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, 2002
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
-----------------------------------------------
(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: 10,675,983 COMMON SHARES
AT MARCH 31, 2002.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
TENGASCO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
* Condensed Consolidated Balance Sheets as of
March 31, 2002 and December 31, 2001 ....................... 3-4
* Condensed Consolidates Statements of Loss for the
three months ended March 31, 2002 and 2001 ................. 5
* Condensed Consolidated Statements of Stockholders'
Equity for the three months ended March 31, 2002 ........... 6
* Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 .......................... 7
* Notes to Condensed Consolidated Financial Statements ....... 8-11
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .............................. 12-15
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK ........................... 16-17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ...................................... 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .............. 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ........................ 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .... 17
ITEM 5. OTHER INFORMATION ...................................... 17
* Signature .................................................. 18
2
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2002 2001
(UNAUDITED)
----------- -----------
Current Assets:
Cash and cash equivalents $ 158,685 $ 393,451
Investments 150,000 150,000
Accounts receivable, net 547,014 661,475
Participant receivable 97,564 84,097
Inventory 159,364 159,364
----------- -----------
Total current assets 1,112,627 1,448,387
Oil and gas properties, net
(on the basis of full cost accounting) 13,385,405 13,269,930
Completed pipeline facilities, net 15,084,307 15,039,762
Property and equipment, net 1,881,461 1,680,104
Restricted cash 121,369 120,872
Loan fees, net 453,396 496,577
Other 87,562 72,613
----------- -----------
$32,126,127 $32,128,245
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2002 2001
(UNAUDITED)
----------- -----------
Current liabilities
Current maturities of long-term debt $ 6,329,547 $ 6,399,831
Accounts payable-trade 1,125,022 1,208,164
Accrued interest payable 53,249 54,138
Accrued dividends payable 112,458 112,458
----------- -----------
Total current liabilities 7,620,276 7,774,591
Long term debt, less current maturities 4,193,280 3,902,757
----------- -----------
Total long term debt 4,193,280 3,902,757
-----------
Total liabilities 11,813,556 11,677,348
----------- -----------
Preferred Stock
Cumulative convertible redeemable
preferred; redemption value $5,459,050;
56,229 shares outstanding 5,459,050 5,459,050
----------- -----------
Stockholders'Equity
Common stock, $.001 per value,
50,000,000 shares authorized 10,691 10,561
Additional paid-in capital 40,084,425 39,242,555
Accumulated deficit (25,095,708) (24,115,382)
Treasury stock, at cost (145,887) (145,887)
----------- -----------
Total stockholders' equity 14,853,521 14,991,847
----------- -----------
$32,126,127 $32,128,245
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
For the Three For the Three
Months Ended Months Ended
March 31, 2002 March 31, 2001
(UNAUDITED) (UNAUDITED)
----------- -----------
Revenues and other income
Oil and gas revenues $ 1,175,444 $ 1,448,318
Pipeline transportation revenues 77,707 0
Interest income 1,038 0
----------- -----------
Total revenues and other income 1,254,189 1,448,318
Costs and other deductions
Production costs and taxes 723,799 731,835
Depletion, depreciation and amortization 487,348 97,500
Interest expense 153,367 77,924
General and administrative costs 640,230 754,062
Professional fees 117,313 155,765
----------- -----------
Total costs and other deductions 2,122,057 1,817,086
----------- -----------
Net loss (867,868) (368,768)
----------- -----------
DIVIDENDS ON PREFERRED STOCK (112,458) (78,778)
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (980,326) $ (447,546)
----------- -----------
Net loss attributable to common shareholders
PER SHARE BASIC AND DILUTED $ (0.09) $ (0.05)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 10,642,541 9,886,587
----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(Unaudited)
COMMON STOCK ADDITIONAL TREASURY STOCK
---------------------- PAID IN ACCUMULATED ----------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
----------- ------- ----------- ----------- ------- ----------- -----------
Balance December 31, 2001 10,560,605 $10,561 $39,242,55 $(24,115,382) 14,500 $ (145,887) $14,991,847
Net loss 0 0 0 (867,868) 0 0 (867,868)
Common stock issued in 100,000 100 631,900 0 0 0 632,000
private placements
Common stock issued on 10,296 10 59,990 0 0 0 60,000
conversion of debt
Common stock issued on 19,582 20 149,980 0 0 0 150,000
purchase of equipment
Dividends on convertible
redeemable preferred stock 0 0 0 (112,458) 0 0 (112,458)
----------- ------- ----------- ----------- ------- ----------- -----------
Net loss for the three months
ended March 31, 2002 10,690,483 $10,691 $40,084,425 $(25,095,708) 14,500 $ (145,887) $14,853,521
=========== ======= =========== =========== ======= =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
For the Three For the Three
Months Ended Months Ended
March 31, 2002 March 31, 2001
(UNAUDITED) (UNAUDITED)
----------- -----------
Operating activities
Net loss $ (867,868) $ (368,768)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depletion, depreciation and amortization 487,348 97,500
Compensation paid in stock options 0 55,200
Changes in assets and liabilities
Accounts receivable 100,994 (13,593)
Other current assets 0 (102,493)
Accounts payable (83,142) 37,809
Accrued liabilities 0 200,920
Accrued interest payable (889) 230,147
----------- -----------
Net cash provided by used in operating activities (363,557) 136,722
----------- -----------
Investing activities
Additions to property and equipment (118,357) (23,600)
Net additions to oil and gas properties (365,475) (529,745)
Net additions to pipeline facilities (171,713) (2,304,934)
Increase in restricted cash (497) 0
Other assets (14,949) 32,888
----------- -----------
Net cash (used in) investing activities (670,991) (2,825,391)
----------- -----------
Financing activities
Repayments of borrowings (238,116) (337,854)
Proceeds from borrowings 518,356 0
Dividends on convertible redeemable
preferred stock (112,458) (78,778)
Proceeds from private placements
of common stock 632,000 2,268,518
----------- -----------
Net cash provided by financing activities 799,782 1,851,886
----------- -----------
Net change in cash and cash equivalents (234,766) (836,783)
Cash and cash equivalents, beginning of period 393,451 1,603,975
----------- -----------
Cash and cash equivalents, end of period $ 158,685 $ 767,192
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENT
7
Tengasco, Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) BASIS OF PRESENTATION
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 three months ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002. For
further information, refer to the Company's consolidated financial
statements and footnotes thereto for the year ended December 31, 2001,
included in the Company's annual report on Form 10-K.
(2) GOING CONCERN UNCERTAINTY
The accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as
a going concern which assumes realization of assets and the satisfaction of
liabilities in the normal course of business. The Company continues to be
in the early stages of its oil and gas related operating history as it
endeavors to expand its operations through the continuation of its drilling
program in the Tennessee Swan Creek Field. Accordingly, the Company has
incurred continuous losses through these operating stages and has an
accumulated deficit of $25,095,708 and a working capital deficit of
$6,507,649 as of March 31, 2002. On April 5, 2002, the Company was informed
by its primary lender that $6,000,000 of its outstanding credit facility
was due and payable within 30 days, as the lender has interpreted is
provided for in the Credit Agreement between the Company and its lender.
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 under the
terms of the Credit Agreement. On May 2, 2002, the Company filed suit in
Federal Court to restrain Bank One from taking further action under the
terms of the Credit Agreement. The Company is attempting to obtain
alternative financing to replace Bank One. There can be no assurance that
the Company will be successful in its plans to obtain the financing
necessary to satisfy their current obligations. The Company has deferred
loan costs relative to the Bank One credit facility which it is amortizing
over the 36 month term of the loan. If this credit facility is terminated,
the unamortized balance of deferred loan fees of $453,396 at March 31, 2002
would be immediately expensed.
8
(3) SALES OF EQUIPMENT
During the third quarter of 2001, the Company sold two fully depreciated
compressors to Miller Petroleum, Inc. ("Miller"), a joint venturer 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.
(4) EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted
loss per share are based on 10,642,541 and 9,886,587 weighted average
shares outstanding for the quarters ended March 31, 2002 and 2001
respectively. The March 31, 2001 figures have been retroactively adjusted
to reflect the 5% stock dividend declared as of September 4, 2001 which was
distributed on October 1, 2001. During the three month periods ended March
31, 2002 and 2001, potential weighted average common shares outstanding
were approximately 821,000 and 500,000 shares, respectively. 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.
(5) NEW ACCOUNTING PRONOUCEMENTS:
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities,
"effective January 1, 2001. SFAS No. 133 (as amended by SFAS 137 and SFAS
138) requires a company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a fair value hedge, changes in
the fair value of the hedged assets, liabilities or firm commitments are
recognized through earnings. If the derivative is a cash flow hedge, the
effective portion of changes in the fair value of the derivative are
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value is immediately recognized in earnings. The adoption of SFAS No.
133, as amended, did not have a material impact on the Company's
consolidated financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 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 the 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 would have been required to adopt SFAS No. 141
on July 1, 2001, and SFAS 142 on a prospective basis as of January 1, 2002.
The Company has not effected a business combination and carries no goodwill
on its balance sheet; accordingly, the adoption of these standards is not
expected to have an effect on the Company's financial position or results
of operations.
9
In June 2001, the Financial Accounting Standards Board approved the
issuance of SFAS No. 143, "Accounting for Asset Retirement Obligations."
SFAS 143 establishes accounting standards for the recognition and
measurement of legal obligations associated with the retirement of tangible
long-lived assets and requires recognition of a liability for an asset
retirement obligation in the period in which it is incurred. The provisions
of this statement are effective for financial statements issued for fiscal
years beginning after June 15, 2002. The adoption of this statement is not
expected to have a material impact on the Company's financial position or
results of operations.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, addresses accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 supersedes SFAS No 121, "Accounting for
the Impairment of Long-Lived Assets and for Long- Lived Assets to be
Disposed Of." SFAS No. 144 establishes a single accounting model for long-
lived assets to be disposed of by sale and expands on the guidance provided
by SFAS No. 121 with respect to cash flow estimations. SFAS No. 144 becomes
effective for the Company's fiscal year beginning January 1, 2002. The
adoption of this statement is not expected to have a material impact on the
Company's financial position or results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Recision of No. 4, 44, 64, Amendment of SFAS No. 13, and
Technical Correction." SFAS No. 4 which was amended by SFAS No. 64 required
all gains and losses from the extinguishment of debt to be aggregated and
if material classified in an extraordinary item net of related income tax
effect. As a result, the criteria in Opinion 30 will now be used to
classify those gains and losses. SFAS No. 13 was amended to eliminate an
inconsistency between the required accounting for sale- leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
The adoption of SFAS No. 145 will not have a current impact on the
Company's consolidated financial statements.
(6) STOCK OPTIONS
For the three months ended March 31, 2002, no stock options were issued,
exercised or expired. During the three months ended March 31, 2001, the
Company extended the exercise period of one employee's stock option who was
retiring resulting in recorded compensation of $55,200.
(7) 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%. 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 repay a note
payable to Spoonbill, Inc. ($1,080,833.34); (4) to repay 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
($1,003,844.44); and (5) to repay in full the remaining principal of the
working capital loan due
10
December 31, 2001 to Edward W.T. Gray III, a former director of the Company
($304,444.44). All of these obligations incurred interest at a rate
substantially greater than the rate 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 has filed
a lawsuit in Federal Court to prevent Bank One from exercising any rights
under the Credit Agreement. No further developments have occurred since the
filing of the lawsuit.
(8) SUBSEQUENT EVENT:
On April 30, 2002, the Company sold 10,000 shares of its Series C 6%
Cumulative Convertible Preferred Stock $100 Par Value ("Series C Shares")
pursuant to a private placement offering which will terminate upon the
earlier of July 15, 2002 or the date at which the entire 50,000 Series C
Shares being offered are sold. Net proceeds, after issuance costs, totaled
$917,000.
(9) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During the three months ended March 31, 2002, the Company converted debt of
$60,000 into 10,296 shares of common stock. Additionally, during this
period, the Company acquired equipment with a fair market value of $150,000
through an exchange of 19,582 shares of common stock.
Cash paid for interest during the three months ended March 31, 2002 and
2001 was approximately $146,000 and $65,000 respectively.
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company began delivering gas from its Swan Creek Field through its
pipeline to BAE Systems ("BAE"), the operator of the Holston Army
Ammunition Plant in Kingsport, Tennessee on April 4, 2001 and to Eastman
Chemical Company ("Eastman") also located in Kingsport on May 24, 2001.
Daily production was 4,936.2 Mcf in June 2001 and daily production average
increased in July 2001 to 5,497 Mcf per day. The Company anticipated that
it would reach its goal of delivering 10MMcf per day to Eastman and BAE by
the end of 2001 but by year end was only delivering approximately 3,000 Mcf
per day. The Company was unable to attain that production target due to the
in-flow of substantially more fluids in the existing wells than expected
which obstructed and significantly reduced the flow of gas from the
existing wells. This required the Company to perform substantial additional
work and repairs to increase the production from existing wells. The repair
work continued through the end of 2001 and into the first quarter of 2002.
As a result of this repair work, many of the existing wells had to be
shut down while the repairs were made. The Company temporarily ceased
drilling new wells in order to concentrate its efforts on the repairs. The
fluid problems in certain wells could only be addressed by re-drilling
those wells and other wells had to be relocated to more productive areas.
These fluid entry problems along with natural production declines and
suspension of drilling activity led to production totals lower than
anticipated during the first quarter of 2002. However, the Company expects
the repair work to be completed by September 2002 and the decline appears
to be stabilizing. By the end of March 2002, production from the Swan Creek
Field began leveling off at approximately 3 Mmcf of gas per day. The
Company has again commenced drilling new wells.
The Company has completed redrilling of the Colson No. 2 well to
deepen it and recomplete it as a gas well. This well was perforated on
April 26, 2002 and exhibits a 1350 psi bottom hole pressure. This well will
be brought into production gradually to maximize the amount of gas that can
be produced from the well, and is expected to produce at least between
300,000 and 500,000 cubic feet of gas per day when placed into full
production.
The Company intends to drill approximately 17 more new wells within
the Knox formation. Because the Knox formation has been defined by the
accumulation of data from the previously drilled wells, new locations and
new wells are expected to contribute significantly to achieving increases
to production totals. The Company is hopeful that production from these new
wells will be in line with the production from its best existing wells in
the Swan Creek Field and will have a noticeable effect on increasing the
total production from the Field. Although no assurances can be made, the
Company believes that, once this work is completed and the new wells are
drilled, production from the Swan Creek Field will substantially increase
by the end of 2002.
The Company also intends to commence drilling in other formations in
its Swan Creek Field. To date, drilling in the Swan Creek Field has focused
on production of gas primarily from the Knox formation. This is a lower
Ordovician Dolomite, and the heart of the anticline structure at Swan
Creek. However, immediately adjacent to this formation and shallower over
these formations
12
are other formations which the Company believes have potential for gas
production. The Stones River and Trenton formations hold the possibility
for both oil and gas and have produced some gas to date. These Upper
Ordovician formations have not been a primary target for gas production,
but the shallower depths needed for drilling and the moderate gas
production might make a potential significant source for additional gas
production. With the completion of only one well in the Trenton formation
which is producing approximately 100Mcf per day, the impact of these
targets is has not yet been defined. The Company also plans to drill a
12,000 to 15,000 feet deep test well in the Company's Swan Creek field,
which the Company believes may have high potential for significant
additional volumes of natural gas. The current wells in this field are all
approximately 5,000 feet deep. Drilling is expected to commence on or
before December 31, 2002.
Because of the production problems in the Swan Creek Field described
above and the decrease in oil and gas prices from the first quarter of
2001, the Company incurred a net loss to holders of common stock of
$980,326 ($0.09 per share) in the first quarter of 2002 compared to net
loss of $447.546 (0.05 per share) in 2001. $487,348 of this loss consisted
of deductions for depletion, depreciation and amortization. This was a
significant increase compared to the first quarter of 2001 when depletion,
depreciation and amortization was estimated at $97,500. This increase is
primarily due to significant increases in depletion expense during the
first quarter of 2002 ($250,000) as a result of the following: decreases in
reserve estimates on oil and gas properties arising from declining
commodity prices; certain of the Company's gas wells had decreased
production levels at year-end due to problems encountered with liquids in
the wells. This decreased production level at year-end was factored into
the estimated future proved reserves calculation performed on December 31,
2001, resulting in a lower future proved reserves estimate. The December
31, 2001 Ryder Scott reserve report was used as a basis for the 2002
estimate. Additionally, the Company took depreciation on its pipeline in
the first quarter of 2002 of ($127,168), while in the first quarter of
2001, the pipeline was not operational.
The Company realized oil and gas revenues of $1,175,444 in the first
quarter of 2002 as compared to $1,448,318 in 2001, despite the fact that
the Company produced more gas in the first quarter of 2002 as production
from the Swan Creek Field had come on line. The decrease from 2002 to 2001
was primarily due to dramatic price decreases. Oil prices averaged $26.76
in the first quarter of 2001 compared to $19.40 in 2002 for Kansas
production. Also, Kansas natural gas prices averaged $7.01 per Mcf in the
first quarter of 2001 as compared to $2.19 in 2002. Production for the
Kansas oil and gas production remained constant.
The decrease in prices for Kansas oil and Kansas gas resulted in a
decrease in revenues of approximately $490,000, of which, $342,000 was
related to gas prices.
Oil production in Swan Creek also decreased significantly from 13,917
barrels and revenues of $232,962 in the first quarter of 2001 to 4,462
barrels and revenues of $50,676 in 2002 as the Company was in the process
of well work-overs on its best wells in Swan Creek.
The Company realized gas revenues from Swan Creek in the first quarter
of 2002 of $389,970 and $0 in 2001. The gas revenues would have been higher
if the Company had not experienced problems in the field as previously
explained. In addition, the Company's subsidiary, Tengasco Pipeline
Corporation, had pipeline transportation revenues of $77,707 in the first
quarter of 2002.
13
The Company's production costs and taxes remained consistent between
the first quarter of 2002 and 2001.
General and administrative expenses have decreased from $754,062 in
the first quarter of 2001 to $640,230 in 2002. The decrease from 2001 to
2002 is primarily due to the closing of the New York office during the
first quarter of 2002 and $55,200 in compensation expense resulting from
the extension of the exercise period for an option granted to an employee
during the first quarter of 2001.
Interest cost for 2002 decreased significantly from 2001 levels. This
decrease is due to reduced interest rates on the Bank One debt compared to
the interest rates on debt associated with financing for the completion of
Phase II of the Company's 65-mile pipeline. However, interest cost of
approximately $148,000 was capitalized in the first 3 months of 2001 during
construction of the pipeline which resulted in lower interest expense
during that period. No interest was capitalized during the first quarter of
2002, as all significant construction was completed.
Dividends on preferred stock has increased from $78,448 in 2001 to
$112,458 in 2002 as a result in the increase in preferred stock
outstanding.
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") whereby Bank One extended to the Company a
revolving line of credit of up to $35 million. The initial borrowing base
under the Credit Agreement was $10 million. As of March 31, 2002 the
outstanding principal balance of the loan was $9,301,776.66. A payment was
made on April 1, 2002 to reduce the outstanding balance to $9,101,776.66.
On or about 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 to $3,101,776.66 and required a $6 million reduction of
the outstanding loan. The notice did not provide any explanation why the
reduction was made or as to how the reduction was calculated. Bank One
demanded that the Company pay the $6 million within thirty days of the
receipt of the notice.
It is the position of the Company that pursuant to the terms of the
Credit Agreement Bank One had no right to redetermine the borrowing base
until it received a December 1, 2002 reserve analysis, and then only if the
value of the reserves was inadequate after applying the same guideline used
with all of its other oil and gas borrowers. The schedule of reserve
reports required by the Credit Agreement upon which such re-determinations
are to be based also specifically sets up a procedure involving an
automatic monthly principle payment of $200,000 commencing February 1,
2002. The Company is current in payments of this monthly reduction.
As a result of Bank One's improperly attempted reduction of the
borrowing base and the corresponding demand for payment of $6 million,
combined with the fact that the Company is still in the early stages of its
oil and gas operating history during which time it has had a history of
losses from operations and has an accumulated deficit of $25,095,708 and a
working capital deficit of $6,507,649 as of March 31, 2002, the Company's
independent auditors indicated a going concern uncertainty in their
14
report on the audit of the Company's consolidated financial statements for
the year ended December 31, 2001. The Company's ability to continue as a
going concern depends upon its ability to obtain long-term debt or raise
capital to satisfy its cash flow requirements.
The Company anticipates it will be able to obtain alternative
financing to replace Bank One as lender in the near future and that ongoing
drilling, production, and transportation will continue without interruption
because of Bank One's improper action.
On May 2, 2002, the Company filed suit in Federal Court in the Eastern
District of Tennessee, Northeastern Division at Greeneville, Tennessee to
restrain Bank One from taking any steps pursuant to its Credit Agreement
with the Company to enforce its demand that the Company reduce its loan
obligation or else be deemed in default and for damages resulting from the
wrongful demand. It is the position of the Company that Bank One's demand
that the Company reduce its loan from $9,101,776.66 to $3,101,776.66 within
thirty days, coming as it does only four months after the loan was made, in
the absence of any change in the Company's production of oil and gas from
the time the loan was closed or the condition of the Company's assets,
without any warning and prior to the receipt of the December 2002 reserve
report, without any basis or explanation, is a violation of the terms of
the Credit Agreement and an act of bad faith. The Company is seeking a jury
trial and actual damages sustained by it as a result of this arbitrary,
wrongful demand, in the amount of $51,000,000 plus punitive damages in the
amount of $100 million.
In addition, on April 26, 2002, the Board of Directors authorized the
issuance by private placement of a new series, Series C, of 6% cumulative
convertible preferred stock in a minimum amount of $1 million and a maximum
amount of $5 million. As of the date of this filing, $1 million of the
Series C offering has been sold netting the Company $917,000 after issuance
costs. The capital raised from this offering will be used to provide funds
to pay for reworking of wells, to continue the drilling program in the Swan
Creek Field to increase production, and to provide working capital.
Although the Company believes it will be able to complete the maximum
amount of this offering, there can be no assurances that the Company will
be able to sell all of such preferred stock or, if it is able to do so, the
proceeds of the sale of the new series of cumulative convertible preferred
stock will be sufficient to accomplish these purposes.
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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 for the first 3 months
of 2002 ranged from a low of $15.20 per barrel to high of $22.26 per
barrel. Monthly gas price realizations for the first 3 months of 2002
ranged from a low of $1.91 per Mcf to a high of $2.61 per Mcf.
The Company was required by Bank One pursuant to the Credit Agreement
to enter into hedge agreements on December 28, 2001 on notional volumes of
oil and natural gas production for the first seven months of 2002 in order
to manage some exposure to oil and gas price fluctuations. Realized gains
or losses from the Company's price risk management activities will be
recognized in oil and gas production revenues when earned since the
Company's positions are not considered hedges for financial reporting
purposes. Notional volumes associated with the Company's derivative
contracts are 27,000 barrels and 630,000 MMBtu's for oil and natural gas,
respectively. The Company does not generally hold or issue derivative
instruments for trading purposes.
At March 31, 2002, the Company's open natural gas and crude oil price
swap positions are not considered to have a material fair value. Assuming
natural gas production and sales volumes remain consistent at December 2001
levels during the entire year of fiscal 2002, management believes that a 10
percent decrease in unhedged natural gas prices would reduce the Company's
natural gas revenues by approximately $41,610 on an annual basis. Assuming
crude oil production and sales volumes remain consistent at December 2001
levels during the entire year of fiscal 2002, management believes that a 10
percent decrease in unhedged crude oil prices would reduce the Company's
crude oil revenues by approximately $208,840 on an annual basis.
INTEREST RATE RISK
At March 31, 2002, the Company had debt outstanding of approximately
$10.5 million. The interest rate on the Bank One revolving credit facility
which at March 31, 2002 was $9.3 million is variable based on the financial
institution's prime rate plus 0.25%. The remaining debt of $1.2 million has
fixed interest rates ranging from 7.5% to 11.95%. As a result, the
Company's annual interest costs in 2002 may fluctuate based on short-term
interest rates on approximately 88% of its total debt outstanding at March
31, 2002. The annual impact on interest expense and the Company's cash
flows of a 10 percent increase in the financial institution's prime rate
(approximately .5 basis points) would be approximately $45,500, assuming
borrowed amounts under the credit facility remain at $9.3 million. The
Company did not have any open derivative contracts relating to interest
rates at March 31, 2002.
FORWARD-LOOKING STATEMENTS AND RISK
Certain statements in this report, including statements of the future
plans, objectives, and
16
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.
17
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On May 2, 2002, the Company filed suit in Federal Court in the Eastern
District of Tennessee, Northeastern Division at Greeneville, Tennessee to
restrain Bank One from taking any steps pursuant to its Credit Agreement with
the Company to enforce its demand that the Company reduce its loan obligation or
else be deemed in default and for damages resulting from the wrongful demand. It
is the position of the Company that Bank One's demand that the Company reduce
its loan from $9,101,776.66 to $3,101,776.66 within thirty days, coming as it
does only four months after the loan was made, in the absence of any change in
the Company's production of oil and gas from the time the loan was closed or the
condition of the Company's assets, without any warning and prior to the receipt
of the December 2002 reserve report, without any basis or explanation, is a
violation of the terms of the Credit Agreement and an act of bad faith. The
Company is seeking a jury trial and actual damages sustained by it as a result
of this arbitrary, wrongful demand, in the amount of $51,000,000 plus punitive
damages in the amount of $100 million.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first quarter of 2002, 100,000 shares of restricted common
stock were sold in a private placement to Bill L. Harbert, a Director of the
Company, who at the time of the transaction was not a Director; 10,296 shares
were issued pursuant to the conversion of convertible notes by several
individuals; and 19,582 shares were issued for payment for a telescoping bender
derrick purchased by the Company from Miller Petroleum, Inc. The equipment was
purchased for $150,000 with stock valued at the January 21, 2002 closing price
of $7.66.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
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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: May 15, 2002 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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