U.S. Securities and
Exchange Commission
Washington,D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly
period ended September 30, 2003
Commission File No.
0-20975
Tengasco, Inc. and
Subsidiaries
(Exactname of small business issuer as specified in its charter)
Tennessee
State or other jurisdiction of
Incorporation or organization
87-0267438
(IRS Employer Identification No.)
603
Main Avenue, Suite 500, Knoxville, TN 37902
(Address of principal
executive offices)
(865-523-1124)
(Issuer’s telephone number, including area code)
Check whether the issuer (1) filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
X No__
State the number of shares
outstanding of each of the issuer’s classes of common equity, as of the latest
practicable date: 12,049,977 common shares at September 30, 2003.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
TENGASCO, INC. AND
SUBSIDIARIES
TABLE OF CONTENTS
| PART I. |
FINANCIAL INFORMATION |
PAGE |
|
|
|
| |
ITEM 1. FINANCIAL STATEMENTS |
|
| |
* Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002 |
3-4 |
|
|
|
| |
| |
* Consolidated Statements of Loss for the three and six months ended June 30, 2003 and 2002 |
5 |
|
|
|
| |
| |
* Consolidated Statements of Stockholders Equity for the six months ended June 30, 2003 and 2002 |
6 |
|
|
|
| |
| |
* Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 |
7 |
|
|
|
| |
* Notes to Condensed Consolidated Financial Statements |
8-14 |
| |
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
14-19 |
|
|
|
| |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
19-20 |
| |
ITEM 4. CONTROLS AND PROCEDURES |
20 |
| PART II. | OTHER INFORMATION |
| |
ITEM 1. LEGAL PROCEEDINGS |
21 |
| |
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS |
21-22 |
| |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES |
22 |
| |
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
22 |
|
|
|
| |
* EXHIBITS |
23 |
| |
SIGNATURES |
24 |
TENGASCO, INC AND
SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
ASSETS
|
September 30, 2003
|
December 31, 2002
|
|
(Unaudited)
|
|
| Current Assets: |
|
|
| |
|
| |
|
| Cash and cash equivalents | | |
$ | 332,185 |
|
$ | 184,130 |
|
| Investments | | |
| 34,500 |
|
| 34,500 |
|
| Accounts receivable net | | |
| 795,916 |
|
| 730,667 |
|
| Participants receivable | | |
| 63,297 |
|
| 70,605 |
|
| Inventory | | |
| 262,748 |
|
| 262,748 |
|
|
|
|
| Current portion of loan fees, net | | |
| 210,380 |
|
| 323,856 |
|
| Other | | |
| | | |
| 67,352 |
|
| 0 |
|
|
|
| |
|
|
|
| Total current assets | | |
| 1,766,378 |
|
| 1,606,506 |
|
| Oil and gas properties, net (on the basis of | | |
| full cost accounting) | | |
| 13,096,898 |
|
| 13,864,321 |
|
| Completed pipeline facilities, net | | |
| 15,312,212 |
|
| 15,372,843 |
|
| Other property and equipment, net | | |
| 1,482,202 |
|
| 1,685,950 |
|
| Loan fees, net of accumulated amortization | | |
| 0 |
|
| 40,158 |
|
| Other | | |
| 5,213 |
|
| 14,613 |
|
|
| |
| |
|
|
|
| | | |
$ | 31,662,903 |
|
$ | 32,584,391 |
|
|
| |
| |
See accompanying notes
to condensed consolidated financial statements
TENGASCO, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
September 30, 2003
|
December 31, 2002
|
|
(Unaudited)
|
|
| Current Liabilities |
|
|
| |
|
| |
|
| Current maturities of long-term debt | | |
$ | 6,724,998 |
|
$ | 7,861,245 |
|
| Accounts payable-trade | | |
| 839,553 |
|
| 1,396,761 |
|
| Accrued interest payable | | |
| 167,227 |
|
| 61,141 |
|
| Accrued dividends payable | | |
| 470,543 |
|
| 254,389 |
|
| Notes payable to related parties | | |
| 2,234,000 |
|
| 750,000 |
|
| Other accrued liabilities | | |
| 627,016 |
|
| 31,805 |
|
|
| |
| |
| Total current liabilities | | |
| 11,063,337 |
|
| 10,355,341 |
|
| Asset retirement obligations | | |
| 666,421 |
|
| 0 |
|
| Long term debt less current maturities | | |
| 590,055 |
|
| 1,256,209 |
|
|
| |
| |
| Total liabilities | | |
| 12,319,813 |
|
| 11,611.550 |
|
|
| |
| |
| Preferred Stock | | |
| Cumulative convertible redeemable preferred; redemption value | | |
| $7,072,000; 70,720 shares outstanding | | |
| | | |
| 6,884,257 |
|
| 6,762,218 |
|
|
| |
| |
| Stockholders Equity | | |
| Common stock, $.001 per value, 50,000,000 shares authorized, | | |
| 12,049,977; 11,444,779 outstanding | | |
| 12,065 |
|
| 11,460 |
|
| Additional paid-in-capital | | |
| 42,855,693 |
|
| 42,237,276 |
|
| Accumulated deficit | | |
| (30,147,538 |
) |
| (27,776,726 |
) |
| Accumulated other comprehensive loss | | |
| (115,500 |
) |
| (115,500 |
) |
| Treasury stock, at cost | | |
| (145,887 |
) |
| (145,887 |
) |
|
| |
| |
| Total stockholders equity | | |
| 12,458,833 |
|
| 14,210,623 |
|
|
| |
| |
| | | |
$ | 31,662,903 |
|
$ | 32,584,391 |
|
|
| |
| |
|
|
|
See accompanying notes
to condensed consolidated financial statements
TENGASCO, INC. AND
SIBSIDIARIESCONSOLIDATED
STATEMENTS OF LOSS
|
For the Three Months Ended
|
For the Nine Months Ended
|
|
September, 30,
(Unaudited) |
September 30,
(Unaudited) |
|
2003 |
2002 |
2003 |
2002 |
| Revenues and other income |
|
|
| |
|
| |
|
| |
|
| |
|
| Oil and gas revenues | | |
$ | 1,546,453 |
|
| 1,450,133 |
|
$ | 4,907,216 |
|
$ | 3,859,050 |
|
| Pipeline transportation revenues | | |
| 52,749 |
|
| 56,088 |
|
| 145,472 |
|
| 197,333 |
|
| Interest income | | |
| 259 |
|
| 1,087 |
|
| 766 |
|
| 2,782 |
|
|
| |
| |
| |
| |
|
|
|
|
|
| Total revenues and other income | | |
| 1,599,461 |
|
| 1,507,308 |
|
| 5,053,454 |
|
| 4,059,165 |
|
| Cost and other deductions | | |
| Production costs and taxes | | |
| 944,019 |
|
| 815,293 |
|
| 2,571,898 |
|
| 2,084,597 |
|
| Depletion, depreciation and amortization | | |
| 628,195 |
|
| 756,486 |
|
| 1,887,333 |
|
| 1,731,182 |
|
| Interest expense | | |
| 168,420 |
|
| 146,382 |
|
| 462,518 |
|
| 448,046 |
|
| General and administrative cost | | |
| 301,794 |
|
| 401,829 |
|
| 1,112,289 |
|
| 1,527,988 |
|
| Public Relations | | |
| 954 |
|
| 15,809 |
|
| 29,131 |
|
| 176,098 |
|
| Professional fees | | |
| 64,326 |
|
| 93,388 |
|
| 485,270 |
|
| 539,198 |
|
|
| |
| |
| |
| |
|
|
|
|
|
| Total cost and other deductions | | |
| 2,107,708 |
|
| 2,229,187 |
|
| 6,548,439 |
|
| 6,507,109 |
|
|
| |
| |
| |
| |
| Net loss | | |
| (508,247 |
) |
| (721,879 |
) |
| (1,494,985 |
) |
| (2,447,944 |
) |
|
| |
| |
| |
| |
| Dividends on preferred stock | | |
| 134,194 |
|
| 134,195 |
|
| 402,583 |
|
| 372,595 |
|
|
| |
| |
| |
| |
|
|
|
|
|
| Net loss attributable to common shareholders | | |
| Before cumulative effect of a change in | | |
| accounting principle | | |
$ | (642,441 |
) |
$ | (856,074 |
) |
$ | (1,897,568 |
) |
$ | (2,820,539 |
) |
|
| |
| |
| |
| |
| Cumulative effect of a change in accounting | | |
| principle | | |
| 0 |
|
| 0 |
|
| (351,204 |
) |
| 0 |
|
|
| |
| |
| |
| |
|
|
|
|
|
| Net loss attributable to common shareholders | | |
| | | |
$ | (642,441 |
) |
$ | (856,074 |
) |
$ | (2,248,772 |
) |
$ | (2,820,539 |
) |
|
| |
| |
| |
| |
| Net loss attributable to common shareholders | | |
| per share basic and diluted: | | |
| Operations | | |
$ | (0.05 |
) |
$ | (0.08 |
) |
$ | (0.16 |
) |
$ | (0.26 |
) |
|
| |
| |
| |
| |
| Cumulative effect of a change in accounting | | |
| principle | | |
| 0 |
|
| 0 |
|
$ | (0.03 |
) |
$ | 0 |
|
|
| |
| |
| |
| |
|
|
|
|
|
| Total | | |
$ | (0.05 |
) |
$ | (0.08 |
) |
$ | (0.19 |
) |
$ | (0.26 |
) |
|
| |
| |
| |
| |
| Weighted average shares outstanding | | |
| 12,047,823 |
|
| 11,365,431 |
|
| 11,919,477 |
|
| 10,933,588 |
|
|
| |
| |
| |
| |
See accompanying notes
to condensed consolidated financial statements
6
TENGASCO, INC. AND
SUBSIDIARIES
CONSILIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
Common Stock
Shares
|
Amount
|
Additional
Paid in Capital
|
Accumulated Other
Comprehensive Loss
|
|
| Balance December 31, 2002 |
|
|
| 11,459,279 |
|
$ | 11,460 |
|
$ | 42,237,276 |
|
$ | (115,500 |
) |
|
|
|
| Net Loss | | |
| 0 |
|
| 0 |
|
| 0 |
|
| Common Stock Issued in Private | | |
| Placements Net of Related Expenses | | |
| | | |
| 227,275 |
|
| 227 |
|
| 249,773 |
|
| Common Stock Issued for exercised | | |
| options | | |
| 94,000 |
|
| 94 |
|
| 46,906 |
|
| Common Stock Issued in Conversion of | | |
| Debt | | |
| 60,528 |
|
| 61 |
|
| 69,538 |
|
| Common Stock Issued for Preferred | | |
| Dividend in Arrears | | |
| 154,824 |
|
| 154 |
|
| 170,155 |
|
| Common Stock Issued for Charity | | |
| 3,571 |
|
| 4 |
|
| 5,710 |
|
| Retained Earnings-Accretion of Issue | | |
| Cost on Preferred Stock | | |
| Common Stock Issued for Services | | |
| 55,000 |
|
| 55 |
|
| 69,945 |
|
| Common Stock Issued for Litigation | | |
| Settlement | | |
| 10,000 |
|
| 10 |
|
| 6,390 |
|
| Dividends on Convertible Redeemable | | |
| Preferred Stock | | |
| 0 |
|
| 0 |
|
| 0 |
|
| Cumulative effect of a change in | | |
| accounting principle | | |
| 0 |
|
| 0 |
|
| 0 |
|
| Balance September 30, 2003 | | |
| 12,064,477 |
|
$ | 12,065 |
|
$ | 42,855,693 |
|
$ | (115,500 |
) |
| |
| |
| |
| |
| |
|
|
|
|
|
|
|
Accumulated
Deficit
|
Shares
|
Amount
|
Total
|
|
| Balance December 31, 2002 |
|
|
$ | (27,776,726 |
) |
| (14,500 |
) |
$ | (145,887 |
) |
$ | 14,210,623 |
|
|
|
|
| Net Loss | | |
| (1,494,985 |
) |
| 0 |
|
| 0 |
|
| (1,494,985 |
) |
| Common Stock Issued in Private | | |
| Placements Net of Related Expenses | | |
| | | |
| 0 |
|
| 0 |
|
| 0 |
|
| 250,000 |
|
| Common Stock Issued for exercised | | |
| options | | |
| 0 |
|
| 0 |
|
| 0 |
|
| 47,000 |
|
| Common Stock Issued in Conversion o | | |
| Debt | | |
| 0 |
|
| 0 |
|
| 0 |
|
| 69,599 |
|
| Common Stock Issued for Preferred | | |
| Dividend in Arrears | | |
| |
|
| |
|
| |
|
| 170,309 |
|
| Common Stock Issued for Charity | | |
| |
|
| |
|
| |
|
| 5,714 |
|
| Retained Earnings-Accretion of Issu | | |
| Cost on Preferred Stock | | |
| (122,040 |
) |
| |
|
| |
|
| (122,040) |
|
| Common Stock Issued for Services | | |
| 0 |
|
| 0 |
|
| |
|
| 70,000 |
|
| Common Stock Issued for Litigation | | |
| Settlement | | |
| |
|
| |
|
| |
|
| 6,400 |
|
| Dividends on Convertible Redeemable | | |
| Preferred Stock | | |
| (402,583 |
) |
| 0 |
|
| 0 |
|
| (402,583 |
) |
| Cumulative effect of a change in | | |
| accounting principle | | |
| (351,204 |
) |
| 0 |
|
| 0 |
|
| (351,204 |
) |
|
|
|
|
|
|
| Balance September 30, 2003 | | |
$ | (30,147,538 |
) |
| (14,500 |
) |
$ | (145,887 |
) |
$ | 12,458,833 |
|
| |
| |
| |
| |
| |
|
|
|
|
|
|
See accompanying notes
to condensed consolidated financial statements
9
TENGASCO, INC. AND
SUBSIDIARIESCONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For the Nine
Months Ended
September 30, 2002
|
For the Nine
Months Ended
September 30, 2003
|
|
(Unaudited)
|
(Unaudited)
|
| Operating Activities |
|
|
| |
|
| |
|
| Net Loss | | |
$ | (1,494,985 |
) |
$ | (2,447,944 |
) |
|
|
|
| Adjustments to reconcile net loss to net cash | | |
| Provided by (used in) operating activities: | | |
| Depletion, depreciation and amortization | | |
| 1,887,333 |
|
| 1,731,182 |
|
| Charitable donation, services paid in stock, stock options | | |
| 122,714 |
|
| 48,620 |
|
| Changes in assets and liabilities | | |
| Accounts receivable | | |
| (65,249 |
) |
| (41,340 |
) |
|
|
|
| Participants receivable | | |
| 7,308 |
|
| 0 |
|
|
|
|
| Accounts payable | | |
| (557,208 |
) |
| (5,021 |
) |
| Accrued interest payable | | |
| 106,086 |
|
| (9,581 |
) |
| Other accrued liabilities | | |
| 595,211 |
|
| 0 |
|
| Other | | |
| (57,952 |
) |
| 0 |
|
|
| |
| |
|
|
|
|
|
|
| Net cash provided by (used in) operating activities | | |
| 543,258 |
|
| (724,084 |
) |
|
| |
| |
|
|
|
| Investing activities | | |
| Additions to property and equipment | | |
| 0 |
|
| (154,526 |
) |
| Net additions to oil and gas properties | | |
| (45,312 |
) |
| (1,796,600 |
) |
| Net additions to pipeline facilities | | |
| (341,369 |
) |
| (739,162 |
) |
| Decrease in restricted cash | | |
| 0 |
|
| 120,872 |
|
| Other assets | | |
| 0 |
|
| 19,432 |
|
|
| |
| |
|
|
|
| Net cash used in investing activities | | |
| (386,681 |
) |
| (2,549,984 |
) |
|
| |
| |
|
|
|
| Financing activities | | |
| Repayments of borrowings | | |
| (1,742,522 |
) |
| (2,129,256 |
) |
| Proceeds from borrowings | | |
| 1,484,000 |
|
| 1,703,103 |
|
| Dividends on convertible redeemable preferred stock | | |
| 0 |
|
| (350,859 |
) |
| Proceeds from private placements of common stock | | |
| 250,000 |
|
| 2,677,000 |
|
| Proceeds from private placements of preferred stock | | |
| 0 |
|
| 1,303,168 |
|
|
| |
| |
|
|
|
| Net cash provided by (used in) financing activities | | |
| (8,522 |
) |
| 3,203,156 |
|
|
| |
| |
|
|
|
| Net change in cash and cash equivalents | | |
| 148,055 |
|
| (70,912 |
) |
| Cash and cash equivalents, beginning of period | | |
| 184,130 |
|
| 393,451 |
|
|
| |
| |
|
|
|
| Cash and cash equivalents, end of period | | |
$ | 332,185 |
|
$ | 322,539 |
|
|
| |
| |
|
|
|
See accompanying notes
to condensed consolidated financial statements
Tengasco, Inc. And
SubsidiariesCondensed
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
| |
The
accompanying un-audited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months ended September 30,
2003 are not necessarily indicative of the results that may be expected for the year ended
December 31, 2003. Additionally, deferred income taxes and income tax expense is not
reflected in the Company’s financial statements due to the fact that the Company has
had recurring losses and deferred tax assets arising from net operating loss carry
forwards have been fully reserved. For further information, refer to the Company’s
consolidated financial statements and footnotes thereto for the year ended December 31,
2002 included in the Company’s annual report on Form 10-K.
|
(2) Going Concern
Uncertainty
| |
The
accompanying consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of the Company as a going concern and assume realization of
assets and the satisfaction of liabilities in the normal course of business. The Company
has incurred continuous losses since commencing its operations and has an accumulated
deficit of $30,147,538 and a working capital deficit of $9,296,959 as of September 30,
2003. During 2002, the Company was informed by its primary lender that the entire amount
of it outstanding credit facility was immediately due and payable, as provided for in the
Credit Agreements. These circumstances raise substantial doubt about the Company’s
ability to continue as a going concern.
|
| |
The
Company has disputed its obligation to make this payment and is attempting to resolve the
dispute or to obtain alternate refinancing arrangements to repay this current obligation.
There can be no assurance that the Company will be successful in its plans to obtain the
financing necessary to satisfy its current obligation.
|
(3) Earnings Per Share
| |
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, basic and diluted loss per share are based on 12,047,823 and 11,365,431 weighted
average shares outstanding for the quarters ended September 30, 2003 and 2002,
respectively. Basic and diluted loss per share are based on 11,919,477 and 10,933,588
weighted average shares outstanding for the nine months ended September 30, 2003 and 2002.
During the nine month period ended September 30, 2003 and year ended December 31, 2002
potential weighted average stock equivalents outstanding were approximately 1,473,000.
These shares are not included in the computation of the diluted loss per share amount
because the Company was in a net loss position and their effect would have been
antidilutive.
|
| |
The
Company adopted the disclosure provision of the Statement of Financial Accounting
Standards (SFAS or statement) No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure”, which amends SFAS No. 123. “Accounting
for Stock-Based Compensation”, SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-
based employee compensation, which was originally provided under SFAS No. 123. The
Statement also improves the timeliness of disclosures by requiring the information be
included in interim, as well as annual, financial statements. The adoption of these
disclosure provisions did not have a material effect on the Company’s 2002
consolidated results of operations, financial position, or cash flows.
|
| |
SFAS
No. 123 encourages, but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company’s stock at the date of
the grant over the amount an employee must pay to acquire the stock. The option price of
all the Company’s stock options is equal to the market value of the stock at the
grant date. As such, no compensation expense is recorded in the accompanying consolidated
financial statements.
|
| |
Had
compensation cost been determined based upon the fair value at the grant date for awards
under the stock option plan consistent with the methodology prescribed under SFAS No. 123,
the Company’s pro forma net income (loss) and net income (loss) per share would have
differed from the amounts reported as follows:
|
|
Three Months
September 30,
2003
|
Three Months
September 30,
2002
|
Nine Months
September 30,
2003
|
Nine Months
September 30,
2002
|
| Net loss as reported |
|
|
$ | (642,441 |
) |
$ | (856,074 |
) |
$ | (2,248,772 |
) |
$ | (2,820,539 |
) |
|
|
|
|
|
| Stock-based employee | | |
| compensation expense | | |
| determined under fair value | | |
| basis | | |
$ | (0 |
) |
$ | (8,400 |
) |
$ | (47,209 |
) |
$ | (202,846 |
) |
|
| |
| |
| |
| |
|
|
|
|
|
| Pro forma net loss | | |
$ | (642,441 |
) |
$ | (864,474 |
) |
$ | (2,295,981 |
) |
$ | (3,023,385 |
) |
|
|
|
|
|
| Earning per share: | | |
| Basic and diluted as reported | | |
| | | |
$ | (0.05 |
) |
$ | (0.08 |
) |
$ | (0.19 |
) |
$ | (0.26 |
) |
|
|
|
|
|
| Basic and diluted pro forma | | |
| | | |
$ | (0.05 |
) |
$ | (0.08 |
) |
$ | (0.19 |
) |
$ | (0.28 |
) |
|
|
|
|
|
(4)
New Accounting Pronouncements:
| |
A
reporting issue has arisen regarding the application of certain provisions of SAFS No. 141
and SFAS No. 142 to companies in the extracting industries including oil and gas
companies. The issue is whether SFAS No. 142 regulates registrants to classify the costs
of mineral rights held under lease or other contractual arrangement associated with
extracting oil and gas as intangible assets in the balance sheet, apart from other
capitalized oil and gas property owned and provide specific footnote disclosures.
Historically, the Company had included the costs of such mineral rights associated with
extracting oil and gas as a component of oil and gas properties. If it is ultimately
determined that SFAS No. 142 requires oil and gas companies to classify cost of mineral
rights held under lease or other contractual arrangement associated with extracting oil
and gas as a separate intangible asset line item on the balance sheet, the Company would
be required to reclassify approximately $453,000 at September 30, 2003 and $346,000 at
December 31, 2002, respectively, out of oil and gas properties and into a separate
intangible asset line item. The Company’s cash flows and results of operations would
not be affected since such intangible assets would continue to be depleted and amortized
for impairment in accordance with full cost accounting rules. Further, the Company does
not believe the classification of the cost of mineral rights associated with extracting
oil and gas as intangible assets would have any impact on compliance with covenants under
its debt agreements.
|
| |
In
June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset
Retirement Obligations “SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement cost. This statement requires companies to record the present
value of obligations associated with the retirement of tangible long-lived assets in the
periods in which it is incurred. The liability is capitalized as part of the related
long-lived assets carrying amount. Over time, accretion of the liability is recognized as
an operating expense and the capitalized cost is depreciated over the expected useful life
of the related asset. The Company’s asset retirement obligations relate primarily to
the plugging, dismantlement, removal site reclamation and similar activities of its oil
and gas properties. Prior to adoption of this statement, such obligations were accrued
ratably over the productive lives of the assets through its depreciation, depletion and
amortization for oil and gas properties without recording a separate liability for such
amounts. The impact of applying this statement as of January 1, 2003 and September 30,
2003 is discussed in footnote 10.
|
| |
In
April 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission
of SFAS No. 4, 44, 64, Amendment of SFAS No. 13, and Technical Corrections”
(“SFAS 145”). SFAS 4, which was amended by SFAS 64, required all gains and
losses from the extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result of SFAS 145, the
criteria in Accounting Principles Board opinion 30 will now be used to classify those
gains and losses. SFAS 13 was amended to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback transactions.
The adoption of SFAS 145 will not have a current impact on the Company’s consolidated
financial statements.
|
| |
In
July 2002, FASB issued SFAS No. 146, Accounting for Cost Associated with Exit or Disposal
Activities. The standard requires companies to recognize cost associated with exit or
disposal activities when they are incurred rather than at the date of commitment to an
exit or disposal plan. Examples of cost covered by the standard include lease termination
costs and certain employee severance costs that are associated with restructuring,
discontinued operation, plant closing, or other exit or disposal activity. Previous
accounting guidance was provided by EITF Issue No. 94-3, “Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring).” Statement 146 replaces Issue 94-3.
Statement 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company does not currently have any plans for exit or
disposal activities, and therefore does not expect this standard to have a material effect
on the Company’s consolidated financial statements upon adoption.
|
| |
In
November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45.
“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others”, which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The disclosure
requirements are effective for financial statements issued after December 15, 2002 and
here cognition/measurement requirements are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The application of the requirements
of FIN 45 did not have an impact on the Company’s financial position or results of
operations.
|
| |
In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based compensation
— Transition and Disclosure — an amendment of FASB Statement No. 123
(“Statement 148”). This amendment provides two additional methods of transition
for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. Additionally, more prominent disclosures in both annual and interim
financial statements are required for stock-based employee compensation. The transition
guidance and annual disclosure provisions of Statement 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning after
December 15, 2002. The adoption of Statement 148 did not have a material impact on the
Company’s consolidated financial statements.
|
| |
In
January 2003, the FASB issued FASB Interpretation No. (FIN) 46, “Consolidation of
Variable Interest Entities.” This interpretation of Accounting Research Bulletin No.
51 “Consolidated Financial Statements” consolidation by business enterprises of
variable interest entities, which possess certain characteristics. The Interpretation
requires that if a business enterprise has a controlling financial interest in a variable
interest entity, the assets, liabilities, and results of the activities of the variable
interest entity must be included in the consolidated financial statements with those of
the business enterprise. This Interpretation applies immediately to variable interest
entities created after January 31, 2003 and to variable interest entities in which an
enterprise obtains an interest after that date. The Company does not have any ownership in
any variable interest entities.
|
| |
In
May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150
requires three types of freestanding financial instruments to be classified as liabilities
in statements of financial position. One type is mandatory redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets. A second
type, which includes put options and forward purchase contracts, involves instruments that
do or may require the issuer to buy back some of its shares in exchange for cash or other
assets. The third type of instrument is obligations that can be settled with shares, the
monetary value of which is fixed, tied solely or predominately to a variable such as a
market index, or varies inversely with the value of the issuer’s shares. The majority
of the guidance in SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. In accordance with SFAS No. 150, the Company
adopted this standard on July 1, 2003. Adoption of SFAS No. 150 did not have a material
impact on the Company’s consolidated financial position and results of operations.
|
(5) Letter of Credit
Agreement
| |
On
November 8, 2001, the Company signed a credit facility with the Energy Finance Division of
Bank One, N.A. in Houston, Texas whereby Bank One extended to the Company a revolving line
of credit of up to $35 million. The initial borrowing base under the facility was $10
million. The interest rate is the Bank One base rate plus one-quarter percent.
|
| |
On
November 9, 2001, funds from this credit line were used to (1) refinance existing
indebtedness on the Company’s Kansas properties, (2) to repay the internal financing
provided by directors and shareholders on the Company’s completed 65-mile Tennessee
intrastate pipeline system (3) to repay a note payable to Spoonbill, Inc. (4) to repay a
purchase money note due to M.E. Ratliff, who at the time was the Company’s chief
executive officer and Chairman of the Board of Directors, for purchase by the Company of a
drilling rig and related equipment, (5) to repay in full the remaining principal of the
working capital loan due December 31, 2001 to Edward W.T. Gray III, who at that time was a
director of the Company. All of these obligations incurred interest at a rate
substantially greater than the rate being charged by Bank One under the Credit facility.
|
| |
On
April 5, 2002, the Company received a notice from Bank One stating that it had
redetermined and reduced the borrowing base under the Credit Agreement by $6,000,000 to
$3,101,766. Bank One demanded that the Company pay the $6,000,000 within thirty days of
the notice. The Company filed a lawsuit in Federal Court to prevent Bank One from
exercising any rights under the Credit Agreement. The Company has been paying $200,000 per
month toward the outstanding balance of the credit facility and any accrued interest until
this situation is resolved. See note 2.
|
(6)
Supplemental Disclosure of Non Cash Investing and Financing Activities:
| |
During
the three months ended March 31, 2003, the Company converted $60,000 of debt and $9,600 of
accrued interest owed to holders of convertible notes into 60,528 shares of common stock.
|
| |
During
the six months ended June 30, 2003 the Company converted $170,309 of accrued dividends
payable into 154,824 shares of common stock.
|
| |
During
the three months ended March 31, 2003, the Company issued 55,000 shares of common stock
for payment for consulting services performed in the amount of $70,000.
|
| |
During
the three months ended March 31, 2003, the Company donated 3,571 shares of stock as a
charitable contribution valued at $5,710.
|
| |
During
the three months ended March 31, 2003 the Company capitalized $260,191 into oil and gas
properties associated with estimated future asset retirement obligations.
|
| |
During
the three months ended September 30, 2003 the Company issued 10,000 shares of common stock
for a litigation settlement. The stock value on date of issue was $16,400.
|
(7) Notes Payable
| |
On
February 3, 2003 and February 28, 2003, Dolphin Offshore Partners, LP which owns more than
10% of the Company’s outstanding common stock and whose general partner, Peter E.
Salas, is a Director of the Company, loaned the Company the sum of $250,000 on each such
date (cumulatively, $500,000) which the Company used to pay the principal and interest due
to Bank One for February and March 2003 and for working capital needs. On May 20, 2003 an
additional loan of $834,000 was loaned by a combination of Dolphin ($750,000) and Jeffrey
R. Bailey who is a Director and President ($84,000) of the Company. On August 6, 2003 an
additional loan of $150,000 was loaned by Dolphin. Each of these loans is evidenced by a
separate promissory note each bearing interest at the rate of 12% per annum, with payments
of interest only payable quarterly and the principal balance payable on January 4, 2004.
Each of the February and March 2003 promissory notes is secured by an undivided 10%
interest in the Company’s pipelines. The May 20, 2003 loans provides Dolphin with a
30% interest and Bailey with a 3.36% interest in the Company’s pipelines. The August
note provides Dolphin with a 6% interest in the Company’s pipelines.
|
(8) Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period’s
presentation.
(9) Law Suit Settlement
| |
On
April 2, 2003 and by agreed order filed May 5, 2003, all claims were settled and the
lawsuit was dismissed in C.H. Fenstermaker & Associates, Inc. v. Tengasco, Inc.: No.
3:01-CV-283, in the United States District Court for the Eastern District of Tennessee, at
Knoxville. The settlement provides that the amount claimed to be owed by the Company to
Caddum was reduced to $297,000 which is to be paid by note due May 1, 2004, with interest
only payable monthly at an annual interest rate of 4.75 percent.
|
(10) Cumulative Effect of
a Change In Accounting Principle
| |
Effective
January 1, 2003, the Company implemented the requirements of Statement of Financial
Accounting Standards No. 143 (SFAS 143), “Accounting for Asset Retirement
Obligations”. Among other things, SFAS 143 requires entities to record a liability
and corresponding increase in long-lived assets for the present value of material
obligations associated with the retirement of tangible long-lived assets. Over the passage
of time, accretion of the liability is recognized as an operation expense and the
capitalized cost is depleted over the estimated useful life of the related asset.
Additionally, SFAS No. 143 requires that upon initial application of these standards, the
Company must recognize a cumulative effect of a change in accounting principle
corresponding to the accumulated accretion and depletion expense that would have been
recognized had this standard been applied at the time the long-lived assets were acquired
or constructed. The Company’s asset retirement obligations relate primarily to the
plugging, dismantling and removal of wells drilled to date.
|
| |
Using
a credit-adjusted risk fee rate of 12%, an estimated useful life of wells ranging from
30-40 years, and estimated plugging and abandonment cost ranging from $5,000 per well to
$10,000 per well, the Company has recorded a non-cash charge related to the cumulative
effect of a change in accounting principle of $351,204 in its statement of operations. Oil
and gas properties were increased by $260,191, which represents the present value of all
future obligations to retire the wells at January 1, 2003, net of accumulated depletion on
this cost through that date. A corresponding obligation totaling $611,395 has also been
recorded as of January 1, 2003.
|
| |
For
the nine month period ended September 30, 2003, the Company recorded accretion and
depletion expenses of $77,952 associated with this liability and its corresponding asset.
These expenses are included in depletion, deprecation, and amortization in the
consolidated statements of loss. Had the provisions of this statement been reflected in
the financial statements for the year ended December 31, 2002, an asset retirement
obligation of $476,536 would have been recorded as of January 1, 2002.
|
| |
The
following is a roll-forward of activity impacting the asset retirement obligation for the
nine months ended September 30, 2003:
|
|
|
| Balance, January 1, 2003: |
|
|
$ | 611,395 |
|
| Accretion expense through September 30, 2003 | | |
| 55,026 |
|
|
| |
| Balance, September 30, 2003 | | |
$ | 666,421 |
|
|
| |
ITEM
2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
b.Results of Operations
and Financial Condition
Kansas
| |
During
the first nine months of 2003, the Company produced and sold 94,782 barrels of oil and
196,373 Mcf of natural gas from its Kansas Properties comprised of 149 producing oil wells
and 59 producing gas wells. The first nine months production of 94,782 barrels of oil
compares to 106,683 barrels produced in the first nine months of 2002. The first nine
months production of 196,373 Mcf of gas compares to 214,859 Mcf produced in the first nine
months of 2002. In summary, the first nine months production reflected expected continued
stable production levels from the Kansas Properties, which have been in production for
many years. The decrease in production reflects a normal decline curve for the Kansas
properties. This decline has not been offset by additional drilling and well work-overs
due to the Bank One litigation. The revenues from the Kansas properties were $2,959,430 in
the first nine months of 2003 as compared to $2,438,136 in 2002. The increase in revenues
is due to a significant increase in the price of oil and gas for 2003.
|
Tennessee
| |
During
the first nine months of 2003, the Company produced gas from 23 wells in the Swan Creek
field, which it sold to its two industrial customers in Kingsport, Tennessee, BAE SYSTEMS
Ordnance Systems Inc. as operator of the Holston Army Ammunition Plant (“BAE”)
and Eastman Chemical Company (“Eastman”).
|
| |
Natural
gas production from the Swan Creek field for the first nine months of 2003 was an average
of 1.195 million cubic feet per day during that period as compared to 2.114 million cubic
feet per day in the first nine months of 2002. The first nine months production reflected
expected natural decline in production from the existing Swan Creek gas wells which were
first brought into production in mid-2001 upon completion of the Company’s pipeline.
This natural decline is normal for any producing well, and this decline as experienced on
existing wells in Swan Creek was not unexpected; however, volumes were not replaced as
expected. In order for overall field production to remain steady or grow, new wells must
be brought online. Any of the new wells drilled by the Company would also experience the
same harmonic (i.e. a relatively steep initial decline curve followed by longer periods of
relatively flat or stable production) decline as does every natural well in a formation
similar to the Knox formation, so continuous drilling is vital to maintaining or
increasing earlier levels of production. No new gas wells have been drilled by the Company
to date in 2003 because it does no have the funds necessary for such drilling, due to the
destabilized lending arrangements caused by the actions of Bank One and ongoing litigation
regarding that matter. The Company anticipates that the natural decline of production from
existing wells is now predictable in Swan Creek, that the total volume of the
Company’s reserves remains largely intact, and that these reserves can be extracted
through existing wells and also by steady additional drilling brought on by reliable
financial arrangements to fund drilling. Upon conclusion of the Bank One litigation, the
Company is hopeful that additional or replacement financing may more easily be obtainable
to allow drilling to increase; however, no assurances can be made that such financing will
be obtained. See, Liquidity and Capital Resources discussion, below.
|
Comparison of the Nine
Months Ending September 30 2003 and 2002
| |
The
Company recognized $5,053,454 in oil and gas revenues from its Kansas Properties and the
Swan Creek Field during the first nine months of 2003 compared to $4,059,165 in the first
nine months of 2002. The increase in revenues was due to an increase in price from oil and
gas sales. Oil prices to date in 2003 have averaged $28.60 per barrel in 2003 as compared
to $22.98 in 2002. Gas prices to date in 2003 have averaged $5.31 per Mcf in 2003 as
compared to $2.89 for 2002. The Swan Creek Field produced 322,739 Mcf and 570,883 Mcf in
the first nine months of 2003 and 2002, respectively. This decrease was due to natural
declines in production which could not be offset as the Company did not have the funds to
continue drilling new wells, due to it’s dispute with it’s primary lender, Bank
One NA. The decrease in pipeline transportation revenues is directly related to the
decrease in gas volumes.
|
| |
The
Company realized a net loss attributable to common shareholders of $2,248,772 (($.19) per
share of common stock), during the first nine months of 2003 compared to a net loss in the
first nine months of 2002 to common shareholders of $2,820,539 (($.26) per share of common
stock). A non-cash charge of $351,204 was recognized as a cumulative effect of a change in
accounting principle during the first quarter of 2003 relating to the implementation of
SFAS 143.
|
| |
Production
costs and taxes in the first nine months of 2003 of $2,571,898 were consistent with
production costs and taxes of $2,084,597 in the first nine months of 2002. The difference
of $487,301 was due to a reclassification of insurance cost relating to field activities
of $148,098 from G&A to production costs. The increase in production costs in 2003 was
also due to the fact that the Company’s field personnel cost was capitalized as the
Company was drilling new wells in 2002, as compared to 2003 when all employees were
working to maintain production. Field salaries in Swan Creek were $209,563 in the first
nine months of 2003. The remaining increase is due to increased property taxes on the
pipeline because it has been assessed at a higher value after completion.
|
| |
Depreciation,
Depletion, and Amortization expense for the first nine months of 2003 was $1,887,333
compared to $1,731,182 in the first nine months of 2002. The December 31, 2002, Ryder
Scott reserve reports were used as a basis for the 2003 estimate. The Company reviews its
depletion analysis and industry oil and gas prices on a quarterly basis to ensure that the
depletion estimate is reasonable. The depletion taken in the first nine months of 2003 was
$1,072,926 as compared to $1,019,138 in the first nine months of 2002. The Company also
amortized $153,633 of loan fees relating to the Bank One note and convertible notes, in
2003 as compared to $129,540 in 2002. The remaining increase relates to the implementation
of SFAS No. 143 as explained in footnote 10.
|
| |
During
the first nine months the Company reduced it general and administrative costs
significantly from 2002 by the amount of $415,699. Management has made an effort of
control cost in every aspect of its operations. Some of these cost reductions included the
closing of the Company’s New York office and a reduction in personnel from 2002
levels. The Company’s public relation costs were reduced by $146,967 from 2002, as
the Company continues cost cutting measures.
|
| |
Professional
fees, in the first nine months of 2003 have remained at a high level, primarily due to
costs incurred for legal and accounting services as a result of the Bank One lawsuit and
the class action lawsuit.
|
| |
Dividends
on preferred stock have increased from $372,595 in 2002 to $402,583 in 2003 as a result of
the increase in the amount of preferred stock outstanding from preferred stock sold
pursuant to private placements during the second quarter of 2002.
|
Comparison of the
Quarters Ending September 30 2003 and 2002
| |
The
Company recognized $1,599,461 in oil and gas revenues from its Kansas Properties and the
Swan Creek Field during the third quarter of 2003 compared to $1,507,308 in the third
quarter of 2002. The increase in revenues was due to an increase in price from oil and gas
sales. Oil prices to date in 2003 averaged $27.82 per barrel in 2003 as compared to $25.77
in 2002. Gas prices to date in 2003 averaged $4.71 per Mcf in 2003 as compared to $3.06
for 2002. The Swan Creek Field produced 115,683 Mcf and 162,290 Mcf in the third quarter
of 2003 and 2002, respectively. This decrease was due to natural declines in production
which could not be offset as the Company did not have the funds to continue drilling new
wells, due to it’s dispute with it’s primary lender, Bank One. The decrease in
pipeline transportation revenues is directly related to the decrease in gas volumes.
|
| |
The
Company realized a net loss attributable to common shareholders of $642,441 (($.05) per
share of common stock) during the third quarter of 2003 compared to a net loss in the
third quarter of 2002 to common shareholders of $856,074 (($.08) per share of common
stock).
|
| |
Production
costs and taxes in the third quarter of 2003 of $944,019 increased from $815,293 in the
third quarter of 2002. The increase in production cost in 2003 was also due to the fact
that part of the Company’s field personnel cost was capitalized as the Company was
drilling new wells in 2002, as compared to 2003 when all employees were working to
maintain production. Field salaries in Swan Creek were $57,345 in the third quarter of
2003. The remaining increase relates to a higher property tax on the Company’s
completed pipeline.
|
| |
Depreciation,
Depletion, and Amortization expense for the third quarter of 2003 was $628,195 compared to
$756,486 in the third quarter of 2002. The December 31, 2002, Ryder Scott reserve reports
were used as a basis for the 2003 estimate. The Company reviews its depletion analysis and
industry oil and gas prices on a quarterly basis to ensure that the depletion estimate is
reasonable. The depletion taken in the third quarter of 2003 was $357,642 as compared to
$519,138 in the third quarter of 2002. The Company also amortized $51,211 of loan fees
relating to the Bank One note and convertible notes, in 2003 as compared to $43,180 in
2002.
|
| |
During
the third quarter the Company reduced its general and administrative costs significantly
from 2002 by the amount of $100,035. Management has made an effort to control costs in
every aspect of its operations. Some of these cost reductions included the closing of the
Company’s New York office and a reduction in personnel from 2002 levels. The
Company’s public relations costs were reduced by $14,855 from 2002, as the Company
continues cost cutting measures.
|
| |
Professional
fees, in the third quarter of 2003 have remained at a high level, primarily due to cost
incurred for legal and accounting services as a result of the Bank One lawsuit and the
class action against the Company.
|
Liquidity and Capital
Resources
| |
On
November 8, 2001, the Company signed a credit facility agreement (the “Credit
Agreement”) with the Energy Finance Division of Bank One, in Houston Texas. The
Company instituted litigation in May 2002 based on certain actions taken by Bank One under
the agreement.
|
| |
In
November 2002, the Company and Bank One concluded a series of meetings and correspondence
by reaching preliminary agreement upon the basic terms of a potential settlement. Any
settlement is conditioned upon execution of final settlement documents, and the parties
agreed to attempt to close the settlement by November 29, 2002. The principal element of
the settlement proposal is for the Bank and the Company to enter into an amended and
restated agreement for a new term loan to replace the prior revolving credit facility. As
of the date of this report, the Company and Bank One continue to negotiate the terms of a
mutually satisfactory settlement agreement.
|
| |
Even
if the Company concludes a settlement with Bank One, the Company does not anticipate that
it will be able to borrow any additional sums from Bank One. To fund additional drilling
and to provide additional working capital, the Company would be required to pursue other
options. Such options include debt financing, sale of equity interests in the Company, a
joint venture arrangement, and/or the sale of oil and gas interest. The inability of the
Company to obtain the necessary cash funding on a timely basis will have an unfavorable
effect on the Company’s financial condition and will require the Company to
materially reduce the scope of its operating activities.
|
| |
The
harmful effects upon operations of the Company caused by the actions of Bank One and the
ongoing litigation with Bank One have been dramatic. First, the action of Bank One had the
effect of totally cutting off any additional funds to the Company to support Company
operations. Further, the funds loaned to the Company by Bank One have been used to
refinance the Company’s indebtedness and no funds were then available to pay this
large repayment obligation to Bank One, even if such action by the Bank was proper, which
the Company has vigorously and continually denied. The principal reason the Company had
entered into the Bank One credit agreement was to provide for additional funds to promote
the growth of the Company. Consequently, as a result of Bank One’s unwarranted
actions no additional funds under the credit facility agreement have been available for
additional drilling that the Company had anticipated performing in the Swan Creek Field in
2002 and 2003, which were critical to the development of that Field. In order for overall
field production to remain steady or grow in a field such as the Swan Creek Field, new
wells must be brought online. Since 2002 only two gas wells have been added by the Company
due to the destabilized lending arrangements caused by the actions of Bank One and ongoing
litigation.
|
| |
Second,
the existence of the dispute with Bank One, compounded by the fact that an effect of Bank
One’s action was to cause the Company’s auditors to indicate that their was an
uncertainty over the Company’s ability to continue as a going concern, has
significantly discouraged other institution lenders from considering a variety of
additional or replacement financing options for drilling and other purposes that may have
ordinarily been available to the Company. Third, the dispute has caused Bank One to fail
grant permission under the existing loan agreements with the Company to permit the Company
to formulate drilling programs involving potential third party investors that may have
permitted additional drilling to occur. Finally, the dispute has caused the Company to
incur significant legal fees to protect the Company’s rights.
|
| |
Although
no assurances can be made, the Company believes that it will either be able to resolve the
Bank One dispute or obtain additional or replacement financing to allow drilling to
increase, and once new wells are drilled, production from the Swan Creek Field will
increase. However no assurances can be made that such financing will be obtained or that
overall produced volumes will increase.
|
| |
Similarly,
when funding for additional drilling becomes available, the Company plans to drill wells
in five new locations it has identified in Ellis and Rush Counties, Kansas on its existing
leases in response to drilling activity in the area establishing new areas of oil
production. Although the Company successfully drilled the Dick No. 7 well in Kansas in
2001 and completed the well as an oil well, it has not been able to drill any new wells in
Kansas in 2002 or 2003 due to lack of funds available for such drilling caused by the Bank
One situation. As with Tennessee, the Company is hopeful that once the Bank One matter is
resolved it will be able to resume drilling and well work-overs in Kansas to maximize
production from the Kansas Properties.
|
Critical Accounting
Policies
| |
The
methods, estimates and judgments the Company’s management uses in applying Company
accounting policies may have a significant effect on the results the Company reports in
its financial statements. The estimates and judgments in applying those accounting
policies which may have the most significant effect on the Company’s financial
statements and operating results include: determinations of impairment of long-lived
assets. Please refer to “Management’s Discussion and Analysis of Financial
Condition Critical Accounting Policies” in the Company’s Annual Report on Form
10-K for the year ended December 31, 2002, for a more complete description of the
Company’s critical accounting policies.
|
ITEM 3 QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Commodity Risk
| |
The
Company’s major market risk exposure is in the pricing applicable to its oil and gas
production. Realized pricing is primarily driven by the prevailing worldwide price for
crude oil and spot prices applicable to natural gas production. Historically, prices
received for oil and gas production have been volatile and unpredictable and price
volatility is expected to continue. Monthly oil price realizations ranged from a low of
$18.56 per barrel to a high of $27.49 per barrel during 2002. Gas price realizations
ranged from a monthly low of $1.91 per Mcf to a monthly high of $4.01 per Mcf during the
same period.
|
Interest Rate Risk
| |
At
December 31, 2002, the Company had debt outstanding of approximately $9.9 million. The
interest rate on the revolving credit facility of $7.5 million is variable based on the
financial institution’s prime rate plus 0.25%. The remaining debt of $2.4 million has
fixed interest rates ranging from 6% to 11.95%. As a result, the Company’s annual
interest cost in 2002 fluctuated based on short term interest rates on approximately 78%
of its total debt outstanding at December 31,2002. The impact on interest expense and the
Company’s cash flows of a 10% increase in the financial institution’s prime rate
(approximately 0.5 basis points) would be approximately $32,000; assuming borrowed amounts
under the credit facility remain at $7.5 million. The Company did not have any open
derivative contracts relating to interest rates at September 30, 2003.
|
Forward-Looking
Statements and Risk
| |
Certain
statements in this report, including statements of the future plans, objectives, and
expected performance of the Company, are forward-looking statements that are dependent
upon certain events, risks and uncertainties that may be outside the Company’s
control, and which could cause actual results to differ materially from those anticipated.
Some of these include, but are not limited to, the market prices of oil and gas, economic
and competitive conditions, inflation rates, legislative and regulatory changes, financial
market conditions, political and economic uncertainties of foreign governments, future
business decisions, and other uncertainties, all of which are difficult to predict.
|
| |
There
are numerous uncertainties inherent in estimating quantities of proved oil and gas
reserves and in projecting future rates of production and the timing of development
expenditures. The total amount or timing of actual future production may vary
significantly from reserves and production estimates. The drilling of exploratory wells
can involve significant risks, including those related to timing, success rates and cost
overruns. Lease and rig availability, complex geology and other factors can also affect
these risks. Additionally, fluctuations in oil and gas prices, or a prolonged period of
low prices, may substantially adversely affect the Company’s financial position,
results of operations and cash flows.
|
ITEM
4 CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures
| |
The
Company’s Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company’s disclosure controls and procedures (as such is defined
in Rules 13 a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as the end of the period covered by this quarterly report
(the “Evaluation Date”). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, the Company’s disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to the
Company (including the Company’s consolidated subsidiaries) required to be included
in the Company’s reports filed or submitted under the Exchange Act.
|
Changes in Internal
Controls
| |
During
the period covered by this quarterly report, there have not been any changes in the
Company’s internal controls that have materially affected or are reasonably likely to
materially affect, The Company's internal controls over financial reporting.
|
PART
II OTHER INFORMATION
ITEM 1 LEGAL
PROCEEDINGS
| |
To
the knowledge of management, no federal, state or local governmental agency is presently
contemplating any proceeding against the Company that would have a result materially
adverse to 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 had a material interest
adverse to the Company in any proceeding.
|
|
1.
Tengasco Pipeline Corporation v. James E. Larkin and Kathleen A.
O’Connor, No. 4929J, Circuit Court for Hawkins County, Tennessee. This
was a condemnation proceeding brought by Tengasco Pipeline Corporation to
acquire a right of way for a 3000-foot long portion of Phase I of the
Company’s pipeline in Hawkins County, TN. The right of way was appraised at
$4,000. The landowners contested the appraised value of the property and claimed
incidental damages to fishponds there, despite a lack of evidence of any fish
farm business actually having been operated on the property or of any losses to
such a business. By counterclaim, the landowners sought $867,585 in compensatory
damages and $2.6 million in punitive damages under various legal theories. The
Court ordered the parties to conduct a second mediation session, which session
occurred on June 2, 2003. At the mediation, settlement was reached whereby the
Company agreed to pay the sum of $20,000 to plaintiffs and plaintiff’s
counsel, and issue to them in the aggregate 10,000 shares of restricted shares
of the Company’s common stock and warrants to purchase 20,000 shares of the
Company’s common stock for three years at 52 cents per share, the closing
price on the settlement date. Plaintiffs have executed a right of way agreement,
all settlement payments including the issuance of stock and warrants have been
made, and the litigation was dismissed by agreed order dated July 17, 2003. |
ITEM
2 CHANGES IN SECURITIES AND USE OF PROCEEDS
| |
On
August 6, 2003 Dolphin Offshore Partners, LP (“Dolphin”) which owns more than
10% of the Company’s outstanding common stock and whose general partner is Peter E.
Salas, a Director of the Company, loaned the Company the sum of $150,000 for which the
Company used for working capital. This loan is evidenced by a separate promissory note
bearing interest at the rate of 12% per annum, with payments of interest only payable
quarterly and the principal balance payable on January 4, 2004, which are secured by an
undivided 6 % interest in the Company’s Tennessee pipelines.
|
| |
During
the quarter ending September 30, 2003, a Director, Charles M. Stivers and an employee of
the Company, Robert M. Carter, exercised options granted to them pursuant to the Tengasco,
Inc. Stock Incentive Plan and purchased 24,000 and 12,000 the number of shares of the
Company’s common stock, respectively at the exercise price of $0.50 per share, which
was the market price of the stock on the date the options were granted
|
| |
On
October 17, 2003, the Company filed a registration statement with the Securities and
Exchange Commission on Form S-1 with respect to a proposed rights offering to existing
shareholders as of the record date, which has not been determined. The rights offering
will provide that the holders of the Company’s approximately 12 million outstanding
shares of common stock may purchase two shares of common stock for each share
held. The offer includes an over-subscription privilege whereby participating
shareholders may purchase shares that were offered but not purchased by other
shareholders.
|
| |
The
right offering is being made in order to reduce debt and increase shareholder
equity. The proceeds from the offering will be used to reduce the
Company’s non-bank indebtedness, to reduce the Company’s indebtedness to its
bank lender, and/or for working capital purposes. The subscription price, record
date, offering period, issuance date and other details of the proposed offering have not
yet been determined, although the Company anticipates that the offering will commence
within 60-90 days from the date of filing of the registration statement. When the
Securities and Exchange Commission declares the registration statement effective, the
prospectus and related documents will be mailed to shareholders of record and will also be
made available, as applicable, for distribution to beneficial owners of the Company’s
common stock. None of the Company, its board of directors or any committee of its
board of directors is making any recommendation to shareholders as to whether to exercise
their subscription rights.
|
ITEM
3 DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
| |
Exhibit 31: Certifications of Richard T. Williams, Chief Executive Officer, and Mark A. Ruth, Chief Financial Officer, pursuant
to Section 302 of the Sarbanes- Oxley Act of 2002. |
| |
Exhibit 32: Certifications of Richard T. Williams, Chief Executive Officer, and Mark A. Ruth, Chief Financial Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
| |
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant duly caused
this report to be signed on its behalf by the undersigned hereto duly authorized.
|
Dated:
November 13, 2003
TENGASCO, INC.
|
By : s/ Richard T. Williams
Richard T. Williams
Chief Executive Officer |
|
By : s/ Mark A. Ruth
Mark A. Ruth
Chief Financial Officer |
Exhibit
31
CERTIFICATION
I,
Richard T. Williams, certify pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of Tengasco, Inc. and
Subsidiaries. |
| 2. |
Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; |
| 3. |
Based on my knowledge, the financial statements, and other information included
in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, m and
for, the periods presented in this quarterly report; |
| 4. |
The Registrant’s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules (13a-15e and 15d-15e) for the Registrant t and we have: |
|
(a)
designed under our supervision to ensure that material information relation to
the Registrant, including its designed such disclosure controls and procedures
or caused such disclosure controls and procedures to be consolidated
subsidiaries, is made know to us by others with those entities, particularly
during the period in which this quarterly report is being prepared: |
|
(b)
evaluated the effectiveness of the Registrant’s disclosure controls and
procedures and presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; :and |
|
(c)
disclosed in this report any change in the registrant’s internal control
over financial reporting that the occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to
materially affect the registrant’s internal control over financial
reporting; and |
| 5. |
The Registrant’s other certifying officers and I have disclosed based on
our most recent evaluation of internal control over financial reporting to the
Registrant’s auditors and the audit committee of the Registrant’s
board of directors) or persons performing the equivalent functions); |
|
(a)
all significant deficiencies and material weaknesses the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the Registrant’s ability to record, process, summarize and
report financial information; and |
|
(b)
any fraud, whether or not material that involves the management or other
employe4s who have a significant role in the Registrant’s internal control
over financial reporting. |
Dated:
November 13, 2003
|
By : s/ Richard T. Williams
Richard T. Williams
Chief Executive Officer |
Exhibit
31
CERTIFICATION
I,
Mark A. Ruth, certify pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of Tengasco, Inc. and
Subsidiaries. |
| 2. |
Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; |
| 3. |
Based on my knowledge, the financial statements, and other information included
in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, m and
for, the periods presented in this quarterly report; |
| 4. |
The Registrant’s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules (13a-15e and 15d-15e) for the Registrant t and we have: |
|
(a)
designed under our supervision to ensure that material information relation to
the Registrant, including its designed such disclosure controls and procedures
or caused such disclosure controls and procedures to be consolidated
subsidiaries, is made know to us by others with those entities, particularly
during the period in which this quarterly report is being prepared: |
|
(b)
evaluated the effectiveness of the Registrant’s disclosure controls and
procedures and presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; :and |
|
(c)
disclosed in this report any change in the registrant’s internal control
over financial reporting that the occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to
materially affect the registrant’s internal control over financial
reporting; and |
| 5. |
The Registrant’s other certifying officers and I have disclosed based on
our most recent evaluation of internal control over financial reporting to the
Registrant’s auditors and the audit committee of the Registrant’s
board of directors) or persons performing the equivalent functions); |
|
(a)
all significant deficiencies and material weaknesses the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the Registrant’s ability to record, process, summarize and
report financial information; and |
|
(b)
any fraud, whether or not material that involves the management or other
employe4s who have a significant role in the Registrant’s internal control
over financial reporting. |
Dated:
November 13, 2003
|
By : s/ Mark A. Ruth
Mark A. Ruth
Chief Financial Officer |
Exhibit
32
CERTIFICATION
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 I hereby certify that:
(J)
I have reviewed the Quarterly Report on Form 10-Q (i);
| (B) |
To the best of my knowledge this Quarterly Report on Form 10-Q (i) fully
complies with the requirements of section 13(a) or 15(d) of the Securities and
Exchange Act of 1934 (U.S.C. 78m(a) or 78o(d)); and, (ii) the information
contained in this Report fairly present, in all material respects, the financial
condition and results of operations of Tengasco, Inc. and its Subsidiaries
during the period covered by this report. |
Dated:
November 13, 2003
|
By : s/ Richard T. Williams
Richard T. Williams
Chief Executive Officer |
Exhibit
32
CERTIFICATION
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 I hereby certify that:
| (C) |
I have reviewed the Quarterly Report on Form 10-Q (i); |
| (B) |
To the best of my knowledge this Quarterly Report on Form 10-Q (i) fully
complies with the requirements of section 13(a) or 15(d) of the Securities and
Exchange Act of 1934 (U.S.C. 78m(a) or 78o(d)); and, (ii) the information
contained in this Report fairly present, in all material respects, the financial
condition and results of operations of Tengasco, Inc. and its Subsidiaries
during the period covered by this report. |
Dated:
November 13, 2003
|
By : s/ Mark A. Ruth
Mark A. Ruth
Chief Financial Officer |
