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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2003
Commission File No. 0-20975
Tengasco, Inc. and Subsidiaries
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(Exact name of small business issuer as specified in its charter)
Tennessee 87-0267438
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State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
603 Main Avenue, Suite 500, Knoxville, TN 37902
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(Address of principal executive offices)
(865-523-1124)
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(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: 11,935,614 common shares at March 31,
2003.
Transitional Small Business Disclosure Format (check one): Yes_____ No __X__
TENGASCO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
* Condensed Consolidated Balance Sheets as of March 31,
2003 (unaudited) and December 31, 2002 .................. 3-4
* Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 (unaudited) ........ 5
* Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 2003 (unaudited) ........... 6
* Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 (unaudited) ........ 7
* Notes to Condensed Consolidated Financial Statements .... 8-11
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ............................... 11-14
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK ............................ 14-15
ITEM 4. CONTROLS AND PROCEDURES ................................. 15-16
PART II. OTHER INFORMATION ....................................... 16
ITEM 1. LEGAL PROCEEDINGS ....................................... 16-17
ITEM 2. CHANGES IN SECURITIES AND USE OF
PROCEEDS ................................................ 17
* SIGNATURES .............................................. 18
* CERTIFICATIONS .......................................... 19-22
2
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2003 December 31, 2002
(Unaudited)
-------------- -----------------
Current Assets:
Cash and cash equivalents $ 176,620 $ 184,130
Investments 34,500 34,500
Accounts receivable, net 1,142,386 730,667
Participant receivable 71,850 70,605
Inventory 262,748 262,748
Current portion of loan fees, net 312,802 323,856
----------- -----------
Total current assets 2,000,906 1,606,506
Oil and gas properties, net (on the basis of
full cost accounting) 13,487,521 13,864,321
Completed pipeline facilities, net 15,573,375 15,372,843
Other property and equipment, net 1,616,202 1,685,950
Loan fees, net of accumulated amortization 0 40,158
Other 14,613 14,613
----------- -----------
$32,692,617 $32,584,391
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 2003 December 31, 2002
(Unaudited)
-------------- -----------------
Current liabilities
Current maturities of long-term debt $ 7,971,776 $ 7,861,245
Accounts payable-trade 1,335,530 1,396,761
Accrued interest payable 46,317 61,141
Accrued dividends payable 229,675 254,389
Current Long term debt to related parties 1,250,000 750,000
Other accrued liabilities 297,170 31,805
------------ ------------
Total current liabilities 11,130,468 10,355,341
Long term debt, less current maturities 451,443 1,256,209
------------ ------------
Total liabilities 11,581,911 11,611,550
------------ ------------
Preferred Stock
Cumulative convertible redeemable preferred;
redemption value $7,072,000 and $7,072,000;
70,720 and 70,720 shares outstanding; respectively 6,857,427 6,762,218
------------ ------------
Stockholders' Equity
Common stock, $.001 per value, 50,000,000 shares
authorized 11,951 11,460
Additional paid-in capital 42,791,007 42,237,276
Accumulated deficit (28,288,292) (27,776,726)
Accumulated other comprehensive loss (115,500) (115,500)
Treasury stock, at cost (145,887) (145,887)
------------ ------------
Total stockholders' equity 14,253,279 14,210,623
------------ ------------
$ 32,692,617 $ 32,584,391
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
For the Three For the Three
Months Ended Months Ended
March 31, 2003 March 31, 2002
(Unaudited) (Unaudited)
-------------- --------------
Revenue and other income
Oil and gas revenues $ 1,923,915 $ 1,175,444
Pipeline transportation revenues 47,504 77,707
Interest increase 184 1,038
------------ ------------
Total revenues and other income 1,971,603 1,254,189
Costs and other deductions
Production costs and taxes 769,909 723,799
Depletion, depreciation and amortization 604,958 487,348
Interest expense 153,356 153,367
General and administrative costs 511,337 640,230
Public Relations 4,779 --
Professional fees 209,426 117,313
------------ ------------
Total costs and other deductions 2,253,765 2,122,057
------------ ------------
Net loss (282,162) (867,868)
------------ ------------
Dividends on preferred stock (134,195) (112,458)
------------ ------------
Net loss attributable to common shareholders $ (416,357) $ (980,326)
------------ ------------
Net loss attributable to common shareholders
Per share basic and diluted $ (0.04) $ (0.09)
============ ============
Weighted average shares outstanding 11,764,321 10,642,541
------------ ------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Common Stock Additional Other
---------------------- Paid-in Comprehensive Accumulated
Shares Amount Capital Loss Deficit
---------- -------- ------------ ------------- -------------
Balance December 31, 2002 11,459,279 $ 11,460 $ 42,237,276 $(115,500) $(27,776,726)
Net Loss 0 0 0 (282,162)
Common Stock Issued in
Private Placements Net of
Related Expenses 227,275 227 249,773 0
Common Stock Issued in
Conversion of Debt 60,528 61 69,538 0
Common Stock Issued for
Preferred Dividend in Arrears 144,461 144 158,765
Common Stock Issued for
Charity 3,571 4 5,710
Retained Earnings-Accretion
of Issue Cost on Preferred
Stock (95,209)
Common Stock Issued for
Services 55,000 55 69,945 0
Dividends on Convertible
Redeemable Preferred Stock 0 0 0 (134,195)
---------- ------- ----------- --------- ------------
Net loss for the three months
ended March 31, 2003 11,950,114 $11,951 $42,791,007 $(115,500) $(28,288,292)
========== ======= =========== ========= ============
Treasury Stock
---------------------
Shares Amount Total
------ ---------- ------------
14,500 $ (145,887) $14,210,623
0 0 (282,162)
0 0 250,000
0 0 69,599
158,909
5,714
(95,209)
0 0 70,000
0 0 (134,195)
------ ---------- ------------
14,500 $(145,887) $14,253,279
====== ========== ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three For the three
Months Ended Months Ended
March 31, 2003 March 31, 2002
(Unaudited) (Unaudited)
-------------- --------------
Operating activities
Net loss $(282,162) $(867,868)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization 604,958 487,348
Charitable donation and services paid in stock 75,714 0
Changes in assets and liabilities
Accounts receivable (411,719) 100,994
Participant receivables (1,245) 0
Accounts payable-trade (61,231) (83,142)
Accrued interest payable (14,824) (889)
Other accrued liabilities (31,805) 0
Other 9,602 0
--------- ---------
Net cash used in operating activities (112,712) (363,557)
--------- ---------
Investing activities
Additions to property and equipment 0 (118,357)
Net additions to oil and gas properties 0 (365,475)
Net additions to pipeline facilities (37,362) (171,713)
Increase in restricted cash 0 (497)
Other 26,800 (14,949)
--------- ---------
Net cash used in investing activities (10,562) (670,991)
--------- ---------
Financing activities
Repayments of borrowings (634,236) (238,116)
Proceeds from borrowings 500,000 518,356
Dividends on convertible redeemable
preferred stock 0 (112,458)
Proceeds from private placements of
common stock 250,000 632,000
--------- ---------
Net cash provided by financing activities 115,764 799,782
--------- ---------
Net change in cash and cash equivalents (7,510) (234,766)
Cash and cash equivalents, beginning of period 184,130 393,451
--------- ---------
Cash and cash equivalents, end of period $ 176,620 $ 158,685
========= =========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited 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 three months ended March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2003. 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 $28,288,292 and a working capital deficit of $9,129,562 as of March 31, 2003.
During 2002, the Company was informed by its primary lender that the entire
amount of its outstanding credit facility was immediately due and payable, as
provided for in the Credit Agreement. 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 11,764,321 and 10,642,541 weighted average shares outstanding for the
quarters ended March 31, 2003 and 2002, respectively. During the three months
period ended March 31, 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.
(4) NEW ACCOUNTING PRONOUNCEMENTS:
In 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 period 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 capitalization 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. Management does not
believe that adoption of this standard has a material impact in financial
positions or results of operation.
In July 2002, FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires companies to
recognize costs 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 costs 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
8
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 the recognition/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 a
impact on our 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 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. We do not have any
ownership in any variable interest entities as of March 31, 2003. We will apply
the consolidation requirement of FIN 46 in future periods if we should own any
interest in any variable interest entity.
(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, which at the present time is
5.25%.
9
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.
(6) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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 three months ended March 31, 2003 the Company
converted $158,909 of accrued dividends payable into 144,461 shares of common
stock.
During the three months ending 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 ending March 31, 2003, the Company
donated 3,571 shares of stock as a charitable contribution valued at $5,713.
10
(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. 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 promissory note is secured by an
undivided 10% interest in the Company's Tennessee and Kansas 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 the Caddum lawsuit. 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.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Kansas
During the first quarter of 2003, the Company produced and sold
32,807 barrels of oil and 64,438 Mcf of natural gas from its Kansas Properties
comprised of 149 producing oil wells and 59 producing gas wells. January
production was 10,986 barrels of oil and 22,577 Mcf of gas; February production
was 10,621 barrels and 19,278 Mcf; and, March production was 11,200 barrels and
22,583 Mcf of gas. The first quarter production of 32,807 barrels of oil
compares to 35,806 barrels produced in the first quarter of 2002. The first
quarter production of 64,438 Mcf of gas compares to 76,849 Mcf produced in the
first quarter of 2002. In summary, the first quarter 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. The revenues from the Kansas
properties were $1,131,627 in the first quarter of 2003 as compared to $692,974
in 2002. The increase in revenues is due to an increase in the price of oil and
gas for 2003.
11
Tennessee
During the first quarter 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
quarter of 2003 was an average of 1.241 million cubic feet per day during that
period. The first quarter 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 as a result of additional drilling. 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 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 expects 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 QUARTERS ENDING MARCH 31 2003 AND 2002
The Company recognized $1,923,915 in oil and gas revenues from
its Kansas Properties and the Swan Creek Field during the first quarter of 2003
compared to $1,175,444 in the first quarter of 2002. The increase in revenues
was due to an increase in price from oil and gas sales. Oil prices averaged
$31.53 per barrel in 2003 as compared to $19.12 in 2002. Gas prices averaged
$6.41 per Mcf in 2003 as compared to $2.33 for 2002. The Swan Creek Field
produced 111,667 Mcf and 215,633 Mcf in the first 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 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 $416,357 (($0.04) per share of common stock) during the first
quarter of 2003 compared to a net loss in the first quarter of 2002 to common
shareholders of $980,326 (($0.09) per share of common stock).
Production costs and taxes in the first quarter of 2003 of
$769,902 were consistent with production costs and taxes of $723,799 in the
first quarter of 2002.
12
Depreciation, Depletion, and Amortization expense for the first
quarter of 2003 was $604,958 compared to $487,348 in the first 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 first quarter of 2003 was $350,000 as
compared to $250,000 in the first quarter of 2002. The Company also amortized
$51,211 of loan fees relating to the Bank One note and convertible notes.
During the first quarter the Company reduced its general and
administrative costs significantly ($128,893) from 2002. 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.
Professional fees, in the first quarter of 2003 have increased
dramatically ($92,113) from the first quarter of 2002, primarily due to costs
incurred for legal and accounting services as a result of the Bank One lawsuit.
Dividends on preferred stock have increased from $112,458 in 2002
to $134,195 in 2003 as a result of the increase in the amount of preferred stock
outstanding from new private placements occurring during the second quarter of
2002.
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,
N.A. in Houston Texas ("Bank One"). Litigation was instituted by the Company 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
would include debt financing, sale of equity interests in the Company, a joint
venture arrangement, the sale of oil and gas interests, etc. The inability of
the Company to obtain the necessary cash funding on a timely basis would have an
unfavorable effect on the Company's financial condition and would require the
Company to materially reduce the scope of its operating activities.
13
The harmful effects upon operations of the Company caused by the
actions of Bank One and the ongoing litigation with Bank One in 2002 have been
dramatic. First, the action of Bank One in April, 2002 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 had 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 were available in 2002 for additional drilling that the Company had
anticipated performing in the Swan Creek Field and 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. Only two gas wells were added by the Company in 2002 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 institutional 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 to 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 that 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 was not able to drill any new wells in
Kansas in 2002 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 workovers in
Kansas to maximize production from the Kansas Properties.
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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
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 costs 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 percent 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
March 31, 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.
15
ITEM 4 CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, President and our Chief
Financial Officer, with the participation of other members of senior management,
reviewed and evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of a date within 90 days before
the filing of this quarterly report on Form 10-Q. Based on this evaluation, the
Company's Chief Executive Officer, President and Chief Financial Officer
believe:
The Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in the reports
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms; and
The Company's disclosure controls and procedures were effective
to ensure that material information was accumulated and communicated to
management, including the Chief Executive Officer, President and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal
controls or, to their knowledge, in other factors that could significantly
affect these controls subsequent to the date of their evaluation, nor were there
any significant deficiencies or material weakness in internal controls. As a
result, no corrective actions were required or undertaken.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
(1). The Company and its subsidiary, Tengasco Pipeline
Corporation ("TPC"), were named as defendants in an action commenced on June 4,
2001 by C.H. Fenstermaker & Associates, Inc. ("Fenstermaker") in the United
States District Court for the Eastern District of Tennessee entitled C.H.
FENSTERMAKER & ASSOCIATES, INC. V. TENGASCO, INC., NO. 3:01-CV-283. The action
sought to recover approximately $365,000 in charges billed to TPC for
engineering services in connection with the planning and construction of Phase
II of the Company's pipeline. On June 25, 2001, the Company and TPC filed an
answer to the complaint denying liability, and counterclaiming against Caddum,
Inc. ("Caddum"), a division of Fenstermaker.. On February 27, 2003, the parties
reached an agreement in principle for the settlement of this action. The
settlement was concluded on April 2, 2003 and by agreed order filed May 5, 2003,
all claims were settled and the lawsuit was dismissed. 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. Each party is to bear its
own attorney's fees and court costs.
(2). TENGASCO PIPELINE CORPORATION V. JAMES E. LARKIN AND
KATHLEEN A. O'CONNOR, No. 4929J in the Circuit Court for Hawkins County,
Tennessee. This is a condemnation proceeding brought by Tengasco Pipeline
Corporation to acquire a temporary construction easement and permanent right of
way to maintain and operate a portion of Phase I of the Company's pipeline in
Hawkins County,
16
Tennessee. The court granted an order of possession to the Company in January,
1998 and the pipeline has been constructed across approximately 3,000 feet of
the property concerned in a rural and very steep locale. The Company has had the
right of way appraised at $4,000. The landowners, Mr. Larkin and Kathleen A. O
Connor who both live on the property, contest the appraised value of the
property and claim incidental damages to certain fish ponds located on their
property. The landowners, despite a lack of evidence of any fish raising or
aquaculture business actually being or having been operated on the premises or
of any actual losses to such business, have counterclaimed for $867,585 in
compensatory damages and $2.6 million in punitive damages arising from trespass
and other legal theories. The Court required the parties to attempt to mediate
this dispute and the mediation occurred in December, 2000. The parties were
unable to reach a mediated settlement and the matter had most recently been
scheduled for trial on January 29, 2003. The January 29, 2003 trial date was
continued by the Court to an unspecified future date. The Court has ordered the
parties to a second mediation session which will occur on June 2, 2003. If
settlement is not reached at mediation, the Company intends to vigorously defend
the allegations of the counterclaim because trial preparations have not
disclosed any fact that reasonably suggests a substantial adverse result in this
matter and the allegations of the counterclaim appear to be without any credible
basis.
All other legal proceedings disclosed in the Annual Report on
Form 10-K for the year ended December 31, 2002 remain materially unchanged at
March 31, 2003.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 8, 2003, Bill L. Harbert, a Director of the Company,
purchased 227,275 shares of the Company's Common Stock from the Company in a
private placement at a price of $1.10 per share. The proceeds from this sale
were used by the Company to pay the principal and interest due to Bank One for
January, 2003 and to provide working capital for the Company's operations.
On February 3, 2003 and February 28, 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 $250,000 on each such date which the
Company used to pay the principal and interest due to Bank One for February and
March 2003 and for working capital. 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 which are secured by an undivided 10% interest in the
Company's Tennessee pipelines.
17
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: May 20, 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
18
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.
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, 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-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within 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 as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date'); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
the Registrant's board of directors (or persons performing the equivalent
function);
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weakness in internal controls; and
(b) any fraud, whether or not material that involves the management or
other employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 20, 2003
/s/ Richard T. Williams
-----------------------------
Richard T. Williams
Chief Executive Officer
19
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.
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, 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-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within 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 as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date'); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
the Registrant's board of directors (or persons performing the equivalent
function);
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weakness in internal controls; and
(b) any fraud, whether or not material that involves the management or
other employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 20, 2003
/s/ Mark A. Ruth
-------------------------
Mark A. Ruth
Chief Financial Officer
20