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 JUNE 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
- ------------------------------ ---------------------------------
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: 9,788,611 COMMON SHARES AT JUNE 30,
2001.
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 JUNE 30, 2001 AND
DECEMBER 31, 2000................................................ 3-4
* CONDENSED CONSOLIDATED STATEMENTS OF LOSS FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 2001 AND 2000.............................. 5
* CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
SIX MONTHS ENDED JUNE 30, 2001................................... 6
* CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 30, 2001 AND 2000..................................... 7
* NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............. 8-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 11-15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...... 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ............................................. 16
ITEM 2. CHANGES IN SECURITIES AND
USE OF PROCEEDS................................................ 17
ITEM 3. SUBMISSION OF MATTERS ......................................... 18
* SIGNATURE.......................................................... 19
2
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, 2001
(UNAUDITED) DECEMBER 31, 2000
-------------- -----------------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 1,731,500 $ 1,603,975
TRADE ACCOUNTS RECEIVABLE, NET 944,698 684,132
WELL PARTICIPANTS RECEIVABLE 257,788 151,272
OTHER CURRENT ASSETS 310,568 251,345
----------- -----------
TOTAL CURRENT ASSETS 3,244,554 2,690,724
OIL AND GAS PROPERTIES, NET (ON THE BASIS OF FULL COST
ACCOUNTING) 11,768,841 9,704,029
COMPLETED PIPELINE FACILITIES, NET 14,373,630 4,200,000
PIPELINE FACILITIES, UNDER CONSTRUCTION, AT COST 0 6,847,038
PROPERTY AND EQUIPMENT, NET 1,609,291 1,677,432
OTHER 63,613 105,501
----------- -----------
$31,059,929 $25,224,724
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, 2001
(UNAUDITED) DECEMBER 31, 2000
-------------- -----------------
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 851,769 1,016,462
ACCRUED INTEREST PAYABLE 358,253 56,657
ACCRUED DIVIDENDS PAYABLE 87,489 78,778
ACCRUED LIABILITIES 50,573 52,640
------------ ------------
TOTAL CURRENT LIABILITIES 4,362,732 3,313,023
LONG-TERM DEBT-RELATED PARTIES,
LESS CURRENT MATURITIES 4,845,000 4,845,000
LONG-TERM DEBT, LESS CURRENT MATURITIES 1,554,621 2,263,599
------------
TOTAL LONG-TERM DEBT 6,399,621 7,108,599
------------ ------------
TOTAL LIABILITIES 10,762,353 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 PER VALUE, 50,000,000 SHARES
AUTHORIZED 9,791 9,296
ADDITIONAL PAID-IN CAPITAL 30,622,757 25,941,709
ACCUMULATED DEFICIT (15,957,872) (15,086,803)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 14,674,676 10,864,202
------------ ------------
$ 31,059,929 $ 25,224,724
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
TENGASCO, INC. AND SUBSIDIAIRES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
OIL AND GAS REVENUES $ 1,863,068 $ 1,270,283 $ 3,311,386 $ 2,450,195
----------- ----------- ----------- -----------
COSTS AND OTHER DEDUCTIONS
PRODUCTION COSTS AND TAXES 619,095 799,736 1,350,930 1,255,561
DEPLETION, DEPRECIATION AND AMORTIZATION 170,957 63,000 268,457 126,000
INTEREST EXPENSE 251,090 105,225 329,014 204,158
GENERAL AND ADMINISTRATIVE COSTS 1,050,245 549,192 1,804,307 1,115,022
LEGAL AND ACCOUNTING 107,715 132,364 263,480 199,141
----------- ----------- ----------- -----------
TOTAL COSTS AND OTHER DEDUCTIONS 2,199,102 1,649,517 4,016,188 2,899,882
----------- ----------- ----------- -----------
NET LOSS (336,034) $ (379,234) (704,802) (449,687)
----------- ----------- ----------- -----------
DIVIDENDS ON PREFERRED STOCK 87,489 72,160 166,267 111,938
----------- ----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (423,523) $ (451,394) $ (871,069) $(561,625)
----------- ----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
PER SHARE BASIC AND DILUTED $ (0.04) $ (0.05) $ (0.09) $ (0.06)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING 10,172,187 9,126,584 10,030,176 9,070,952
----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ADDITIONAL
COMMON STOCK PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------------ ---------- ------------ ------------
BALANCE DECEMBER 31, 2000 9,295,558 $ 9,296 $ 25,941,709 $(15,086,803)
COMMON STOCK ISSUED IN 247,622 248 2,640,902 0
PRIVATE PLACEMENTS
COMMON STOCK ISSUED ON 22,068 23 134,978 0
CONVERSION OF DEBT
COMMON STOCK ISSUED AS A 1,159 1 14,776 0
CHARITABLE DONATION
STOCK OPTIONS EXERCISED 209,857 210 1,819,404 0
CONVERSION OF PREFERRED STOCK
TO COMMON STOCK 12,347 13 70,988 0
PAYMENT OF DIVIDENDS ON
CONVERTIBLE REDEEMABLE PREFERRED STOCK 0 0 0 (166,267)
NET LOSS FOR THE SIX MONTHS
ENDED JUNE 30, 2001 0 0 0 (704,802)
------------ ---------- ------------ ------------
BALANCE, JUNE 30, 2001 9,788,611 $ 9,791 $ 30,622,757 $(15,957,872)
============ ========== ============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
(UNAUDITED) (UNAUDITED)
------------ -----------
OPERATING ACTIVITIES
NET LOSS $ (704,802) $ (449,687)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
DEPLETION, DEPRECIATION AND AMORTIZATION 268,457 126,000
COMPENSATION PAID IN STOCK OPTIONS 55,200 0
CHANGES IN ASSETS AND LIABILITIES
ACCOUNTS RECEIVABLE (367,082) (76,524)
OTHER CURRENT ASSETS (59,223) 15,000
ACCOUNTS PAYABLE (164,693) 28,925
ACCRUED LIABILITIES (2,067) (74,219)
ACCRUED INTEREST PAYABLE 301,596 0
ACCRUED DIVIDENDS PAYABLE 8,711 0
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (663,903) (430,505)
----------- -----------
INVESTING ACTIVITIES
NET ADDITIONS TO OIL AND GAS PROPERTIES (2,064,812) (798,760)
NET ADDITIONS TO PIPELINE FACILITIES AND OTHER
PROPERTY AND EQUIPMENT (3,567,331) (641,405)
DECREASE IN RESTRICTED CASH 0 625,000
OTHER ASSETS 41,888 0
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (5,590,255) (815,165)
----------- -----------
FINANCING ACTIVITIES
PROCEEDS FROM BORROWINGS 1,000,000 795,595
REPAYMENTS OF BORROWINGS (667,816) (1,694,277)
DIVIDENDS ON CONVERTIBLE REDEEMABLE PREFERRED STOCK (166,267) (111,938)
PROCEEDS FROM PRIVATE PLACEMENTS OF COMMON STOCK, NET,
AND, EXERCISE OF STOCK OPTIONS 4,460,766 1,454,000
PROCEEDS FROM PRIVATE PLACEMENTS OF PREFERRED STOCK 1,755,000 950,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,381,683 1,393,380
----------- -----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 127,525 147,710
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,603,975 420,590
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,731,500 $ 568,300
=========== ===========
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 six months ended June 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) 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 quartly interest
payments to begin June 2001. The holders of the note have agreed to extend
the interest repayment term to commence on July 15, 2001. All other terms
of the agreement remain in effect.
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 payments due beginning July
1, 2001 at the annual stated rate of 15% with the total principle due
April 26, 2002.
8
(3) In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted
loss per share are based on 10,172,187 weighted average shares outstanding
for the quarter ended June 30, 2001 and 9,126,584 weighted average shares
outstanding for the quarter ended June 30, 2000. Weighted average shares
outstanding for the six month periods ended June 30, 2001 and 2000 were
10,030,176 and 9,070,952, respectively. These figures have been
retroactively adjusted to reflect the 5% stock dividend declared on August
1, 2001 (see Note 8). During the three month and six month periods ended
June 30, 2001, potential weighted average common shares outstanding were
approximately 1,490,000 and 1,506,000 shares, respectively. During the
three month and six month periods ended June 30, 2000, potential weighted
average common shares outstanding were approximately 900,000 and 920,000
shares, respectively. These shares were not included in the computation of
the diluted loss per share amount because the Company was in a net loss
position and, thus, any potential common shares were anti-dilutive.
The weighted average number of shares outstanding and the
corresponding loss per share for the three month and six month periods
ended June 30, 2000 have been restated to reflect the appropriate amounts.
The previously filed 10-QSB will be amended to reflect such changes.
(4) 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.
9
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 amorized 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 June 30, 2001. Presently, the
adoption of these new standards is not expected to have a material impact
on the Company's financial condition or results of operations.
(5) During the six months ended June 30, 2001, the Company converted $135,000
of debt through the issuance of approximately 22,000 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 six months ended June 30, 2001. During the three months ended June
30, 2001 the Company converted 710 shares of preferred stock to common
stock totaling $71,000.
(6) During the six months ended June 30, 2001, the Stock Option Committee
granted 115,000 options to purchase the Company's 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 six months ended June 30, 2001.
(7) 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 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.
(8) On August 1, 2001 Tengasco announced a 5% stock dividend payable on
October 1, 2001 to shareholders of record of the Company's common stock on
September 4, 2001.
(9) Certain comparative amounts have been reclassified to conform to the
current period presentations.
10
ITEM 2
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 242 oil and gas wells in Kansas and has 32 natural
gas and 8 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 currently
selling approximately 6,000 MMBTU of gas per day to Eastman and BAE SYSTEMS.
Eastman is increasing its purchased volumes in phased stages to enable it to
orderly adapt its current facilities and feedstock operations to the
characteristics of the gas supply resulting from the addition of the Company's
gas to its existing supplier's gas. The Company anticipates that Eastman will
begin to purchase a minimum of 10,000 MMBTU of gas per day within forty-five
days. 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.
The anticipated sales of natural gas resulting from the completion of the
pipeline will also allow the Company to continue its drilling program on the
Swan Creek leases and continue the development of that field.
The Company's plan of operations for the period ending December 31, 2002 calls
for the drilling of 50 additional wells in the Swan Creek Field at a cost of
approximately $250,000 per well. During the first six months of 2001, the
Company drilled 8 wells in the Swan Creek field, all of which were successful
resulting in 8 additional gas wells. Although the Company does not presently
have the funds needed to complete its fifty-well drilling program, it
anticipates that as a result of the completion of the pipeline, it will receive
sufficient proceeds from the sale of gas from the Swan Creek Field, in
particular sales to Eastman, to complete the program.
Alternatively, the Company believes that if proceeds from gas sales are
insufficient to pay for the drilling program it will be able to obtain the
necessary funds from other sources such as a bank loan, an equity investment, or
a joint venture with another company. Although there can be no assurances that
such financing will be available, the Company believes that it will be able to
procure such financing if needed, and is in the process of negotiating
acceptable terms for such financing.
11
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 as greater volumes of gas become available from the Swan Creek Field as a
result of additional drilling. Other large industrial customers in Kingsport
presently served by an interstate pipeline include Willamette Paper, General
Shale (brick manufacturer) and AFG Glass.
The aggregate requirements of these 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. 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 in Kingsport, not only
the large industrial customers listed herein. The franchise agreement is subject
to approval by the Tennessee Regulatory Authority which the Company expects to
be granted in the very near future.
The Company's wholly owned subsidiary, Tengasco Pipeline Corporation, signed an
agreement to install and operate 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. 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 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.
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. 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's
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. However, the Company
does not presently have the funds necessary for all of these projects and the
ability to undertake such efforts is dependent on the Company obtaining such
funds. Management has made the decision to undertake only such efforts it can
afford at this time. It will however, reconsider its decision if such funds
become available through the Company's operations or other sources of financing.
12
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 and related leasing activities
should be completed in approximately six months, and the Company plans to
conduct exploration activities in these new areas. The Company plans to obtain
funds for these activities from the results of operations or from third party
sources such as a bank loan or other third party financing.
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, and drilling and operating costs, as well as the proceeds
from production. Penn Virginia is named as the initial operator under the joint
operating agreement. Drilling operations will be based on the results of seismic
exploration that Penn Virginia will initiate immediately. 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.
13
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 June 30, 2001 and 2000
The Company recognized $1,863,068 in revenues from its Kansas Properties and the
Swan Creek Field during the second quarter of 2001 compared to $1,270,283 in the
second quarter of 2000. This increase in revenues was due primarily to gas
production from the Swan Creek Field in the second quarter. The Swan Creek Field
produced 212,401 MCF of gas, resulting in $711,000 of net revenues. Kansas oil
revenues were down approximately $118,000 in the second quarter of 2001 due to a
decrease in oil price from the second quarter of 2000.
Although the Company's revenues increased during the second quarter of 2001, the
Company incurred a net loss to holders of common stock of $423,523 ($.04 per
share of common stock) during this period compared to a net loss in the second
quarter of 2000 to holders of common stock of $451,394 ($.05 per share of common
stock.)
Production costs and taxes in the second quarter of 2001 of $619,035 were
slightly less compared to $799,736 in the second quarter of 2000. During the
second quarter of 2000 the Company completed well workovers in Kansas in order
to increase future production.
Depreciation, Depletion and Amortization expense for the second quarter of 2001
was $170,957, compared to $63,000 for the three months ended June 30, 2000. This
increase was partially due to depreciation taken on the Company's completed
65-mile pipeline for the first time in the second quarter of 2001. Other
increases include an increase in depletion and an increase in depreciation on
additional equipment purchased in late 2000.
Interest expense for the second quarter of 2001 was $251,090 as compared to
$105,225 in the second 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 second quarter of 2001 increased
$501,053 from $549,192 in the second quarter of 2000. Approximately $160,000 of
this increase was due to an increase in insurance to expand coverage including
blowout insurance for the Company and approximately $124,000 was attributable to
public relations costs associated with producing the Company's annual report,
proxy statement, and press releases. Engineering services and professional fees
increased approximately $100,000 for reserve analysis.
Legal and accounting fees decreased $24,649 from the second quarter of 2000 as
several legal matters were settled late in the year 2000.
During the second quarter of 2001 the Company acquired debt financing from a
major stockholder in the amount of $1,000,000. The note evidencing this
indebtedness provides for monthly interest payments beginning July 1, 2001 at
the annual stated rate of $15% with the total principal and unpaid interest due
April 26, 2002.
During the three months ended June 30, 2001, the Company incurred approximately
$1,021,658 of additional capitalized costs associated with the completion of the
Swan Creek pipeline.
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Comparison Of The Six Month Periods Ending June 30, 2001 And 2000.
The Company recognized $3,311,386 in revenues from the Kansas and Swan Creek oil
and gas fields during the six months ended June 30, 2001 compared to $2,450,195
for the six months ended June 30, 2000. This approximate $861,000 increase in
revenues was due primarily to gas production from the Swan Creek Field in the
second quarter of 2001. In the six months ended June 30, 2001, the Swan Creek
Field produced 212,401 MCF of gas, resulting in $711,000 of net revenues. Kansas
gas revenues for the six months ended June 30, 2001 were approximately $400,000
higher than those for the six-month period ended June 30, 2000. This change was
due to an increase in price per MCF from the six months ended June 30, 2000;
most of the increase was in the first quarter of 2001. Kansas oil and Swan Creek
oil revenues were down approximately $250,000 in the six months ended June 30,
2001 compared to the same period in 2000 due to price decreases.
Although the Company's six month revenues increased from the six months ended
June 30, 2000, the Company incurred a net loss to holders of common stock of
$871,069 ($0.09 per share of common stock) compared to a net loss to holders of
common stock of $561,625 ($0.06 per share common stock) for the six months ended
June 30, 2000.
Production costs and taxes for the first six-months of 2001 of $1,350,930 were
higher compared to $1,255,561 in the first six months of 2000. During the first
six months of 2001, the Company incurred additional maintenance cost in Swan
Creek in preparation for production beginning in April of 2001.
Depreciation, Depletion and Amortization expenses for the six months ended 2001
were $268,457, compared to $126,000 for the first six months of 2000.
Approximately $80,000 of this increase was due to depreciation being taken on
the pipeline for the first time in the second quarter of 2001. Other increases
include an increase in depletion and an increase in depreciation on additional
equipment purchased in late 2000.
Interest expense for the six months ending June 30, 2001 was $329,014, as
compared to $204,158 in 2000. This increase is due to additional interest cost
associated with financing for Phase II of the Company's 65-mile pipeline. This
increase is offset 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 six months of 2001 increased
$689,285 from $1,115,022 in the first six months of 2000. Approximately $192,000
of this increase was due to an increase in insurance to expand coverage
including blowout insurance for the Company and approximately $157,000 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 services and professional
fees increased approximately $100,000 for reserve analysis.
Legal and accounting fees increased $64,339 for the first six 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 six months ended June 30, 2001, the Company incurred approximately
$3,326,000 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 consolidated balance sheet as of June 30, 2001.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK:
The Company also 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. Pricing volatility is expected
to continue.
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PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company and its wholly owned 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
for the Eastern District of Tennessee entitled C.H. FENSTERMAKER & ASSOCIATES,
INC. V. TENGASCO, INC., No. 3:01-CV-283.
The action seeks to recover approximately $365,000 in fees and charges billed to
TPC for engineering services Fenstermaker claims it performed in connection with
the planning and construction of Phase II of the Company's pipeline which runs
from Rogersville, TN to Kingsport, TN to serve Eastman Chemical Company and
Holston Army Ammunition Plant.
On June 25, 2001, the Company and TPC filed an answer to the complaint denying
liability for the billings claimed, and counterclaiming against Caddum, Inc.
("Caddum"), an unincorporated division of Fenstermaker. The counterclaim seeks
recovery from Caddum of damages for breach of contract and breach of
professional engineering standards caused by the actions of Caddum, including
unauthorized deviations from the pipeline route which caused the Company to
incur significant additional costs. These costs included substantial fees for
concrete capping of the pipeline as a result of the pipeline being placed too
close to the adjoining highway right of way. The counterclaim further alleges
that Caddum damaged the Company: by causing delays in completing the pipeline by
failing to submit engineering drawings and failing to timely obtain certain
x-rays of the pipeline welds; its unauthorized actions in ordering supplies and
materials; and, overbilling from the agreed contract rate for engineering
services. The counterclaim seeks actual damages from Caddum of approximately
$475,000, treble damages under state law for the overbilling, and damages to the
Company arising from the delay caused by Caddum in the production from the Swan
Creek field all in the aggregate amount of $1.25 million. The District Court has
scheduled the case for a non-jury trial on June 19, 2002 before Judge James H.
Jarvis. The Company believes its counterclaims are meritorious and intends to
vigorously prosecute them and anticpates that, at a minimum, its counterclaims
will either fully offset or substantially reduce exposure to liability for the
amounts claimed by Fenstermaker.
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ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
During the six months ended June 30, 2001, 247,622 shares of restricted common
stock were sold in a private placement (of which 172,622 shares were issued
during the second quarter), 22,068 shares were issued pursuant to the conversion
of convertible notes in the first quarter, 212,357 shares of common stock were
issued pursuant to the exercise of options (of which 45,532 was in the second
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 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.
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ITEM 3 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of the Company was held on
June 26, 2001.
(b) The first item voted on was the election of Directors. Joseph E.
Armstrong, Benton L. Becker, Edward W.T. Gray III, Robert D. Hatcher, Jr.,
Shigemi Morita, Malcolm E. Ratliff and Allen J. Sweeney were elected as
Directors of the Company for a term of one year or until their successors were
elected and qualified. The results of voting were as follows: 9,165,439 votes
for Joseph E. Armstrong and 5,468 withheld; 9,165,439 votes for Benton L. Becker
and 5,468 withheld; 9,165,039 votes for Edward W.T. Gray III and 5,868 withheld;
9,147,839 votes for Robert D. Hatcher, Jr. and 23,068 withheld; 9,164,739 votes
for Shigemi Morita and 6,168 withheld; 9,148,439 votes for Malcolm E. Ratliff
and 22,468 withheld; and, 9,165,639 votes for Allen J. Sweeney and 5,268
withheld.
A majority of votes at the meeting having voted for them, Messrs.
Armstrong, Becker, Gray, Hatcher, Morita, Ratliff and Sweeney were duly elected
as Directors of the Company.
(b) The next item of business was the proposal to ratify the Tengasco,
Inc. Stock Incentive Plan. The results of the voting were as follows:
6,563,713 votes for the resolution,
107,444 votes against
13,212 votes abstained and
2,486,538 no votes.
A majority of the votes cast at the meeting having voted for the
resolution, the resolution was duly passed.
(c) The third item of business was the proposal to ratify the
appointment of BDO Seidman, LLP, the independent certified public accountants of
the Company, for fiscal 2001. The results of the voting were as follows:
9,159,829 votes for the resolution,
7,066 votes against and
4,012 votes abstained.
A majority of the votes cast at the meeting having voted for the
resolution, the resolution was duly passed.
No other matters were voted on at the meeting.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Dated: August 14, 2001 TENGASCO, INC.
By: /s/ Harold G. Morris
-------------------------------------
Harold G. Morris, President
By: /s/ Mark A. Ruth
-------------------------------------
Mark A. Ruth, Chief Financial Officer
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