development and production costs and the ultimate hydrocarbon recovery percentage. As a result, oil and gas reserve estimates and present value estimates 10 are frequently revised in subsequent periods to reflect production data obtained after the date of the original estimates. If reserve estimates are inaccurate, production rates may decline more rapidly than anticipated, and future production and revenues may be less than estimated. Moreover, significant downward revisions of reserve estimates may adversely affect the Company's ability to borrow funds in the future or have an adverse impact on other financing arrangements. In addition, any estimates of future net revenues and the present value thereof are based upon period ending prices and on cost assumptions made by the Company which only represent its best estimate. If these estimates of quantities, prices and costs prove inaccurate and the Company is unsuccessful in expanding its oil and gas reserves base, and/or declines in and instability of oil and gas prices occur, write-downs in the capitalized costs associated with the Company's oil and gas assets may be required. The Company will also rely to a substantial degree on reserve estimates in connection with the acquisition of producing properties. If the Company overestimates the potential oil and gas reserves of a property to be acquired, or if its subsequent operations on the property are not successful, the acquisition of the property could result in substantial losses to the Company. See, "Description of Property". 9. Operating Hazards. Oil and gas operations involve a high degree of risk. Natural hazards, such as excessive underground pressures, may cause costly and dangerous blowouts or make further operations on wells financially or physically impractical. Similarly, the testing and recompletion of oil and gas wells involves a high degree of risk arising from operational failures, such as blowouts, fires, pollution, collapsed casing, loss of equipment and numerous other mechanical and technical problems. Any of the foregoing hazards may result in substantial losses or liabilities to third parties, including claims for bodily injuries, reservoir damage, loss of reserves, environmental damage and other damage to persons or property. The Company does not have insurance against such hazards. 10. Future Sales of Common Stock. Industrial Resources Corp. ("IRC") currently beneficially owns approximately 2,853,823 shares of the common stock of the Company or approximately 34.1% of its outstanding voting securities. This amount is based upon 7,992,016 shares being outstanding or beneficially owned. The shares owned by IRC include 67,519 shares owned directly, and an option to purchase 50,000 shares held, by Malcolm E. Ratliff, 30,000 shares owned directly by Tracmark, Inc. and 128,700 shares owned directly by Ratliff Farms, Inc. James Ratliff is the sole owner of the outstanding securities of IRC and, accordingly, he may be deemed to be an affiliate of the Company. James Ratliff is also the father of Malcolm E. Ratliff, the Company's Chief Executive Officer and a Director of the Company. Malcolm E. Ratliff is the 11 President of IRC and his wife, Linda Ratliff, is the Secretary of IRC. Tracmark, Inc., is a corporation, the sole shareholder of which is James Ratliff, as Trustee for the Ratliff Family. James Ratliff is the President, Malcolm E. Ratliff is the Vice-President and Linda Ratliff is the Secretary-Treasurer of Tracmark, Inc. which may also be deemed an affiliate of the Company. James Ratliff is the sole shareholder and President of Ratliff Farms, Inc. Malcolm E. Ratliff is the Vice-President/Secretary of Ratliff Farms which may also be deemed an affiliate of the Company. At April 15, 1999, all of the shares of the common stock owned by IRC have been beneficially owned for two years, and subject to compliance with the applicable provisions of Rule 144 of the Securities and Exchange Commission, IRC may then commence to sell these "restricted securities" in an amount equal to up to 1% of the then outstanding securities of the Company, or the average weekly trading volume in the securities of the Company on any recognized automated system during the four weeks preceding any Notice of Sale pursuant to Rule 144, in any three month period, provided the Company is current in filing required reports with the Securities and Exchange Commission. The Company is presently current in its filings. In such event, such sales could have a substantial adverse effect on any public market that may then exist in the Company's common stock. Purchasers of shares offered hereby may experience, as a result, substantial difficulty in selling their shares at satisfactory prices. Sales of any of these shares by IRC could severely affect the ability of the Company to secure the necessary debt or equity funding for the Company's proposed business operations. For additional information concerning the present market for shares of common stock of the Company, See the caption "Market Price of and Dividends on the Company's Common Stock and Other Stockholder Matters." For information regarding common stock ownership of IRC and the Ratliff family, see, "Security Ownership of Certain Beneficial Owners and Management." The availability of Rule 144 for resales of "restricted securities" by affiliates is primarily conditioned upon the Company being a "reporting company" under the 1934 Act, and being "current" in all reports required to be filed. The Company is presently a reporting company and is current with all required reports. Shares held by non-affiliates are able to be sold after a holding period of one year. 11. Control by Current Security Holders. The Shares offered hereby represent a minority of the Company's outstanding voting equity. By virtue of IRC's present ownership of approximately 34.1% of the Company's outstanding voting securities, the management of IRC has the ability to effect significantly the election of the Company's directors, who in turn elect all executive officers. The management of IRC may be deemed to have substantial control over the management and affairs of the Company. Malcolm E. Ratliff, the Company's Chief Executive Officer and a Director, is the son of the owner of a majority of the outstanding 12 shares of IRC. He is also the President of IRC. See "Security Ownership of Certain Beneficial Owners and Management." Upon conclusion of this offering IRC's control will not be diminished. 12. Warrants. Warrants which were issued in connection with loans made to the Company could under certain circumstances enable the holders of such warrants to acquire a controlling interest in the Company. The Company has commenced a lawsuit seeking to invalidate those warrants. (See "Legal Proceedings") 13. Competition. The Company's business is highly competitive. In seeking any other suitable oil and gas properties for acquisition, or drilling rig operators and related personnel and equipment, the Company will be competing with a number of other companies, including large oil and gas companies and other independent operators with substantially greater financial resources. See "Competition." 14. Dependence on Technical Personnel. Certain members of present management have substantial expertise in the areas of endeavor presently conducted and to be engaged in by the Company. To the extent that their services become unavailable, the Company will be required to retain other qualified personnel. There can be no assurance that it will be able to recruit and hire qualified persons upon acceptable terms. See "Directors, Executive Officers, Promoters and Control Persons." Similarly, the oil and gas exploration industry requires the use of personnel with substantial technical expertise. In the event that the services of its current technical personnel become unavailable, the Company will need to hire qualified personnel to take their place; no assurance can be given that it will be able to recruit and hire such persons on mutually acceptable terms. 15. Governmental Regulations. The Company is subject to numerous state and federal regulations, environmental and otherwise, that may have a substantial negative effect on its ability to operate at a profit. For a discussion of the risks involved as a result of such regulations, See "Effect of Existing or Probable Governmental Regulations on Business" and "Costs and Effects of Compliance with Environmental Laws." 16. Market for the Shares. The Company's Common Stock is presently traded on the OTC Bulletin Board. There can be no assurance that there will be a market for the Shares or that the price of such stock will be maintained hereafter. Due to numerous factors the price of the Company's Common Stock may fluctuate significantly. If the price of the Company's Common Stock trades for less than $5.00 per share on the OTC Bulletin Board or the National Quotation Bureau's "pink sheets", the stock will become subject to the Commission's penny stock disclosure requirements. This may have a substantial adverse effect on the liquidity of the 13 Company's common stock and, in addition, these regulations could limit the ability of brokers/dealers to sell the Company's securities and thus the ability of purchasers of the Company's securities, including the Shares offered hereby, to sell such securities in the secondary market. 17. Dividends Unlikely. The holders of Common Stock of the Company are entitled to receive dividends when, as and if declared by the Company's Board of Directors. The Board does not intend to declare any dividends in the foreseeable future and earnings, if any, will be used to finance the requirements of the Company. USE OF PROCEEDS The Company will not receive any of the proceeds from the sale of Shares by the Selling Shareholders. All of the proceeds from such sales will be retained by the Selling Shareholders. DETERMINATION OF PRICE OF SHARES The price received by the Selling Shareholders will be determined by prevailing market prices at the time of sale, at prices related to such prevailing market prices or at negotiated prices. DILUTION The Company is not selling any of the Shares offered. As a result, no dilution will result from the sale of the Shares in this Offering. SELLING SHAREHOLDERS The following table sets forth certain information with respect to persons for whom the Company is registering the Shares for resale to the public. The Company will not receive any of the proceeds from the sale of the Shares by the Selling Shareholders. Beneficial ownership of the Shares by such Selling Shareholders after this Offering will depend on the number of Shares sold by each Selling Shareholder. This table assumes that all of the Shares offered hereby will be sold. 14
Shares Beneficially Owned Shares Beneficially Owned Prior To Offering(2) After the Offering Name and Address of ------------------------- Number of ------------------------- Beneficial Owner Number Percent Shares Offered Number Percent - ------------------- ------ ------- -------------- ------ ------- Neal Harding(3) 337,500 4.2% 337,500 0 0 5544 Fairfax St. Orlando, Fl. 32812 Donald Janda 2,113 * 2,113 0 0 105 14th Ave. Charles City, IA. 50616 Robert Nicholson 5,515 * 5,515 0 0 5734 Paddington Way Boca Raton, FL 33486 PLAN OF DISTRIBUTION Upon the effectiveness of the Registration Statement, the Selling Shareholders may use this Prospectus, as updated from time to time, to offer the Shares for sale by the Selling Shareholders directly, or through broker-dealers or agents as may be designated from time to time by the Selling Shareholders, or through a combination of such methods. Sales may be effected on the OTC Bulletin Board or otherwise, at market prices prevailing at the time of sale, at prices related to prevailing market prices, or at negotiated prices. Broker-dealers and agents will receive compensation in the form of concessions or commissions from the Selling Shareholders and/or purchasers of the Shares for whom they may act as agent. Such compensation will be negotiated and paid for by either the Selling Shareholders and/or purchasers. The Company has not arranged for the sale of any of the Shares and is not responsible for any concessions or commissions to be paid in connection with such sales. Each Selling Shareholder and any brokers or agents that participate in the distribution of the Shares may be deemed underwriters under the Securities Acts. The Shares may be sold on the OTC Bulletin Board or in - ------------------------ (2) Applicable percentage of ownership is based upon 7,992,016 shares of Common Stock of the Company outstanding as of March 15, 1999. (3) Includes 300,000 shares of common stock issuable upon exercise of an option granted to this Selling Shareholder by IRC on May 7, 1997. The exercise price of the option is $10.00 per share. 15 privately negotiated transactions. Sales of the Shares on the OTC Bulletin Board may be made by one or more of the following means: (a) block trades in which a broker-dealer will attempt to sell shares as agent but may position and resell a portion of the block as principal to facilitate the transactions; (b) purchases by a broker-dealer as principal and resale by such broker-dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; and (d) any other means permitted by applicable regulations and laws. In addition, any Shares which qualify for sale pursuant to Rule 144 under the Act may be sold under Rule 144 rather than pursuant to this Prospectus. Upon the Company being notified by a Selling Shareholder that any material arrangement has been entered into with a broker-dealer for the sale of Shares under any circumstances which require the filing of a supplemental prospectus, a supplemental prospectus will be filed under Rule 424(c) under the Act setting forth the names of the participating broker-dealers, the number of Shares involved, the price at which such Shares were sold by the Selling Shareholder, and the commission paid or discounts or concessions allowed by the Selling Shareholder to such broker-dealers. LEGAL PROCEEDINGS Except as described hereafter, the Company is not a party to any pending material legal proceeding. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceeding against the Company. To the knowledge of management, no director, executive officer or affiliate of the Company or owner of record or beneficially of more than 5% of the Company's common stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding. 1. The Company was named as a defendant in an action commenced on March 18, 1997 in the Supreme Court of the State of New York, New York County entitled Ulrich Hocker, Plaintiff v. Tengasco, Inc., Defendant, Index no. 601385/97. In that action the plaintiff sought to recover the sum of $250,000 loaned to the Company which loan was evidenced by a promissory note. The loan made by the plaintiff was part of a bridge loan to the Company made by three lenders in the aggregate amount of $1,000,000. The Company, for no additional consideration other than the loan, issued warrants to the plaintiff to purchase 50,000 shares of the common stock of the Company. The warrants contain an elaborate formula pursuant to which the exercise price of the warrants would be reduced and the 16 number of shares increased if the price of the Company's stock decreased. This formula guaranteed that the warrants would continue to retain their value no matter what happened to the price of the Company's stock. The action was recently settled. The settlement provides that the Company shall pay the plaintiff the sum of $286,416.87 which represents 90% of the amount of the monies loaned to the Company by the plaintiff together with interest thereon at 10% from the date of the loan. As part of the settlement, the warrants held by plaintiff will be deemed null and void and unenforceable. 2. The Company filed an action in Chancery Court for Knox County, Tennessee on March 21, 1997 entitled, Tengasco, Inc., Plaintiff v. Theodore Scallan, Thieme Fonds, Ulrich Hocker and Wallington, Investments, Ltd., Case No. 133620-2 against Ulrich Hocker and two other lenders, Thieme Fonds and Wallington Investments, Ltd., as well as Theodore Scallan, the Company's former President, to invalidate the warrants which were issued in connection with and as consideration for the bridge loan of $1,000,000 made by the lenders to the Company. (See, description of the Hocker action above). It is the position of management that these warrants were never validly issued and are null and void because they were not properly authorized by the Company's Board of Directors. It is also the position of the Company that the issuance of these warrants to the lenders and the fees paid to Heiko Thieme, who represented all of the lenders, constituted usurious interest. The Company has also claimed that it was fraudulently induced into the loan transaction as a result of several misrepresentations made by Heiko Thieme. Two of the lender-defendants, Ulrich Hocker ("Hocker") and Thieme Fonds moved to dismiss the complaint on the ground that the court lacked jurisdiction over them. The other lender-defendant, Wallington Investments, Ltd., appeared specially in the action and moved to dismiss on the ground that it had not been properly served with process. On March 20, 1999, the Court issued its opinion and order finding that it had jurisdiction over the defendants and that process had been properly served upon Wallington Investments, Ltd. The Company now intends to vigorously pursue its claims. As part of its settlement of the action brought against the Company by Hocker in New York, the Company has discontinued this action against Hocker. It is the opinion of management that there is a strong likelihood that the Company will be successful in this action against the remaining defendants. 3. The Company was recently named as a defendant in an action commenced in the Supreme Court of the State of New York, New York County entitled Wallington Investments, Ltd., Plaintiff v. Tengasco, Inc., Defendant, Index no. 605876/98 In that action the plaintiff seeks to recover the sum of $500,000 loaned to the Company which was part of the $1,000,000 bridge loan transaction with Ulrich Hocker ("Hocker") and Thieme Fonds arranged by Heiko Thieme (See, discussion of the transaction in nos. 1 and 2 above.) 17 The loan by Wallington Investments, Ltd., like the loan by Hocker, is evidenced by a promissory note and the action brought by Wallington Investments, Ltd. is based upon that note. The complaint fails to make any mention of the warrants which were issued by the Company as part of the consideration for the bridge loan and which the Company contends renders the amount of interest extracted in connection with the loan transaction usurious. The Company has filed an answer to the complaint asserting that the loan transaction and the note sued upon are void and unenforceable because the warrants issued in connection with the loan were never validly issued and were not properly authorized by the Company's Board of Directors. As stated, it is also the position of the Company that the issuance of these warrants to the lenders and the fees paid to Heiko Thieme, who represented all of the lenders, constituted usurious interest. The Company has further claimed that it was fraudulently induced into the loan transaction as a result of several misrepresentations made by Heiko Thieme. The Company has moved to have this action stayed pending the outcome of the prior pending action in Tennessee (See, no. 2 above) since the issues in both cases are the same and the determination of the prior case will most likely be dispositive of the issues in this case. In any event, the Company intends to vigorously pursue its defenses to this action, as well as claims it has against the plaintiff and the other similarly situated lenders. The Company believes that it will be successful in defending this action. 4. The Company, its Chief Executive Officer, Malcolm E. Ratliff, and one of its attorneys, Morton S. Robson, have been named as defendants in an action commenced in the Supreme Court of the State of New York, New York County entitled Maureen Coleman, John O. Kohler, Charles Massoud, Jonathan Sarlin, Von Graffenried A.G. and VPM Verwatungs A.G., Plaintiffs v. Tengasco, Inc., Morton S. Robson and Malcolm E. Ratliff, Defendants, Index no. 603009/98 In that action, the plaintiffs, shareholders of the Company each of which purchased restricted shares of the Company's Common Stock, allege that although they were entitled to sell their shares pursuant to SEC Rule 144 in the open market, they were precluded from doing so by the defendants' purported wrongful refusal to remove the restrictive legend from their shares. The plaintiffs own in the aggregate 35,000 shares of the Company's common stock. The plaintiffs are seeking damages in an amount equal to the difference between the amount they would have been able to sell their shares if the plaintiffs had acted to remove the restrictive legends when requested and the amount they will receive on the sale of their shares. The plaintiffs are also seeking punitive damages in an amount they claim to be in excess of $500,000 together with interest, costs and disbursements of bringing the action, including reasonable attorneys fees. The Company believes that there are several substantial factual and legal issues as to the date on which the shareholders were entitled to sell their stock pursuant to Rule 144. Management 18 further believes that the Company did not wrongfully withhold its approval of the removal of the restrictive legends at the times such removal was requested by the shareholders. However, in the event the Company is found to have improperly withheld its permission to remove the restrictive legends from the shares owned by the shareholders, the Company may be held liable for damages to the shareholders in an amount equal to the difference between the actual sale price of such shares and the sales price they would have realized on the date such restrictive legends should have been permitted to be removed. As this time it is not possible to ascertain with any certainty what such damages would be. 5. The Company was named as a defendant in an action commenced in May 1998 in the United States District Court for the Eastern District of Tennessee entitled Operations Management International, Inc. ("OMI") v. Tengasco, Inc. The complaint seeks a declaratory judgment declaring a teaming agreement the Company entered into in March 1997 with OMI to operate, as a subcontractor, the steam generating facilities at the East Tennessee Technology Park ("ETTP") in Oak Ridge, Tennessee invalid and unenforceable, or in the alternative to declare that the Company is in breach of the teaming agreement thereby rendering it unenforceable. No claim for recovery of money is made against the Company. The Company has filed an answer and counterclaim against OMI seeking $10 million in damages for breach of contract. The action is scheduled for trial in July 1999. As of this date, discovery still has not been completed. Although it is not possible at this time to predict the outcome of this action, it is not anticipated that the Company will suffer a money judgment against it. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS and CONTROL PERSONS Identification of Directors and Executive Officers The following table sets forth the names of all current directors and executive officers of the Company. These persons will serve until the next annual meeting of stockholders (to be held at such time as the Board of Directors shall determine) or until their successors are elected or appointed and qualified, or their prior resignations or terminations. 19 Date of Positions Election or Name Held Designation - ---- ---- ----------- Joseph E. Armstrong Director 3/13/97 2624 Selma Avenue Knoxville, TN 37914 John L. Kidde Director 6/19/98 154 Oldchester Road Essex Fells, N.J. 07021 James B. Kreamer Director 3/13/97 3621 Cabin Creek Road London, KY 40741 William A. Moffett Director 5/95 29 Chisolm Trail Santa Fe, NM 87501 Shigemi Morita Director 3/13/97 80 Park Avenue New York, N.Y. 10016 Allen H. Sweeney Chairman of 3/13/97 1400 Oak Tree Drive the Board of Edmund, OK 73003 Directors Malcolm E. Ratliff Director; Chief 4/21/98 12608 Avallon Place Executive Officer Knoxville, TN 37922 Robert M. Carter President 3/13/98 317 Heathermoor Drive Knoxville, TN 37922 Mark A. Ruth Chief Financial 12/14/98 104-D Cynthia Lane Officer Knoxville, TN 37922 Sheila Sloan Treasurer 3/13/97 121 Oostanali Way Loudon, TN 37774 Elizabeth Wendelken Secretary 3/13/97 8023 Stanley Road Powell, TN 37849 20 Business Experience Joseph Earl Armstrong is 41 years old and a resident of Knoxville, Tennessee. He is a graduate of the University of Tennessee and Morristown College where he received a Bachelor of Science Degree in Business Administration. From 1988 to the present, he has been an elected State Representative for Legislative District 15 in Tennessee. From 1994 to the present he has been in charge of government relations for the Atlanta Life Insurance Co. From 1981 to 1994 he was a District Manager for the Atlanta Life Insurance Co. John L. Kidde is 60 years old. He received a B.A. Degree from Princeton University in 1956. From 1969 to 1988 he served as a Director and Vice-President of Kidde International, Inc. which was engaged in several businesses in the area of safety, security and business protection. Subsequently and to date he has acted as President of KDM Development Corporation, an investment management company. Mr. Kidde is also a Co-Founder and Chairman of Australasia, Inc., a Pacific Rim investment fund. He is also a Director and Investment Committee member of Asset Management Advisors, Inc. of Palm Beach, Florida and an active General Partner in a number of venture capital partnerships including, Claflin Capital I-V, North American Venture Capital II and the Opportunity Fund. Mr. Kidde is a Trustee of the Stevens Institute of Technology and the Open Space Institute in New York. James B. Kreamer is 59 years old. He earned a Degree in Business from the University of Kansas in 1963. He has been the owner of several business enterprises. In 1982, he purchased a seat on the Kansas City Board of Trade where he served on several committees working on the development of futures trading. Since 1979, he has been engaged in the oil and gas business as an investor. He currently serves as a member of the Board of Directors of Panaco, Inc., a NASDAQ energy company. William A. Moffett is 64 years old. He received a BS Degree in Geological Engineering from Oklahoma University in 1956. From 1977 to 1982, he was Operations Manager for Esso Exploration and Production in the United Kingdom. From 1982 to 1984, he was General Production Manager for Intercol (an affiliate of Exxon in Colombia). From 1984 to 1991 he was CEO for Stan Vac Indonesia, a joint Exxon/Mobil affiliate. Shigemi Morita is 63 years old. He received an A.B. Degree from Elon College in North Carolina. From 1969 to 1996 he was the President and CEO of Morita & Co., an insurance agency specializing in insurance for Japanese companies doing business in the United States. In 1996, Morita & Co., Inc. was acquired by Tokio Marine Management, Inc., Mitsubishi International Corporation in New York and Mitsubishi International, Ltd. in Tokyo. He remains as a consultant. 21 Malcolm E. Ratliff is 52 years old. He attended the University of Mississippi from 1965 to 1967. He has been involved in the oil and gas business since 1974, initially as a roustabout and then developing oil and gas leases. In 1992 he was involved with personal investments. In 1993 and 1994 he experienced serious health problems which prevented him from working. In April 1995, he became associated with the Company and, after its merger with Onasco, he served as a consultant to the Company's Board of Directors. From March 13, 1997 until March 13, 1998 when he resigned for health reasons, he was the Chief Executive Officer of the Company, and until his resignation on March 13, 1998, he was also acting as interim President of the Company as the result of the death, on September 19, 1997, of Daniel Follmer, the Company's President. On April 21, 1998 at the request of the Company's Board of Directors, Mr. Ratliff agreed to return to the management of the Company as its Chief Executive Officer. On June 19, 1998 at the Company's Annual Meeting of Stockholders he was elected to the Company's Board of Directors. Allen H. Sweeney is 52 years old. He received an MBA in finance from Oklahoma City University in 1972 and a Bachelor Degree in Accounting from Oklahoma State University in 1969. From 1978 to 1980, he served as Treasurer and CEO of Phoenix Resources Company. From 1980 to 1981, he served as Vice-President-Finance for Plains Resources, Inc. From 1982 to 1984, he was Vice-President-Finance for Wildcat Mud, Inc. From 1984 to 1992 he operated an independent consulting service under the name of AHS and Associates, Inc. Since 1992, he has served as Director and President of Columbia Production Company and Mid-America Waste Management, Inc. Robert M. Carter is 63 years old. He received a B.A. degree in Business form the Middle Tennessee State College. For 35 years was an owner of Carter Lumber & Building Supply Company and Carter Warehouse in Loudon County, Tennessee. He has been with the Company since 1995 and during that time has been involved in all phases of the Company's business including pipeline construction, leasing financing and the negotiation of acquisitions. Mr. Carter was elected Vice-President of the Company in March, 1996, as Executive Vice-President in April 1997 and on March 13, 1998 he was elected as President of the Company. Mark A. Ruth is 40 years old. He is a certified public accountant with 17 years accounting experience. He received a B.S. degree in accounting with honors from the University of Tennessee at Knoxville. He has served as a project controls engineer for Bechtel Jacobs Company, LLC; business manager and finance officer for Lockheed Martin Energy Systems; settlement department head and senior accountant for the Federal deposit Insurance Corporation; senior financial analyst/internal auditor for Phillips Consumer Electronics Corporation; and, as an auditor for Arthur Andersen and Company. 22 Section 16(a) Beneficial Ownership Reporting Compliance In fiscal 1998, Malcolm E. Ratliff, the Company's Chief Executive Officer and a Director, Shigemi Morita and John L. Kidde, two of the Company's other Directors, and IRC, which owns more than ten percent (10%) of the Company's common stock inadvertently failed to timely file certain Form 3, 4 and 5 reports. Mr. Ratliff failed to timely file two Form 4 reports involving five transactions. Mr. Morita failed to timely file a Form 5 report and two Form 4 reports involving two transactions. Mr. Kidde failed to timely file his Form 3 and 5 reports and one Form 4 report involving one transaction. IRC failed to timely file three Form 4 reports involving four transactions. These deficiencies have all been cured. Committees The Company has operating audit and compensation committees. Messers. Sweeney, Armstrong and Morita comprise the audit committee and Messers. Sweeney, Ratliff and Morita are the members of the compensation committee. Family Relationships There are no family relationships between any of the present directors or executive officers of the Company. Involvement in Certain Legal Proceeding To the knowledge of management, during the past five years, no present or former director, executive officer, affiliate or person nominated to become a director or an executive officer of the Company: (1) Filed a petition under the federal bankruptcy laws or any state insolvency law, nor had a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he or she was a general partner at or within two years before the time of such filing, or any corporation or business association of which he or she was an executive officer at or within two years before the time of such filing; (2) Was convicted in a criminal proceeding or named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) Was the subject of any order, judgment or decree, 23 not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from or otherwise limiting his or her involvement in any type of business, securities or banking activities; (4) Was found by a court of competent jurisdiction in a civil action, by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the Securities and Exchange Commission has not been subsequently reversed, suspended, or vacated. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS and MANAGEMENT Security Ownership of Certain Beneficial Owners The following tables set forth the share holdings of the Company's directors and executive officers and those persons who own more than 5% of the Company's common stock as of March 15, 1999 with these computations being based upon 7,992,016 shares of common stock being outstanding and assumes the exercise of 375,000 shares vested under options granted by the Company as of March 15, 1999. Five Percent Stockholders Percent Number of Shares of Name and Address Title Beneficially Owned Class - ---------------- ----- ------------------ ----- Industrial Resources Stockholder 2,853,823 34.1% Corporation(4) - -------------------------- (4) James Ratliff is the sole owner of the outstanding securities of Industrial Resources Corporation ("IRC"), and, accordingly, he may be deemed to be an affiliate of the Company. James Ratliff is also the father of Malcolm E. Ratliff, the Company's Chief Executive Officer and a Director. Malcolm E. Ratliff is the President of IRC and his wife, Linda Ratliff, is the Secretary of IRC. Tracmark, Inc., is a corporation, the sole shareholder of which is James Ratliff, as Trustee for the Ratliff Family. James Ratliff is the President, Malcolm E. Ratliff is the Vice-President and Linda Ratliff is the Secretary-Treasurer of Tracmark, Inc. which may also be deemed an affiliate of the Company. James Ratliff is the sole shareholder and President of Ratliff Farms, Inc. Malcolm E. Ratliff is the Vice-President/Secretary of Ratliff Farms. The shares listed here for IRC include 67,519 shares owned directly and an option to purchase 50,000 shares held by Malcolm E. Ratliff, 30,000 shares owned directly by Tracmark, Inc. and 128,700 shares owned directly by 24 603 Main Ave. Knoxville, TN 37902 Spoonbill, Inc. Stockholder 418,024 5.2% Tung Wai Commercial Bldg. 20th Floor 109-111 Gloucester Rd. Wanchai, Hong Kong Directors and Executive Officers Name and Address Title Shares Beneficially Percent of - ---------------- ----- ------------------- ---------- Owned Class ----- ----- Joseph Earl Armstrong Director 50,000(5) Less than 1% 2624 Selma Avenue Knoxville, TN 37914 Robert M. Carter President 98,000(6) 1.21% 317 Heathermoor Drive Knoxville, TN 37922 John L. Kidde Director 59,0007 Less than 1% 154 Oldchester Road Essex Falls, NJ 07021 James B. Kreamer Director 50,000(8) Less than 1% 3621 Cabin Creek Rd. London, KY 40741 William A. Moffett Director 100,000 1.25% 1073 Encantado Drive Santa Fe, NM 87501 - -------------------------- Ratliff Farms, Inc. (5) Consists of shares underlying an option. (6) Consists of 23,000 shares held directly and options to purchase 75,000 shares. (7) Consists of 9,000 shares held directly and options to purchase 50,000 shares. (8) Consists of options to purchase shares. 25 Shigemi Morita Director 171,141(9) 2.13% 80 Park Avenue New York, N.Y. 10016 Malcolm E. Ratliff Director; 2,853,823(10) 34.1% 12608 Avallon Place Chief Knoxville, TN 37922 Executive Officer Mark A. Ruth Chief -0- -0- 104-D Cynthia Lane Financial Knoxville, TN 37922 Officer Sheila F. Sloan Treasurer 12,000(11) Less than 1% 121 Oostanali Way Loudon, TN 37774 Allen H. Sweeney Chairman of 150,500(12) 1.87% 1400 Oak Tree Drive the Board Edmund, OK 73003 - ------------------------ (9) Consists of 61,741 shares held directly (including 7,000 shares owned by Morita Poperties, Inc. of which Shigemi Morita is the sole shareholder), 79,400 shares held as an IRA beneficiary and options to purchase 30,000 shares. (10) Malcolm E. Ratlif, the Company's Chief Executive Officer and a Director, is President of Industrial Resources Corporation ("IRC"). James Ratliff, who is the father of Malcolm E. Ratliff, is the sole shareholder of IRC and Linda Ratliff, the wife of Malcolm E. Ratliff, is the Secretary of IRC. Malcolm E. Ratliff is also Vice-President of Tracmark, Inc., a corporation whose sole stockholder is James Ratliff as Trustee for the Ratliff Family. James Ratliff is the sole shareholder and president of Ratliff Farms, Inc. Malcolm E. Ratliff is the Vice-President/Secretary of Ratliff Farms, Inc. The shares listed here include 67,519 shares owned directly and an option to purchase 50,000 shares held by Malcolm E. Ratliff, 2,577,604 shares owned directly by IRC, 30,000 shares owned directly by Tracmark, Inc. and 128,700 shares owned directly by Ratliff Farms, Inc. (11) Consists of 2,000 shares held directly and options to purchase 10,000 shares. (12) Consists of 100,500 shares held indirectly through a company which he controls and options to purchase 50,000 shares. 26 Elizabeth Wendelken Secretary 11,000(13) Less than 1% 8023 Stanley Road Powell, TN 37849 All Officers and 3,555,464(14) 42.49% Directors as a Group Changes in Control Except as indicated below, to the knowledge of the Company's management, there are no present arrangements or pledges of the Company's securities which may result in a change in control of the Company. DESCRIPTION OF SECURITIES Authorized Capital Stock The authorized capital stock of the Company is seventy five million (75,000,000) shares consisting of fifty million (50,000,000) shares, designated as Common Stock, at par value of $.001 per share, and twenty five million (25,000,000) shares, designated as Preferred Stock, at a par value of $.0001 per share. Preferred Stock. The Preferred Stock may be issued, from time to time, by authorization of the Company's Board of Directors in one or more series, with such designations, preferences and relative, participating, optional or other rights, qualifications, limitations or restrictions thereof as shall be stated and expressed in the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors. The Company's Board of Directors recently authorized the issuance of a series of a class of convertible preferred stock designated as Series A 8% Cumulative Convertible Preferred Stock. The Series A Preferred Shares have the following rights and preferences. Liquidation Preference The Series A Shares shall have a liquidation preference of $100 per Series A Share, plus any accrued and unpaid dividends thereon. - ----------------------- (13) Consists of 1,000 shares held directly and options to purchase 10,000 shares. (14) Consists of shares held directly and indirectly by management, shares held by Industrial Resources Corporation, shares held by Tracmark, Inc. Ratliff Farms, Inc. and 375,000 shares underlying options. 27 Dividends The holders of the Series A Shares shall be entitled to receive a preferential cumulative dividend of 8% of the liquidation preference per annum, payable quarterly. Conversion The holders of the Series A Shares have the right at any time to convert the principal amount of the purchase price of the Series A Shares into shares of the Company's common stock at a conversion rate of $5.75 per share of Common Stock, subject to adjustment to protect against dilution. Voting Rights The holders of Series A Shares shall have no voting rights prior to conversion of the Series A Shares. However, in the event that the Company shall fail to pay dividends to the holders of the Series A Shares in any two of six consecutive quarters, the Company shall take such action as is necessary, within 45 days of such occurrence, to appoint to the Board of Directors those nominees of the holders of the Series A Shares which shall constitute a majority of the members of the Company's Board of Directors and thereafter, the holders of the Series A Shares shall be entitled to nominate and elect a majority of the Company's Board of Directors in all election until such time as all accrued and unpaid dividends are paid to the holders of the Series A Shares. Redemption The Company may, at any time, in its sole discretion, upon 30 days written notice, redeem all of the Series A Shares at a price of $100 per Series A Share, subject to adjustment, plus any accrued dividends, provided that at the time of such redemption notice, (i) the Company's shares of Common Stock shall be listed for trading on a national securities exchange, The NASDAQ National Market System or The NASDAQ SmallCap Market on the redemption date; (ii) the closing sale price of the Company's Common Stock as reported on such national securities exchange, The NASDAQ National Market System or The NASDAQ SmallCap Market shall have exceeded $11.50 for 60 consecutive trading days preceding the date of the redemption notice; and (iii) the shares of Common Stock issued or issuable upon conversion of the Series A Shares are subject to an effective registration statement permitting their resale under the Securities Act. The holders of the Series A Shares shall be entitled to exercise their conversion option during the thirty days notice period. Registration Rights The holders of the Series A Shares are entitled to certain piggyback registration rights pursuant to which the Company shall include the shares of Common Stock issuable upon conversion of the Series A Shares in any registration statement the purpose of which is to register the resale of its securities under the Securities Act of 1933, as amended, subject to certain restrictions which may be imposed by the underwriters in the event of an underwritten offering. The Company recently issued 5,750 shares of the Series A 28 Preferred Stock in connection with an $800,000 loan transaction between the Company and five individuals in July 1998 and to repay the balance of a loan made to the Company by an individual in 1997. Both of those transaction are more fully described below under the heading "Certain Relationships and Related Transactions - Transactions with Management and Others". The Company may issue more Preferred Stock from time to time in order to raise funds for the Company's operations and/or the acquisition of new properties. Common Stock. The holders of the common stock are entitled to one vote per share on each matter submitted to a vote at any meeting of stockholders. Shares of common stock do not carry cumulative voting rights, and therefore, a majority of the shares of outstanding common stock will be able to elect the entire Board of Directors and, if they do so, minority stockholders would not be able to elect any persons to the Board of Directors. The Company's Bylaws provide that a majority of the issued and outstanding shares of the Company shall constitute a quorum for stockholders meetings except with respect to certain matters for which a greater percentage quorum is required by statute or the by-laws. Stockholders of the Company have no preemptive rights to acquire additional shares of common stock or other securities. The common stock is not subject to redemption and carries no subscription or conversion rights. In the event of liquidation of the Company, the shares of common stock are entitled to share equally in corporate assets after satisfaction of all liabilities. Holders of common stock are entitled to receive such dividends as the Board of Directors may from time to time declare out of funds legally available for the payment of dividends. The Company seeks growth and expansion of its business through the reinvestment of profits, if any, and except as indicated under the heading "Market Price of and Dividends On the Company's Common Equity and Other Stockholder Matters" - "Dividends" below, the Company does not anticipate that it will pay dividends in the foreseeable future. The Board of Directors has the authority to issue the authorized but unissued shares of common stock without action by the stockholders. The issuance of such shares would reduce the percentage ownership held by existing shareholders and may dilute the book value of their shares. There are no provisions in the Bylaws or Articles of Incorporation of the Company which would delay, defer or prevent a change in control of the Company. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES and AGENTS Section 48-18-502 of the Tennessee Business Corporation 29 Act (the "TBCA") allows a corporation to indemnify any director in any civil or criminal proceeding (other than a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation or any other proceeding in which he or she was adjudged liable on the basis that he or she improperly received a personal benefit) by reason of service as a director if the person to be indemnified conducted himself or herself in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. Unless limited by its charter, Section 48-18-503 of the TBCA requires a corporation to indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he or she was a party because of his or her role as director against reasonable expenses incurred in connection with the proceeding. The Company's charter does not provide any limitations on this right of indemnification. Pursuant to Section 48-18-504 of the TBCA, the Company may advance a director's expenses incurred in defending any proceeding upon receipt of an undertaking and a statement of the director's good faith belief that he or she has met the standard of conduct described in Section 48-18-502. Section 48-18-505 of the TBCA permits a court, upon application of a director, to order indemnification if it determines that the director is entitled to mandatory indemnification under Section 48-18-503 or that he or she is fairly and reasonably entitled to indemnification, whether or not he or she met the standards set forth in Section 48-18-502. Section 48-18-506 of the TBCA limits indemnification under Section 48-18-502 to situations in which either (i) the majority of a disinterested quorum of directors; (ii) independent special legal counsel; or (iii) the stockholders determine that indemnification is proper under the circumstances. Section 48-18-507 of the TBCA extends certain indemnification rights to officers, employees and agents of a corporation as well. Regardless of whether a director, officer, employee or agent has the right to indemnity under Section 48-18-502 or Section 48-18-503 of the TBCA, Section 48-18-508 allows the corporation to purchase and maintain insurance on his or her behalf against liability resulting from his or her corporate role. Section 48-18-509 of the TBCA provides that the rights to indemnification and advancement of expenses shall not be deemed exclusive of any other rights under any bylaw, agreement, 30 stockholder vote or vote of disinterested directors; however, no indemnification may be made where a final adjudication adverse to the director establishes his or her liability for breach of the duty of loyalty to the corporation or its stockholders or for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defenses of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being offered hereunder, the Company will, unless in the opinion of its counsel that matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the questions whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. DESCRIPTION OF BUSINESS Glossary of Terms Confirmed Structure: A structure that is defined due to actual geological testing and information. Farmout Agreement: A form of agreement between oil and gas operators whereby the owner of a lease who is not interested in drilling at the time, agrees to assign the lease or a portion of it to another operator who wishes to drill the acreage. The assignor may or may not retain an interest (royalty or production payment) in the production. Hydrocarbons: Organic chemical compounds of hydrogen and carbon atoms. There are a vast number of these compounds, and they form the basis of all petroleum products. They may exist as gases, liquids or solids. An example of each is methane, hexane and asphalt. 31 Verified Structure: A structure that is verified by actual geological testing and/or penetration. Wildcat: A term applied to a mining company organized, or to a mine or well dug, in an attempt to develop unproven ground far from previous production. Any risky venture in the mining or petroleum industry. Shut-in Well: A well that is not in production because of a lack of a market or a pipeline connection. Shut-in Royalty: Payment to royalty owners under the terms of a mineral lease that allows the operator or lessee to defer production from a shut-in well. History of the Company The Company was initially organized under the laws of the State of Utah on April 18, 1916, under the name "Gold Deposit Mining & Milling Company." The Company was formed for the purpose of mining, reducing and smelting mineral ores. On November 10, 1972, the Company conveyed to an unaffiliated entity substantially all of the Company's assets and the Company ceased all business operations. From approximately 1983 to 1991, the operations of the Company were limited to seeking out the acquisition of assets, property or businesses. At a special meeting of stockholders held on April 28, 1995, the Company's stockholders voted (i) to approve the execution of an agreement (the "Purchase Agreement") pursuant to which the Company would acquire certain oil and gas leases, equipment, securities and vehicles owned by Industrial Resources Corporation ("IRC"), a Kentucky corporation, in consideration of the issuance of 4,000,000 post-split (as described below) "unregistered" and "restricted" shares of the Company's common stock and a $450,000 8% promissory note payable to IRC. The promissory note was converted into 83,799 shares of the Company's common stock in December 1995; (ii) to amend the Articles of Incorporation of the Company to effect a reverse split of the Company's outstanding $0.001 par value common stock on a basis of one share for two, retaining the par value at $0.001 per share, with appropriate adjustments being made in the additional paid-in capital and stated capital accounts of the Company; (iii) to change the name of the Company from "Onasco 32 Companies, Inc."to "Tengasco, Inc."; and (iv) to change the domicile of the Company from the State of Utah to the State of Tennessee by merging the Company into Tengasco, Inc., a Tennessee corporation, formed by the Company solely for this purpose. The Purchase Agreement was duly executed by the Company and IRC, effective May 2, 1995. The reverse split, name change and change of domicile became effective on May 4, 1995, the date on which duly executed Articles of Merger effecting these changes were filed with the Secretary of State of the State of Tennessee; a certified copy of the Articles of Merger from the State of Tennessee was filed with the Department of Commerce of the State of Utah on May 5, 1995. Unless otherwise noted, all subsequent computations herein retroactively reflect this one for two reverse split. During 1996, the Company formed Tengasco Pipeline Corporation, a wholly-owned subsidiary, to manage the construction and operation of Phase I of its pipeline, as well as other pipelines planned for the future. General 1. The Swan Creek Field Amoco Production Company ("AMOCO") during the late 1970's and early 1980's, after extensive geological and seismic studies, leased approximately 50,000 acres of oil and gas leases in the Eastern Overthrust in the Appalachian Basin, an area now referred to as the Swan Creek Field. In 1982 AMOCO successfully drilled two significant natural gas discovery wells in the Swan Creek Field to the Knox Formation at approximately 6,000 feet of total depth. These wells, once completed, had an extraordinarily high pressure and volume of deliverability of natural gas; however, in the mid-1980's a substantial decline in worldwide oil and gas prices occurred and the high cost of constructing a 23 mile pipeline across three rugged mountain ranges and crossing the environmentally protected Clinch River from Sneedville to the closest market in Rogersville, Tennessee was cost prohibitive. In 1987, AMOCO farmed out its leases to Eastern American Energy Company which held the leases until July 1995. The Company became aware of a law adopted by the Tennessee legislature which enabled the Company to lease all of AMOCO's prior acreage. The Company filed for a declaratory judgment as to its right to lease AMOCO's prior acreage. The Company was ultimately successful in winning all right, title and interest in all of AMOCO's prior 33 leases in a precedent setting Supreme Court case. In July 1995 after completion of the Purchase Agreement, the Company acquired the Swan Creek Leases. These leases provide for a landowner royalty of 12.5%, leaving the Company a net royalty interest of 87.5% in each lease. The first well drilled by the Company in the Swan Creek Field, the Gary Patton #1 tested at 6.5 Mmcf of deliverable gas per day, making it the largest known tested well in the states of Tennessee, Kentucky and Virginia. Since then the Company has drilled twelve additional gas wells at 6,000 feet and two oil wells for a total of fifteen wells. During 1999 and 2000 Tengasco anticipates drilling, completing and producing a total of 50 additional wells with over 100 million cubic feet of deliverability of natural gas per day. Having completed Phase I of its pipeline, in July 1998 the Company began selling gas to Hawkins County Utility District which services residential, municipal and industrial customers in the Hawkins County area, pursuant to a written contract entered into on September 26, 1996. During the period from August 1998 through December 31, 1998 the Company delivered 46,776 Mcf of gas to Hawkins County Utility District. During the period from January 1, 1999 through March 23, 1999 Hawkins County Utility District has taken only 477 Mcf of gas from the Company. Although Hawkins County Utility District could take gas in commercial quantities, it has declined to do so. Pursuant to its contract, it is not obligated to purchase any specific amount of gas. The Company does not know if Hawkins County Utility District will ever take gas in commercial quantities and intends to seek to terminate its contract with Hawkins County Utility District. The Company is currently engineering and designing the second phase ("Phase II") of its pipeline, an additional 20 miles of 12 inch pipeline which will connect into East Tennessee Natural Gas' main gas transmission line. This will enable the Company to service communities throughout Tennessee and the southeastern region of the United States. It is estimated that Phase II of the pipeline will cost approximately $5,000,000 and will take six to eight months to construct. (See, "Item 6 - Management's Discussion and Analysis or Plan of Operation"). 2. The Kansas Properties The Company, as of December 31, 1997 acquired the Kansas Properties which included 149 producing oil wells and 59 producing 34 gas wells in the vicinity of Hays, Kansas and a gathering system including 50 miles of pipeline. The aggregate production for the Kansas Properties at present is approximately 1,005 Mcf of gas and 378 barrels of oil per day. Revenues for the Kansas Wells are approximately $82,000 per month with net income after operating expenses of approximately $34,000. There are several capital projects that are available in Kansas which include drilling wells, recompletion of wells and major workovers. These projects when completed may well increase production in Kansas. Management, however, has made the decision to not perform this work until the price of oil has stabilized at $15 or higher. Current prices recently reached $15 per barrel. 3. The Company's Other Leases In connection with the Purchase Agreement, the Company acquired from IRC the following properties: (i) a 100% working interest in 41 oil and gas leases on a total of 8,058 acres, more or less, and a 25% working interest on one lease of 462 acres, more or less, located in Clay County, Kentucky (collectively, the "Beech Creek Leases"). Each of these leases provided for a landowner royalty of 12.5% of the oil produced and saved from the leased premises or, at the lessee's option, to pay the market price for such 12.5% royalty. The leases also provided for a landowner royalty equal to 12.5% of the market price at the well of the gas sold or used off the premises, except for injection for secondary recovery of oil. The Beech Creek Leases were also subject to overriding royalties ranging from 1.25% to 5%. (ii) a 100% working interest in 5 oil and gas leases on a total of 741 acres, more or less, located in Clay County, Kentucky (collectively, the "Wildcat Leases"). Each of these leases was subject to a 12.5% landowner royalty, on the same terms as the Beech Creek Leases, and a 3.125% overriding royalty. (iii) a 100% working interest in six oil and gas leases on a total of 744 acres, more or less, located in Clay County, Kentucky (collectively, the "Burning Springs Leases"). Each of these leases was subject to a 12.5% landowner royalty, on the same terms as the Beech Creek Leases and the Wildcat Leases, and overriding royalties ranging from 3.125% to 7.5%. (iv) a 100% working interest in nine oil and gas leases on a total of 2,121 acres, more or less, located in Fentress County, Tennessee (collectively, the "Fentress County Leases"). Each of these leases was subject to a 12.5% landowner royalty, on the same terms as the above referenced leases, and a 19% overriding royalty; and a 25% overriding royalty on one existing well. 35 All of the above referenced leases have expired and the Company does not plan to pursue development of these properties since the Company intends to concentrate on the development of the Swan Creek Leases which management believes has greater economic potential. Subsequent to the Purchase Agreement, the Company also acquired a 100% working interest in four oil and gas leases on a total of 1,003.19 acres, more or less, located in Lauderdale County, Alabama (collectively, the "Alabama Leases"). The Alabama Leases have expired and the Company does not intend to pursue the development of these leases for the same reasons it is not pursuing the development of its other leases that have expired. Governmental Regulations The Company is subject to numerous state and federal regulations, environmental and otherwise, that may have a substantial negative effect on its ability to operate at a profit. For a discussion of the risks involved as a result of such regulations, see, "Effect of Existing or Probable Governmental Regulations on Business" and "Costs and Effects of Compliance with Environmental Laws" hereinafter in this section. Principal Products or Services and Markets The Company will conduct exploration and production activities to produce crude oil and natural gas. The principal markets for these commodities are local refining companies, major natural gas transmission pipeline companies, local utilities and private industry end users, which purchase the crude oil, and natural gas pipeline companies, which purchase the gas. In Hancock County, gas production from the Swan Creek Field can presently be delivered through the completed Phase I of the Company's pipeline to the Hawkins County Gas Utility. The Company has acquired all necessary regulatory approvals and 100% of necessary property rights for Phase I of the pipeline. The Company's pipeline will not only service the Company's wells, but, will provide transportation of gas for small independent producers in the local area as well. It is anticipated that direct sales could also be made to some local towns and industries. No assurance can be given that the Company will be able to produce a sufficient quantity of crude oil or natural gas or that it will obtain purchasers of gas from the Company in sufficient quantities to make these operations profitable. It is anticipated that when Phase II of the pipeline is 36 completed that the Company will be able to provide gas to communities throughout the State of Tennessee and to other areas of the southeastern United States. It is anticipated that completion of Phase II will permit the Company to sell all of its daily natural gas production from the Swan Creek Field. Natural gas from the Kansas Properties is delivered to Kansas-Nebraska Energy, Inc. in Bushton, Kansas. At present, crude oil is being trucked and transported through pipelines to the National Cooperative Refining Association in McPherson, Kansas, 120 miles from Hays. National Cooperative is solely responsible for transportation of products whether by truck or pipeline. An additional purchaser of the crude oil produced is Farmland Industries in Neodosha. There is a limited market in the area and the only other purchaser of crude oil is Koch Oil. Reserve Analyses Coburn Petroleum Engineering of Tulsa, Oklahoma, has performed reserve analyses of all the Company's productive leases (with the exception of the wells acquired from AFG). R. W. Coburn, a registered petroleum engineer, and the owner of Coburn Petroleum Engineering, has no interest in the Company or IRC, and performed these services at his standard rate ($90 per hour was billed and paid for these reports). The net reserve values used hereafter were obtained from a report dated February 9, 1999 prepared by Coburn Petroleum Engineering. In substance, the report, used estimates of oil and gas reserves based upon standard petroleum engineering methods which include decline curve analysis, volummetric calculations, pressure history, analogy, various correlations and technical judgment. Information for this purpose was obtained from owners of interests in the areas involved, state regulatory agencies, commercial services, outside operators and files of Coburn Petroleum Engineering. The report of Coburn Petroleum Engineering provides that the net reserves of the existing 15 wells in the Swan Creek Field is over 50 Bcf of natural gas with a present-day deliverability of 15 million cubic feet of natural gas per day and 784,033 barrels of oil. According to the Coburn Engineering Report, discounting the net reserve values by 10% results in a present value as of December 31, 1998 of $50,320,416 before taxes and $40,580,884 after taxes. Columbia Engineering based in Oklahoma City, Oklahoma, has performed a reserve analysis of the Kansas Properties. David F. Yard, a registered petroleum engineer is the principal of Columbia Engineering. Neither Columbia Engineering nor Mr. Yard has an interest in the Company or IRC and Mr. Yard performed these services at his standard rate of $75 per hour. The net reserve values used hereafter were obtained from a report dated February 20, 1999. According to the report of Columbia Engineering, discounting the net reserve values by 10% results in a present 37 value as of December 31, 1998 of $2,970,124 before taxes and $2,395,108 after taxes for the Kansas Properties. Reserve analyses are at best speculative, especially when based upon limited production; no assurance can be given that the reserves attributed to these leases exist or will be economically recoverable. See "Risk Factors" - "Uncertainty of Reserve Estimates." It is standard in the industry for reserve analyses such as these to be used as a basis for financing of drilling costs. Distribution Methods of Products or Services Crude oil is normally distributed in Tennessee by tank truck and natural gas is distributed and transported via pipeline. The Company has no farmout agreements with any entity. Status of Any Publicly Announced New Product or Service The Company has publicly announced its agreement with Enserch Energy Services, Inc. ("Enserch") to market gas provided by that company in Tennessee and Southeastern United States. As of the current date, Enserch has not provided any gas to the Company and, as a result, the Company is not proceeding with that agreement. In March 1997, the Company signed a teaming agreement with Operations Management International ("OMI") to operate, as a subcontractor, the steam generating facilities at the East Tennessee Technology Park ("ETTP") in Oak Ridge, Tennessee. This is the site of the original Manhattan Project that has been privatized by the United States Department of Energy ("DOE") and currently produces enriched uranium for commercial and military use. OMI is a subsidiary of CH2M Hill, Ltd., an international engineering and operations company. On May 7, 1998, OMI filed a complaint for declaratory judgment in the United States District Court for the Eastern District of Tennessee seeking to declare the teaming agreement as invalid and unenforceable, or in the alternative to declare that the Company is in breach of the teaming agreement thereby rendering it unenforceable. The Company has filed an answer and counterclaim against OMI seeking $10 million in damages for breach of contract. The action is scheduled for trial in July 1999. As of this date discovery still has not been completed. (See, "Legal Proceedings"). 38 Competitive Business Conditions, Competitive Position in the Industry and Methods of Competition The Company's contemplated oil and gas exploration activities in the States of Tennessee and Kansas will be undertaken in a highly competitive and speculative business atmosphere. In seeking any other suitable oil and gas properties for acquisition, the Company will be competing with a number of other companies, including large oil and gas companies and other independent operators with greater financial resources. Management does not believe that the Company's initial competitive position in the oil and gas industry will be significant. Its principal competitors in the State of Tennessee are Ashland Oil and Miller Services. In the area of the Company's pipeline, the Company is in a favorable position since it will own the only pipeline within a 20 mile radius. Within that area, the Company owns leases on approximately 44,000 acres. There are numerous producers in the area of the Kansas Properties. Some are larger and some smaller than the Company. However, management expects that it will be able to sell all the gas and oil the Kansas Properties produce. Management does not foresee any difficulties in procuring drilling rigs or the manpower to run them in the area of its operations. The experience of management has been that in most instances, drilling rigs have only a one or two day waiting period; however, several factors, including increased competition in the area, may limit the availability of drilling rigs, rig operators and related personnel and/or equipment; such an event may have a significant adverse impact on the profitability of the Company's operations. The Company anticipates no difficulty in procuring well drilling permits which are obtained from the Tennessee Oil and Gas Board. They are usually issued within one week of application. The Company generally does not apply for a permit until it is actually ready to commence drilling operations. The Company presently has five well drilling permits for use anywhere in Tennessee. The prices of the Company's products are controlled by the world oil market and the United States natural gas market; thus, competitive pricing behaviors are considered unlikely; however, competition in the oil and gas exploration industry exists in the form of competition to acquire the most promising acreage blocks and obtaining the most favorable prices for transporting the product. Management believes that the Company is well-positioned in these areas because of the transmission lines that run through and adjacent to the properties it leases and because it holds relatively large acreage blocks in what management believes are promising areas. 39 Sources and Availability of Raw Materials and Names of Principal Suppliers Excluding the development of oil and gas reserves and the production of oil and gas, the Company's operations are not dependent on the acquisition of any raw materials. See, "Competitive Business Conditions, Competitive Position in the Industry and Methods of Competition" set forth above. Dependence on One or a Few Major Customers The Company is not presently dependent upon any major customers for the gas from its Swan Creek Field. However, upon completion of Phase II of its pipeline, the Company anticipates being dependent upon a few customers. Natural gas from the Kansas Properties is delivered to Kansas-Nebraska Energy, Inc. in Bushton, Kansas. At present, crude oil from the Kansas Properties is being trucked and transported through pipelines to the National Cooperative Refining Association in McPherson, Kansas, 120 miles from Hays. National Cooperative is solely responsible for transportation of products whether by truck or pipeline. An additional purchaser of the crude oil produced is Farmland Industries in Neodosha, Kansas. There is a limited market in the area and the only other purchaser of crude oil is Koch Oil. The Company, however, anticipates that it will be able to sell all of the oil and gas produced from the Kansas Properties. Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, including Duration Royalty agreements relating to oil and gas production are standard in the industry. The amount of the Company's royalty payments varies from lease to lease. See, the heading "General" under this section. The amounts of the royalties on each of the Company's leases may be obtained from the Company. Need for Governmental Approval of Principal Products or Services None of the principal products or services offered by the Company require governmental approval; however, permits are required for drilling oil or gas wells. See, "Effect of Existing or Probable Governmental Regulations on Business" below in this section. 40 Effect of Existing or Probable Governmental Regulations on Business Exploration and production activities relating to oil and gas leases are subject to numerous environmental laws, rules and regulations. The Federal Clean Water Act requires the Company to construct a fresh water containment barrier between the surface of each drilling site and the underlying water table. This involves the insertion of a seven-inch diameter steel casing into each well, with cement on the outside of the casing. The cost of compliance with this environmental regulation is approximately $10,000 per well. The State of Tennessee also requires the posting of a bond to ensure that the Company's wells are properly plugged when abandoned. A separate $2,000 bond is required for each well drilled. The Company currently has the requisite amount of bonds on deposit with the State of Tennessee. As part of the Company's purchase of the Kansas Properties it acquired a statewide permit to drill in Kansas, such permits being applied for and issued within one-two weeks prior to drilling. At the present time, the State of Kansas does not require the posting of a bond either for permitting or to insure that the Company's wells are properly plugged when abandoned. All of the wells in the Kansas Properties have all permits required and are in compliance with the laws of the State of Kansas. The Company's operations are also subject to laws and regulations requiring removal and cleanup of environmental damages under certain circumstances. Laws and regulations protecting the environment have generally become more stringent in recent years, and may in certain circumstances impose "strict liability," rendering a corporation liable for environmental damages without regard to negligence or fault on the part of such corporation. Such laws and regulations may expose the Company to liability for the conduct of operations or conditions caused by others, or for acts of the Company which were in compliance with all applicable laws at the time such acts were performed. The modification of existing laws or regulations or the adoption of new laws or regulations relating to environmental matters could have a material adverse effect on the Company's operations. In addition, the Company's existing and proposed operations could result in liability for fires, blowouts, oil spills, discharge of hazardous materials into surface and subsurface aquifers and other environmental damage, any one of which could result in personal injury, loss of life, property damage or destruction or suspension of operations. The Company believes it is presently in compliance with all applicable federal, state or local environmental laws, rules or regulations; however, continued compliance (or failure to comply) and future legislation may have an adverse impact on the Company's 41 present and contemplated business operations. At Board of Directors' meetings held June 6 and 7, 1995, the Board of Directors adopted resolutions to form an Environmental Response Policy and Emergency Action Response Policy Program. A plan was recently adopted which provides for the erection of signs at each well and at strategic locations along the pipeline containing telephone numbers of the Company's office and the home telephone numbers of key personnel. A list will be maintained at the Company's office and at the home of key personnel listing phone numbers for fire, police, emergency services and Company employees who will be needed to deal with emergencies. The foregoing is only a brief summary of some of the existing environmental laws, rules and regulations to which the Company's business operations are subject, and there are many others, the effects of which could have an adverse impact on the Company. Future legislation in this area will no doubt be enacted and revisions will be made in current laws. No assurance can be given as to what effect these present and future laws, rules and regulations will have on the Company's current and future operations. Research and Development The Company has not expended any material amount in research and development activities during the last two fiscal years. Research done in conjunction with its exploration activities will consist primarily of running radiometric surveys on the lease blocks and conducting geological research on the surface. This work will be performed by the Company's full time geologist and will not have a material cost of anything more than his standard salary. See "Number of Total Employees and Number of Full-Time Employees" set forth below in this section. Cost and Effects of Compliance With Environmental Laws See, "Effect of Existing or Probable Governmental Regulations on Business" set forth above in this section. Number of Total Employees and Number of Full-Time Employees The Company presently has twenty-six full-time employees and no part-time employees. The Company has hired a full-time geologist at a salary of $48,000 per year. His duties for the Company include: surface and sub-surface geology, log correlation, surface and sub-surface mapping, field--research (i.e., radiometric, gravity, magnetic and 42 geochemical research) and well-site geology. MANAGEMENT'S DISCUSSION and ANALYSIS or PLAN of OPERATION The Company intends to continue its drilling program on the Swan Creek leases. The existence of substantial deposits of hydrocarbons (oil and/or gas) in the Swan Creek structure (i.e. the rock formation beneath the surface) is confirmed by the following facts: The Swan Creek structure is located in an area known as the Eastern Overthrust Belt which is an area with numerous faults. A fault is an area where geologic plates overlap. The Eastern Overthrust Belt is geologically similar to the Western Overthrust Belt located in the Rocky Mountains, where there are other oil and gas producing properties. The Company has successfully completed thirteen gas wells in this area, all of which have been flow tested by metering gas from the wells through one-half inch orifice. These tests all verify the presence of a substantial reservoir of natural gas and/or oil. One of these wells, the Reed #1 tested at 4,800,000 cubic feet of gas per day with a pressure of 800 psi. Another well, the Sutton #1 tested at 1,200,000 cubic feet per day with a pressure of 150 psi. To date, the Company has not drilled any dry wells. In July 1998, the Company completed Phase I of its 8 inch 23 mile pipeline from the Swan Creek Field to Rogersville, Tennessee. With the assistance of the Tennessee Valley Authority, the Company was successful in utilizing TVA's rights-of-way along its main power grid from the Swan Creek Field to Rogersville, Tennessee. The Company's plan of operations for the next two years calls for the drilling of 50 additional wells on the Swan Creek Field at a cost of approximately $250,000 per well. The Company's future plans also include completing Phase II of its pipeline to extend its recently completed Phase I a distance of 20 miles at a cost of approximately $5,000,000 to connect with the main gas transmission line of East Tennessee Natural Gas. The Tennessee Department of Transportation has verbally granted the Company the right to lay Phase II of its pipeline along state highway 11 to Kingsport, Tennessee where the Company will connect its line with East Tennessee Natural Gas pipeline and other potential customers. This will allow the Company to sell all of the natural gas it can produce throughout the southeastern and northeastern United States. At the present time, the Company is capable of producing substantially more gas than it is able to sell. The Company 43 estimates that its ultimate deliverability will reach 80 to 100 Mmcf per day or 2.5 to 3.1 Bcf per month once Phase II of its pipeline is completed. The Company expects to reach this capacity on or about December 31, 2002. The estimated time from start to finish of construction of Phase II of the Pipeline is six to eight months. The Company does not presently have the funds needed to enable it to complete its drilling program and the extension of the pipeline. There can be no assurances that all of the funding necessary for the continuation of the drilling program and the completion of Phase II of the pipeline will become available. Moreover, no assurance can be given that the Company will be able to obtain the required rights of way to construct Phase II of its pipeline, and the completed Phase I of the pipeline will only serve production from a portion of the Swan Creek Field. In connection with its acquisition of all of AFG's assets, the Company acquired 208 working wells in Kansas. Pursuant to the acquisition agreement the Company was entitled to all income from those wells as of January 1, 1998. The acquisition was for a total purchase price of approximately $5.5 million, which consisted of $3 million in cash and seller financing of $2.5 million. This financing is evidenced by a note which accrues interest at the 9.5 % per annum for the period from December 1998 to May 1999. After May 1999, the interest rate becomes 9% per annum. Monthly interest only payments are due from December 1998 to May 1999. Monthly installments of principal and interest $138,349 are due from June 1999 to December 1999. There is a balloon payment of $983,773 due in January 2000. The aggregate current production form the Kansas Properties is approximately 1,002 Mcf of natural gas and 378 barrels of oil per day. Income from the Kansas properties at the present time is approximately $82,000 per month with net income after operating expenses of approximately $34,000 per month. Revenues from the Kansas Properties for 1998 were significantly lower than in the prior two years as a result of lower oil and gas prices. There are several capital projects that are available in Kansas which include drilling wells, recompletion of wells and major workovers to increase current production. These projects when completed may well increase production in Kansas. However, the cost of reworking certain existing wells is projected to be $1.4 million. Since the Company does not presently have the funds necessary to rework existing wells and/or drill additional wells the ability to undertake such efforts is dependent on the Company obtaining additional debt or equity financing. Management has made the decision to not undertake such efforts to raise the funds necessary to perform this work until the price of oil has stabilized at $15 per barrel or higher. Current prices have recently reached $15 per barrel. 44 The Company has determined not to pursue the development of the Beech Creek, Fentress County, Wildcat, Burning Springs and Alabama Leases, all of which have expired. The Company, instead, will concentrate on the development of its other properties which management believes have greater economic potential and the acquisition of other properties. The Company has no plans, at present, to increase the number of its employees significantly. This plan of operation is based upon many variables and estimates, all of which may change or prove to be other than or different from information relied upon. Results of Operations The Company incurred a net loss of $3,083,638 ($0.42 per share) in 1998 compared to a net loss of $4,370,570 ($0.71 per share) in 1997. The Company realized oil and gas revenues of $2,078,101 in 1998. In 1997 the Company had no revenues. Revenues in 1998 were offset by increased production costs and taxes of $1,943,944 compared to $3,748 in 1997. These increases in revenues and production costs were attributable primarily to the acquisition of the Kansas Properties in 1998. Depletion, depreciation and amortization increased from $79,267 in 1997 to $290,030 in 1998 due, again, primarily to the acquisition of the Kansas Properties. General and administrative costs decreased $163,709 to $1,372,132 in 1998. The decrease occurred primarily as a result of cost savings with respect to the Kansas Properties and the completion of Phase I of the Pipeline. Interest expense of $574,906 in 1998 was $1,310,542 less than the previous year due to less debt and funding transactions. Public relations costs of $342,803 in 1998 was $52,489 less than in 1997 as a result of an effort by the Company to cut costs. Legal and accounting costs in 1998 were $656,104 compared to $390,297 in 1997. This increase of $265,807 was due primarily to an increase in costs for auditing services and legal costs for services related to on-going litigation and a failed private placement. The Company did not have any income tax expense in 1998 or 1997 due to a net operating loss carryfoward. Deferred tax 45 assets, consisting primarily of these loss carryfowards, have been fully reduced by a valuation allowance as management considers it unlikely these tax assets will be realized. Liquidity During 1998, as in prior years, revenues from operations were insufficient to fund the Company's operations. The Company's primary source of funds during 1998 came from private placements of the Company's restricted securities in the amount of approximately $3,557,396 and borrowings of $3,021,555. The Company expects to need approximately $5,000,000 in 1999 to complete Phase II of its pipeline and $6,000,000 to continue development of its Swan Creek Field and other working capital requirements. The Company plans to raise this money from investors and/or lenders. The Company does not expect to realize positive cash flows from operations until Phase II of its pipeline is completed which is currently projected to be six to eight months from the start of construction of the pipeline. The "Report of Independent Certified Public Accountants" for December 31, 1998 to the Company's shareholders included a statement that as a result of the Company's losses from operations, its working capital deficiency and the requirement of an additional expenditure of approximately $5 million to complete Phase II of its pipeline there is Asubstantial doubt@ about the Company's ability to continue as a going concern. Although there is no assurance that the Company will be able to raise the necessary funds to complete Phase II of the pipeline, management is engaged in discussions with several funding sources and anticipates that it will be able to raise the necessary financing in the near future. Management further believes that once such funding is in place it will be able to complete Phase II of the pipeline and it will be well-positioned to shortly have positive cash flow and be financially stable. New Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" is effective for years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income, its components and accumulated balances. This pronouncement did not have an impact on the Company's financial statements. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" is effective for years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial 46 statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This pronouncement did not have an impact on the Company's financial statements. SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" is effective for all fiscal years beginning after June 15, 1999. This statement requires recognition of all derivative contracts as either assets or liabilities in the balance sheet and the measurement of them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of any gains or losses on the hedge with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. It is not anticipated that this pronouncement will have any impact on the Company since the Company does not have any open derivative contracts and it does not enter into any hedging transactions. Year 2000 Risks As is the case with other companies using computers in their operations, the Company is faced with the task of addressing the Year 2000 issue during the next year. The Year 2000 issue arises from the widespread use of computer programs that rely on two-digit date codes to perform computations or decision-making functions. The Company believes it has fully achieved Year 2000 compliance for all internal information systems. As such, management believes that Year 2000 transition of the Company's internal information systems will not have a material adverse effect on future results. Costs associated with compliance were immaterial and have been fully incurred. The Company is in the process of examining key third party relationships to determine, to the extent practical, the degree of such parties' Year 2000 compliance. The Company faces risks if key business suppliers, banks, utilities, transportation providers, communications providers or government services are not compliant for the Year 2000. In order to mitigate this risk, the Company is reviewing its options to continue operations using alternative suppliers, banks, utilities and providers of transportation and communication services. There can be no guarantee that the measures taken by the Company will solve the Year 2000 issue of such third parties. If such problems are not solved by such third parties and the Company can not locate alternative sources as outlined, this may have a significant adverse impact on the Company. 47 DESCRIPTION OF PROPERTY Property Location, Facilities, Size and Nature of Ownership The Company's Swan Creek Leases are on approximately 44,000 acres in Hancock and Claiborne Counties in Tennessee. The initial terms of these leases vary from one to four years. Many of them can be extended at the option of the Company by payment of annual rent. Some of them will terminate unless the Company has commenced drilling. However, the Company does not anticipate any difficulty in continuing the Swan Creek Leases. See "Description of Business" - "General" above. The Kansas Properties acquired from AFG contain 138 leases totaling 32,158 acres in the vicinity of Hays, Kansas. The original term on these was from 1 to 10 years and in most cases has expired, however, most leases are still in effect because they are being held by production. The Company maintains a 100% working interest in most wells. The leases provide for a landowner royalty of 12.5%. Some wells are subject to an overriding royalty interest from 0.5% to 9%. The Company leases its principal executive offices, consisting of approximately 4,731 square feet located at 603 Main Avenue, Suite 500, Knoxville, Tennessee, at a monthly rent of $3,942.50. The Company also leases a field office in Sneedville, Tennessee at a rental of $500 per month. The Company also leases an office in Hays, Kansas at a rental of $500 per month. In addition, the Company has drilling equipment and vehicles which it acquired from IRC. All of this equipment is in satisfactory operating condition. The securities which the Company acquired from IRC were sold during 1996 for $250,000. Disclosure of Oil and Gas Operations The Swan Creek Field currently has thirteen completed natural gas wells and two oil wells. Phase I of the Company's pipeline was completed in July 1998. In August 1998 the gas wells in the Swan Creek Field were connected to Phase I of the Company's pipeline. The Company plans to drill an additional 50 wells in the Swan Creek Field. The Company also plans to complete Phase II of its pipeline which is an additional 20 miles of 12 inch pipeline connecting the wells in the Swan Creek field to the main gas transmission line of East Tennessee Natural Gas. This will enable the Company to service communities throughout Tennessee and the southeastern region of the United States. It is estimated that Phase II of the pipeline will cost approximately $5,000,000 and will take six to eight months to construct. 48 Tests to date on the completed wells on the Swan Creek Leases indicate substantial potential for future deliverability. Based upon engineering reports, management believes that the wells drilled to date have a life expectancy of approximately 37 years on a declining basis. In connection with its acquisition of all of AFG's assets, the Company acquired 208 working wells in Kansas. Pursuant to the acquisition agreement the Company was entitled to all income from those wells as of January 1, 1998. The aggregate current production from the Kansas Properties is approximately 1,002 Mcf of natural gas and 378 barrels of oil per day. Income from the Kansas properties at the present time is approximately $82,000 per month with net income after operating expenses of approximately $34,000 per month. Revenues from the Kansas Properties for 1998 were significantly lower than in the prior two years as a result of lower oil and gas prices. In light of currently depressed oil and gas prices, the Company plans to reduce costs by shutting-in approximately 20 marginally producing wells. When oil and gas prices recover, the Company plans to increase production by reworking certain existing wells at a cost of $1.4 million. Management has made the decision not to perform this work until the price of oil stabilizes at $15 per barrel or higher. Current prices recently reached $15 per barrel. The Company's ability to rework existing wells and/or drill additional wells in the Kansas Properties is, however, dependent on its obtaining additional debt or equity financing. There can be no assurances that the Company will be able to obtain such additional or debt equity financing to do this work even if oil prices rise to this level. The Company pays ad valorem taxes on its Kansas Properties. It does not pay any taxes on its Swan Creek Leases. The Company has general liability insurance for the Kansas Properties and the Swan Creek Field. CERTAIN RELATIONSHIPS and RELATED TRANSACTIONS Transactions with Management and Others Except as set forth hereafter, there have been no material transactions, series of similar transactions or currently proposed transactions, to which the Company or any of its subsidiaries was or is to be a party, in which the amount involved exceeds $60,000 and in which any director or executive officer or any security holder who is known to the Company to own of record or beneficially more than 5% of the Company's common stock, or any member of the immediate family of any of the foregoing persons, had 49 a material interest. During 1997, the Company converted $333,719 of debt payable to IRC to 59,328 shares of common stock, $12,398 of debt payable to Malcolm E. Ratliff to 2,204 shares of common stock and $138,105 of debt payable to Tracmark, Inc. to 24,552 shares of common stock. Those obligations arose from loans to the Company by IRC, Malcolm E. Ratliff and Tracmark, Inc. During 1997 the Company borrowed the sum of $1,000,000 from an individual, Neal Harding. The loan from Mr. Harding was used primarily for pipeline construction. Repayment of the loan from Mr. Harding was guaranteed by IRC, which also granted an option to Mr. Harding to purchase 300,000 shares of stock of the Company it owned at a price of $10 per share. One-half of that loan was repaid in January 1998 from existing cash and the balance was paid in October 1998 by paying Mr. Harding $250,680.56 in cash and issuing to him 2,950 shares of the Company's Series A 8% Cumulative Convertible Preferred Stock. The Company has issued fully paid 25% working interests in six wells in the Swan Creek Field to Shigemi Morita, one of the Directors of the Company, which were paid for in part by crediting Mr. Morita $360,000 for placement fees in connection with private placements of the Company's common stock which occurred during the fourth quarter of 1997 and the first quarter of 1998. Mr. Morita was given an option that if it was determined that a well(s) at the time of completion of the drilling was not economically feasible and as such was subsequently plugged and abandoned, he had 30 days, after written notice from the Company, to convert amounts paid for that well(s) to restricted shares of the Company's common stock at 70% of its then current market value. However, all six of the wells in which Mr. Morita has a participation interest are producing, therefore his options for these wells are not exercisable. On July 16, 1998, the Company entered into a loan agreement with five individual investors totaling $800,000. The loans were secured by a pledge of 118,200 shares of the Company's Common Stock owned by Malcolm E. Ratliff, the Company's Chief Executive Officer and a Director. The loans bore interest at the rate of 8% per annum and matured on October 14, 1998. Loan origination fees consisted of $64,000 in cash to the broker who arranged the loan and 16,800 shares of the Company's common stock advanced to the lenders and broker on behalf of the Company by Malcolm E. Ratliff. Approximately $520,000 of this loan has been repaid by the Company out of proceeds from a Convertible Note in the amount of $1,500,000 received during October, 1998. The Convertible Note matures in five years and is convertible into shares of the Company's common stock at a price of $6.25 per share. In connection with the loan received by the Company evidenced by the Convertible Note, the Company issued 25,000 shares of its common stock to the lender as a loan fee. The balance of the 50 $800,000 loans have been satisfied by the issuance to the lenders of 2,800 shares of Series A 8% Cumulative Convertible Preferred Stock convertible at a price of $5.75 per share. The Company has entered into a financial consulting agreement with Proton Capital, LLC ("Proton") of Westport Connecticut, for a two (2) year period commencing as of January 1, 1999, whereby Proton is to provide services in connection with shareholder relations, press releases, long term financial planning, corporate reorganizations and financing. The Company is to pay Proton $10,000 per month commencing in June 1999, or sooner if financing is procured by Proton. Further, if the Company enters into a business combination with parties introduced by Proton, then the Company will pay Proton a finders fee according to a fee schedule ranging from a fee of five (5%) percent for a business combination wherein the consideration does not exceed $5 million to a fee of $320,000 plus two (2%) percent in excess of $7 million where the transaction consideration is in excess of $7 million. Malcolm E. Ratliff, the Chief Executive Officer and a Director of the Company, has entered into an agreement with Proton to sell Proton not more than 370,000 shares of common stock of the Company at $5.00 per share over a five (5) year period. Proton has issued a non-recourse promissory note in the amount of $1.85 million, together with interest at six (6%) percent per annum. The promissory note is payable out of proceeds of the sale of the shares. The 370,000 shares were transferred from IRC, an affiliate of Mr. Ratliff, to a privately held company solely owned by James Ratliff, the father of Malcolm E. Ratliff, and subsequently to Proton. As of the date of this Report, no shares have been sold by Proton under the terms of this agreement. Indebtedness of Management No officer, director or security holder known to the Company to own of record or beneficially more than 5% of the Company's common stock or any member of the immediate family of any of the foregoing persons is indebted to the Company. Parent of the Issuer Unless IRC may be deemed to be a parent of the Company, the Company has no parent. 51 MARKET FOR COMMON EQUITY and RELATED STOCKHOLDER MATTERS Market Information The Company's common stock has been listed on the OTC Bulletin Board of the NASD since March 31, 1994 under the symbol TNGO. The range of high and low bid prices for shares of common stock of the Company during the fiscal years ended December 31, 1997 and 1998 are set forth below. Bid High Low Fiscal Year Ended December 31, 1998 March 31, 1998 13.12 9.09 June 30, 1998 12.50 9.00 September 30, 1998 9.75 5.75 December 31, 1998 7.12 3.50 Fiscal Year Ended December 31, 1997 March 31, 1997 17.25 10.00 June 30, 1997 14.50 10.50 September 30, 1997 13.50 8.25 December 31, 1997 16.63 8.50 These bid prices were obtained from the National Quotation Bureau, Inc. ("NQB") and do not necessarily reflect actual transactions, retail markups, mark downs or commissions. The transactions include inter-dealer transactions. Holders As of December 31, 1998, the number of shareholders of record of the Company's common stock was 481, and management believes that there are approximately 1,203 beneficial owners of 52 the Company's common stock. Dividends There are no present material restrictions that limit the ability of the Company to pay dividends on common stock or that are likely to do so in the future. The Company has not paid any dividends with respect to its common stock, and does not intend to pay dividends in the foreseeable future. ITEM 10 EXECUTIVE COMPENSATION The following table sets forth a summary of all compensation awarded to, earned or paid to, the Company's Chief Executive Officer during fiscal years ended December 31, 1998, December 31, 1997 and December 31, 1996. None of the Company's other executive officers earned compensation in excess of $100,000 per annum for services rendered to the Company in any capacity. 53
Summary Compensation Table Long Term Awards ----------------------------------- Annual Compensation Awards Payouts ------------------------------ ------------------------ -------- Other Restricted Securities Payouts All Name and Year Salary Bonus Annual Stock Underlying Other Principal Position ($) ($) Compensation Awards Options Compensation ($) ($) /SARs (#) - ---------------------------- ---- --------- ----- ------------ ----------- ----------- -------- ------------ Malcolm E. Ratliff, 1998 $60,000 $-0- $500 -0- 50,000 -0- -0- Chief Executive Officer 1997 $ 9,731 $-0- $500 -0- -0- -0- -0- 1996 $-0- $-0- $500 -0- -0- -0- -0- James E. Kaiser, 1998 $-0- $-0- $-0- -0- -0- -0- -0- Chief Executive Officer and 1997 $ 6,154 $-0- $-0- -0- -0- -0- -0- General Counsel 1996 $20,000 $-0- $-0- -0- -0- -0- -0- Theodore Scallan, 1998 $-0- $-0- $-0- -0- -0- -0- -0- Chief Executive Officer and 1997 $-0- $-0- $-0- -0- -0- -0- -0- President 1996 $53,120 $-0- $-0- 462,250(15) 100,000(16) -0- $20,000(17) George E. Walter, Jr. 1998 $-0- $-0- $-0- -0- -0- -0- -0- Chief Executive Officer 1997 $-0- $-0- $-0- -0- -0- -0- -0- 1996 $ 923 $-0- $20,000 -0- -0- -0- -0-
(15) Represents shares transferred from majority shareholder, based upon closing price of $6.25 on 7/28/95, closing price of $7.25 on 8/31/95 and $6.00, the bid on 11/28/95. (16) Option has expired. (17) Termination compensation. 54 OPTION GRANTS IN LAST FISCAL YEAR
Individualized Grants ------------------------------------------------------------- Number of Percent of Total Securities Options/SARs Exercise Underlying Granted to or Base Options/SARs Employees in Price Expiration Name Granted(#) Fiscal 1998 ($/Sh) Date - -------------- ------------- ---------------- -------- ----------- Malcolm E. Ratliff 50,000 100% $7.00 6/19/99
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. 55 Bonuses and Deferred Compensation None; not applicable. Compensation Pursuant to Plans The Company does not presently have any stock option, stock incentive, bonus or similar plan for its directors, executive officers or employees; however, in the past the Company has granted options to directors and executive officers and certain consultants of the Company to purchase shares of "unregistered" and "restricted" common stock of the Company at various prices. Pension Table The Company does not presently have a pension or similar plan for its directors, executive officers or employees. Management intends to adopt a 401(k) plan and full liability insurance for directors and executive officers and a health insurance plan for employees in the near future. Termination of Employment and Change of Control Arrangement None; not applicable. CHANGES IN and DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING and FINANCIAL DISCLOSURE Change from Price-Bednar, LLP, CPA to Charles M. Stivers, CPA Price-Bednar, LLP, Certified Public Accountants, were engaged as the Company's accountants as of February 22, 1996, to audit the financial statements of the Company for the calendar year ending December 31, 1995. The Company had engaged the services of another accountant to complete certain preparatory on-site audit activities for preliminary review by Price-Bednar. These services were not timely provided by the other accountant. Also, many of the records of IRC were unavailable, and, Price-Bednar required a number of these records to be reconstructed prior to its completion of the audit. During the week of May 20, 1996, the Company was advised that the principal accountant of Price-Bednar, who was responsible for the Company's audit, would be out of town for the following week, and it became clear that Price-Bednar would not be 56 able to complete the audit for at least three weeks, because certain information requested by them had not yet been provided by the Company. Price-Bednar was terminated by the President, effective June 7, 1996, and Charles M. Stivers, Certified Public Accountant, of Manchester, Kentucky, who had been engaged to conduct the preparatory on-site audit activities for Price-Bednar when the other accountant failed to perform as promised, indicated that he could timely deliver the required audit report and was promptly engaged to do so by the Board of Directors. Also, during, the Company's two most recent fiscal years, and since then, Price-Bednar has not advised the Company that any of the following exist or are applicable: (1) That the internal controls necessary for the Company to develop reliable financial statements do not exist, that information has come to their attention that has led them to no longer be able to rely on management's representations, or that has made them unwilling to be associated with the financial statements prepared by management; (2) That the Company needs to expand significantly the scope of its audit, or that information has come to their attention that if further investigated may materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements or any other financial presentation, or cause them to be unwilling to rely on management's representations or be associated with the Company's financial statements for the foregoing reasons or any other reason; or (3) That they have advised the Company that information has come to their attention that they have concluded materially impacts the fairness or reliability of either a previously issued report or the underlying financial statements for the foregoing reasons or any other reason. Further, during the Company's two most recent fiscal years and since then, the Company has not consulted Price-Bednar regarding the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements or any other financial presentation whatsoever. The Company previously provided Price-Bednar with a copy of the disclosure herein and advised them to provide the Company with a letter addressed to the Commission as to whether they agree or disagree with the disclosures made herein. Price-Bednar's response to the Securities and Exchange Commission indicated it agreed with these disclosures. 57 Change from Charles M. Stivers, CPA, to BDO Seidman, LLP On December 15, 1996, the Company terminated Charles M. Stivers, CPA and retained BDO Seidman, LLP to conduct the audit of the Company's financial statements for the year ended December 31, 1996 because it became apparent that Charles M. Stivers, as an individual practitioner, would not be able to perform the required audit on a timely basis. During the Company's two most recent fiscal years, and since then, Charles M. Stivers has not advised the Company that any of the following exist or are applicable: (1) That the internal controls necessary for the Company to develop reliable financial statements do not exist, that information has come to his attention that has led him to no longer be able to rely on management's representations, or that has made him unwilling to be associated with the financial statements prepared by management; (2) That the Company needs to expand significantly the scope of its audit, or that information has come to his attention that if further investigated may materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements or any other financial presentation, or cause him to be unwilling to rely on management's representations or be associated with the Company's financial statements for the foregoing reasons or any other reason; or (3) That he has advised the Company that information has come to his attention that he has concluded materially impacts the fairness or reliability of either a previously issued report or the underlying financial statements for the foregoing reasons or any other reason. Further, during the Company's two most recent fiscal years and since then, the Company has not consulted Charles M. Stivers, in his capacity as an independent certified public accountant, regarding the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements or any other financial presentation whatsoever. The Company has provided Charles M. Stivers with a copy of the disclosures provided herein and has advised him to provide the Company with a letter addressed to the Commission as to whether they agree or disagree with the disclosures made herein. Mr. Stivers' response to the 58 Securities and Exchange Commission indicated he agreed with these disclosures. LEGAL MATTERS The validity of the Shares offered hereby will be passed upon for the Company by the law firm of Robson & Miller, LLP, 666 Third Avenue, New York, New York 10017, telephone number (212) 949-1860. Robson & Miller, LLP was not hired on a contingent basis and is not receiving any interest, direct or indirect in the Company. Neither Robson & Miller, LLP or any of its partners or employees is a director, officer, employee, voting trustee, promoter or underwriter of the Company. EXPERTS The financial statements as and for the years ended December 31, 1997 and December 31, 1998 included in this Prospectus and in the Registration Statement have been audited by BDO Seidman, LLP, independent auditors as set forth in their report, which contains an explanatory paragraph regarding the Company's ability to continue as a going concern, appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in auditing and accounting. No dealer, salesman or other person has been authorized to give any information or to make any representation not contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this Prospectus or an offer to sell or a solicitation of an offer to buy the securities to or from any person in any jurisdiction in which such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder at any time shall, under any circumstances, imply that there has been no change in the business or affairs of the Company since the date hereof or that the information in this Prospectus herein is correct as of any time subsequent to its date. 59 TABLE OF CONTENTS Page Forward Looking Statement.......................................... 2 Available Information ............................................. 3 Prospectus Summary ................................................ 4 The Company ............................................ 4 The Offering ........................................... 6 Summary Financial Data ................................. 6 Risk Factors ...................................................... 7 Use of Proceeds ................................................... 14 Determination of Price of Shares .................................. 14 Dilution .......................................................... 14 Selling Shareholders .............................................. 14 Plan of Distribution .............................................. 15 Legal Proceedings ................................................. 16 Directors, Executive Officers, Promoters and Control Persons ................................................... 19 Identification of Directors and Officers ............... 19 Business Experience .................................... 21 Section 16(a) Beneficial Ownership Reporting Compliance.................................... 23 Committees ............................................. 23 Family Relationships ................................... 23 Involvement in Certain Legal Proceedings ............... 23 Security Ownership of Certain Beneficial Owners and Management ............................................. 24 Security Ownership of Certain Beneficial Owners .................................................. 24 60 Changes in Control ...................................... 27 Description of Securities .......................................... 27 Authorized Capital Stock ................................ 27 Indemnification of Directors, Officers, Employees and Agents ............................................... 29 Description of Business ............................................ 31 Glossary of Terms ....................................... 31 History of the Company .................................. 32 General ................................................. 33 Governmental Regulations ................................ 36 Principal Products or Services and Markets .............. 36 Reserve Analyses ........................................ 37 Distribution Methods of Products or Services ............ 38 Status of Any Publicly Announced New Product or Service .................................. 38 Competitive Business Conditions, Competitive Position in the Industry and Methods of Competition .................................. 39 Sources and Availability of Raw Materials and Names of Principal Suppliers ........................ 40 Dependence on One or a Few Major Customers .............. 40 Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements, Labor Contracts, including Duration ........................... 40 Need for Governmental Approval of Principal Products or Services .................................... 40 Effect of Existing or Probable Governmental Regulations on Business ................................. 41 Research and Development ................................ 42 Cost and Effects of Compliance with Environmental Laws ...................................... 42 61 Number of Total Employees and Number of Full-Time Employees....................................... 42 Management's Discussion and Analysis of Plan of Operation................... 43 Results of Operations............................................... 45 Liqudity............................................................ 46 New Accounting Pronouncements....................................... 46 Year 2000 Risks..................................................... 47 Description of Property..................................................... 48 Property Location, Facilities, Size and Nature of Ownership......... 48 Disclosure of Oil and Gas Operations................................ 48 Certain Relationships and Related Transactions.............................. 49 Transactions with Management and Others............................. 49 Indebtedness of Management.......................................... 51 Parent of the Issuer................................................ 51 Market For Common Equity and Related Stockholder Matters.................... 52 Market Information.................................................. 52 Holders............................................................. 52 Dividends........................................................... 53 Executvive Compensation..................................................... 53 Summary Compensation Table.......................................... 54 Option Grants in Last Fiscal Year .................................. 55 Compensation of Directors .......................................... 55 Employment Contracts ............................................... 55 Bonuses and Deferred Compensation .................................. 56 Pension Table ...................................................... 56 62 Termination of Employment and Change of Control ........ 56 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................... 56 Change from Price-Bednar, LLP, CPA to Charles M. Stivers, CPA ................................ 56 Change from Charles M. Stivers, CPA to BDO Seidman, LLP ....................................... 58 Legal Matters ..................................................... 59 Experts ........................................................... 59 Financial Statements .............................................. F-1 Audited Financial Statements for 1998 and 1997 ......... F-1 Audited Statements of Revenues and Direct Operating Expenses of Properties Acquired from AFG Energy, Inc. .................................. F-33 Pro Forma Combined Statements of Loss for Year Ended December 31, 1997 for AFG Energy, Inc. and Tengasco, Inc. regarding Sale of Assets from AFG Energy, Inc. ........................... F-41 63 Tengasco, Inc. Consolidated Financial Statements Years Ended December 31, 1998 and 1997 F-1 Tengasco, Inc. Contents Report of Independent Certified Public Accountants F-3 Consolidated Financial Statements Balance sheets F-5 Statements of loss F-6 Statements of stockholders' equity F-7 Statements of cash flows F-8-9 Notes to financial statements F-10-32 F-2 [Letterhead of BDO Seidman] Report of Independent Certified Public Accountants Board of Directors Tengasco, Inc. Knoxville, Tennessee We have audited the accompanying consolidated balance sheets of Tengasco, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of loss, stockholders' equity and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tengasco, Inc. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and as of December 31, 1998 has a working capital deficiency. Further, management estimates that additional financing of approximately $5.0 million is required in order for the Company to complete Phase II of its pipeline facilities under construction. These matters raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP Atlanta, Georgia March 5, 1999 F-3
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 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-8 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-9 Tengasco, Inc. Notes to Consolidated Financial Statements 1. Summary of Organization Significant Accounting Policies Tengasco, Inc. (the "Company"), a publicly held corporation, was organized under the laws of the State of Utah on April 18, 1916, as Gold Deposit Mining and Milling Company. The Company subsequently changed its name to Onasco Companies, Inc. Effective May 2, 1995, Industrial Resources Corporation, a Kentucky corporation ("IRC"), acquired voting control of the Company in exchange for approximately 60% of the assets of IRC. Accordingly, the assets acquired, which included certain oil and gas leases, equipment, marketable securities and vehicles, were recorded at IRC's historical cost. The transaction was accomplished through the Company's issuance of 4,000,000 shares of its' common stock and a $450,000, 8% promissory note payable to IRC. The promissory note was converted into 83,799 shares of Tengasco, Inc. common stock in December 1995. The Company changed its domicile from the State of Utah to the State of Tennessee on May 5, 1995 and its name was changed from "Onasco Companies, Inc." to "Tengasco, Inc." The Company's principal business consists of oil and gas exploration, production and related property management in the Appalachian region of eastern Tennessee and in the state of Kansas. The Company's corporate offices are in Knoxville, Tennessee. The Company operates as one reportable business segment based on the similarity of activities. During 1996, the Company formed Tengasco Pipeline Corporation, a wholly-owned subsidiary, to manage the construction and operation of a 43 mile gas pipeline as well as other pipelines planned for the future. Consolidation The consolidated financial statements include the accounts of the Company, Tengasco Pipeline Corporation and Tennessee Land and Mineral, Inc. All significant intercompany balances and transactions have been eliminated. F-10 Tengasco, Inc. Notes to Consolidated Financial Statements Cash and Cash Equivalents The Company considers all investments with a maturity of three months or less when purchased to be cash equivalents. Inventory Inventory consists primarily of crude oil in tanks and is carried at the lower of current market value or cost. Oil and Gas Properties The Company follows the full cost method of accounting for oil and gas property acquisition, exploration and development activities. Under this method, all productive and nonproductive costs incurred in connection with the acquisition of, exploration for and development of oil and gas reserves for each cost center are capitalized. Capitalized costs include lease acquisitions, geological and geophysical work, delay rentals and the costs of drilling, completing and equipping oil and gas wells. Gains or losses are recognized only upon sales or dispositions of significant amounts of oil and gas reserves. Proceeds from all other sales or dispositions are treated as reductions to capitalized costs. The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated costs of plugging and abandonment, net of estimated salvage value, are amortized on the unit-of-production method based on total proved reserves. The costs of unproved properties are excluded from amortization until the properties are evaluated, subject to an annual assessment of whether impairment has occurred. The costs of significant development projects awaiting completion of pipeline facilities are excluded from amortization until such time as the pipeline facilities are completed. The Company's proved gas reserves were estimated by Columbia Engineering, independent petroleum engineers, for the Kansas properties, and by Coburn Petroleum Engineering for the Tennessee properties. The capitalized oil and gas property and pipeline costs, less accumulated depreciation, depletion and amortization and related deferred income taxes, if any, are generally limited to an amount (the ceiling limitation) equal to the sum of: (a) the present value of estimated future net revenues computed by applying current prices in effect as of the balance sheet date (with F-11 Tengasco, Inc. Notes to Consolidated Financial Statements consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves, less estimated future expenditures (based on current costs) to be incurred in developing and producing the reserves using a discount factor of 10% and assuming continuation of existing economic conditions; and (b) the cost of investments in unevaluated properties excluded from the costs being amortized. No ceiling writedown was recorded in 1998 or 1997. Pipeline Facilities Under Construction Pipeline facilities under construction are carried at cost. The Company will provide for depreciation of Phase II of the pipeline facilities using the straight-line method over the estimated useful life of the asset once this section of the pipeline is completed and placed in service. Phase II is expected to be completed in 1999. Accordingly, no depreciation expense has been recorded for 1998 and 1997 relating to Phase II of the pipeline facilities. Other property and Equipment Other property and equipment are carried at cost. The Company provides for depreciation of other property and equipment using the straight-line method over the estimated useful lives of the assets which range from five to seven years. Income Taxes The Company accounts for income taxes using the "liability method." Accordingly, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. At times, such cash in banks is in excess of the FDIC insurance limit. At December 31, 1998, the Company had deposits with one financial institution in an amount which exceeds the federally insured limit by approximately $700,000. The Company's primary business activities include oil and gas sales to several customers in the states of Tennessee and Kansas. F-12 Tengasco, Inc. Notes to Consolidated Financial Statements The related trade receivables subject the Company to a concentration of credit risk within the oil and gas industry. Loss Per Common Share Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of shares outstanding during each year. Shares issued during the year are weighted for the portion of the year that they were outstanding. Diluted loss per share is calculated in a manner consistent with that of basic loss per share while giving effect to all dilutive potential common shares that were outstanding during the period. Basic and diluted loss per share are based upon 7,348,632 shares for the year ended December 31, 1998 and 6,189,293 shares for the year ended December 31, 1997. There were 475,827 and 618,551 potential weighted common shares outstanding during 1998 and 1997 related to common stock options and warrants. These shares were not included in the computation of the diluted loss per share amount because the Company was in a net loss position and, thus, any potential common shares were anti-dilutive. Accounting Estimates The accompanying financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The actual results could differ from those estimates. Fair Values of Financial Instruments Fair values of cash and cash equivalents and short-term debt approximate cost due to the short period of time to maturity. Fair values of long-term debt are based on quoted market prices or pricing models using current market rates. F-13 Tengasco, Inc. Notes to Consolidated Financial Statements Derivatives Beginning in December 1997, the Company began trading in derivative financial instruments for speculative purposes. Derivative financial instrument contracts entered into are comprised of natural gas future and option contracts. At December 31, 1998, there were no open positions in any derivative contracts. Net trading (gains) losses of $(18,180) and $80,677 are included in the accompanying Statements of Loss for the years ended December 31, 1998 and 1997, respectively. Significant Risks and Uncertainties The Company's operations are subject to all of the environmental and operational risks normally associated with the oil and gas industry. The Company maintains insurance that is customary in the industry; however, there are certain risks for which the Company does not maintain full insurance coverage. The occurrence of a significant event that is not fully covered by insurance could have a significant adverse effect on the Company's financial position. New Accounting Pronouncements SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" is effective for all fiscal years beginning after June 15, 1999. This statement requires recognition of all derivative contracts as either assets or liabilities in the balance sheet and the measurement of them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of any gains or losses on the hedge with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. F-14 Tengasco, Inc. Notes to Consolidated Financial Statements Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. 2. Going Concern The Company has experienced losses Uncertainty totalling $3,083,638 and $4,370,570 for the years ended December 31, 1998 and 1997, respectively, and has a working capital deficit of $1,929,215 at December 31, 1998. In addition, as of December 31, 1998, management estimates that additional expenditures of approximately $5.0 are required to complete Phase II of its pipeline facilities under construction. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans include raising additional capital in order to complete the pipeline facilities and drilling additional oil and gas wells. The accompanying financial statements do not include any adjustments relating to the recoverability and classifications of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. 3. Business On December 18, 1997, the Company Acquisition entered into an asset purchase agreement in which certain producing oil and gas properties and inventory located in the state of Kansas ("the Kansas Properties") were acquired from AFG Energy, Inc. ("AFG"). The agreement, which was effective as of December 31, 1997, closed on March 5, 1998, whereby the Company paid $2,990,253 in cash and entered into a note payable agreement with AFG in the amount of $2,500,000. The note will accrue interest at 9.5% per annum for the period from December 1998 to May 1999. After May 1999, the interest rate becomes 9% per annum. Monthly interest only payment are due from December 1998 to May 1999. Monthly installments of principal and interest of $138,349 are due from June 1999 to December 1999. There is a balloon payment of $983,773 due in January 2000. The acquisition has been accounted for as a purchase and, accordingly, the purchase price of $5,490,253 has been allocated to the assets acquired based on the estimated fair values at the date of acquisition as follows: F-15 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-16 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-17 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-18 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-19 Tengasco, Inc. Notes to Consolidated Financial Statements In conjunction with the issuance of the notes payable denoted in (A) and (B) listed above, the Company granted the lenders detachable stock warrants which enable the holder to obtain up to 200,000 shares of the Company's common stock at a price of $5 per share. (A) These notes had not been repaid as of the above noted due dates. As noted in (C) below, the Company has filed a claim against the lenders. (B) In March 1997, the individual note holder filed a lawsuit asserting the Company was in default of the $250,000 note. This action seeks the principal amount, interest, and costs of collection. The parties have agreed to a settlement in principle whereby the Company would pay the individual lender approximately $286,000. As part of the settlement, the 50,000 warrants to purchase common stock of the Company that this individual lender holds will be deemed null and void and unenforceable. (C) Also in March 1997, the Company filed a claim against the three lenders discussed in (A) and (B) above and a former officer of the Company asserting that the Company did not authorize the issuances of certain stock warrants related to the borrowings and seeking rescission of the warrant agreements. The Company is disputing the validity of the stock warrant agreements based upon certain provisions which were not authorized by the board of directors. If the Company is unsuccessful in its attempt to rescind these stock warrant agreements, these provisions could result in the lenders obtaining additional shares and a potential controlling interest, as the stock warrant agreements provide for the granting of increasing amounts of shares, at pro-rata reduced prices, if the market price of the Company's stock is below $16 per share. F-20 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-21 Tengasco, Inc. Notes to Consolidated Financial Statements The aggregate maturities of long term debt for the five years ending December 31, 2003, are as follows: Year Amount ---------------------------------------- 1999 $ 89,135 2000 86,962 2001 584,586 2002 36,187 2003 1,506,988 ---------------------------------------- $ 2,303,858 ---------------------------------------- 10. Commitments The Company is a party to lawsuits in and Contingencies the ordinary course of its business. While the damages sought in some of these actions are material, the Company does not believe that it is probable that the outcome of any individual action will have a material adverse effect, or that it is likely that adverse outcomes of individually insignificant actions will be sufficient enough, in number or magnitude, to have a material adverse effect in the aggregate. As of December 31, 1998, the approximate future minimum payments to be made under noncancellable operating leases were: Year Amount ---------------------------------------- 1999 $ 86,000 2000 69,000 2001 14,000 2002 12,000 2003 7,000 ---------------------------------------- $ 188,000 ---------------------------------------- Rent expense was approximately $50,000 and $60,000 for the years ended December 31, 1998 and 1997, respectively. F-22 Tengasco, Inc. Notes to Consolidated Financial Statements 11. Convertible The Company is authorized to issue Redeemable 25,000,000 shares of preferred stock, Preferred Stock with $.0001 par value. In October 1998, the Company completed the issuance of 5,750 shares of its Convertible Redeemable Preferred Stock to extinguish $575,000 of notes payable. The Company paid $46,000 on commissions on the placement of the 5,750 shares of Preferred Stock. The Company issued an additional 2,250 shares of Preferred Stock in December 1998 for approximately $225,000 which netted the Company $207,000 after commissions. The Preferred Stock is entitled to a cumulative dividend of 8% per quarter. In the event that the Company does not make any two of six consecutive quarterly dividend payments, the holders of the Preferred Stock may appoint those directors which would constitute of majority of the Board of Directors. In such a scenario, the holders of the Preferred Shares would be entitled to elect a majority of the Board of Directors until all accrued and unpaid dividends have been paid. Shares of the Redeemable Preferred Stock are immediately convertible into shares of Common Stock. Each $100 liquidation preference share of preferred stock and a rate of $5.75 per share of common stock. The conversion rate is subject to downward adjustment if the Company subsequently issues shares of common stock for consideration less than $5.75 per share. The Company may redeem the Preferred Shares upon payment of $100 per share plus any accrued and unpaid dividends. 12. Common Stock to be In 1998, an institution purchased Issued and Due from 140,000 shares of common stock for Stockholder $700,000. As of December 31, 1998, the stockholder owed the Company $400,000 for the stock purchase. Additionally, as of December 31, 1998, the Company had not issued the shares. The entire $700,000 is included as common stock to be issued on the accompanying consolidated balance sheet. F-23 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-24 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-25 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 liabilities as management is unable to determine that these tax benefits are more likely than not to be realized. F-26 Tengasco, Inc. Notes to Consolidated Financial Statements As of December 31, 1998, the Company had net operating loss carryforwards of approximately $8,864,000 which will expire, if not utilized, as follows: Year Amount ---------------------------------------- 2010 $ 587,000 2011 1,399,000 2012 4,067,000 2013 2,811,000 ---------------------------------------- Total $8,864,000 ---------------------------------------- Additionally, at December 31, 1998, the Company had capital loss carryforwards of approximately $657,000 which will expire, if not offset against capital gains, as follows: 2001- $576,000, 2002-$81,000. 15. Supplemental Cash The Company paid approximately $328,000 Flow Information and $282,000 for interest in 1998 and 1997, respectively. The Company paid $0 for income taxes in 1998 and 1997. In 1997, the Company issued 86,084 shares of common stock to extinguish approximately $484,000 of debt, which approximated the fair value of the shares. In 1998, the Company paid for commissions on certain private placements of common stock by granting to the brokers oil and gas properties recorded at an aggregate historical cost of $396,300. In 1998, the Company issued 25,000 shares of common stock with a fair value of approximately $128,000 to an institutional lender as a loan fee. In 1998, the Company issued 5,750 shares of redeemable, convertible preferred stock to extinguish approximately $575,000 of debt, which approximated the fair value of the shares. In 1998, the Company issued a payable to the major stockholder in the amount of $163,800 as payment for that stockholder's payment of interest expense in the same amount on behalf of the Company. F-27 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-28 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-29 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-30 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-31 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-32 Kansas Properties - -------------------------------------------------------------------------------- Statements of Revenues and Direct Operating Expenses Years Ended December 31, 1997 and 1996 F-33 Kansas Properties Contents - -------------------------------------------------------------------------------- Independent Auditors' Report 2 Financial Statements Statements of revenues and direct 3 operating expenses Notes to financial statements 4-7 F-34 Independent Auditors' Report Board of Directors Tengasco, Inc. Knoxville, Tennessee We have audited the accompanying statements of revenues and direct operating expenses of the properties acquired by Tengasco, Inc. from AFG Energy, Inc. ("the Kansas Properties") for the years ended December 31, 1997 and 1996. These financial statements are the responsibility of AFG Energy, Inc. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements were prepared on the basis discussed in Note 1 and are for the purpose of complying with certain rules and regulations of the Securities and Exchange Commission ("SEC") for inclusion in certain SEC regulatory reports and filings of Tengasco, Inc. and are not intended to be a complete presentation of the revenues and expenses of the Kansas Properties. In our opinion, the financial statements referred to above present fairly, in all material respects, the revenues and direct operating expenses of the Kansas Properties for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP BDO Seidman, LLP Atlanta, Georgia March 12, 1998 F-35 Kansas Properties Statements of Revenues and Direct Operating Expenses - -------------------------------------------------------------------------------- Year ended December 31, 1997 1996 - -------------------------------------------------------------------------------- Revenues Oil $ 2,687,816 $ 2,378,882 Gas 742,513 789,613 - -------------------------------------------------------------------------------- Total revenues 3,430,329 3,168,495 Direct operating expenses (2,207,201) (1,936,272) - -------------------------------------------------------------------------------- Revenues in excess of direct operating expenses $ 1,223,128 $ 1,232,223 ================================================================================ See accompanying notes to financial statements. F-36 Kansas Properties Notes to Financial Statements - -------------------------------------------------------------------------------- 1. Basis of Presentation Pursuant to an agreement effective December 31, 1997, Tengasco, Inc. acquired AFG Energy, Inc.'s interest in certain producing oil and gas properties located in the state of Kansas ("the Kansas Properties"). The acquisition has been accounted for as a purchase and the results of operations for the Kansas Properties will be included in Tengasco's results of operations beginning January 1, 1998. The accompanying statements of revenues and direct operating expenses ("the Historical Statements") were prepared from the historical accounting records of AFG Energy, Inc. The Historical Statements are presented using accrual basis, successful efforts accounting for oil and gas activities, in accordance with generally accepted accounting principles. Gross revenues and direct operating expenses included herein are not necessarily representative of future operations. Additionally, the Historical Statements do not include depreciation, depletion and amortization, administrative and general expenses, interest expenses, or Federal and state income taxes. Complete financial statements, including a balance sheet, are not presented as the Kansas Properties were not maintained as a separate business unit, and assets, liabilities or indirect operating costs applicable to the Kansas Properties were not segregated. Accordingly, it is not practicable to identify all assets, liabilities or indirect operating costs applicable to the Kansas Properties. 2. Supplemental Oil and Estimated Quantities of Proved Oil and Gas Information Gas Reserves (Unaudited) (Unaudited) The reserve information presented below is based on the December 31, 1997 reserve report prepared by an independent petroleum engineer. The December 31, 1996 and 1995 information has been computed by adjusting the December 31, 1997 reserve report for production and known purchases. F-37 Kansas Properties Notes to Financial Statements - -------------------------------------------------------------------------------- Proved reserves are estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those which are expected to be recovered through existing wells with existing equipment and operating methods. Below are the net quantities of proved reserves and proved developed reserves for the Kansas Properties:
Oil (Bbls) Gas (Mcf) ---------------------------------------------------------------------------- Proved reserves at December 31, 1995 1,466,489 3,439,692 Production (114,660) (432,753) Acquisition of proved reserves 674,154 869 ---------------------------------------------------------------------------- Proved reserves at December 31, 1996 2,025,983 3,007,808 Production (141,535) (353,558) ---------------------------------------------------------------------------- Proved reserves at December 31, 1997 1,884,448 2,654,250 ---------------------------------------------------------------------------- Proved developed producing reserves at December 31, 1997 1,277,707 1,384,980 ---------------------------------------------------------------------------- Proved developed producing reserves at December 31, 1996 1,419,244 1,738,539 ----------------------------------------------------------------------------
Standardized Measure of Discounted Future Net Cash Flows (Unaudited) The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves ("the Standardized Measure") is a disclosure requirement under Statement of Financial Accounting Standards No. 69. The Standardized Measure does not purport to present the fair market value of the proved oil and gas reserves. This would require consideration of expected future economic and operating conditions, which are not taken into account in calculating the Standardized Measure. F-38 Kansas Properties Notes to Financial Statements - -------------------------------------------------------------------------------- Under the Standardized Measure, 1997 and 1996 future cash inflows were estimated by applying December 31, 1997 and 1996 prices, respectively, adjusted for fixed and determinable escalations, to the estimated future production of proved reserves. Future cash inflows for 1997 and 1996 were reduced by estimated future production, development and dismantlement costs based on 1997 and 1996 year-end costs, respectively, to determine pre-tax cash inflows. Future net cash inflows were discounted using a 10% annual discount rate to arrive at the Standardized Measure. No deduction has been made for general and administrative expenses, interest expense, provisions for depreciation, depletion or amortization, or taxes on income. The following Standardized Measure and changes in the Standardized Measure are based on the reserve estimate performed as of December 31, 1997, using appropriate year-end prices and costs. Set forth below is the Standardized Measure (before income taxes) relating to proved oil and gas reserves at December 31, 1997 and 1996:
1997 1996 ---------------------------------------------------------------------------- Future cash inflows $ 36,523,378 $ 55,344,098 Future production costs and taxes (18,128,184) (18,854,868) Future development costs (1,336,050) (1,855,550) ---------------------------------------------------------------------------- Future net cash inflows 17,059,144 34,633,680 Discount at 10% for timing of cash flows (6,707,755) (15,597,754) ---------------------------------------------------------------------------- Standardized Measure (before income taxes) of discounted future net cash flows $ 10,351,389 $ 19,035,926 ----------------------------------------------------------------------------
F-39 Kansas Properties Notes to Financial Statements - -------------------------------------------------------------------------------- The Standardized Measure of discounted future net cash flows is based on the following oil and gas prices at December 31, 1997 and 1996:
1997 1996 ---------------------------------------------------------------------------- Oil (per Bbl) $16.48 $22.70 Gas (Mcf) 2.06 3.11 ---------------------------------------------------------------------------- The following table sets forth the changes in the Standardized Measure (before income taxes) during 1997 and 1996: 1997 1996 ---------------------------------------------------------------------------- Standardized Measure (before income taxes), beginning of year $19,035,926 $ 7,195,410 Sales, net of production costs and taxes (1,223,128) (1,232,223) Acquisition of proved reserves - 5,409,784 Changes in prices and production costs (9,269,527) 6,936,079 Interest factor - accretion of discount 1,903,593 719,541 Changes in production rates and other (95,475) 7,335 ---------------------------------------------------------------------------- Standardized Measure (before income taxes), end of year $10,351,389 $19,035,926 ----------------------------------------------------------------------------
F-40 Tengasco, Inc. and The Kansas Properties - -------------------------------------------------------------------------------- Pro Forma Combined Statement of Loss Year Ended December 31, 1997 F-41 Tengasco, Inc. and The Kansas Properties Contents - -------------------------------------------------------------------------------- Financial Statement Pro forma combined statement of loss (unaudited) 2 Notes to pro forma financial statement 3-7 F-42 Tengasco, Inc. and The Kansas Properties Pro Forma Combined Statement of Loss (Unaudited) Year Ended December 31, 1997 - --------------------------------------------------------------------------------
Kansas Pro Forma Pro Forma Tengasco, Inc. Properties Adjustments Combined ----------------------------------------------------------------------------------------------------------------- Revenues Oil $ $ 2,687,816 $ $ 2,687,816 - - Gas - 742,513 - 742,513 ----------------------------------------------------------------------------------------------------------------- Total revenues - 3,430,329 - 3,430,329 ----------------------------------------------------------------------------------------------------------------- Cost and expenses Production costs and taxes 3,748 2,207,201 - 2,210,949 Depletion, depreciation and amortization 79,267 - 531,233 610,500 General and administrative costs 1,535,841 - 40,000 1,575,841 Interest expense 1,885,448 - 174,533 2,059,981 Public relations 395,292 - - 395,292 Legal and accounting 390,297 - - 390,297 Realized loss on sale of investments 80,677 - - 80,677 ----------------------------------------------------------------------------------------------------------------- Total costs and expenses 4,370,570 2,207,201 745,766 7,323,537 ----------------------------------------------------------------------------------------------------------------- Net income (loss) (4,370,570) 1,223,128 (745,766) (3,893,208) ----------------------------------------------------------------------------------------------------------------- Basic and diluted loss per common share $(0.71) $(0.63) -----------------------------------------------------------------------------------------------------------------
See accompanying notes to pro forma financial statement. F-43 Tengasco, Inc. and The Kansas Properties Notes to Pro Forma Financial Statement (Unaudited) - -------------------------------------------------------------------------------- The unaudited pro forma combined statement of loss for the year ended December 31, 1997 gives effect to the acquisition by Tengasco, Inc. of certain producing oil and gas properties located in the state of Kansas ("the Kansas Properties") as if the acquisition, accounted for as a purchase, had occurred on January 1, 1997. The pro forma information is based on the historical consolidated financial statements of Tengasco, Inc. and the historical statement of revenues and direct operating expenses of the Kansas Properties for the year ended December 31, 1997, after giving effect to the acquisition and the assumptions and adjustments in the accompanying notes to the pro forma financial statement. The pro forma financial statement has been prepared by Tengasco, Inc. based upon the historical statement of revenues and direct operating expenses of the Kansas Properties (included elsewhere in the Form 10-KSB). The pro forma financial statement may not be indicative of the results that actually would have occurred if the combination had been effective on the dates indicated or which may be obtained in the future. The pro forma financial statement should be read in conjunction with the audited consolidated financial statements of Tengasco, Inc. and the audited statement of revenues and direct operating expenses of the Kansas Properties. Basis of Presentation Tengasco, Inc. follows the full cost method of accounting for oil and gas properties. Under this method, all productive and nonproductive costs incurred in connection with the acquisition of, exploration for and development of oil and gas reserves for each cost center are capitalized. The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves and estimated costs of plugging and abandonment, net of estimated salvage value, are amortized on the unit-of-production method based on total proved reserves. The capitalized oil and gas properties, less accumulated depletion, depreciation and amortization and related income taxes, are generally limited to an amount (the ceiling limitation) equal to the sum of: (a) the present value of estimated future net revenues computed by applying current prices in effect as of the balance sheet date to estimated future production of proved oil and gas reserves, less estimated future expenditures (based on current costs) to be incurred in developing and producing the F-44 Tengasco, Inc. and The Kansas Properties Notes to Pro Forma Financial Statement (Unaudited) - -------------------------------------------------------------------------------- reserves using a discount factor of 10% and assuming continuation of existing economic conditions; and (b) the cost of investments in unevaluated properties excluded from the costs being amortized. The accompanying pro forma combined statement of loss for the year ended December 31, 1997 was prepared using the full cost method of accounting in conformity with generally accepted accounting principles. Pro Forma Adjustments The following pro forma adjustments are made to reflect additional costs which would have been incurred by Tengasco, Inc. had the Kansas Properties been acquired as of January 1, 1997 and are reflected in the accompanying pro forma combined statement of loss for the year ended December 31, 1997:
Amount ----------------------------------------------------------------------------- Additional depletion, depreciation and amortization $531,233 Interest expense on the acquisition note payable 174,533 Additional general and administrative expenses 40,000 ----------------------------------------------------------------------------- $745,766 -----------------------------------------------------------------------------
Pro Forma Supplemental Oil and Gas Pro Forma Estimated Combined Information (Unaudited) Quantities of Proved Oil and Gas Reserves (Unaudited) The pro forma combined reserve information presented below is based on the December 31, 1997 reserve reports prepared by Coburn Petroleum Engineering and Columbia Engineering, independent petroleum engineering firms. The January 1, 1997 information has been computed by adjusting the December 31, 1997 reserve reports for production and known purchases. The following table sets forth the combined net proved oil and gas reserves at December 31, 1997 and the pro forma changes in the combined net proved oil and gas reserves for the year then ended. Proved reserves are estimated quantities of crude oil, natural gas and natural gas liquids in which geological and F-45 Tengasco, Inc. and The Kansas Properties Notes to Pro Forma Financial Statement (Unaudited) - -------------------------------------------------------------------------------- engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. The reserve information indicated below requires substantial judgment on the part of the reserve engineers, resulting in estimates which are not subject to precise determination. Accordingly, it is expected the estimates of reserves will change as future production and development information becomes available and revisions in these estimates could be significant.
Oil (Bbls) Gas (Mcf) ---------------------------------------------------------------------------- Proved reserves at January 1, 1997 2,127,548 25,575,163 Discoveries and extensions 198,065 75,476 Revisions of previous estimates (101,565) (4,679,460) Production (141,535) (353,558) ---------------------------------------------------------------------------- Proved reserves at December 31, 1997 2,082,513 20,617,621 ----------------------------------------------------------------------------
Pro Forma Standardized Measure of Discounted Future Net Cash Flows (Unaudited) The following table sets forth the pro forma standardized measure of discounted future net cash flows from the combined proved oil and gas reserves of Tengasco, Inc. and the Kansas Properties at December 31, 1997 as if the acquisition of the Kansas Properties had occurred on January 1, 1997. The standardized measure of discounted future net cash flows does not purport to present the fair market value of the proved oil and gas reserves as this would require consideration of expected future economic and operating conditions, which are not taken into account in the calculation. F-46 Tengasco, Inc. and The Kansas Properties Notes to Pro Forma Financial Statement (Unaudited) - --------------------------------------------------------------------------------
Amount ---------------------------------------------------------------------------- Future cash inflows $ 87,493,504 Future production costs and taxes (21,813,667) Future development costs (2,873,550) Future income tax expenses (12,918,485) ---------------------------------------------------------------------------- Net cash flows 49,887,802 Discount at 10% for timing of cash flows (17,864,113) ---------------------------------------------------------------------------- Discounted future net cash flows from proved reserves $ 32,023,689 ---------------------------------------------------------------------------- The following table sets forth the pro forma changes in the standardized measure of discounted future net cash flows from combined proved reserves during 1997: Amount ----------------------------------------------------------------------------- Balance, January 1, 1997 $44,731,424 Sales, net of production costs and taxes (1,219,380) Discoveries and extensions 1,984,106 Changes in prices and production costs (22,910,339) Revisions of quantity estimates (8,576,161) Changes in development costs 3,882,741 Net change in income taxes 8,137,097 Interest factor - accretion of discount 6,038,403 Changes in production rates and other (44,202) ----------------------------------------------------------------------------- Balance, December 31, 1997 $32,023,689 -----------------------------------------------------------------------------
Estimated future net cash flows represent an estimate of future net revenues from the production of proved reserves using current sales prices, along with estimates of the operating costs, production taxes and future development and abandonment costs (less salvage value) necessary to produce such reserves. The average prices used at December 31, 1997 were $16.53 per barrel of oil and $2.57 per mcf of gas. No deduction has been made for depletion, depreciation and amortization or any indirect costs such as general corporate overhead or interest expense. F-47 Tengasco, Inc. and The Kansas Properties Notes to Pro Forma Financial Statement (Unaudited) - -------------------------------------------------------------------------------- Operating costs and production taxes are estimated based on current costs with respect to producing oil and gas properties. Future development costs are based on the best estimate of such costs assuming current economic and operating conditions. Income tax expense is computed based on applying the appropriate statutory tax rate to the excess of future net cash flows less future production and development costs over the tax basis of the properties involved, less applicable carryforwards, for both regular and alternative minimum tax. The future net revenue information assumes no escalation of costs or prices, except to gas sales made under terms of contracts which include fixed and determinable escalation. Future costs and prices could significantly vary from current amounts and, accordingly, revisions in the future could be significant. F-48 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24 - INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 48-18-502 of the Tennessee Business Corporation Act (the "Act") authorizes a Tennessee corporation to indemnify any director against liability incurred in a legal proceeding if (i) he or she conducted himself or herself in good faith; and (ii) he or she reasonably believed that his or her conduct was in the best interest of the company or, if the conduct was not undertaken in his or her official capacity, that it was not opposed to the company's best interests. In the case of a criminal proceeding, the director must have had no reasonable cause to believe that his or her conduct was unlawful. A corporation may not indemnify a director under Section 48-18-502 in connection with a proceeding "by or in the right of the corporation in which the director was adjudged liable to the corporation" or in connection with any other proceeding charging improper personal benefit to him or her, in which he or she was adjudged liable on the basis that he or she improperly received a personal benefit. Unless limited by its charter, Section 48-18-503 of the Act requires a corporation to indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he or she was a party because of his or her role as director against reasonable expenses incurred in connection with the proceeding. The Company's charter does not provide any limitations on this right of indemnification. Pursuant to Section 48-18-504 of the Act, the Company may advance a director's expenses incurred in defending any proceeding upon receipt of an undertaking and a statement of the director's good faith belief that he or she has met the standard of conduct described in Section 48-18-502. Section 48-18-505 permits a court, upon application of a director, to order indemnification if it determines that the director is entitled to mandatory indemnification under Section 48-18-503 or that he or she is fairly and reasonably entitled to indemnification, whether or not he or she met the standards set forth in Section 48-18-502. Section 48-18-506 limits indemnification under Section 48-18-502 to situations in which either (i) the majority of a disinterested quorum of directors; (ii) independent special legal counsel; or (iii) the stockholders determine that indemnification II-1 is proper under the circumstances. Unless the corporate charter provides otherwise, Section 48-18-507 extends the rights to indemnification and advancement of expenses to officers, employees and agents. The Company's corporate charter does not provide for any limitations on these rights of indemnification. Regardless of whether a director, officer, employee or agent has the right to indemnity under Section 48-18-502 or Section 48-18-503, Section 48-18-508 allows the corporation to purchase and maintain insurance on his or her behalf against liability resulting from his or her corporate role. Section 48-18-509 provides that the rights to indemnification and advancement of expenses shall not be deemed exclusive of any other rights under any bylaw, agreement, stockholder vote or vote of disinterested directors; however, no indemnification may be made where a final adjudication adverse to the director establishes his or her liability for breach of the duty of loyalty to the corporation or its stockholders or for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law. The Company is seeking bids from insurance companies to provide Directors' and Executive Officers' Insurance, and has adopted the provisions of the Act. ITEM 25 - OTHER EXPENSES OF ISSUANCE and DISTRIBUTION The following table sets forth the estimated costs and expenses to be borne by the Company in connection with the Offering described in the Registration Statement other than underwriting commissions and discounts. Registration Fee $ 3,268.58 Legal Fees and Expenses $25,000.00 Accounting Fees and Expenses $15,000.00 Printing Expenses $ 500.00 Consulting Fee $ 500.00 Miscellaneous Expense $ 1,000.00 ---------- Total $45,268.58 II-2 ITEM 26 - RECENT SALES OF UNREGISTERED SECURITIES The following table provides information with respect to the sale of all "unregistered" and "restricted" securities sold by the Company during the past three years, which were not registered under the 1933 Act: Common Stock Number Date Of Aggregate Name of Owner Acquired Shares Consideration Arzonetti, Walter C. 4/22/97 88,493 2 Brockman, Jeff 7/29/96 10,000 2 8/29/96 62,329 2 Carter, Robert M. 6/15/96 15,671 2 8/26/96 2,000 2 6/30/97 7,329 2 DeMunnik, Jeffrey 5/29/96 16,664 2 3/15/97 4,000 2 Grabill, Kelly S. 7/29/96 12,500 2 Harding, Neil 5/21/97 100,000 3 Industrial Resources 3/29/96 76,557 1 Corporation 4/10/96 87,709 1 Estate of Raymond E. Johnson 4/3/96 10,000 2 Johnson, Mike 3/26/96 10,000 2 Manhoff, Charles, N. 4/10/96 88,356 2 Mattei, Joseph B. 4/19/96 37,000 2 McCown, Michael 6/30/97 50,000 2 Moffett, William A. 4/23/96 37,397 2 6/25/97 72,603 2 Ratliff, Russell 3/29/96 37,534 2 Sweeney, Allen 12/31/96 33,151 2 Walter, James C. 3/22/96 35,616 2 II-3 Adams, Stanley & Sharon E. 10/15/97 6,000 53,580.00 Adams, Stanley & Sharon E. 05/04/98 10,000 71,300.00 Angle, Noriko T. 10/10/97 5,714 50,000.00 Arkwright, Richard T. 11/04/97 10,989 99,999.90 Astuto, Angelo 04/22/98 500 3,590.00 Astuto, Laura J. 04/22/98 500 3,590.00 Bailey, Gurvin & Margaret 09/25/97 4,500 36,225.00 Blaker, Barbara & Lloyd 12/26/97 1,120 10,000.00 Bonham, Elizabeth D. 12/19/97 5,952 50,000.00 Borger, Jeannie 10/15/97 224 2,000.32 Buck, Frank S. & Martha J. 10/22/97 5,000 47,250.00 Burklow, Jim 06/15/98 1,000 7,780.00 Burleson, Elizabeth E., 09/15/97 500 3,895.00 Rev. Tr DTD 5/6/93 Cajigas, Arthur & Hidako 05/21/98 1,143 10,000.00 Carter, Daryl M. 07/02/98 1,500 10,500.00 Carter, Maury L. 07/02/98 3,500 24,500.00 Carvajah, Rose Marie 09/01/98 250 1,750.00 Casillas, Arcadio & Renate 11/19/97 9,685 99,997.63 Cates, Dennis 10/14/97 7,000 58,800.00 Chandler, Robert A. 11/13/97 500 4,945.00 Dale, John D., Jr. 12/10/97 4,682 50,000.00 Day, Christopher 08/22/97 482 2,966.11 Egger and Company 10/28/97 202,380 1,700,000.00 Eisert, Anthony & Marie 02/25/98 2,857 20,000.00 Emory Clinic Profit Sharing 11/06/97 2,646 25,004.70 Plan FBO William J. Casarella II-4 Ershek, John 11/03/97 5,000 41,100.00 Esrick, Ralph Trust 03/10/98 1,000 7,170.00 Evans, William 9/5/96 12,121 100,000.00 Fortune Hunters Investment 10/09/97 201 1,759.00 Club French, Peter & Grace 12/09/97 2,267 25,000.00 Fujii, Daisuke 06/01/98 1,406 10,000.00 Fujita, Eiji 05/18/98 21,097 150,000.00 Funk, Frederick 10/20/97 2,158 20,000.00 Funk, Sharon 10/15/97 5,599 49,999.07 Gerding, Daniel J. 11/21/97 1,000 9,890.00 Gerding, James A. 08/26/97 20,000 140,000.00 Gerding, Scott J. 12/09/97 1,000 9,890.00 Gillis, Terry 11/06/97 2,667 24,989.79 Gillis, Terry 11/14/97 1,465 15,001.60 Gillis, Wayne H. 08/26/97 14,286 100,000.00 Giresi, Mary E. 4/22/98 2,000 14,360.00 Gray, Edward W.T. 08/22/97 80,515 500,000.00 Greene, Daryl, IRA R/O UTA 10/13/97 5,000 42,000.00 Charles Schwab & Co., Inc. Habbersett, Edith T., TTEE 11/18/97 1,500 16,020.00 Habbersett, William C. 08/27/97 2,197 15,005.51 TTEE TR 9/1/94 Habbersett, William C. 09/24/97 1,500 11,550.00 TTEE UTD 9/1/94 Habbersett, William C. 11/14/97 1,000 10,240.00 TTEE UTD 9/1/94 Habbersett, William C. 01/05/98 2,303 21,970.62 TTEE UTD 9/1/94 II-5 Hamac & Co., TTEE 11/05/97 10,582 99,999.90 Marillyn Himes Riviere TR Hampton, Earl 09/24/97 500 3,850.00 Harbert, Bill L. 10/10/97 34,286 300,002.50 Harbert, Bill L. 04/30/98 40,000 262,800.00 Harbert, Bill L. 06/11/98 75,414 497,441.00 Harbert, Bill L. 10/22/98 150,200 488,150.00 Harris, Rona 09/01/98 500 3,500.00 Honeycutt, Robert M. 10/15/97 100 893.00 Honeycutt, Robert M. 04/16/98 100 639.00 Houser, Janice 01/21/98 3,008 20,000.00 Huang, Diedre A. 11/06/97 5,336 49,998.32 Huang, Peter C.R. 11/06/97 16,008 149,994.96 Haung, Stephen 11/06/97 5,336 49,998.32 Hut, Robert A. 12/03/97 4,682 50,000.00 Donald Janda 9/5/96 2,131 17,580.00 Robert Janda 9/5/96 22,730 187,520.00 Jones Investment Co. 12/04/97 6,000 50,400.00 Jones, Michael J. 10/14/97 2,200 20,020.00 Jones, Ronald M. 10/28/97 1,500 12,600.00 Jungman, Paul Claude 10/15/97 500 5,000.80 Kail, Wilbert L. 09/02/97 1,000 6,650.00 Kamer, John P. 09/22/97 400 2,976.00 Keller, James & Shirley 05/04/98 4,000 28,520.00 Keyser, Frank & Mims, 12/09/97 443 4,500.00 Catherine Kiryu, Hironori 05/26/98 1,406 10,000.00 II-6 Kitaoka, Yukiko 07/31/98 1,429 10,000.00 Knott, Patricia 10/24/97 500 4,550.00 Kobayashi, Shungo 07/02/98 1,429 10,000.00 Koshi, Junichiro 05/18/98 2,628 20,000.00 Kourkoumelis, James M. 10/21/97 500 4,815.00 L'Hussier, Harold R. 10/17/97 1,406 15,002.02 L'Hussier, Harold 03/03/08 1,594 11,715.90 Lange, Robert A. 10/10/97 1,500 13,345.00 Lautzenhiser, Stephen 08/19/97 800 4,832.00 Leonard, William Curtis 11/07/97 216 2,004.00 Malone, Michael & Kimberly 12/09/97 49 500.00 McCarty, Billy E. & Carol J. 12/09/97 99 1,000.00 Mertins, Janelle 01/21/98 10,000 77,500.00 Miller, William F., Jr. 10/10/97 3,000 26,250.00 Milligan, Shirley, 09/30/97 300 2,415.00 TTEE TR UA 7/3/90 Mintzer, Dorothy 09/01/98 500 3,500.00 Mobarak, Heather L. 02/12/98 500 4,000.00 Moor, John 05/04/98 1,000 7,130.00 Morita, Shegemi 04/10/98 7,400 37,000.00 Mori, Masahiko 05/28/98 7,032 50,000.00 MSP Enterprises 12/09/97 500 5,515.00 Myers, Garry D. 12/31/97 1,344 12,000.00 Nagashima, Tsuyoshi 07/22/98 1,429 10,000.00 Nevin, Micah Cole 11/06/97 100 945.00 Nikovits, John L. 04/22/98 1,000 7,180.00 Nishimura, Joseph Y. 12/16/97 5,192 50,000.00 II-7 Nishiwaki, Nick S. 10/23/97 21,978 200,000.00 Padron, Ramon 05/13/98 1,000 7,350.00 Pichiarella, Lawrence S. 12/08/97 100 1,103.00 Pichiarella, Lawrence S. 12/11/97 200 1,960.00 Pichiarella, Lawrence S. 12/17/97 100 840.00 Presnell, Joe 11/14/97 2,000 20,480.00 Presnell, Joe & Alma 12/08/97 1,000 11,030.00 Presnell, Joe 02/25/98 1,000 6,650.00 Presnell, Joe 04/28/98 1,000 6,430.00 Presnell, Joe 06/15/98 1,000 7,000.00 Pych, Barbara M. 04/22/98 1,000 7,180.00 Pych, Cynthia M. 04/24/98 2,000 14,360.00 Pych, Gregory L. 04/22/98 2,000 14,360.00 Pych, Joseph 04/22/98 1,250 8,975.00 Pych, Joseph R. 04/22/98 1,000 7,180.00 Pych, Robert F. 04/22/98 1,000 7,180.00 Regions Bank, TTEE for the 10/10/97 5,656 49,999.99 Bobby P. Lemay Directed IRA Reventlow, Richard H. 11/06/97 10,989 99,999.90 Rich Energy, Inc. 12/09/97 700 6,370.00 Scott, Donald L. 10/14/97 2,220 20.020.00 Scott, Randall L. 10/14/97 2,220 20,020.00 Seevers, Larry 03/10/98 1,504 10,000.00 Sherbal, Rose 09/01/98 500 3,500.00 Silva, Anthony 01/26/99 20,000 100,000.00 Silva, Anthony 03/08/99 22,300 100,350.00 II-8 Smithers, Charles F., Jr. 02/12/98 6,250 50,000.00 Spoonbill, Inc. 10/23/97 178,024 1,619,949.00 Spoonbill, Inc. 01/29/98 50,000 350,000.00 Spoonbill, Inc. 09/02/98 50,000 250,000.00 Spoonbill, Inc. 01/06/99 140,000 700,000.00 Stanley, David G, TTEE. 12/08/98 5,000 23,750.00 Stanley, Robert J. 10/10/97 11,313 100,006.92 STEP, Inc. 10/22/97 2,000 18,200.00 Stern, William TTEE 4/7/98 10,000 70,000.00 Stern, William TTEE 4/9/98 5,000 35,000.00 Steuer, Joseph Jr. 08/19/97 1,703 9,996.61 Stewart S. Kent, TTEE, 10/23/97 2,500 22,550.00 UA/TR Dtd 12/29/88 Strickland, Thomas, Jr. 08/26/97 200 1,174.00 Synap Corp. 05/29/98 9,143 80,000.00 Thomson, Charles A. 10/29/97 2,000 15,400.00 Thurman, Shawn Lee 08/26/97 219 1,495.00 Ueshima, Takeshi 02/05/98 6,494 50,000.00 Ura, Yukari 06/02/98 1,406 10,000.00 Uy, Camilo 12/11/97 2,500 25,000.00 Viam Charitable & Edu. 10/21/97 11,905 100,000.00 Foundation, Inc. Vickers, T. Owen 10/09/97 7,584 64,994.88 Warhaft, Terri 09/01/98 500 3,500.00 Watson, W.N. 11/06/97 534 5,003.58 Weeks, Everette J. 03/10/98 500 3,590.00 Welden, William Edgar, Jr. 11/11/97 506 5,000.00 II-9 Welden, William Edgar, Sr. 11/11/97 2,528 25,000.00 Widmer, Edward J. 12/31/97 500 4,465.00 Wilson, Henry A. 11/03/97 585 5,019.30 Yoshida, Teruni 07/31/98 1,429 10,000.00 TOTAL 1,492,893 10,584,623.92 Series A 8% Cumulative Convertible Preferred Stock ($100.00 per share) Number Date Of Aggregate Name of Owner Acquired Shares Consideration - ------------- -------- ------ ------------- Harding, Neal 10/30/98 2,950 4 Cipponeri, Jerome 10/30/98 500 5 Kenny, Vernon & Rosemary 10/30/98 1,300 5 Gorman, Robert & Anne 10/30/98 1,000 5 Cregan, John D. 10/30/98 500 $ 50,000.00 Stern, William M., TTEE 10/30/98 750 75,000.00 Hall, Kelly 12/30/98 1,000 100,000.00 1 Issued in consideration of the cancellation of debt owed by the Company to IRC. See, "Description of Business" - "Business Development" above. 2 Issued pursuant to Stock Option Agreements adopted by the Board of Directors granting these persons an option to purchase "unregistered" and "restricted" shares of the Company's common stock at a price of $0.275 per share. 3 Issued as consideration for the granting of a loan in the amount of $1,000,000. 4 Issued as partial payment of a loan made to Company in 1997 by Harding. See,"Certain Relationships and Related Transactions - Transactions with Management and Others" 5 Issued as partial payment of loans made to the Company in July 1998 by the above shareholders. See, "Certain Relationships and Related Transactions - Transactions with Management and Others" II-10 Management believes that all of the foregoing persons were either "accredited investors" as that term is defined under applicable federal and state securities laws, rules and regulations, or were persons who by virtue of background, education and experience who could accurately evaluate the risks and merits attendant to an investment in the securities of the Company. Further, all such persons were provided with access to all material information regarding the Company, prior to the offer or sale of these securities, and each had an opportunity to ask of and receive answers from directors, executive officers, attorneys and accountants for the Company. The offers and sales of the foregoing securities are believed to have been exempt from the registration requirements of Section 5 of the 1933 Act, as amended, pursuant to Section 4(2) thereof, and from similar state securities laws, rules and regulations covering the offer and sale of securities by available state exemptions from such registration. ITEM 27 - EXHIBITS The following exhibits are filed as a part of this Registration Statement: Number Description 2.1 Plan of Acquisition. Agreement dated December 18,1997 between AFG Energy, Inc. and Tengasco, Inc. regarding sale of assets of AFG Energy, Inc. 3.1 Initial Articles of Incorporation 3.2 Bylaws 3.3 Articles of Amendment dated April 12, 1966 3.4 Articles of Amendment dated July 12, 1984 3.5 Articles of Amendment dated December 18, 1991 3.6 Articles of Amendment dated September 11, 1992 3.7 Articles of Incorporation of the Tennessee wholly-owned subsidiary ** 3.8 Articles of Merger and Plan of Merger (taking into account the formation of the Tennessee wholly-owned subsidiary for the purpose of changing the Company's domicile and effecting reverse split) II-11 changing the Company's domicile and effecting reverse split) 3.9 Amendment to the Corporate Charter dated June 24, 1998 3.10 Amendment to the Corporate Charter dated October 30, 1998 5.1 Opinion of Robson & Miller, LLP 10.1(a) Purchase Agreement with IRC 10.1(b) Amendment to Purchase Agreement with IRC 10.1(c) General Bill of Sale and Promissory Note 10.2(a) Compensation Agreement - M. E. Ratliff 10.2(b) Compensation Agreement - Jeffrey D. Jenson 10.2(c) Compensation Agreement - Leonard W. Burningham, Esq. 10.3 Agreement with The Natural Gas Utility District of Hawkins County, Tennessee 10.4 Agreement with Powell Valley Electric Cooperative, Inc. 10.5 Agreement with Enserch Energy Services, Inc. 10.6 Teaming Agreement between Operations Management International, Inc. and Tengasco, Inc. dated March 12, 1997 10.7 Agreement for Transition Services between Operations Management International, Inc. and Tengasco, Inc. regarding the East Tennessee Technology Park 16.1 Letter of David T. Thomson, CPA, Regarding Change in Certifying Accountant 16.2 Letter of Charles M. Stivers, CPA, Regarding Change in Certifying Accountant 16.3 Letter of Price-Bednar, LLP, CPA, Regarding Change in Certifying Accountant 23.1 Consent of Charles M. Stivers, CPA II-12 23.2 Consent of David T. Thomson, CPA 23.3 Consent of BDO Seidman, LLP 23.4 Consent of Robson & Miller, LLP 23.5 Consent of Coburn Petroleum Engineering Co. 23.6 Consent of Columbia Engineering, Inc. 99.1 Beech Creek Lease Schedule 99.2 Wildcat Lease Schedule 99.3 Burning Springs Lease Schedule 99.4 Fentress County Lease Schedule 99.5 Swan Creek Lease Schedule 99.6 Alabama Lease Schedule 99.7 Coburn Engineering Report 99.8 Coburn Engineering Report dated February 18, 1997 (Paper copy filed on Form SE pursuant to continuing hardship granted by Office of EDGAR Policy) 99.9 Columbia Engineering Report dated March 2, 1997 (Paper copy filed on Form SE pursuant to continuing hardship granted by Office of EDGAR Policy) 99.10 Coburn Engineering Report dated February 9, 1999 (Paper copy filed on Form SE pursuant to continuing hardship granted by Office of EDGAR Policy) 99.11 Columbia Engineering Report dated February 20, 1999 (Paper copy filed on Form SE pursuant to continuing hardship granted by Office of EDGAR Policy) * Summaries of all exhibits contained within this Registration Statement are modified in their entirety by reference to these Exhibits. ** These are form documents much of which are substantially handwritten and may be II-13 illegible. The best available copy thereof has been filed with the Commission and copies may be obtained from the principal executive offices of the Company at no charge. ITEM 28 - UNDERTAKINGS The Company hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to the Registration Statement to: (i) Include any prospectus required by Section 10(a)(3) of the Act; (ii) Reflect in the Prospectus any facts or events which individually or together represent a fundamental change in the information in the Registration Statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) That, for the purpose of determining any liability under the Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. The Company hereby undertakes: (1) For determining any liability under the Act, treat the information omitted from the form prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company under Rule 424(b)(1) or (4) or 497(n) under the Act as part of the Registration Statement as of the time the Commission declared it effective. (2) For determining liability under the Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and the offering of the securities as that time as the initial bona fide offering of those securities. II-14 Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defenses of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel that matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the questions whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-15 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing of Form SB-2 and authorized this registration statement on its behalf by the undersigned, thereunto duly authorized, in the City of Knoxville, State of Tennessee on the 21st day of April, 1999. Tengasco, Inc. By: s/Malcolm E. Ratliff ------------------------------------------- Malcolm E. Ratliff Chief Executive Officer In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated. Signature Title Date s/Malcolm E. Ratliff Director; Chief April 21, 1999 - ------------------------ Executive Officer Malcolm E. Ratliff s/Allen H. Sweeney Chairman of the Board April 21, 1999 - ------------------------ of Directors Allen H. Sweeney s/Joseph Earl Armstrong Director April 21, 1999 - ------------------------ Joseph Earl Armstrong s/John L. Kidde Director April 21, 1999 - ------------------------ John L. Kidde s/James B. Kreamer Director April 21, 1999 - ------------------------ James B. Kreamer s/William A. Moffett Director April 21, 1999 - ------------------------ William A. Moffett II-16 s/Shigemi Morita Director April 21, 1999 - ------------------------ Shigemi Morita s/Robert M. Carter President April 21, 1999 - ------------------------ Robert M. Carter s/Mark A. Ruth Principal Financial April 14, 1999 - ------------------------ and Accounting Mark A. Ruth Officer s/Sheila F. Sloan Treasurer April 21, 1999 - ------------------------ Sheila F. Sloan s/Elizabeth Wendelken Secretary April 21, 1999 - ------------------------ Elizabeth Wendelken II-17 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-5.1 4 CONSENT OF COUNSEL EXHIBIT 5.1 and 23.4 [LETTERHEAD OF ROBSON & MILLER, LLP] April 20, 1999 Tengasco, Inc. 603 Main Avenue - Suite 500 Knoxville, Tennessee 37902 Re: Tengasco. Inc. Gentlemen: We have acted as counsel to Tengasco, Inc., a Tennessee corporation (the "Company"), in connection with a registration statement on Form SB-2 (the "Registration Statement") and all amendments thereto, to be filed with the Securities and Exchange Commission for the purpose of registering an aggregate of 345,128 shares (the "Shares") of common stock, $.001 par value per share (the "Common Stock") owned by certain shareholders (collectively the "Selling Shareholders") of the Company under the Securities Act of 1933, as amended (the "Act"). As counsel for the Company, we have examined and are familiar with the Certificate of Incorporation and By-Laws of the Company, and all amendments thereto. We are also familiar with the form of the Company's stock certificate, as well as all corporate proceedings taken by the Company in connection with the authorization of the issuance and acquisition of the Shares by the Selling Shareholders. Throughout such examination we have assumed the genuineness of signatures and accuracy and conformity to original documents of all copies of documents supplied to us. As to questions of fact material to the opinion expressed herein, we have, when relevant facts were not independently determinable, relied upon information furnished to us by officers and directors of the Company or their duly authorized agents or employees. Based upon the foregoing, it is our opinion that the Shares have been duly executed and delivered and the consideration therefor duly paid, and such Shares are validly issued, fully paid and nonassessable and owned by the Selling Shareholders. [LETTERHEAD OF ROBSON & MILLER, LLP] We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Robson & Miller, LLP ---------------------------------- Robson & Miller, LLP EX-23.1 5 CONSENT OF COUNSEL (CHARLES M. STIVERS, CPA) EXHIBIT 23.1 [LETTERHEAD OF CHARLES M. STIVERS] April 21, 1999 Securities and Exchange Commission 45 Fifth Street Washington, D.C. 20549 Gentlemen: We have read the statements made by Tengasco, Inc. in Amended Form SB-2, which we understand will be filed with the Commission, with respect to the change in accountants from Price-Bednar, LLP to our firm and thereafter, from our firm to DBO Seidman LLP. We agree with the statements concerning our firm in such Amended Form SB-2. Further, I consent to the reference to me under the captions "Experts" and "Changes in and Disagreements with Accountants on Accounting and Financial Disclosure" and to the use of my report for the year ended December 31, 1995 in the Amended Registration Statement (Form SB-2) of Tengasco, Inc. /s/ Charles M. Stivers, CPA ------------------------------------ Charles M. Stivers, CPA EX-23.3 6 CONSENT OF BDO SEIDMAN, LLP EXHIBIT 23.3 Consent of Independent Certified Public Accountants Tengasco, Inc. Knoxville, Tennessee We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated March 5, 1999 relating to the consolidated financial statements of Tengasco, Inc. which is contained in that Prospectus. Our report contains an explanatory paragraph regarding the Company's ability to continue as a going concern. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO Seidman, LLP BDO SEIDMAN, LLP Atlanta, Georgia April 27, 1999 EX-23.5 7 CONSENT OF COUNSEL (COBURN PETROLEUM ENGINEERING) EXHIBIT 23.5 [LETTERHEAD OF COBURN PETROLEUM ENGINEERING] April 21, 1999 Securities and Exchange Commission 459 Fifth Street Washington, D.C. 70549 Gentlemen: I consent to the use of our engineering report in an amendment SB-2 filed by Tengasco, Inc. and to the reference of our firm under the captions "Experts". Sincerely, COBURN PETROLEUM ENGINEERING /s/ R.W. Coburn - ------------------------------ R.W. Coburn Registered Petroleum Engineer Oklahoma #3449 RWC/pk EX-23.6 8 CONSENT OF COUNSEL (COLUMBIA ENGINEERING) EXHIBIT 23.6 [LETTERHEAD OF COLUMBIA ENGINEERING] April 21, 1999 Securities and Exchange Commission 459 Fifth Street Washington, D.C. 70549 Gentlemen: I hereby consent to the use of my engineering report in an amended SB-2 being filed by Tengasco, Inc. and to the reference of me or my firm under the captions "Experts" Sincerely, /s/ David F. Yard, P.E. - ----------------------------- David F. Yard, P.E. Columbia Engineering -----END PRIVACY-ENHANCED MESSAGE-----