U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 2001
Commission File No. 0-20975
Tengasco, Inc. and Subsidiaries
----------------------------------------------------------------
(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)
------------------------------------------------
(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: 9,960,326 common shares at September
30, 2001.
Transitional Small Business Disclosure Format (check one): Yes___ No _X_
This amendment on Form 10-Q/A amends the previously filed quarterly report on
Form 10-Q of Tengasco, Inc. and subsidiaries for the three month and nine month
periods ended September 30, 2001 to correct a change in the Company's depletion
estimate. The Company increased its depletion estimate by $562,000 due to
results disclosed in the reserve analysis which was based on the June 30, 2001
Ryder Scott report. Additionally, this Form 10-Q/A corrects a footing error
totaling $ 86,018 on the Statement of Cash Flows for the nine-month period ended
September 30, 2001.
TENGASCO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
* Condensed Consolidated Balance Sheets as of September 30,
2001 and December 31, 2000................................. 3-4
* Condensed Consolidated Statements of Loss for the three
and nine months ended September 30, 2001 and 2000.......... 5
* Condensed Consolidated Statements of Stockholders'
Equity for the nine months ended September 30, 2001........ 6
* Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000.............. 7
* Notes to Condensed Consolidated Financial Statements....... 8-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.......................................... 12-17
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK........................... 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES AND
USE OF PROCEEDS........................................ 19
ITEM 6. EXHIBITS AND 8-K REPORTS............................... 19
* Signature.................................................. 20
* Certifications............................................. 21-23
2
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2001 December 31, 2000
(Unaudited)
------------------ -----------------
Current Assets:
Cash and cash equivalents $ 918,947 $ 1,603,975
Trade accounts receivable, net 1,046,527 684,132
Accounts receivable 150,000 0
Well participants receivable 80,874 65,254
Other current assets 301,345 251,345
----------- -----------
Total current assets 2,497,693 2,604,706
Oil and gas properties, net (on the basis of full cost
accounting) 12,806,909 9,790,047
Completed pipeline facilities, net 14,704,636 4,200,000
Pipeline facilities, under construction, at cost 0 6,847,038
Property and equipment, net 1,626,651 1,677,432
Other 55,613 105,501
----------- -----------
$31,691,502 $25,224,724
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, 2001 December 31, 2000
(Unaudited)
------------------ -----------------
Current liabilities
Current maturities of long-term debt-related party $ 500,000 $ 500,000
Current maturities of long-term debt 2,514,648 1,608,486
Accounts payable-trade 952,836 1,016,462
Accrued interest payable 213,856 56,657
Accrued dividends payable 112,458 78,778
Accrued liabilities 60,588 52,640
------------ ------------
Total current liabilities 4,354,386 3,313,023
Long-term debt-related parties,
less current maturities 4,805,728 4,845,000
Long-term debt, less current maturities 1,276,405 2,263,599
------------ ------------
Total long-term debt 6,082,133 7,108,599
------------ ------------
Total liabilities 10,436,519 10,421,622
------------ ------------
Preferred Stock
Convertible redeemable preferred; redemption value
$5,622,900 and $3,938,900; 56,229 and 39,389
shares outstanding; respectively 5,622,900 3,938,900
------------ ------------
Stockholders'Equity
Common stock, $.001 par value, 50,000,000 shares
authorized; 9,960,326 and 9,295,558
shares outstanding; respectively 9,962 9,296
Common stock dividend distributable (498,016 shares) 498 0
Additional paid-in capital 38,445,159 25,941,709
Accumulated deficit (22,823,536) (15,086,803)
------------ ------------
Total stockholders' equity 15,632,083 10,864,202
------------ ------------
$ 31,691,502 $ 25,224,724
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
TENGASCO, INC. AND SUBSIDIAIRES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Oil and gas revenues $ 2,306,279 $ 1,666,583 $ 5,550,640 $ 4,116,778
Pipeline transportation revenues 127,479 -- 194,504 --
Equipment sales 150,000 0 150,000 0
------------ ------------ ------------ ------------
Total revenues 2,583,758 1,666,583 5,895,144 4,116,778
------------ ------------ ------------ ------------
Costs and other deductions
Production costs and taxes 1,112,471 664,526 2,463,401 1,920,087
Depletion, depreciation and amortization 779,551 63,000 1,048,008 189,000
Interest expense 248,328 95,686 577,342 299,844
General and administrative costs 763,569 679,479 2,567,876 1,794,501
Legal and accounting 58,436 78,983 321,916 278,124
------------ ------------ ------------ ------------
Total costs and other deductions 2,962,355 1,581,674 6,978,543 4,481,556
------------ ------------ ------------ ------------
Net income (loss) (378,597) 84,909 (1,083,399) (364,778)
------------ ------------ ------------ ------------
Dividends on preferred stock 112,458 66,845 278,725 178,778
------------ ------------ ------------ ------------
Net income (loss) attributable to common shareholders $ (491,055) $ 18,064 $ (1,362,124) $ (543,556)
------------ ------------ ------------ ------------
Net income (loss) attributable to common shareholders
Per share basic and diluted $ (0.05) $ 0.00 $ (0.13) $ (0.06)
------------ ------------ ------------ ------------
Weighted average shares outstanding 10,393,140 9,318,097 10,303,126 9,153,935
------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Common Stock Additional
-------------------------- Dividend Paid In Accumulated
Shares Amount Distributable Capital Deficit
------------ ------------ ------------- ------------ ------------
Balance December 31, 2000 9,295,558 $ 9,296 0 $ 25,941,709 $(15,086,803)
Common stock issued 0 0 498 6,374,111 (6,374,609)
with 5% stock dividend
Common stock issued in 358,733 359 0 3,640,840 0
private placements, net
Common stock issued on 33,872 34 0 221,967 0
conversion of debt
Common stock issued as a 1,159 1 0 14,776 0
charitable donation
Stock options exercised 258,657 259 0 2,180,768 0
Conversion of preferred stock
to common stock 12,347 13 0 70,988 0
Dividends on
convertible redeemable preferred stock 0 0 0 0 (278,725)
Net loss for the nine months
ended September 30, 2001 0 0 0 0 (1,083,399)
------------ --------- ------- ------------ ------------
Balance, September 30, 2001 9,960,326 $ 9,962 $ 498 $ 38,445,159 $(22,823,536)
============ ========= ======= ============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine For the Nine
Months Ended Months Ended
September 30, 2001 September 30, 2000
(Unaudited) (Unaudited)
----------- ------------------
Operating activities
Net loss $(1,083,399) $ (364,778)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depletion, depreciation and amortization 1,048,008 189,000
Compensation paid in stock options 55,200 0
Changes in assets and liabilities
Accounts receivable (528,015) (156,101)
Other current assets (50,000) (73,103)
Accounts payable (63,626) (232,661)
Accrued liabilities 7,948 (133,617)
Accrued Interest payable 157,199 0
----------- -----------
Net cash used in operating activities (456,685) (771,260)
----------- -----------
Investing activities
Net additions to oil and gas properties (3,871,362) (796,682)
Net additions to pipeline facilities and other
property and equipment (3,800,325) (3,060,741)
Decrease in restricted cash 0 625,000
Other assets 49,888 23,000
----------- -----------
Net cash used in investing activities (7,621,799) (3,209,423)
----------- -----------
Financing activities
Proceeds from borrowings 1,000,000 3,945,595
Repayments of borrowings (1,120,304) (2,081,434)
Dividends paid on convertible redeemable preferred stock (245,045) (178,781)
Proceeds from private placements of common stock, net,
and exercise of stock options 6,003,805 2,696,700
Proceeds from private placements of preferred stock 1,755,000 1,950,000
----------- -----------
Net cash provided by financing activities 7,393,456 6,332,080
----------- -----------
Net change in cash and cash
equivalents (685,028) 2,351,397
Cash and cash equivalents, beginning of period 1,603,975 420,590
----------- -----------
Cash and cash equivalents, end of period $ 918,947 $ 2,771,987
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7
Tengasco, Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) The accompanying unaudited condensed 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, 2001 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2001. For
further information, refer to the Company's consolidated financial
statements and footnotes thereto for the year ended December 31, 2000,
included in the Company's annual report on Form 10-KSB.
(2) This amendment on Form 10-Q/A amends the previously filed quarterly report
on Form 10-Q of Tengasco, Inc. and subsidiaries for the three month and
nine month periods ended September 30, 2001 to correct a change in the
Company's depletion estimate. The Company increased it's depletion estimate
by $562,000 due to results disclosed in the reserve analysis which was
based on the June 30, 2001 Ryder Scott report. Additionally, this Form
10-Q/A corrects a footing error totaling $ 86,018 on the Statement of Cash
Flows for the nine-month period ended September 30, 2001.
(3) During 2000, the Company acquired debt financing in the amount of
$3,850,000 from two members of the board of directors, one affiliate, and
two shareholders in order to complete construction of its pipeline from
Swan Creek to Kingsport. The terms of the debt provide for the directors to
receive a throughput fee once production begins. This fee is to continue
until the debt is repaid. The throughput fee is 10 cents per MMBtu
delivered through the pipeline in proportion to the director's proportion
of total debt. The volume delivered shall be calculated on a monthly basis.
The original agreement provided for quarterly interest payments to begin
June 2001. The holders of the note agreed to extend the interest repayment
term to commence on July 15, 2001. All other terms of the agreement remain
in effect. Principle and interest payments are being made monthly over the
next fifty-four months. All payments are current.
During 2000, the Company acquired debt financing from a major
officer/stockholder in the amount of $995,000 in order to purchase a
drilling rig.
During 2000 the Company paid approximately $270,000 in consulting fees and
commissions on equity transactions to a member of the Board of Directors.
During the second quarter 2001 the Company acquired debt financing from a
major stockholder in the amount of $1,000,000. This note evidencing this
indebtness provides for monthly interest payment due beginning July 1, 2001
at the annual stated rate of 15% with the total principle due April 26,
2002.
See note 10 for subsequent payoff of debt
8
(4) During the third quarter of 2001, the Company sold two fully depreciated
compressors to Miller Petroleum, Inc.("Miller"), a joint venture with the
Company, for $150,000. In exchange for this equipment, the Company agreed
to accept 150,000 shares of Miller's stock which had an approximate stock
price of $1 per share. The Company recorded a receivable for $150,000 until
the stock was legally transferred on October 16, 2001.
(5) SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, is effective for all fiscal years beginning after
June 15, 2000 (as amended by FAS 138). This statement requires recognition
of all derivative contracts as either assets or liabilities in the balance
sheet and the measurement of them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of any gains or losses on the hedge with
the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings
effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. Historically, the Company has not entered
into any material derivative contracts either to hedge existing risks or
for speculative purposes. The adoption of the new standard on January 1,
2001 did not affect the Company's financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition in Financial Statements" which outlines the basic
criteria that must be met to recognize revenue and provided guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. Adoption of SAB No.
101 did not have a material impact on the Company's financial position or
its results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and
SFAS No 142. "Goodwill and Other Intangible Assets". SFAS No. 141 addresses
the initial recognition and measurement of goodwill and other intangible
assets acquired in a business combination and SFAS No. 142 addresses this
initial recognition and measurement of intangible assets acquired outside
of a business combination whether acquired individually or with a group of
other assets. These standards require all future business combinations to
be accounted for using the purchase method of accounting. Goodwill will no
longer be amortized but instead will be subject to impairment tests at
least annually. The Company is required to adopt SFAS No 141 and 142 on a
prospective basis as of January 1, 2002, however, certain provisions of
these new Standards may also apply to any acquisitions concluded subsequent
to September 30, 2001. Presently, the adoption of these new standards has
not affected the Company's financial condition or results of operations.
9
(6) During the nine months ended September 30, 2001, the Company converted
$222,000 of debt through the issuance of 33,872 shares of common stock.
Additionally, the Company donated 1,159 shares of common stock to a
charitable organization during this period. The donation, totaling $14,777
was recorded as a charitable contribution and is included in general and
administrative expenses in the accompanying consolidated statement of loss
for the nine months ended September 30, 2001. During the nine months ended
September 30, 2001 the Company converted 710 shares of preferred stock to
common stock totaling $71,000. During the nine months ended September 30,
2001, the Company sold certain equipment in exchange for 150,000 shares of
the purchaser's stock. The sale was recorded at $150,000.
(7) During the nine months ended September 30, 2001, the Stock Option Committee
had granted 75,000 options to purchase the Company's common stock at
prevailing market prices. The options were granted to employees and
directors of the Company under the terms of the Tengasco, Inc. Stock
Incentive Plan.
Additionally, the Company extended the exercise period of one employee's
stock option who was retiring resulting in recorded compensation of $55,200
during the nine months ended September 30, 2001.
(8) During the second quarter of 2001, the Company sold 17,550 shares of its
Series B 8% Cumulative Convertible Preferred stock ($100 par value)
pursuant to a private placement offering which terminated on June 15, 2001.
The funds raised through this offering, net of issuance cost will be used
for the Company's drilling program in the Swan Creek field, the exploration
of new geological structures, and working capital, as the Company deems
appropriate.
(9) On August 1, 2001 Tengasco announced a 5% stock dividend distributable on
October 1, 2001 to shareholders of record of the Company's common stock on
September 4, 2001. Based on the number of common shares outstanding on the
record date, the Company expects to issue 498,016 new shares.
The fair market value of the additional shares issued, aggregating
$6,374,609, was charged to accumulated deficit, and common stock dividend
distributable and additional paid-in- capital were increased by $498 and
$6,374,111, respectively. All references in the accompanying financial
statements to the number of common shares and per share amounts are based
on the increased number of shares giving retroactive effect to the stock
dividend.
10
(10) 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 has
extended to the Company a revolving line of credit of up to $35 million.
The initial borrowing base under the facility is $10 million and the
borrowing base will be adjusted upon periodic review by Bank One of the
Company's oil and gas reserves. The interest rate is the Bank One base rate
plus one-quarter percent which at the present time is 5.25%. On November 9,
2001, funds from this credit line were used to (1) refinance existing
indebtedness on the Company's Kansas properties ($1,427,309.25); (2) to
repay the internal financing provided by directors and shareholders on the
Company's recently completed 65-mile Tennessee intrastate pipeline system
($3,895,490.83); (3) to prepay a note payable to Spoonbill, Inc. in the
amount of $1,080,833.34; (4) to prepay a purchase money note due to M.E.
Ratliff, the Company's chief executive officer, for purchase by the Company
of a drilling rig and related equipment in the amount of $1,003,844.44; and
(5) to prepay in full the remaining principal of the working capital loan
due December 31, 2001 to Edward W.T. Gray III, a director of the Company,
in the amount $304,444.44. All of these obligations incurred interest at a
rate substantially greater than the rate being charged by Bank One under
the credit facility. Together with attorney fees, mortgage taxes in Kansas
and Tennessee, and related fees, the total drawn on November 9, 2001 from
the credit facility was $7,901,776.65.
(11) Certain comparative amounts have been reclassified to conform to the
current period presentations.
11
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
The Company is in the business of exploring for, producing and transporting oil
and natural gas in Tennessee and Kansas and marketing gas for others in
Tennessee. The Company has 243 oil and gas wells in Kansas and has 34 natural
gas and 10 oil wells in Tennessee.
With the completion of its 65 mile pipeline, the Company is now delivering its
gas to Eastman Chemical Company ("Eastman"), BAE SYSTEMS at the Holston Army
Ammunition Plant and anticipates being eventually able to sell substantially all
of its natural gas production from the Swan Creek Field. Deliveries of natural
gas to BAE SYSTEMS at the Holston facility commenced on April 4, 2001. Initial
deliveries of gas to Eastman were made on May 21, 2001. The Company is presently
selling an average of approximately 5,000 MMBTU of gas per day, which is
slightly lower than in the prior quarter and than what was anticipated as a
result of a temporary reduction in gas flow caused by larger amounts of
condensate in the pipeline than anticipated. The Company is currently reworking
the configuration of the compressors and installing equipment to remove the
condensate and sell it. It is anticipated that the installation will be
completed by November 30 and gas sales should rise to a level of 6,000 MMBTU
within a short period and gradually to 10,000 MMBTU. The condensate, which at
present is produced at the rate of approximately 20 barrels per day, is to be
sold at the same price the Company receives for its crude oil. The Company
anticipates that purchases under the agreement with BAE SYSTEMS will ultimately
be 1,800 MMBTU of gas per day as that company's production requirements
increase. The Company is currently supplying all of the natural gas requirements
of BAE SYSTEMS and cannot determine at this time what their ultimate production
schedule and thus their natural gas requirements may be.
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 has
extended to the Company a revolving line of credit of up to $35 million. The
initial borrowing base under the facility is $10 million and the borrowing base
will be adjusted upon periodic review by Bank One of the Company's oil and gas
reserves. The interest rate is the Bank One base rate plus one-quarter percent
which at the present time is 5.25%. On November 9, 2001, funds from this credit
line were used to (1) refinance existing indebtedness on the Company's Kansas
properties ($1,427,309.25); (2) to prepay the internal financing provided by
directors and shareholders on the Company's recently completed 65-mile Tennessee
intrastate pipeline system ($3,895,490.83); (3) to prepay a note payable to
Spoonbill, Inc. in the amount of $1,080,833.34; (4) to prepay a purchase money
note due to M.E. Ratliff, the Company's chief executive officer, for purchase by
the Company of a drilling rig and related equipment in the amount of
$1,003,844.44; and (5) to prepay in full the remaining principal of the working
capital loan due December 31, 2001 to Edward W.T. Gray III, a director of the
Company, in the amount of $304,444.44. All of these obligations incurred
interest at a rate substantially greater than the rate being charged by Bank One
under the credit facility. Together with attorney's fees, mortgage taxes in
Kansas and Tennessee, and related fees, the total drawn on November 9, 2001 from
the credit facility was $7,901,776.65.
12
The Company's plan of operations for the period ending December 31, 2002 calls
for the drilling of a minimum of 30 additional wells in the Swan Creek Field at
a cost of approximately $250,000 per well. During the first nine months of 2001,
the Company drilled 12 wells in the Swan Creek Field, all of which were
successful resulting in 9 additional gas wells and 3 additional oil wells. The
Company anticipates that as a result of sales of natural gas from its Swan Creek
Field and the acquisition of the Bank One line of credit it will have sufficient
funds to complete the drilling program.
The Company's present plan of operations also includes contracting for sales of
additional volumes of natural gas not only to Eastman and BAE Systems as their
needs increase, but to other industrial customers in the Kingsport, Tennessee
area. Negotiations with such additional potential customers are in the
preliminary stages. Other large industrial customers in Kingsport presently
served by an interstate pipeline include Willamette Paper, General Shale (brick
manufacturer) and AFG Glass.
The aggregate requirement of these potential customers exceeds the requirements
of Eastman. The Company has not entered into any contracts for sales to any of
these potential customers, and no assurances can be made that such contracts
will be agreed upon. However, the Company plans to fully exploit this
significant market potential in the Kingsport area for serving large volume
industrial customers assuming that sufficient volumes of natural gas can be
produced and transported through the Company's pipeline. In addition, the
Company's subsidiary, Tengasco Pipeline Corporation, has entered into a
franchise agreement with the City of Kingsport that grants it authority for
twenty years to construct facilities and to sell and distribute natural gas to
all classes of customers listed herein. The franchise agreement is subject to
approval by the Tennessee Regulatory Authority. The Company expects to file for
approval shortly and anticipates that such approval will be granted.
The Company's wholly owned subsidiary, Tengasco Pipeline Corporation, installed
and operates a new natural gas utility service to residential, commercial and
industrial users in Hancock County, Tennessee for the Powell Valley Utility
District. The Powell Valley District previously had no natural gas facilities.
The system was installed in the year 2000 and deliveries of gas to customers in
Sneedville began in the first quarter of 2001. Revenues to date from sales of
gas have been limited due to the small number of initial residential customers.
The system will be gradually expanded over time to serve as many of the 6,900
residential and commercial customers in the county as may be economically
possible. The system is currently being extended approximately two miles in
order to serve a new industrial customer in the Sneedville industrial park.
The Company plans to drill five new wells in Ellis and Rush Counties, Kansas on
its existing Kansas leases during the remainder of this calendar year in
response to drilling activity in the area establishing new areas of production.
During this quarter, the Company successfully drilled the Dick No. 7 well in
Kansas and completed the well as an oil well. The Company is also engaged, for a
fee, to gather the gas produced from wells owned by others located in Kansas
adjacent to the Company's wells and near the Company's gathering lines.
13
The Company's plans for its Kansas properties include maintaining the current
productive capacity of its existing wells through normal workovers and
maintenance of the wells, performing gathering or sales services for adjacent
producers, and expanding the Company's own productions through drilling
additional wells. In addition, there are several capital development projects
that the Company is considering with respect to the Kansas Properties which
include recompletion of wells and major workovers to increase current
production. These projects when completed are expected to increase production in
Kansas.
The Company's plan of operation also includes exploration in six or more
additional major geological structures in the East Tennessee area that are
similar to the Swan Creek structure and which the Company's geology staff
indicate have a high probability of producing hydrocarbons.
The Company has either acquired seismic data on these structures from third
party sources, or is conducting its own seismic studies with its own trucks and
equipment. The seismic data is being analyzed at facilities of the University of
Tennessee as part of the strategic alliance between the Company and the
University of Tennessee. The seismic analysis is continuing and related leasing
activities have begun based on initial analysis of seismic results. The analysis
should be completed in approximately six months, and the Company plans to
conduct exploration activities in these new areas.
On August 10, 2001, the Company and Penn Virginia Oil & Gas Corporation, a
subsidiary of Penn Virginia Corporation entered into a joint operating agreement
to explore, drill, and develop a certain area of mutual interest in East
Tennessee and southern Virginia. The area of mutual interest is in addition to
the six areas described above identified as potentially productive. Both
companies will share equally all lease acquisition costs, seismic exploration
and analysis costs, drilling and operating costs, as well as the proceeds from
production. Penn Virginia is named as the initial operator under the joint
operating agreement. Penn Virginia has begun the seismic program and drilling
operations will be based on the results of seismic analysis. While the Company
anticipates the possibility of significant production as a result of this
venture, no assurances can be made at this time of the amount of reserves that
may be discovered or produced in the course of this venture.
The Company has no plans, at present, to increase the number of its employees
significantly.
This plan of operations is based upon many variables and estimates, all of which
may change or prove to be other than or different from information relied upon.
The information contained in this Report, in certain instances, includes certain
forward-looking statements. When used in this document, the words budget,
budgeted, anticipate, expects, estimates, believes, goals or projects and
similar expressions are intended to identify forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those projected by such forward-looking statements.
14
Important factors that could cause actual results to differ materially from
those projected in the forward-looking statements include, but are not limited
to, the following: production variances from expectations, volatility of oil and
gas prices, the need to develop and replace reserves, the substantial capital
expenditures required for the drilling of wells and the related need to fund
such capital requirements through commercial banks and/or public securities
markets, environmental risks, drilling and operating risks, risks related to
exploration and development drilling, the uncertainty inherent in estimating
future oil and gas production or reserves, uncertainty inherent in litigation,
competition, government regulation, and the ability of the Company to implement
its business strategy, including risks inherent in integrating acquisition
operations into the Company's operations.
Results of Operations and Financial Condition
Comparison of the Quarters Ending September 30, 2001 and 2000
The Company recognized $2,433,758 in oil and gas revenues and transportation
revenues from its Kansas Properties and the Swan Creek Field during the third
quarter of 2001 compared to $1,666,583 in the third quarter of 2000. This
increase in revenues was due primarily to gas production from the Swan Creek
Field in the third quarter. The Swan Creek Field produced 434,557 MCF of gas,
resulting in $1,090,000 of net revenues. Although production was approximately
the same during the quarters ending September 30, 2001 and 2000, Kansas oil
revenues were down approximately $87,000 and gas revenues were down
approximately $123,000 in the third quarter of 2001 due to a decrease in oil
prices from the third quarter of 2000. Oil prices in the third quarter of 2000
were approximately $29.50 per BBL and gas prices were approximately $4.10 per
MCF whereas the prices in the third quarter of 2001 were approximately $24.25
per BBL and gas prices were approximately $2.70 per MCF. Additionally, during
the three months ended September 30, 2001, the Company sold two fully
depreciated compressors, resulting in other income of $150,000.
The Company realized net loss attributable to common shareholders of (491,055)
($.05 per share of common stock) during this period compared to a net income in
the third quarter of 2000 to common shareholders of $18,064 ($.00 per share of
common stock).
Production costs and taxes in the third quarter of 2001 of $1,112,471 were
higher when compared to $664,526 in the third quarter of 2000. The increase is
primarily due to production cost, severance taxes and gas royalties resulting
from the increased production from the Swan Creek Field.
Depreciation, Depletion and Amortization expense for the third quarter of 2001
was $779,551, compared to $63,000 in the third quarter of 2000. This increase is
primarily due to significant increases in depletion expense during the third
quarter of 2001, (612,000) as a result of decreases in reserve estimates on oil
and gas properties arising from the Companies gas wells had decreased production
levels due to problems encountered with liquids in the wells. This decreased
production level was factored into the estimated future proved reserves
calculated on June 30, 2001 resulting in a lower future reserve estimate. The
June 30, 2001 Ryder Scott reserve report was used as a basis for the September
30, 2001 estimate. Additional increases in depreciation was due to the Company's
depreciation on its completed 65-mile pipeline for the first time in the year
2001.
15
Interest expense for the third quarter of 2001 was $248,328 as compared to
$95,686 in the third quarter of 2000. This increase was due to additional
interest cost associated with necessary financing for the completion of Phase II
of the Company's 65-mile pipeline.
General and Administrative Expenses for the third quarter of 2001 increased
$84,090 from $679,479 in the third quarter of 2000. Most of this cost increase
was to expand insurance coverage including blowout insurance for the Company and
also for the Company's medical insurance plan.
Legal and accounting fees decreased $20,547 from the third quarter of 2000 as
several legal matters were settled late in the year 2000.
During the three months ended September 30, 2001, the Company incurred $398,479
of additional capitalized costs associated with the completion of the Swan Creek
Pipeline.
Comparison of the Nine Month Periods Ending September 30, 2001 and 2000.
The Company recognized $5,745,144 in oil and gas revenues and transportation
revenues from the Kansas and Swan Creek oil and gas fields during the nine
months ended September 30, 2001 compared to $4,116,778 for the nine months ended
September 30, 2000. This $1,778,366 increase in revenues was due primarily to
gas production from the Swan Creek Field in the second and third quarters of
2001. In the nine months ended September 30, 2001, the Swan Creek Field produced
646,958 MCF of gas, resulting in $1,800,491 of net revenues. Kansas gas revenues
for the nine months ended September 30, 2001 were approximately $276,000 higher
than those for the nine-month period ended September 30, 2000. This change was
due to an increase in price per MCF from the nine months ended September 30,
2000; all of the increase was in the first quarter of 2001 as prices were down
in the second and third quarters of 2001. Although production was approximately
the same during the nine months ending September 30, 2001 and 2000, Kansas oil
and Swan Creek oil revenues were down approximately $300,000 in the nine months
ended September 30, 2001 compared to the same period in 2000 due to price
decreases. Additionally, during the three months ended September 30, 2001, the
Company sold two fully depreciated compressors, resulting in other income of
$150,000.
Although the Company's nine month revenues increased from the nine months ended
September 30, 2000, the Company incurred a net loss available to holders of
common stock of $1,362,124 (0.13 per share of common stock) compared to a net
loss available to holders of common stock of $543,556 ($0.06 per share of common
stock) for the nine months ended September 30, 2000.
The increase in the loss was due to the following factors:
Production costs and taxes for the first nine-months of 2001 of $2,463,401
were higher compared to $1,920,087 in the first nine months of 2000. The
increase is primarily due to production costs, severance taxes, and gas
royalties resulting from the increased production from the Swan Creek Field.
Also, during the first nine months of 2001 the Company incurred additional
maintenance costs in Swan Creek in connection with the preparation of
production beginning in April of 2001.
16
Depreciation, Depletion and Amortization expenses for the nine months ended
2001 were $1,048,008, compared to $189,000 for the first nine months of
2000. The primary increase is due to an increase in depletion estimate as
explained in the three month comparison. Approximately an additional
$147,000 of this increase was due to depreciation being taken on the
pipeline for the first time in the second and third quarters of 2001.
Interest expense for the nine months ending September 30, 2001 was $577,342,
as compared to $299,844 in 2000. This increase is due to additional interest
cost associated with financing for the completion of Phase II of the
Company's 65-mile pipeline. This increase was reduced by interest cost of
approximately $148,000 which was capitalized in the first three months of
2001 during construction of the pipeline.
General and Administrative Expenses for the first nine months of 2001
increased $773,375 from $1,794,501 in the first nine months of 2000.
Approximately $320,000 of this increase was due to an increase in insurance
to expand coverage including blowout insurance for the Company and
approximately $196,000 was attributable to public relations costs associated
with producing the annual report, the proxy statement and press releases.
The Company also incurred a $55,200 compensation adjustment resulting from
the extension of the exercise period for options granted to an employee.
Engineering service and professional fees increased approximately $100,000
for reserve analysis.
Legal and accounting fees increased $43,792 for the first nine months of
2001. The increase was for additional services provided by our auditors
associated with year-end filings, the proxy statement and the annual
reports.
During the nine months ended September 30, 2001, the Company incurred $3,724,479
of additional capitalized costs associated with the Swan Creek Pipeline.
On March 8, 2001, the pipeline was ready for its intended use; accordingly,
pipeline facilities under construction were reclassified to completed pipeline
facilities on the accompanying condensed consolidated balance sheet at September
30, 2001.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK:
The Company has risk exposure for interest rates on its outstanding debt. A
significant portion of the Company's long-term debt is based upon published
prime rates. Interest rates have recently been somewhat volatile, and although
it is difficult to predict future fluctuations of interest rates volatility is
expected to continue.
The Company's major market risk exposure is in the pricing applicable to its
natural gas and crude oil production. Historically, prices received for gas
production have been volatile and unpredictable. For example, gas prices as of
December 31, 2000 was $9.77 per MCF compared to $2.70 per MCF in the third
quarter of 2001. Pricing volatility is expected to continue.
17
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On October 10, 2001 an arbitration hearing was held by the American Arbitration
Association between the Company's wholly owned subsidiary, Tengasco Pipeline
Corporation ("TPC"), and King Pipeline & Utility Company ("King"), the
contractor for the construction of Phase II of the Company's pipeline. The
arbitration was held to resolve disputes concerning final billings by King for
the pipeline construction. King made four claims, seeking (1) payment for straw
matting done by King on slopes calculated at two dollars per square foot; (2) to
retain payment it had received for clearing and grubbing charges; (3) the
release of a currently retained sum of $46,585, to which TPC made no claim,
presently being held in escrow pending outcome of ongoing litigation between
King and King's boring subcontractor; and (4) payment of $94,000 billed by King
for alleged extra work it performed in trenching at a depth deeper than called
for by the contract.
On October 31, 2001 the arbitrator issued his award finding that King was
entitled to recover the sum of $266,390.66 for straw matting work performed by
King, calculated at $2 per square foot as sought by King; that King was entitled
to retain the $72,500 payment made to it by TPC for clearing and grubbing work,
and that the retained sum be released from escrow. The arbitrator denied all
relief sought by King for extra charges in the amount of $94,000 for deeper
trenching, and awarded King its attorney's fees of approximately $14,000. The
Company is examining the possibility of appeal of the award, since the Company
believes that the arbitrator's ruling is not supported by the record presented.
However, available grounds for appeal appear extremely limited and it is
therefore unlikely that an appeal will occur. In the event an appeal is
unavailable and payment is made to satisfy the award, then based on the evidence
presented at the arbitration hearing, the Company and TPC intend to seek
recovery of the payments made to King as an additional element of damages being
sought from Caddum, Inc., the project engineer, in an action now pending 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-2.
Any settlements paid to King would be an addition to completed pipeline
facilities.
18
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2001, 358,733 shares of restricted
common stock were sold in a private placement (of which 111,111 shares were
issued during the third quarter), 33,872 shares were issued pursuant to the
conversion of convertible notes (of which 11,804 shares were issued during the
third quarter), 258,657 shares of common stock were issued pursuant to the
exercise of options (of which 46,300 was in the third quarter), the majority of
which were granted under the Tengasco, Inc. Stock Incentive Plan and 12,347
shares were issued pursuant to the conversion of 710 shares of preferred stock
to common stock in the second quarter.
During the second quarter of 2001, the Company sold 17,550 shares of its Series
B 8% Cumulative Convertible Preferred stock ($100 par value) pursuant to a
private placement offering which terminated on June 15, 2001. The funds raised
through this offering, net of issuance cost will be used for the Company's
drilling program in the Swan Creek fields, the exploration of new geological
structures, and working capital, as the Company deems appropriate.
ITEM 6 EXHIBITS AND 8-K REPORTS.
During the quarter ending September 30, 2001 the Company did not file
any Reports on Form 8-K.
The following exhibits are filed herewith:
EXHIBITS 10.21 Credit Agreement - Reducing Revolving Line of Credit Up to
$35,000,000 from Bank One, N.A. to Tengasco, Inc., Tennessee Land & Mineral
Corporation and Tengasco Pipeline Corporation dated November 8, 2001.
19
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, 2002 TENGASCO, INC.
BY: /s/ JEFFREY R. BAILEY
-----------------------
Jeffrey R. Bailey
President
By: /s/ MARK A. RUTH
-----------------------
Mark A. Ruth
Chief Financial Officer
20
CERTIFICATION
I, Malcolm E. Ratliff, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A 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;
/s/ MALCOLM E. RATLIFF November 13, 2002
-----------------------
Malcolm E. Ratliff
Chief Executive Officer
21
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I hereby
certify that:
(A) I have reviewed the Quarterly Report on Form 10-Q/A;
(B) To the best of my knowledge this Quarterly Report on Form 10-Q/A
(I) fully complies with the requirements of section 13(a) or 15(d) of the
Securities and Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d); and, (ii) the
information contained in this Report fairly presents, in all material respects,
the financial condition and results of operations of Tengasco, Inc. And its
Subsidiaries during the period covered by this Report.
/s/ MALCOLM E. RATLIFF
------------------------------
Malcolm E. Ratliff
Chief Executive Officer
22
CERTIFICATION
I, Jeffrey R. Bailey, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A 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;
/s/ JEFFREY R. BAILEY November 13, 2002
-----------------------
Jeffrey R. Bailey
President
23
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I hereby
certify that:
(A) I have reviewed the Quarterly Report on Form 10-Q/A;
(B) To the best of my knowledge this Quarterly Report on Form 10-Q/A
(I) fully complies with the requirements of section 13(a) or 15(d) of the
Securities and Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d); and, (ii) the
information contained in this Report fairly presents, in all material respects,
the financial condition and results of operations of Tengasco, Inc. And its
Subsidiaries during the period covered by this Report.
/s/ JEFFREY R. BAILEY
------------------------------
Jeffrey R. Bailey
President
24
CERTIFICATION
I, Mark A. Ruth, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A 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;
/s/ MARK A. RUTH November 13, 2002
------------------------
Mark A. Ruth
Chief Executive Officer
25
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I hereby
certify that:
(A) I have reviewed the Quarterly Report on Form 10-Q/A;
(B) To the best of my knowledge this Quarterly Report on Form 10-Q/A
(i) fully complies with the requirements of section 13(a) or 15(d) of the
Securities and Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and, (ii) the
information contained in this Report fairly presents, in all material respects,
the financial condition and results of operations of Tengasco, Inc. and its
Subsidiaries during the period covered by this Report.
/s/ MARK A. RUTH
------------------------------
Mark A. Ruth
Chief Financial Officer
26