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, 2003
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COMMISSION FILE NO. 0-20975
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TENGASCO, INC. AND SUBSIDIARIES
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(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
TENNESSEE 87-0267438
------------------------------ -------------------
STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
603 MAIN AVENUE, SUITE 500, KNOXVILLE, TN 37902
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(865-523-1124)
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(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER
PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES __X__ NO _____
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
EQUITY, AS OF THE LATEST PRACTICABLE DATE: 12,003,977 COMMON SHARES AT JUNE 30,
2003.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES _____ NO __X__
1
TENGASCO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
* Condensed Consolidated Balance Sheets as of June 30, 2003
(unaudited) and December 31, 2002 ...................... 3-4
* Consolidated Statements of Loss for the three and
six months ended June 30, 2003 and 2002 (unaudited) .... 5
* Consolidated Statements of Stockholders' Equity for
the six months ended June 30, 2003 and 2002 ............ 6
* Consolidated Statements of Cash Flows for the
six months ended June 30, 2003 and 2002 ................ 7
* Notes to Condensed Consolidated Financial Statements ... 8-14
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .............................. 14-19
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK ........................... 20-21
ITEM 4. CONTROLS AND PROCEDURES ................................ 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ...................................... 21-23
ITEM 2. CHANGES IN SECURITIES AND USE OF
PROCEEDS ............................................... 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ........................ 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS ....................................... 24
* EXHIBITS ............................................... 25
SIGNATURES ............................................. 26
2
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2003 December 31, 2002
(Unaudited)
------------- -----------------
Current Assets:
Cash and cash equivalents $ 383,058 $ 184,130
Investments 34,500 34,500
Accounts receivable, net 758,040 730,667
Participant receivable 60,696 70,605
Inventory 262,748 262,748
Current portion of loan fees, net 261,591 323,856
----------- -----------
Total current assets 1,760,633 1,606,506
Oil and gas properties, net (on the basis of
full cost accounting) 13,422,702 13,864,321
Completed pipeline facilities, net 15,439,812 15,372,843
Other property and equipment, net 1,549,202 1,685,950
Loan fees, net of accumulated amortization 0 40,158
Other 6,033 14,613
----------- -----------
$32,178,382 $32,584,391
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 2003 December 31, 2002
(Unaudited)
------------- -----------------
Current liabilities
Notes payable to related parties $ 7,391,029 $ 7,861,245
Accounts payable-trade 788,723 1,396,761
Accrued interest payable 112,671 61,141
Accrued dividends payable 352,469 254,389
Current Maturities of long term debt to related parties 2,084,000 750,000
Other accrued liabilities 226,098 31,805
------------ ------------
Total current liabilities 10,954,990 10,355,341
Asset retirement obligations 648,079 0
Long term debt, less current maturities 614,181 1,256,209
------------ ------------
Total liabilities 12,217,250 11,611,550
------------ ------------
Preferred Stock
Cumulative convertible redeemable preferred; redemption
value $7,072,000 and $7,072,000;
70,720 and 70,720 shares outstanding; respectively 6,870,694 6,762,218
------------ ------------
Stockholders' Equity
Common stock, $.001 per value, 50,000,000 shares
authorized 12,019 11,460
Additional paid-in capital 42,831,339 42,237,276
Accumulated deficit (29,491,533) (27,776,726)
Accumulated other comprehensive loss (115,500) (115,500)
Treasury stock, at cost (145,887) (145,887)
------------ ------------
Total stockholders' equity 13,090,438 14,210,623
------------ ------------
$ 32,178,382 $ 32,584,391
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues and other income
Oil and gas revenues $ 1,436,848 $ 1,233,473 $ 3,360,763 $ 2,408,917
Pipeline transportation revenues 45,219 63,538 92,723 141,245
Interest income 323 657 507 1,695
------------ ------------ ------------ ------------
Total revenues and other income 1,482,390 1,297,668 3,453,993 2,551,857
Costs and other deductions
Productions costs and taxes 857,970 545,505 1,627,879 1,269,304
Depletion, depreciation and amortization 628,196 487,348 1,259,138 974,696
Interest expense 140,742 148,297 294,098 301,664
General and administrative costs 299,158 539,842 810,495 1,126,109
Public relations 23,398 106,326 28,177 160,289
Professional fees 211,518 328,547 420,944 445,860
------------ ------------ ------------ ------------
Total costs and other deductions 2,160,982 2,155,865 4,440,731 4,277,922
------------ ------------ ------------ ------------
Net loss (678,592) (858,197) (986,738) (1,726,065)
------------ ------------ ------------ ------------
Dividends on preferred stock 134,194 125,942 268,389 238,400
------------ ------------ ------------ ------------
Net loss attributable to common shareholders
Before cumulative effect of a change in
accounting principle $ (812,786) $ (984,139) $ (1,255,127) $ (1,964,465)
------------ ------------ ------------ ------------
Cumulative effect of a change in accounting principle 0 0 (351,204) 0
------------ ------------ ------------ ------------
Net loss attributable to common shareholders $ (812,786) $ (984,139) $ (1,606,331) $ (1,964,465)
------------ ------------ ------------ ------------
Net loss attributable to common shareholders
Per share basic and diluted:
Operations $ (0.07) $ (0.09) $ (0.11) $ (0.18)
Cumulative effect of a change in accounting principle $ 0 $ 0 $ (0.03) $ 0
------------ ------------ ------------ ------------
Total $ (0.07) $ (0.09) $ (0.14) $ (0.18)
------------ ------------ ------------ ------------
Weighted average shares outstanding 11,944,583 10,784,847 11,854,950 10,714,087
------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Accumulated
Common Stock Additional Other
---------------------------- Paid in Comprehensive Accumulated
Shares Amount Capital Loss Deficit
------------ ------------ ------------ ------------- ------------
Balance December 31, 2002 11,459,279 $ 11,460 $ 42,237,276 $ (115,500) $(27,776,726)
Net Loss 0 0 0 (986,738)
Common Stock Issued in
Private Placements Net of
Related Expenses 227,275 227 249,773 0
Common Stock Issued for
exercised options 58,000 58 28,942 0
Common Stock Issued in
Conversion of Debt 60,528 61 69,538 0
Common Stock Issued for
Preferred Dividend in Arrears 154,824 154 170,155
Common Stock Issued for
Charity 3,571 4 5,710
Retained Earnings-Accretion
of Issue Cost on Preferred
Stock (108,476)
Common Stock Issued for
Services 55,000 55 69,945 0
Dividends on Convertible
Redeemable Preferred Stock 0 0 0 (268,389)
Cumulative effect of a change
in accounting principle 0 0 0 (351,204)
============ ============ ============ ============ ============
Net loss for the six months
ended June 30, 2003 12,018,477 $ 12,019 $ 42,831,339 $ (115,500) $(29,491,533)
============ ============ ============ ============ ============
Treasury Stock
- ----------------------------
Shares Amount Total
- ------------ ------------ ------------
14,500 $ (145,887) $14,210,623
0 0 (986,738)
0 0 250,000
0 0 29,000
0 0 69,599
170,309
5,714
(108,476)
0 0 50,000
0 0 (268,389)
0 0 (351,204)
============ ============ ============
14,500 $ (145,887) $ 13,090,438
============ ============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six For the Six
Months Ended Months Ended
June 30, 2003 June 30, 2002
(Unaudited) (Unaudited)
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Operating activities
Net loss $ (986,738) $(1,726,065)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization 1,259,138 974,696
Charitable donation, services paid in stock, stock options 104,714 48,621
Changes in assets and liabilities
Accounts receivable (27,373) (24,054)
Participant receivables 9,909 (33,990)
Accounts payable-trade (608,038) (26,245)
Accrued interest payable 51,530 0
Other accrued liabilities 194,294 (5,825)
Accrued dividends payable 0 13,535
Other 8,580 0
----------- -----------
Net cash provided by (used in) operating activities 6,016 (779,327)
----------- -----------
Investing activities
Additions to property and equipment 0 (118,356)
Net additions to oil and gas properties (13,474) (1,020,026)
Net additions to pipeline facilities (334,969) (349,918)
Decrease in restricted cash 0 45,855
Other 0 (22,108)
----------- -----------
Net cash used in investing activities (348,443) (1,464,553)
----------- -----------
Financing activities
Repayments of borrowings (1,042,645) (1,268,608)
Proceeds from borrowings 1,334,000 1,018,356
Dividends on convertible redeemable preferred stock 0 (238,400)
Proceeds from private placements of common stock 250,000 1,111,998
Proceeds from private placements of preferred stock 0 1,328,168
----------- -----------
Net cash provided by financing activities 541,355 1,951,514
----------- -----------
Net change in cash and cash equivalents 198,928 (292,366)
Cash and cash equivalents, beginning of period 184,130 393,451
----------- -----------
Cash and cash equivalents, end of period $ 383,058 $ 101,085
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Item
210 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six months ended June 30, 2003 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2003. Additionally, deferred income taxes and income tax
expense is not reflected in the Company's financial statements due to the fact
that the Company has had recurring losses and deferred tax assets arising from
net operating loss carry-forwards have been fully reserved. For further
information, refer to the Company's consolidated financial statements and
footnotes thereto for the year ended December 31, 2002 included in the Company's
annual report on Form 10-K.
(2) GOING CONCERN UNCERTAINTY
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplates continuation of the Company as a
going concern and assume realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has incurred
continuous losses since commencing its operations and has an accumulated deficit
of $29,491,533 and a working capital deficit of $9,194,357 as of June 30, 2003.
During 2002, the Company was informed by its primary lender that the entire
amount of its outstanding credit facility was immediately due and payable, as
provided for in the Credit Agreement. These circumstances raise substantial
doubt about the Company's ability to continue as a going concern.
The Company has disputed its obligation to make this payment and
is attempting to resolve the dispute or to obtain alternate refinancing
arrangements to repay this current obligation. There can be no assurance that
the Company will be successful in its plans to obtain the financing necessary to
satisfy its current obligation.
(3) EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share", basic and diluted loss per share are based
on 11,944,583 and 10,784,847 weighted average shares outstanding for the
quarters ended June 30, 2003 and 2002, respectively. Basic and diluted loss per
share are based on 11,854,950 and 10,714,087 weighted average shares outstanding
for the six months ended June 30, 2003 and 2002. During the six months period
ended June 30, 2003 and year ended
8
December 31, 2002 potential weighted average stock equivalents outstanding were
approximately 1,473,000. These shares are not included in the computation of the
diluted loss per share amount because the Company was in a net loss position and
their effect would have been antidilutive.
The Company adopted the disclosure provision of the Statement of
Financial Accounting Standards (SFAS or Statement) No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation", SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation, which was originally provided
under SFAS No. 123. The Statement also improves the timeliness of disclosures by
requiring the information be included in interim, as well as annual, financial
statements. The adoption of these disclosure provisions did not have a material
affect on the Company's 2002 consolidated results of operations, financial
position, or cash flows.
SFAS No. 123 encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The option price of
all the Company's stock options is equal to the market value of the stock at the
grant date. As such, no compensation expense is recorded in the accompanying
consolidated financial statements.
Had compensation cost been determined based upon the fair value at the grant
date for awards under the stock option plan consistent with the methodology
prescribed under SFAS No. 123, the Company's pro forma net income (loss) and net
income (loss) per share would have differed from the amounts reported as
follows:
Year Ended Six Months Six Months
December 31, 2002 June 30, 2002 June 30, 2003
----------------- ------------- -------------
Net loss as reported $(3,661,344) $(1,964,465) $(1,606,331)
Stock-based employee compensation
expense determined under fair value
basis $ (77,821) $ (194,446) $ (47,209)
----------- ----------- -----------
Pro forma net loss $(3,739,165) $(2,158,911) $(1,653,540)
Earning per share:
Basic and diluted as reported $ (0.33) $ (0.18) $ (0.14)
Basic and diluted pro forma $ (0.34) $ (0.18) $ (0.14)
4) NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement Of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations" SFAS
9
No. 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement cost. This statement requires companies to record the present value
of obligations associated with the retirement of tangible long-lived assets in
the period in which it is incurred. The liability is capitalized as part of the
related long-lived assets carrying amount. Over time, accretion of the liability
is recognized as an operating expense and the capitalized cost is depreciated
over the expected useful life of the related asset. The Company's asset
retirement obligations relate primarily to the plugging, dismantlement, removal
site reclamation and similar activities of its oil and gas properties. Prior to
adoption of this statement, such obligations were accrued ratably over the
productive lives of the assets through its depreciation, depletion and
amortization for oil and gas properties without recording a separate liability
for such amounts. The impact of applying this statement as of January 1,2003 and
June 30, 2003 is discussed in footnote 10.
In April 2002, the Financial Accounting Standards Board issued
SFAS No. 145, "Rescission of SFAS No. 4, 44, 64, Amendment of SFAS No. 13, and
Technical Corrections" ("SFAS 145"). SFAS 4, which was amended by SFAS 64,
required all gains and losses from the extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. As a result of SFAS 145, the criteria in Accounting Principles Board
Opinion 30 will now be used to classify those gains and losses. SFAS 13 was
amended to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The adoption of SFAS 145 will not have a current impact on the
Company's consolidated financial statements.
In July 2002, FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Statement 146
replaces Issue 94-3. Statement 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company does not
currently have any plans for exit or disposal activities, and therefore does not
expect this standard to have a material effect on the Company's consolidated
financial statements upon adoption.
In November 2002, the FASB issued FASB Interpretation ("FIN")
No.45,"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", which clarifies
disclosure and recognition/measurement requirements related to certain
guarantees. The disclosure requirements are effective for financial statements
issued after December 15, 2002 and here cognition/measurement requirements are
effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The application of the requirements of FIN 45 did not have a
impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123 ("Statement
10
148"). This amendment provides two additional methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. Additionally, more prominent disclosures in both annual
and interim financial statements are required for stock-based employee
compensation. The transition guidance and annual disclosure provisions of
Statement 148 are effective for fiscal years ending after December 15, 2002. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of Statement 148 did not have a material impact on the Company's
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. (FIN)
46, "Consolidation of Variable Interest Entities." This interpretation of
Accounting Research Bulletin No. 51 "Consolidated Financial Statements"
consolidation by business enterprises of variable interest entities which
possess certain characteristics. The Interpretation requires that if a business
enterprise has a controlling financial interest in a variable interest entity,
the assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those of
the business enterprise. This Interpretation applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. The Company
does not have any ownership in any variable interest entities as of March 31,
2003. The Company will apply the consolidation requirement of FIN 46 in future
periods if it should own any interest in any variable interest entity.
In May 2003, the FASB issued Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 requires three types of freestanding financial instruments
to be classified as liabilities in statements of financial position. One type is
mandatorily redeemable shares, which the issuing company is obligated to buy
back in exchange for cash or other assets. A second type, which includes put
options and forward purchase contracts, involves instruments that do or may
require the issuer to buy back some of its shares in exchange for cash or other
assets. The third type of instrument is obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominately to a
variable such as a market index, or varies inversely with the value of the
issuer's shares. The majority of the guidance in SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. In accordance with SFAS No. 150, the Company plans to adopt
this standard on July 1, 2003. Adoption of SFAS No. 150 by the Company on July
1, 2003 is not expected to have a material impact on the Company's consolidated
financial position and results of operations.
(5) LETTER OF CREDIT AGREEMENT
On November 8, 2001, the Company signed a credit facility with
the Energy Finance Division of Bank One, N.A. in Houston, Texas whereby Bank One
extended to the Company a revolving line of credit of up to $35 million. The
initial borrowing base under the facility was $10 million. The interest
11
rate is the Bank One base rate plus one-quarter percent.
On November 9, 2001, funds from this credit line were used to (1)
refinance existing indebtedness on the Company's Kansas properties, (2) to repay
the internal financing provided by directors and shareholders on the Company's
completed 65-mile Tennessee intrastate pipeline system (3) to repay a note
payable to Spoonbill, Inc. (4) to repay a purchase money note due to M.E.
Ratliff, who at the time was the Company's chief executive officer and Chairman
of the Board of Directors, for purchase by the Company of a drilling rig and
related equipment, (5) to repay in full the remaining principal of the working
capital loan due December 31, 2001 to Edward W.T. Gray III, who at that time was
a director of the Company. All of these obligations incurred interest at a rate
substantially greater than the rate being charged by Bank One under the credit
facility.
On April 5, 2002, the Company received a notice from Bank One
stating that it had redetermined and reduced the borrowing base under the Credit
Agreement by $6,000,000 to $3,101,766. Bank One demanded that the Company pay
the $6,000,000 within thirty days of the notice. The Company filed a lawsuit in
Federal Court to prevent Bank One from exercising any rights under the Credit
Agreement. The Company has been paying $200,000 per month toward the outstanding
balance of the credit facility and any accrued interest until this situation is
resolved.
(6) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
During the three months ended March 31, 2003, the Company
converted $60,000 of debt and $9,600 of accrued interest owed to holders of
convertible notes into 60,528 shares of common stock.
During the six months ended June 30, 2003 the Company converted
$170,309 of accrued dividends payable into 154,824 shares of common stock.
During the three months ended March 31, 2003, the Company issued
55,000 shares of common stock for payment for consulting services performed in
the amount of $70,000.
During the three months ended March 31, 2003, the Company donated
3,571 shares of stock as a charitable contribution valued at $5,710.
During the three months ended March 31,2003 the Company
capitalized $260,191 into oil and gas properties associated with estimated
future obligations.
12
(7) NOTES PAYABLE
On February 3, 2003 and February 28, 2003, Dolphin Offshore
Partners, LP which owns more than 10% of the Company's outstanding common stock
and whose general partner, Peter E. Salas, is a Director of the Company, loaned
the Company the sum of $250,000 on each such date (cumulatively, $500,000) which
the Company used to pay the principal and interest due to Bank One for February
and March 2003 and for working capital needs. On May 20, 2003 an additional loan
of $834,000 was loaned by a combination of Dolphin ($750,000) and Jeffery R.
Bailey who is a Director and President ($84,000) of the Company. Each of these
loans is evidenced by a separate promissory note each bearing interest at the
rate of 12% per annum, with payments of interest only payable quarterly and the
principal balance payable on January 4, 2004. Each of the February and March
2003 promissory notes is secured by an undivided 10% interest in the Company's
pipelines. The May 20, 2003 loans provide Dolphin with a 30% interest and
Bailey with a 3.36% interest in the Company's pipelines.
(8) RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to
the current period's presentation.
(9) LAW SUIT SETTLEMENT
On April 2, 2003 and by agreed order filed May 5, 2003, all
claims were settled and the lawsuit was dismissed in C. H. Fenstermaker &
Associates, Inc. v. Tengasco, Inc.: No.3:01-CV-283, in the United States
District Court for the Eastern District of Tennessee, at Knoxville. The
settlement provides that the amount claimed to be owed by the Company to Caddum
was reduced to $297,000 which is to be paid by note due May 1, 2004, with
interest only payable monthly at an annual interest rate of 4.75 percent.
(10) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2003, the Company implemented the
requirements of Statement of Financial Accounting Standards No. 143 (SFAS 143),
"Accounting for Asset Retirement Obligations". Among other things, SFAS 143
requires entities to record a liability and corresponding increase in long-lived
assets for the present value of material obligations associated with the
retirement of tangible long-lived assets. Over the passage of time, accretion of
the liability is recognized as an operating expense and the capitalized cost is
depleted over the estimated useful life of the related asset. Additionally, SFAS
143 requires that upon initial application of these standards, the Company must
recognize a cumulative effect of a change in accounting principle corresponding
to the accumulated accretion and depletion expense that would have
13
been recognized had this standard been applied at the time the long-lived assets
were acquired or constructed. The Company's asset retirement obligations relate
primarily to the plugging, dismantling and removal of wells drilled to date.
Using a credit-adjusted risk free rate of 12%, an estimated
useful life of wells ranging from 30 - 40 years, and estimated plugging and
abandonment costs ranging from $5,000 per well to $10,000 per well, the Company
has recorded a non-cash charge related to the cumulative effect of a change in
accounting principle of $351,204 in its statement of operations. Oil and gas
properties were increased by $260,191, which represents the present value of all
future obligations to retire the wells at January 1, 2003, net of accumulated
depletion on this cost through that date. A corresponding obligation totaling
$611,395 has also been recorded as of January 1, 2003.
For the six month period ended June 30, 2003, the Company
recorded accretion and depletion expenses of $51,968 associated with this
liability and its corresponding asset. These expenses are included in depletion,
depreciation, and amortization in the consolidated statements of loss. Had the
provisions of this statement been reflected in the financial statements for the
year ended December 31, 2002, an asset retirement obligation of $476,536 would
have been recorded as of January 1, 2002.
The following is a roll-forward of activity impacting the asset retirement
obligation for the six months ended June 30, 2003:
Balance, January 1, 2003: $611,395
Accretion expense through June 30, 2003 36,684
--------
Balance, June 30, 2003 $648,079
========
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Kansas
14
During the first six months of 2003, the Company produced and
sold 65,457 barrels of oil and 129,995 Mcf of natural gas from its Kansas
Properties comprised of 149 producing oil wells and 59 producing gas wells. The
first six months production of 65,457 barrels of oil compares to 72,124 barrels
produced in the first six months of 2002. The first six months production of
129,995 Mcf of gas compares to 146,783 Mcf produced in the first six months of
2002. In summary, the first six months production reflected expected continued
stable production levels from the Kansas Properties which have been in
production for many years. The decrease in production reflects a normal decline
curve for the Kansas properties. This decline has not been offset by additional
drilling and well work overs due to the Bank One litigation. The revenues from
the Kansas properties were $2,049,781 in the first six months of 2003 as
compared to $1,559,361 in 2002. The increase in revenues is due to a significant
increase in the price of oil and gas for 2003.
Tennessee
During the first six months of 2003, the Company produced gas from
23 wells in the Swan Creek field which it sold to its two industrial customers
in Kingsport, Tennessee, BAE SYSTEMS Ordnance Systems Inc. as operator of the
Holston Army Ammunition Plant ("BAE") and Eastman Chemical Company ("Eastman").
Natural gas production from the Swan Creek field for the first
six months of 2003 was an average of 1.150 million cubic feet per day during
that period as compared to 2.270 million cubic feet per day in the first six
months of 2002. The first six months production reflected expected natural
decline in production from the existing Swan Creek gas wells which were first
brought into production in mid-2001 upon completion of the Company's pipeline.
This natural decline is normal for any producing well, and this decline as
experienced on existing wells in Swan Creek was not unexpected; however, volumes
were not replaced as expected. In order for overall field production to remain
steady or grow, new wells must be brought online. Any of the new wells drilled
by the Company would also experience the same harmonic (i.e. a relatively steep
initial decline curve followed by longer periods of relatively flat or stable
production) decline as does every natural well in a formation similar to the
Knox formation, so continuous drilling is vital to maintaining or increasing
earlier levels of production. No new gas wells have been drilled by the Company
to date in 2003 because it does not have the funds necessary for such drilling,
due to the destabilized lending arrangements caused by the actions of Bank One
and ongoing litigation regarding that matter. The Company anticipates that the
natural decline of production from existing wells is now predictable in Swan
Creek, that the total volume of the Company's reserves remains largely intact,
and that these reserves can be extracted through existing wells and also by
steady additional drilling brought on by reliable financial arrangements to fund
drilling. Upon conclusion of the Bank One litigation, the Company is hopeful
that additional or replacement financing may more easily be obtainable to allow
drilling to increase; however, no assurances can be made that such financing
will be obtained. See, Liquidity and Capital Resources discussion, below.
15
COMPARISON OF THE SIX MONTHS ENDING JUNE 30 2003 AND 2002
The Company recognized $3,360,763 in oil and gas revenues from
its Kansas Properties and the Swan Creek Field during the first six months of
2003 compared to $2,408,917 in the first six months of 2002. The increase in
revenues was due to an increase in price from oil and gas sales. Oil prices
averaged $28.90 per barrel in 2003 as compared to $21.54 in 2002. Gas prices
averaged $5.71 per Mcf in 2003 as compared to $2.80 for 2002. The Swan Creek
Field produced 207,056 Mcf and 408,593 Mcf in the first six months of 2003 and
2002, respectively. This decrease was due to natural declines in production
which could not be offset as the Company did not have the funds to continue
drilling new wells, due to it's dispute with it's primary lender, Bank One NA.
The decrease in pipeline transportation revenues is directly related to the
decrease in gas volumes.
The Company realized a net loss attributable to common
shareholders of $1,606,331 (($.14) per share of common stock), during the first
six months of 2003 compared to a net loss in the first six months of 2002 to
common shareholders of $1,964,465 (($.18) per share of common stock). A non-
cash charge of $351,204 was recognized as a cumulative effect of a change in
accounting principle during the first quarter of 2003 relating to the
implementation of SFAS143.
Production costs and taxes in the first six months of 2003 of
$1,627,079 were consistent with production costs and taxes of $1,269,304 in the
first six months of 2002. The difference of $358,575 was due to a
reclassification of insurance cost relating to field activities of $176,258 from
G&A to production costs. Part of the increase in production costs in 2003 was
due to the fact that the Company's field personnel cost was capitalized as the
Company was drilling new wells in 2002, as compared to 2003 when all employees
were working to maintain production. Field salaries in Swan Creek was $152,217
in the first six months of 2003.
Depreciation, Depletion, and Amortization expense for the first
six months of 2003 was $1,207,170 compared to $974,696 in the first six months
of 2002. The December 31, 2002, Ryder Scott reserve reports were used as a basis
for the 2003 estimate. The Company reviews its depletion analysis and industry
oil and gas prices on a quarterly basis to ensure that the depletion estimate is
reasonable. The depletion taken in the first six months of 2003 was $700,000 as
compared to $500,000 in the first quarter of 2002. The Company also amortized
$102,422 of loan fees relating to the Bank One note and convertible notes, in
2003 as compared to $86,360 in 2002.
During the first six months the Company reduced its general and
administrative costs significantly ($315,614) from 2002. Management has made an
effort to control costs in every aspect of its operations. Some of these cost
reductions included the closing of the Company's New York office and a reduction
in personnel from 2002 levels. The Company's public relations cost was reduced
($132,112) from 2002, as the Company continues cost cutting measures.
Professional fees, in the first six months of 2003 have remained
at a high level, primarily
16
due to costs incurred for legal and accounting services as a result of the Bank
One lawsuit and the shareholders's suit.
Dividends on preferred stock have increased from $238,400 in 2002
to $268,389 in 2003 as a result of the increase in the amount of preferred stock
outstanding from preferred stock sold pursuant to private placements during the
second quarter of 2002.
COMPARISON OF THE QUARTERS ENDING JUNE 30 2003 AND 2002
The Company recognized $1,436,848 in oil and gas revenues from
its Kansas Properties and the Swan Creek Field during the second quarter of 2003
compared to $1,233,473 in the second quarter of 2002. The increase in revenues
was due to an increase in price from oil and gas sales. Oil prices averaged
$26.47 per barrel in 2003 as compared to $23.73 in 2002. Gas prices averaged
$5.00 per Mcf in 2003 as compared to $3.30 for 2002. The Swan Creek Field
produced 95,389 Mcf and 192,960 Mcf in the second quarter of 2003 and 2002,
respectively. This decrease was due to natural declines in production which
could not be offset as the Company did not have the funds to continue drilling
new wells, due to it's dispute with it's primary lender, Bank One NA. The
decrease in pipeline transportation revenues is directly related to the decrease
in gas volumes.
The Company realized a net loss attributable to common
shareholders of $812,786 (($.07) per share of common stock) during the second
quarter of 2003 compared to a net loss in the second quarter of 2002 to common
shareholders of $984,139 (($.09) per share of common stock).
Production costs and taxes in the second quarter of 2003 of
$857,970 increased from $545,505 in the second quarter of 2002. The difference
of $312,465 was due to a reclassification of insurance cost relating to field
activities of $92,855 from G&A to production cost. Part of the increase in
production costs in 2003 was due to the fact that the Company's field personnel
cost was capitalized as the Company was drilling new wells in 2002, as compared
to 2003 when all employees were working to maintain production. Field salaries
in Swan Creek were $67,623 in the second quarter of 2003. An additional $50,620
was paid in property taxes in Kansas. The remaining increase relates to field
operations cost other than salaries that were capitalized during drilling
activities.
Depreciation, Depletion, and Amortization expense for the second
quarter of 2003 was $602,212 compared to $487,348 in the second quarter of 2002.
The December 31, 2002, Ryder Scott reserve reports were used as a basis for the
2003 estimate. The Company reviews its depletion analysis and industry oil and
gas prices on a quarterly basis to ensure that the depletion estimate is
reasonable. The depletion taken in the second quarter of 2003 was $350,000 as
compared to $250,000 in the second
17
quarter of 2002. The Company also amortized $51,211 of loan fees relating to the
Bank One note and convertible notes, in 2003 as compared to $43,180 in 2002.
During the second quarter the Company reduced its general and
administrative costs significantly ($240,684) from 2002. Management has made an
effort to control costs in every aspect of its operations. Some of these cost
reductions included the closing of the Company's New York office and a reduction
in personnel from 2002 levels. The Company's public relations cost was reduced
($82,928) from 2002, as the Company continues cost cutting measures.
Professional fees, in the second quarter of 2003 have remained at
a high level, primarily due to costs incurred for legal and accounting services
as a result of the Bank One lawsuit and the shareholders's action against the
Company.
Dividends on preferred stock have increased from $125,942 in 2002
to $134,194 in 2003 as a result of the increase in the amount of preferred stock
outstanding from preferred stock sold pursuant to private placements during the
second quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
On November 8, 2001, the Company signed a credit facility
agreement (the "Credit Agreement") with the Energy Finance Division of Bank One,
N.A. in Houston Texas ("Bank One"). Litigation was instituted by the Company in
May 2002 based on certain actions taken by Bank One under the agreement.
In November 2002, the Company and Bank One concluded a series of
meetings and correspondence by reaching preliminary agreement upon the basic
terms of a potential settlement. Any settlement is conditioned upon execution of
final settlement documents, and the parties agreed to attempt to close the
settlement by November 29, 2002. The principal element of the settlement
proposal is for the Bank and the Company to enter into an amended and restated
agreement for a new term loan to replace the prior revolving credit facility. As
of the date of this report, the Company and Bank One continue to negotiate the
terms of a mutually satisfactory settlement agreement.
Even if the Company concludes a settlement with Bank One, the
Company does not anticipate that it will be able to borrow any additional sums
from Bank One. To fund additional drilling and to provide additional working
capital, the Company would be required to pursue other options. Such options
include debt financing, sale of equity interests in the Company, a joint venture
arrangement, and/or the sale of oil and gas interests. The inability of the
Company to obtain the necessary cash funding on a timely basis will have an
unfavorable effect on the Company's financial condition and will require the
Company to materially reduce the scope of its operating activities.
18
The harmful effects upon operations of the Company caused by the
actions of Bank One and the ongoing litigation with Bank One have been dramatic.
First, the action of Bank One had the effect of totally cutting off any
additional funds to the Company to support Company operations. Further, the
funds loaned to the Company by Bank One have been used to refinance the
Company's indebtedness and no funds were then available to pay this large
repayment obligation to Bank One, even if such action by the Bank was proper,
which the Company has vigorously and continually denied. The principal reason
the Company had entered into the Bank One credit agreement was to provide for
additional funds to promote the growth of the Company. Consequently, as a result
of Bank One's unwarranted actions no additional funds under the credit facility
agreement have been available for additional drilling that the Company had
anticipated performing in the Swan Creek Field in 2002 and 2003 which were
critical to the development of that Field. In order for overall field production
to remain steady or grow in a field such as the Swan Creek Field, new wells must
be brought online. Since 2002 only two gas wells were added by the Company due
to the destabilized lending arrangements caused by the actions of Bank One and
ongoing litigation.
Second, the existence of the dispute with Bank One, compounded by
the fact that an effect of Bank One's action was to cause the Company's auditors
to indicate that their was an uncertainty over the Company's ability to continue
as a going concern, has significantly discouraged other institutional lenders
from considering a variety of additional or replacement financing options for
drilling and other purposes that may have ordinarily been available to the
Company. Third, the dispute has caused Bank One to fail to grant permission
under the existing loan agreements with the Company to permit the Company to
formulate drilling programs involving potential third party investors that may
have permitted additional drilling to occur. Finally, the dispute has caused the
Company to incur significant legal fees to protect the Company's rights.
Although no assurances can be made, the Company believes that it
will either be able to resolve the Bank One dispute or obtain additional or
replacement financing to allow drilling to increase, and that once new wells are
drilled, production from the Swan Creek Field will increase. However, no
assurances can be made that such financing will be obtained or that overall
produced volumes will increase.
Similarly, when funding for additional drilling becomes
available, the Company plans to drill wells in five new locations it has
identified in Ellis and Rush Counties, Kansas on its existing leases in response
to drilling activity in the area establishing new areas of oil production.
Although the Company successfully drilled the Dick No. 7 well in Kansas in 2001
and completed the well as an oil well, it was not able to drill any new wells in
Kansas in 2002 or 2003 due to lack of funds available for such drilling caused
by the Bank One situation. As with Tennessee, the Company is hopeful that once
the Bank One matter is resolved it will be able to resume drilling and well
workovers in Kansas to maximize production from the Kansas Properties.
19
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
COMMODITY RISK
The Company's major market risk exposure is in the pricing
applicable to its oil and gas production. Realized pricing is primarily driven
by the prevailing worldwide price for crude oil and spot prices applicable to
natural gas production. Historically, prices received for oil and gas production
have been volatile and unpredictable and price volatility is expected to
continue. Monthly oil price realizations ranged from a low of $18.56 per barrel
to a high of $27.49 per barrel during 2002. Gas price realizations ranged from a
monthly low of $1.91 per Mcf to a monthly high of $4.01 per Mcf during the same
period.
INTEREST RATE RISK
At December 31, 2002, the Company had debt outstanding of
approximately $9.9 million. The interest rate on the revolving credit facility
of $7.5 million is variable based on the financial institution's prime rate plus
0.25%. The remaining debt of $2.4 million has fixed interest rates ranging from
6% to 11.95%. As a result, the Company's annual interest costs in 2002
fluctuated based on short-term interest rates on approximately 78% of its total
debt outstanding at December 31, 2002. The impact on interest expense and the
Company's cash flows of a 10% increase in the financial institution's prime rate
(approximately 0.5 basis points) would be approximately $32,000, assuming
borrowed amounts under the credit facility remain at $7.5 million. The Company
did not have any open derivative contracts relating to interest rates at June
30, 2003.
FORWARD-LOOKING STATEMENTS AND RISK
Certain statements in this report, including statements of the
future plans, objectives, and expected performance of the Company, are
forward-looking statements that are dependent upon certain events, risks and
uncertainties that may be outside the Company's control, and which could cause
actual results to differ materially from those anticipated. Some of these
include, but are not limited to, the market prices of oil and gas, economic and
competitive conditions, inflation rates, legislative and regulatory changes,
financial market conditions, political and economic uncertainties of foreign
governments, future business decisions, and other uncertainties, all of which
are difficult to predict.
There are numerous uncertainties inherent in estimating
quantities of proved oil and gas reserves and in projecting future rates of
production and the timing of development expenditures. The total amount or
timing of actual future production may vary significantly from reserves and
production estimates. The drilling
20
of exploratory wells can involve significant risks, including those related to
timing, success rates and cost overruns. Lease and rig availability, complex
geology and other factors can also affect these risks. Additionally,
fluctuations in oil and gas prices, or a prolonged period of low prices, may
substantially adversely affect the Company's financial position, results of
operations and cash flows.
ITEM 4 CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer
have evaluated the effectiveness of the Company's disclosure controls and
procedures (as such is defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as the end of
the period covered by this quarterly report (the "Evaluation Date"). Based on
such evaluation, such officers have concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures are effective in alerting them
on a timely basis to material information relating to the Company (including the
Company's consolidated subsidiaries) required to be included in its reports
filed or submitted under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
During the period covered by this quarterly report, there have
not been any changes in our internal controls that have materially affected, or
are reasonably likely to materially affect, the Company's internal controls over
financial reporting.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Except as described hereafter, the Company is not a party to any
pending material legal proceeding. To the knowledge of management, no federal,
state or local governmental agency is presently contemplating any proceeding
against the Company that would have a result materially adverse to the Company.
To the knowledge of management, no director, executive officer or affiliate of
the Company or owner of record or beneficially of more than 5% of the Company's
common stock is a party adverse to the Company or has a material interest
adverse to the Company in any proceeding.
21
1. TENGASCO PIPELINE CORPORATION v. JAMES E. LARKIN AND KATHLEEN
A. O'CONNOR, No. 4929J, Circuit Court for Hawkins County, Tennessee. This was a
condemnation proceeding brought by Tengasco Pipeline Corporation to acquire a
right of way for a 3000-foot long portion of Phase I of the Company's pipeline
in Hawkins County, TN. The right of way was appraised at $4,000. The landowners
contested the appraised value of the property and claimed incidental damages to
fish ponds there, despite a lack of evidence of any aquiculture business
actually having been operated on the property or of any losses. By counterclaim,
the landowners sought $867,585 in compensatory damages and $2.6 million in
punitive damages under various legal theories. The Court ordered a second
mediation that occurred on June 2, 2003. At mediation, settlement was reached
whereby the Company was to pay the sum of $20,000 to plaintiffs and plaintiff's
counsel, and issue to them in the aggregate 10,000 shares of restricted shares
of the Company's common stock and warrants to purchase 20,000 shares of the
Company's common stock for three years at 52 cents per share, the closing price
on the settlement date. Plaintiffs have executed a right of way agreement, all
settlement payments including the issuance of stock and warrants have been made,
and the litigation was dismissed by agreed order dated July 17, 2003.
2. TENGASCO, INC., TENGASCO LAND AND MINERAL CORPORATION AND
TENGASCO PIPELINE CORPORATION v. BANK ONE, NA, Docket No. 2:02-CV-118 in the
United States District Court for the Eastern District of Tennessee at
Greeneville, TN. In this action, the Company has brought suit against its
primary lender under a credit facility for a revolving line of credit of up to
$35 million. The initial borrowing base under the facility was $10 million. On
April 5, 2002, the Company received a notice from Bank One stating that it had
redetermined and reduced the then-existing 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. On May 2, 2002, the Company filed suit to
restrain Bank One from taking any steps 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.
During the pendency of this action, the Company has continued to
pay the sum of $200,000 per month of principal due under the original terms of
the Credit Agreement, plus interest, and has reduced the principal now
outstanding to approximately $5,901,766.66 million as of August 14, 2003. As
stated in the Company's earlier reports, on November 5, 2002, the Company and
the Bank reached preliminary agreement on terms of a potential settlement of the
litigation, subject to execution of formal settlement documents. Although the
parties have attempted to reach settlement of all outstanding issues, the
parties have not been able to reach agreement upon the specific terms of a
settlement agreement. At a scheduling conference held by the Court on August 6,
2003, a previous trial setting in November was continued and a procedural
schedule has been set leading toward a trial date of June 22, 2004 if settlement
is not resolved.
3. PAUL MILLER v. M. E. RATLIFF AND TENGASCO, INC., DOCKET NUMBER
3:02-CV-644. United States District Court for the Eastern District of Tennessee,
Knoxville, The complaint in this action seeks certification of a class action to
recover on behalf of the class of all persons who purchased shares of the
Company's common stock between August 1, 2001 and April 23, 2002, damages in an
amount not specified which were allegedly caused by violations of the federal
securities laws, specifically Rule 10b-5 issued under the Securities Exchange
Act of 1934 as to the Company and the Company's former chief executive officer,
Malcolm E. Ratliff, and Section 20(a) the Securities Exchange Act of 1934 as to
Mr.
22
Ratliff. The complaint alleges that documents and statements made to the
investing public by the Company and Mr. Ratliff misrepresented material facts
regarding the business and finances of the Company. The Company has filed a
motion to dismiss the action based on the failure of the complaint to meet the
requirements of the Securities Litigation Reform Act of 1995. The Company has
begun discussions that may lead to a settlement of this matter and these
discussions are continuing. If settlement is not reached, the Company intends to
vigorously defend against all allegations of the complaint.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 8, 2003, Bill L. Harbert, a Director of the Company,
purchased 227,275 shares of the Company's Common Stock from the Company in a
private placement at a price of $1.10 per share. The proceeds from this sale
were used by the Company to pay the principal and interest due to Bank One for
January, 2003 and to provide working capital for the Company's operations.
On February 3, 2003 and February 28, 2003, Dolphin Offshore
Partners, LP ("Dolphin") which owns more than 10% of the Company's outstanding
common stock and whose general partner is Peter E. Salas, a Director of the
Company, loaned the Company the sum of $250,000 on each such date which the
Company used to pay the principal and interest due to Bank One for February and
March 2003 and for working capital. Each of these loans is evidenced by a
separate promissory note each bearing interest at the rate of 12% per annum,
with payments of interest only payable quarterly and the principal balance
payable on January 4, 2004 which are secured by an undivided 10% interest in the
Company's Tennessee pipelines. On May 20, 2003 an additional loan of $834,000
was loaned by a combination of Dolphin ($750,000) and Jeffery R. Bailey, a
Director and President of the Company ($84,000). Each of these loans is
evidenced by a separate promissory note each bearing interest at the rate of 12%
per annum, with payments of interest only payable quarterly and the principal
balance payable on January 4, 2004. The May 20, 2003 loans provides Dolphin with
a 30% interest and Bailey with a 3.36% interest in the Company's Tennessee and
Kansas pipelines as security for the repayment of these loans.
During the quarter ending June 30, 2003, the Company issued
10,363 shares of its common stock to holders of Series A 8% Cumulative
Convertible Preferred Stock in lieu of cash quarterly interest payments due to
those shareholders. Also during the quarter, certain Directors of the Company
exercised options granted to them pursuant to the Tengasco, Inc. Stock Incentive
Plan and purchased the following number of shares of the Company's common stock
at the exercise price of $0.50 per share, which was the market price of the
stock on the date the options were granted: Richard T. Williams - 10,000 shares;
Bill Harbert - 24,000 shares; and, John A. Clendening - 24,000 shares.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
NONE
23
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of the Company was held on
June 27, 2003.
(b) The first item voted on was the election of Directors.
Stephen W. Akos, Joseph E. Armstrong, Jeffrey R. Bailey, John A. Clendening,
Robert L. Devereux, Bill L. Harbert, Peter E. Salas, Charles Stivers and Richard
T. Williams 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: 9,484,371 votes for Stephen W. Akos and 52, 804 withheld; 9,484,771
votes for Joseph E. Armstrong and 52,404 withheld; 9,484,193 votes for Jeffrey
R. Bailey and 52,982 withheld; 9,477,914 votes for John A. Clendening and 59,261
withheld; 9,484,571 votes for Robert L. Devereux and 52,604 withheld; 9,483,731
votes for Bill L. Harbert and 53,444 withheld; 9,479,003 votes for Peter E.
Salas and 58,172 withheld; 9,474,065 votes for Charles M. Stivers and 63,110
withheld; and 9,479,003 votes for Richard T. Williams and 58,182 withheld.
A majority of votes at the meeting having voted for them, Messrs.
Akos, Armstrong, Bailey, Clendening, Devereux, Harbert, Salas, Stivers and
Williams were duly elected as Directors of the Company.
(c) The next item of business was the proposal to ratify the
appointment of BDO Seidman, LLP, the independent certified public accountants of
the Company, for fiscal 2003. The results of the voting were as follows:
9,497,508 votes for the resolution,
25,017 votes against and
14,650 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.
24
EXHIBITS
Exhibit 31: Certifications of Richard T. Williams, Chief
Executive Officer, and Mark A. Ruth, Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32: Certifications of Richard T. Williams, Chief
Executive Officer, and Mark A. Ruth, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
25
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: August 14, 2003 TENGASCO, INC.
By: s/ Richard T. Williams
-----------------------------------
Richard T. Williams
Chief Executive Officer
By: s/ Mark A. Ruth
-----------------------------------
Mark A. Ruth
Chief Financial Officer
26