<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB/A
(Mark one)
/X/ Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1997 or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
Commission File No. 0-20975
TENGASCO, INC.
(Name of small business issuer in its charter)
Tennessee 87-0267438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
603 Main Avenue, Knoxville, Tennessee 37902
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (423) 523-1124.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value per share.
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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 / /
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $0
State the aggregate market value of the voting stock held by
nonaffiliates (based on the closing price on April 6, 1998 of $9.38):
$33,809,141.
State the number of shares outstanding of the registrant's $.001 par
value common stock as of the close of business on the latest practicable date
(April 6, 1998): 7,284,801
Documents Incorporated By Reference: None.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Company intends to continue its 48 well drilling program
on the Swan Creek leases. The existence of substantial deposits of hydrocarbons
(oil and/or gas) in the Swan Creek structure (i.e. the rock formation beneath
the surface) is confirmed by the following facts:
The Swan Creek structure is located in an area known as the
Eastern Overthrust Belt which is an area with numerous faults. A fault is an
area where geologic plates overlap. The porous rock within such areas generally
contains significant amounts of oil and/or gas. The Eastern Overthrust Belt is
geologically similar to the Western Overthrust Belt located in the Rocky
Mountains, where there are other oil and gas producing properties.
The Company has successfully completed seven wells in this
area, all of which have been flow tested by metering gas from the wells through
one-half inch orifice. These tests all verify the presence of a substantial
reservoir of natural gas and/or oil. One of these wells, the Reed #1 tested at
4,800,000 cubic feet of gas per day with a pressure of 800 psi. Another well,
the Sutton #1 tested at 1,200,000 cubic feet per day with a pressure of 150 psi.
The Company's plan of operations for the next twelve months
calls for the drilling of 24 additional wells on the Swan Creek leases at a cost
of approximately $250,000 per well (over a two to three year period
approximately 50 additional wells are to be drilled).
During the first quarter of 1998, the Company completed its
pipeline in Tennessee which will enable it to sell gas from the Swan Creek
leases sometime early in the second quarter of 1998. Additional costs of
approximately $804,000 were incurred in the first quarter of 1998 to complete
the pipeline.
The Company is currently drilling two of the additional wells
with funds advanced on a participation basis by a director and a third-party.
This arrangement provides for the participants to receive 25% of income.
Drilling is anticipated to be continued with additional funds provided on a
similar participating basis until income from well production is sufficient to
fund further drilling. To date, the Company has not drilled any dry wells. There
can be no assurance, of course, that all of the funding necessary for the
completion of the wells will become available.
Effective December 31, 1997, the Company acquired from AFG, a
private company, approximately 30,000 of acres of leases in the vicinity of
Hayes, Kansas (the "Kansas Properties"). Included in the acquisition which
closed on March 5, 1998 are 149 producing oil wells, 59 producing gas wells and
a related 50 mile pipeline
1
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and gathering system. Historically, these oil and gas wells have produced
approximately $3.4 million in net annual revenues. However, the first quarter of
1998 net revenues have been lower than in the prior two years as a result of
lower oil and gas prices. The Company expects to increase current production by
reworking certain existing wells at a projected cost of $1.4 million. The
acquisition was for a total purchase price of approximately $5.5 million, which
consisted of $3 million in cash and seller financing of $2.5 million. Interest
on the debt is at 9% and is payable in 23 installments of $79,500 plus a final
payment of approximately $984,000 in February 2000. The Company's ability to
rework existing wells and/or drill additional wells is, however, dependent on it
obtaining additional debt or equity financing.
The Company's future plans include constructing two extensions
to its pipelines in Tennessee so as to enable it to exploit other leases which
are part of the Swan Creek leases. These extensions which will be approximately
40 miles in length will cost approximately $7.5 million. The Company's ability
to expand its operations in this manner is dependent upon the success of the
Company's drilling program. Moreover, no assurance can be given that the Company
will be able to obtain the required rights of way to construct any such
pipeline, and the pipeline currently under construction will only serve
production from a portion of the Swan Creek Field.
The Company does not presently have the funds needed to enable
it to complete the extensions to its pipeline.
Other Significant Plans
The Company also intends to actively pursue the gas marketing
business on the Eastern seaboard. The Eastern seaboard, and Tennessee in
particular, has numerous industrial end users of natural gas that are currently
exposed to a limited number of gas suppliers. In this regard, the Company also
anticipates income from the sale of gas pursuant to a marketing agreement with
Enserch Energy Services, Inc. ("Enserch"), a major marketer of natural gas,
pursuant to which the Company will receive 50% of the profits derived from the
sale of natural gas in Tennessee and other Southeastern States. Enserch is a
wholly owned subsidiary of Texas Utilities, Inc., a public company listed on the
New York Stock Exchange engaged in the production and sale of hydrocarbons. It
has a net worth of more than $2,000,000,000. To date, Enserch has not exploited
the market in Tennessee and Southeastern United States.
The Enserch agreement has a term of five years and will
terminate May 31, 2002 and thereafter, will continue from year to year unless
terminated.
2
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Exploitation of the other leases held by the Company is being
placed on hold at the present time so that the Company can focus on the Swan
Creek Leases and the Kansas Properties as a result of their higher economic
attractiveness.
In addition to an active drilling program and the Kansas
Properties, the Company intends to continue strategically acquiring leases in
promising areas in the States of Kentucky and Tennessee. No assurance can be
given that the Company will be able to identify or acquire any such leases or
that if it does acquire any such leases, they will be profitable.
The Company has no plans, at present, to increase the number
of its employees significantly.
This plan of operation is based upon many variables and
estimates, all of which may change or prove to be other than or different from
information relied upon.
Results of Operations
During the year ended December 31, 1997, the Company had no
revenues of as compared with revenues of $26,253 for the year ended December 31,
1996. The Company has shut in the wells which produced the gas in 1996 and has
transferred some of the equipment to the Swan Creek leases in anticipation of
the completion of its pipeline.
Depletion, depreciation and amortization expense, which
remained constant, was $79,267 in 1997 and $76,520 in 1996.
A realized loss on sale of investments of $80,677 in 1997 was
incurred as a result of the Company trading in natural gas future and option
contracts during December 1997. The Company did not have any open positions in
any derivative contracts at December 31, 1997. Trading in derivatives during the
first quarter of 1998 has not resulted in any material realized or unrealized
gains or losses for the Company.
General and administrative expense increased by approximately
$267,000 in 1997 primarily as the result of additional personnel at the
Company's headquarters and the cost of travel and expense by management in an
effort to raise funds through debt and equity financing.
Interest expense also increased from $201,969 in 1996 to
$1,885,448 in 1997 as the result of: (1) amortization of $1,100,000 in loan fees
which were paid by the issuance of common stock and options; (2) amortization of
the imputed value of stock warrants issued in connection with notes payable (the
validity of these
3
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warrants is being contested by the Company. See, "Part I" - "Item 3 - Legal
Proceedings"); (3) amortization of debt issuance costs relating to the pipeline
financing which occurred in the fourth quarter of 1996; (4) increased amounts of
debt financing during 1997; and, (5) amortization of costs to convert debt to
equity for a related party.
Public relations and legal and accounting expense increased by
approximately $563,000 in 1997 as a result of costs incurred to promote the
Company's common stock through several market makers, as well as significant
costs for legal and accounting services related to the filings of Forms 10-SB
and SB-2.
Liquidity
The Company expects to earn a profit in 1998 as a result of
its acquisition of the Kansas Properties and sales of natural gas to a local
public utility through its new pipeline which should commence in April or May of
1998 upon connection of seven existing natural gas wells to the pipeline.
During 1997, as in the prior year, revenues from operations
were insufficient to fund the Company's operations. The Company's primary source
of funds during this past year were from private placements of restricted common
stock of the Company in the amount of approximately $6,307,000, obtaining
short-term debt financing of approximately $1,000,000 from an individual, Neal
Harding, and loans in the aggregate amount of $463,000 from related parties.
The loan from Mr. Harding was used primarily for pipeline
construction. Repayment of the loan from Mr. Harding was guaranteed by IRC,
which also granted an option to Mr. Harding to purchase 300,000 shares of stock
of the Company it owned at a price of $10 per share. One-half of that loan was
repaid in January 1998 from existing cash revenues and Mr. Harding has agreed to
extend payment of the balance of the loan until June 30, 1998.
In 1997, IRC, Malcolm E. Ratliff and Tracmark, Inc., a
subsidiary of IRC, advanced loans to the Company in the aggregate amount of
$463,000. These loans, plus accrued interest, were satisfied by the issuance of
59,328 shares of the Company's common stock to IRC, 2,204 shares to Malcolm E.
Ratliff and 24,552 shares to Tracmark, Inc.
The Company is continuing to seek additional debt and or
equity funding in order to complete additional wells, rework existing wells and
extend its pipeline as described above.
An additional $3,000,000 in cash which was on hand at
December 31, 1997, was used as partial payment for the Kansas
4
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Properties.
The Company has experienced losses totalling $4,370,570 and
$1,761,064 for the years ended December 31, 1997 and 1996, respectively, and has
a working capital deficit of $1,774,571 at December 31, 1997. (See, Report of
Independent Certified Public Accountants included elsewhere in this report.) In
addition, the Company completed its pipeline in Tennessee in the first quarter
of 1998 at an additional cost of approximately $804,000. Management's plans
include raising additional capital in order to pay for drilling additional oil
and gas wells. In addition, beginning in January 1998, management expects the
Company to incur positive cash flow from its acquisition of the Kansas
Properties and in May 1998 from the Swan Creek leases and the use of its
pipeline in Tennessee. It is anticipated that these revenues will be able to be
used to pay the costs of drilling additional oil and gas wells. This is,
however, a forward looking statement and is subject to many variables over which
the Company has no control such as the price of oil and gas, competition,
inflation, etc. Therefore, there can be no assurances that the revenues from the
Kansas Properties and Swan Creek leases will be sufficient to pay the costs of
drilling additional oil and gas wells.
New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" is effective for years beginning after December
15, 1997. This statement establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. This
pronouncement is not expected to have a material impact on the Company's
financial statements when adopted.
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" is effective for years beginning after December 15, 1997.
This statements establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. This pronouncement is not
expected to have a material impact on the Company's financial statements when
adopted.
Year 2000 Risks
As is the case with other companies using computers in their
operations, the Company is faced with the task of addressing the Year 2000 issue
during the next two years. The Year 2000 issue arises from the widespread use of
computer programs that rely on two-digit codes to perform computations or
decision-making
5
<PAGE>
functions. The Company has not yet performed a comprehensive review of its
computer programs to identify the systems that would be affected by the Year
2000 issue nor has it yet reviewed the Company's Year 2000 exposure to
customers, distributors, suppliers and banking institutions. Management is
presently unable to estimate the costs associated with modification or
replacement of systems affected by the Year 2000 issue, however, these costs
could be significant.
ITEM 7 FINANCIAL STATEMENTS
The financial statements and supplementary date commence on
page F-1.
6
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TENGASCO, INC.
(Registrant)
By:s/Malcolm E. Ratliff
--------------------------
Malcolm E. Ratliff,
Chief Executive Officer
Dated: June 12, 1998
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in their capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
s/Malcolm E. Ratliff Chief Executive June 12, 1998
- - ---------------------- Officer
Malcolm E. Ratliff
s/Allen H. Sweeney Chairman of the Board June 12, 1998
- - ------------------- of Directors
Allen H. Sweeney
s/Joseph Earl Armstrong Director June 12, 1998
- - -----------------------
Joseph Earl Armstrong
s/James B. Kreamer Director June 10, 1998
- - -----------------------
James B. Kreamer
s/William A. Moffett Director June 10, 1998
- - -----------------------
William A. Moffett
s/Shigemi Morita Director June 12, 1998
- - -----------------------
Shigemi Morita
<PAGE>
s/Robert M. Carter President June 12, 1998
- - ------------------ Vice-President
Robert M. Carter
s/William F. Stenken Chief Accounting June 12, 1998
- - ---------------------- Officer
William F. Stenken
s/Sheila F. Sloan Treasurer June 12, 1998
- - ----------------------
Sheila F. Sloan
s/Elizabeth Wendelken Secretary June 12, 1998
- - ----------------------
Elizabeth Wendelken
<PAGE>
Tengasco, Inc.
- - -------------------------------------------------------------------------------
Consolidated Financial Statements
Years Ended December 31, 1997 and 1996
<PAGE>
Tengasco, Inc.
Contents
- - -------------------------------------------------------------------------------
Report of Independent Certified Public Accountants 2
Consolidated Financial Statements
Balance sheets 3
Statements of loss 4
Statements of stockholders' equity 5
Statements of cash flows 6
Notes to financial statements 7-29
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Tengasco, Inc.
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheets of Tengasco, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of loss, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 16, the Company has restated its consolidated financial
statements at December 31, 1997 and for the year then ended to reflect changes
to amounts recorded for interest expense and additional paid-in capital relative
to common shares issued in a conversion of corporate debt. The effects of these
corrections are discussed in Note 16.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tengasco, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. In addition, as of December 31, 1997,
management estimates that additional costs of approximately $804,000 are
required to complete its pipeline facilities under construction. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO Seidman, LLP
Atlanta, Georgia
March 12, 1998,
except for Note 16
which is as of June 8, 1998
F-2
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Note 8)
Current
Cash and cash equivalents (including $25,000 restricted
certificate of deposit in 1997) (Note 3) $ 4,451,274 $ 146,554
Accounts receivable - 4,658
Inventory (Note 3) 140,253 -
Prepaid expenses 270,939 7,463
- - -----------------------------------------------------------------------------------------------------------------------
Total current assets 4,862,466 158,675
Oil and gas properties, net (on the basis
of full cost accounting) (Note 5) 6,872,571 1,287,142
Pipeline facilities under construction, at cost (Note 6) 2,596,967 887,315
Property and equipment, net (Notes 7 and 9) 302,146 203,244
Other 10,661 190,845
- - -----------------------------------------------------------------------------------------------------------------------
$14,644,811 $2,727,221
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-3
<PAGE>
Tengasco, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current
Due to AFG Energy, Inc. (Note 3) $3,552,005 $ -
Notes payable (Note 8) 2,007,486 780,000
Loans payable to affiliates (Note 4) 252,398 48,190
Current maturities of long-term debt (Note 9) 41,161 14,017
Accounts payable - trade 527,398 347,093
Accrued liabilities 256,589 35,086
- - -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,637,037 1,224,386
Due to AFG Energy, Inc. (Note 3) 1,865,078 -
Long term debt, less current maturities (Note 9) 141,215 47,828
- - -----------------------------------------------------------------------------------------------------------------------
Total liabilities 8,643,330 1,272,214
- - -----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 6, 8 and 10)
Stockholders' equity (as restated (Note 16)) (Notes 8 and 10) Common stock,
$.001 par value; 50,000,000 shares
authorized 7,029 5,708
Additional paid-in capital 13,470,446 4,783,369
Unamortized stock option awards (63,540) (292,186)
Accumulated deficit (7,412,454) (3,041,884)
- - -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,001,481 1,455,007
- - -----------------------------------------------------------------------------------------------------------------------
$14,644,811 $2,727,221
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Tengasco, Inc.
Consolidated Statements of Loss
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996
As restated
(Note 16)
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Oil and gas revenues $ - $ 26,253
- - -----------------------------------------------------------------------------------------------------------------------
Costs and expenses
Production costs and taxes 3,748 17,138
Depletion, depreciation and amortization 79,267 76,520
General and administrative costs 1,535,841 1,268,771
Interest expense 1,885,448 201,969
Public relations 395,292 34,575
Legal and accounting 390,297 188,344
Realized loss on sale of investments 80,677 -
- - -----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 4,370,570 1,787,317
- - -----------------------------------------------------------------------------------------------------------------------
Net loss $(4,370,570) $(1,761,064)
- - -----------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share $(0.71) $(0.32)
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Tengasco, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unamortized
Additional stock
Common Stock paid-in option Accumulated
-------------------------
Shares Amount capital awards deficit
- - ------------------------------------------------ ------------ ------------ --- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 5,229,300 $5,229 $ 2,425,185 $(130,208) $(1,280,820)
Common stock issued for exercised options 327,079 327 90,792 - -
Common stock issued for the
extinguishment of debt 65,569 66 638,823 - -
Common stock subscribed for the
extinguishment of debt 48,897 49 421,052 - -
Stock option awards - - 225,000 (225,000) -
Amortization of stock option awards - - - - 63,022 -
Common stock options granted to
non-employees - - 371,864 - -
Common stock issued in private
placements 36,982 37 280,653 - -
Stock warrants issued in connection with
notes payable - - 330,000 - -
Net loss for the year ended
December 31, 1996 - - - - (1,761,064)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 5,707,827 5,708 4,783,369 (292,186) (3,041,884)
Common stock issued for exercised options 345,414 345 94,645 - -
Common stock issued for the
extinguishment of debt - As restated
(Notes 4 and 16) 86,084 86 677,829 - -
Stock option awards and amortization, net - - (175,069) 228,646 -
Common stock options granted to
non-employees - - 295,419 - -
Common stock issued in private
placements 754,510 754 6,307,201 - -
Stock issued for loan origination fee
(Note 8) 100,000 100 1,024,900 - -
Stock issued for services 36,000 36 462,152 - -
Net loss for the year ended
December 31, 1997 - As restated (Note 16) - - - - (4,370,570)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 - As restated
(Note 16) 7,029,835 $7,029 $13,470,446 $ (63,540) $(7,412,454)
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Tengasco, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996
As restated
(Note 16)
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net loss $(4,370,570) $(1,761,064)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization 79,267 76,520
Loss on disposal of property and equipment - 3,671
Compensation paid in stock options 736,183 434,886
Amortization of loan fees and inputed interest incurred
from issuance of common stock and stock options 1,293,694 -
Amortization of imputed value of stock warrants issued
in connection with notes payable 220,000 110,000
Amortization of deferred loan costs 170,833 56,667
Changes in assets and liabilities:
Accounts receivable 4,658 4,360
Prepaid expenses and other assets (4,125) (2,677)
Accounts payable 180,305 300,171
Accrued liabilities 148,333 13,463
- - -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,541,422) (764,003)
- - -----------------------------------------------------------------------------------------------------------------------
Investing activities
Proceeds from sale of marketable equity securities - 250,000
Additions to property and equipment (178,169) (60,754)
Net additions to oil and gas properties (545,429) (744,951)
Proceeds on sale of oil and gas interests 310,000 100,000
Additions to pipeline facilities under construction (1,709,652) (887,315)
- - -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,123,250) (1,343,020)
- - -----------------------------------------------------------------------------------------------------------------------
Financing activities
Payment of loan costs and other - (238,798)
Proceeds from borrowings 1,617,924 2,156,581
Repayments of borrowings (51,478) (36,727)
Proceeds from issuance of common stock 6,402,946 371,809
- - -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,969,392 2,252,865
- - -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,304,720 145,842
Cash and cash equivalents, beginning of year 146,554 712
- - -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 4,451,274 $ 146,554
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
1. Summary of Organization
Significant Accounting
Policies Tengasco, Inc. (the "Company"), a
publicly held corporation, was
organized under the laws of the State
of Utah on April 18, 1916, as Gold
Deposit Mining and Milling Company. The
Company subsequently changed its name
to Onasco Companies, Inc.
Effective May 2, 1995, Industrial
Resources Corporation, a Kentucky
corporation ("IRC"), acquired voting
control of the Company in exchange for
approximately 60% of the assets of IRC.
Accordingly, the assets acquired, which
included certain oil and gas leases,
equipment, marketable securities and
vehicles, were recorded at IRC's
historical cost. The transaction was
accomplished through the Company's
issuance of 4,000,000 shares of its'
common stock and a $450,000, 8%
promissory note payable to IRC. The
promissory note was converted into
83,799 shares of Tengasco, Inc. common
stock in December 1995
The Company changed its domicile from
the State of Utah to the State of
Tennessee on May 5, 1995 and its name
was changed from "Onasco Companies,
Inc." to "Tengasco, Inc."
The Company's principal business
consists of oil and gas exploration,
production and related property
management in the Appalachian region of
eastern Tennessee and in the state of
Kansas. The Company's corporate offices
are in Knoxville, Tennessee.
During 1996, the Company formed Tengasco
Pipeline Corporation, a wholly-owned
subsidiary, to manage the construction
and operation of a 23-mile gas pipeline
as well as other pipelines planned for
the future.
Consolidation
The consolidated financial statements
include the accounts of the Company and
Tengasco Pipeline Corporation. All
significant intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all investments
with a maturity of three months or less
when purchased to be cash equivalents.
F-8
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
Inventory
Inventory consists primarily of crude
oil in tanks and is carried at the lower
of current market value or cost.
Oil and Gas Properties
The Company follows the full cost method
of accounting for oil and gas property
acquisition, exploration and development
activities. Under this method, all
productive and nonproductive costs
incurred in connection with the
acquisition of, exploration for and
development of oil and gas reserves for
each cost center are capitalized.
Capitalized costs include lease
acquisitions, geological and geophysical
work, delay rentals and the costs of
drilling, completing and equipping oil
and gas wells. Gains or losses are
recognized only upon sales or
dispositions of significant amounts of
oil and gas reserves. Proceeds from all
other sales or dispositions are treated
as reductions to capitalized costs.
The capitalized costs of oil and gas
properties, plus estimated future
development costs relating to proved
reserves and estimated costs of plugging
and abandonment, net of estimated
salvage value, are amortized on the
unit-of-production method based on total
proved reserves. The costs of unproved
properties are excluded from
amortization until the properties are
evaluated, subject to an annual
assessment of whether impairment has
occurred. The costs of significant
development projects awaiting completion
of pipeline facilities are excluded from
amortization until such time as the
pipeline facilities are completed. The
Company's proved gas reserves were
estimated by Coburn Petroleum
Engineering ("Coburn") and Columbia
Engineering, independent petroleum
engineers, as of December 31, 1997 and
by Coburn as of December 31, 1996.
The capitalized oil and gas property and
pipeline costs, less accumulated
depreciation, depletion and amortization
and related deferred income taxes, if
any, are generally limited to an amount
(the ceiling limitation) equal to the
sum of: (a) the present value of
estimated future net revenues computed
by applying current prices in effect as
of the balance sheet date (with
consideration of price changes only to
the extent provided by contractual
arrangements) to estimated future
production of proved oil and gas
reserves, less estimated future
expenditures (based on current costs) to
be incurred in developing and
F-9
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
producing the reserves using a discount
factor of 10% and assuming continuation
of existing economic conditions; and
(b) the cost of investments in
unevaluated properties excluded from
the costs being amortized.
Pipeline Facilities Under Construction
Pipeline facilities under construction
are carried at cost. The Company will
provide for depreciation of the pipeline
facilities using the straight-line
method over the estimated useful life of
the asset once the pipeline is completed
and placed in service. The pipeline
facilities are expected to be completed
during the first quarter of 1998.
Accordingly, no depreciation expense has
been recorded for 1997 and 1996 relating
to the pipeline facilities.
Property and Equipment
Property and equipment are carried at
cost. The Company provides for
depreciation of property and equipment
using the straight-line method over the
estimated useful lives of the assets
which range from five to seven years.
Other Assets
Other assets in 1996 consisted
principally of deferred loan costs
which were amortized over the
respective loan terms.
Income Taxes
The Company accounts for income taxes
in accordance with Statement of
Financial Accounting Standards No. 109,
"Accounting for Income Taxes" which
requires the use of the "liability
method." Accordingly, deferred tax
liabilities and assets are determined
based on the temporary differences
between the financial statement and tax
bases of assets and liabilities, using
enacted tax rates in effect for the
year in which the differences are
expected to reverse.
Concentration of Credit Risk
Financial instruments which potentially
subject the Company to concentrations
of credit risk consist principally of
cash and accounts receivable. At times,
such cash in banks is in excess of the
FDIC
F-10
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
insurance limit. At December 31, 1997,
the Company had deposits with one
financial institution in an amount
which exceeds the federally insured
limit by approximately $4 million. The
Company's primary business activities
include oil and gas sales to several
customers in the states of Tennessee
and Kansas. The related trade
receivables subject the Company to a
concentration of credit risk within the
oil and gas industry.
Earnings Per Common Share
In March 1997, the Financial Accounting
Standards Board ("FASB") issued
Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings
Per Share." The new Standard simplifies
the computation of earnings per share
and requires presentation of two
amounts, basic and diluted earnings per
share for all periods presented.
Basic earnings per share is computed by
dividing income available to common
shareholders by the weighted average
number of shares outstanding during each
year. Shares issued during the year are
weighted for the portion of the year
that they were outstanding. Diluted loss
per share is calculated in a manner
consistent with that of basic loss per
share while giving effect to all
dilutive potential common shares that
were outstanding during the period.
Basic and diluted loss per share are
based upon 6,189,293 shares for the year
ended December 31, 1997 and 5,427,247
shares for the year ended December 31,
1996. There were 618,551 and 1,206,800
potential weighted common shares
outstanding during 1997 and 1996 related
to common stock options and warrants.
These shares were not included in the
computation of the diluted per share
amount because the Company was in a net
loss position and, thus, any potential
common shares were anti-dilutive.
The weighted average number of shares
outstanding for the year ended December
31, 1996, as previously presented, has
been restated to comply with the
provisions of Securities Exchange
Commission Staff Accounting Bulletin 98.
Accounting Estimates
The accompanying financial statements
are prepared in conformity with
generally accepted accounting principles
which requires
F-11
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
management to make estimates and
assumptions that affect the reported
amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the
financial statements and the reported
amounts of revenues and expenses during
the reporting period. The actual
results could differ from those
estimates.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents
and short-term debt approximate cost due
to the short period of time to maturity.
Fair values of long-term debt are based
on quoted market prices or pricing
models using current market rates.
Derivatives
Beginning in December 1997, the Company
began trading in derivative financial
instruments for speculative purposes.
Derivative financial instrument
contracts entered into are comprised of
natural gas future and option contracts.
At December 31, 1997, there were no open
positions in any derivative contracts.
Net trading losses of $80,677 are
included in the accompanying Statements
of Loss for the year ended December 31,
1997.
Significant Risks and Uncertainties
The Company's operations are subject to
all of the environmental and operational
risks normally associated with the oil
and gas industry. The Company maintains
insurance that is customary in the
industry; however, there are certain
risks for which the Company does not
maintain full insurance coverage. The
occurrence of a significant event that
is not fully covered by insurance could
have a significant adverse effect on the
Company's financial position.
New Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive
Income" is effective for years beginning
after December 15, 1997. This statement
establishes standards for reporting and
display of comprehensive income, its
components and accumulated balances.
This pronouncement is not expected to
have a material impact on the Company's
financial statements when adopted.
F-12
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related
Information" is effective for years
beginning after December 15, 1997. This
statement establishes standards for the
way that public business enterprises
report information about operating
segments in annual financial statements.
It also establishes standards for
related disclosures about products and
services, geographic areas, and major
customers. This pronouncement is not
expected to have a material impact on
the Company's financial statements when
adopted.
Reclassifications
Certain prior year amounts have been
reclassified to conform with current
year presentation.
2. Going Concern The Company has experienced losses
totalling $4,370,570 and $1,761,064 for
the years ended December 31, 1997 and
1996, respectively, and has a working
capital deficit of $1,774,571 at
December 31, 1997. These matters raise
substantial doubt about the Company's
ability to continue as a going concern.
In addition, as of December 31, 1997,
management estimates that additional
costs of approximately $804,000 are
required to complete its pipeline
facilities under construction.
Management's plans include raising
additional capital in order to complete
the pipeline facilities and drill
additional oil and gas wells. In
addition, beginning in January 1998,
management expects the Company to incur
positive cash flow from its acquisition
of various oil and gas properties in
the state of Kansas (see Note 3). The
accompanying financial statements do
not include any adjustments relating to
the recoverability and classifications
of recorded asset amounts or the
amounts and classifications of
liabilities that might be necessary
should the Company be unable to
continue as a going concern.
3. Business
Aquisition On December 18, 1997, the Company
entered into an asset purchase
agreement in which certain producing
oil and gas properties and inventory
located in the state of Kansas ("the
Kansas Properties") were acquired from
AFG Energy, Inc. ("AFG"). The
agreement, which was effective as of
December 31, 1997, closed on March 5,
1998, whereby the Company paid
$2,990,253 in cash and entered into a
note payable agreement with AFG in the
amount of $2,500,000. The note will
accrue interest at 9% per annum and is
due in 23 monthly installments of
principal and interest of $79,500 with
a
F-13
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
balloon payment of $983,773 due in
February, 2000. The acquisition has
been accounted for as a purchase and,
accordingly, the purchase price of
$5,490,253 has been allocated to the
assets acquired based on the estimated
fair values at the date of acquisition
as follows:
<TABLE>
<CAPTION>
Amount
-----------------------------------------------------------------------------
<S> <C> <C>
Inventory - oil in tanks $ 140,253
-----------------------------------------------------------------------------
Oil and gas properties
Leasehold costs 3,745,000
Lease and well equipment 1,284,000
Pipeline 321,000
-----------------------------------------------------------------------------
Total oil and gas properties 5,350,000
-----------------------------------------------------------------------------
$5,490,253
-----------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the purchase price
of the Kansas Properties is included in
the Company's consolidated balance
sheet. The results of operations will be
included in the consolidated financial
statements beginning January 1, 1998.
The unaudited pro forma results of
operations presented below show the
Company's operations for 1997 and 1996
as though the acquisition had taken
place at the beginning of each period
presented. The pro forma results have
been prepared for comparative purposes
only, and are not necessarily indicative
of what the actual results of operations
would have been had the acquisition
occurred at the beginning of each period
presented, or what the results of
operations of the Company will be in the
future.
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $3,430,329 $3,194,748
Net loss (3,893,208) (1,274,607)
Basic and diluted loss per
common share $(0.63) $(0.23)
-----------------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
4. Related Party
Transactions The Company has a loan payable to a
major stockholder in the amount of
$250,000. Additionally, the Company has
a loan payable to an affiliate in the
amount of $2,398. A major stockholder
of the Company is also a major
stockholder of the affiliate. The loans
bear interest at the rate of 10% per
annum and are due on demand.
During 1997, the Company converted
approximately $334,000 and $138,000 of
debt payable to related parties IRC and
Tracmark, respectively, to common stock.
The Company also converted approximately
$12,000 of debt payable to a major
stockholder to common stock (see Note
14).
During 1996, the Company converted
approximately $1,060,000 of debt payable
to IRC to common stock and common stock
subscribed (see Note 14). The Company
also converted approximately $100,000 of
debt payable to a major stockholder to
common stock subscribed (see Note 14).
5. Oil and Gas
Properties The following table sets forth
information concerning the Company's
oil and gas properties at December 31:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Evaluated $6,823,246 $1,288,243
Unevaluated 76,743 26,317
-----------------------------------------------------------------------------
6,899,989 1,314,560
Accumulation depreciation,
depletion and amortization (27,418) (27,418)
-----------------------------------------------------------------------------
$6,872,571 $1,287,142
-----------------------------------------------------------------------------
</TABLE>
Evaluated costs excluded from
amortization at December 31, 1997 and
1996 consist of approximately $913,000
and $730,000, respectively, of costs
relating to the Company's Swan Creek
development project which is awaiting
the completion of a gas pipeline
expected to be completed in the first
quarter of 1998. In addition, evaluated
costs at December 31, 1997 include
approximately $5,350,000 of costs
associated with the acquisition of the
Kansas Properties (see Note 3).
F-15
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
6. Pipeline Facilities
Under Construction During the fourth quarter of 1996, the
Company began construction of a 23-mile
gas pipeline which will (1) connect the
Swan Creek development project to a gas
purchaser and (2) enable the Company to
develop gas transmission business
opportunities in the future.
As of December 31, 1997, management
estimates the costs to complete the
pipeline are approximately $804,000.
In January 1997, the Company entered
into an agreement with the Tennessee
Valley Authority ("TVA") whereby the TVA
allows the Company to bury the pipeline
within the TVA's transmission line
rights-of-way. In return for this right,
the Company paid $35,000 plus agreed to
annual payments of approximately $6,200
for 20 years. This agreement expires in
2017 at which time the parties may renew
the agreement for another 20 year term
in consideration of similar
inflation-adjusted payment terms.
7. Property and Property and equipment consisted of
Equipment the following:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Machinery and equipment $277,433 $245,756
Vehicles 231,228 83,299
Other 44,971 42,113
-----------------------------------------------------------------------------
553,632 371,168
Less accumulated depreciation (251,486) (167,924)
-----------------------------------------------------------------------------
Property and equipment - net $302,146 $203,244
-----------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
8. Notes Payable Notes payable consisted of the following:
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Note payable to an individual;
approximately $500,000 due in each of
January 1998 and July 1998 with interest
payable quarterly at 11% per annum;
collateralized by equipment owned by a
major shareholder of the Company. An
affiliate is serving as guarantor on the
loan. The Company provided the lender
with 100,000 shares of common stock as a
loan origination fee. In conjunction
with the loan agreement, the lender has
an option to purchase 300,000 shares of
the Company's common stock from IRC. In
January 1998, the Company paid $500,000
of principal on this note (A). $1,007,486 $ -
Note payable, in default, to an
investment company due May 1997 with
interest payable monthly at 10% per
annum; less unamortized discount of
$123,750 at December 31, 1996, relating
to stock warrants issued; collateralized
by a subordinated security interest in
all assets ofthe Company (B). 500,000 376,250
Note payable, in default, to an
individual due April 1997 with interest
payable monthly at 10% per annum; less
unamortized discount of $48,125 at
December 31, 1996, relating to stock
warrants issued; collateralized by all
assets of the Company (B), (C). 250,000 201,875
Note payable, in default, to a company
due April 1997 with interest payable
monthly at 10% per annum; less
unamortized discount of $48,125 at
December 31, 1996, relating to stock
warrants issued; collateralized by all
assets of the Company (B). 250,000 201,875
-----------------------------------------------------------------------------
$2,007,486 $780,000
-----------------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
(A) As of December 31, 1997, the Company
was in violation of a covenant regarding
this loan. As a result, the lender has
the option to declare the remaining note
payable balance immediately due and
payable.
In conjunction with the issuance of the
notes payable denoted in (B) and (C)
listed above, the Company granted the
lenders detachable stock warrants which
enable the holder to obtain up to
200,000 shares of the Company's common
stock at a price of $5 per share.
(B) These notes had not been repaid as
of the above noted due dates. As noted
in (D) below, the Company has filed a
claim against the lenders.
(C) In March 1997, the individual note
holder (above) filed a lawsuit asserting
the Company was in default of the
$250,000 note. This action seeks the
principal amount, interest, and costs of
collection. No additional costs have
been accrued in the accompanying
consolidated financial statements in
connection with this lawsuit, as a range
of such costs cannot be estimated.
Management believes, however, it has
certain defenses to this motion as noted
in (D) below.
(D) Also in March 1997, the Company
filed a claim against the three lenders
discussed in (B) and (C) above and a
former officer of the Company asserting
that the Company did not authorize the
issuances of certain stock warrants
related to the borrowings and seeking
rescission of the warrant agreements.
The Company is disputing the validity of
the stock warrant agreements based upon
certain provisions which were not
authorized by the board of directors. If
the Company is unsuccessful in its
attempt to rescind these stock warrant
agreements, these provisions could
result in the lenders obtaining
additional shares and a potential
controlling interest, as the stock
warrant agreements provide for the
granting of increasing amounts of
shares, at pro-rata reduced prices, in
the event the market price of the
Company's stock falls below $16 per
share.
F-18
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
9. Long Term Debt Long-term debt consisted of the following:
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
8.75% installment note, payable $861
monthly, including interest, due
September 2002, collateralized by a
vehicle. $ 39,871 $ -
10.5% installment note, payable $789
monthly, including interest, due October
2001, collateralized by a
vehicle. 29,730 -
11% installment note, payable $667
monthly, including interest, due
December 2001, collateralized by a
vehicle. 25,671 30,563
10.0% installment note, payable $503
monthly, including interest, due
September 2002, collateralized by a
vehicle. 22,759 -
9.75% installment note, payable $492
monthly, including interest, due July
2002, collateralized by a
vehicle. 21,762 -
9.75% installment note, payable $480
monthly, including interest, due May
2002, collateralized by a vehicle.
20,601 -
10.7% installment note, payable $423
monthly, including interest, due May
2000, collateralized by a vehicle.
10,761 14,466
12% installment note, payable $385
monthly, including interest, due April
2000, collateralized by a
vehicle. 9,248 12,545
-----------------------------------------------------------------------------
Balance carried forward 180,403 57,574
-----------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance brought forward $180,403 $57,574
-----------------------------------------------------------------------------
Other 1,973 4,271
-----------------------------------------------------------------------------
Total long term debt 182,376 61,845
Less current maturities (41,161) (14,017)
-----------------------------------------------------------------------------
Long term debt, less current
maturities $141,215 $ 47,828
-----------------------------------------------------------------------------
</TABLE>
The approximate future maturities of
debt were as follows:
<TABLE>
<CAPTION>
Year Amount
-----------------------------------------------------------------------------
<S> <C> <C>
1998 $ 41,161
1999 42,937
2000 41,380
2001 39,919
2002 16,979
-----------------------------------------------------------------------------
$182,376
-----------------------------------------------------------------------------
</TABLE>
10. Commitments
and Contingencies As of December 31, 1997, the future
minimum payments to be made under
noncancellable operating leases were:
<TABLE>
<CAPTION>
Year Amount
-----------------------------------------------------------------------------
<S> <C> <C>
1998 $52,590
1999 52,590
2000 52,590
2001 5,280
2002 5,280
-----------------------------------------------------------------------------
$168,330
-----------------------------------------------------------------------------
</TABLE>
Rent expense was approximately $60,000
and $54,000 for the years ended December
31, 1997 and 1996, respectively.
F-20
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
At December 31, 1997, the Company owed,
but had not yet issued, certain
individuals an aggregate amount of
46,401 shares of Tengasco, Inc. common
stock, valued at approximately $421,931,
as payment for placement fees in
connection with common stock private
placements which occurred during the
fourth quarter of 1997.
As is the case with other companies
using computers in their operations,
the Company is faced with the task of
addressing the Year 2000 issue during
the next two years. The Year 2000 issue
arises from the widespread use of
computer programs that rely on
two-digit date codes to perform
computations or decision-making
functions. The Company has not yet
performed a comprehensive review of its
computer programs to identify the
systems that would be affected by the
Year 2000 issue nor has it yet reviewed
the Company's Year 2000 exposure to
customers, distributors, suppliers and
banking institutions. Management is
presently unable to estimate the costs
associated with modification or
replacement of systems affected by the
Year 2000 issue, however, these costs
could be significant.
11. Stock Options Changes that occurred in options
outstanding in 1997 and 1996 are
summarized below:
<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding,
beginning
of year 1,202,420 $3.295 1,791,849 $0.483
Granted 230,000 5.000 730,000 5.566
Exercised (345,414) 0.275 (327,079) 0.275
Expired/canceled (627,006) 5.359 (992,350) 0.275
-------- --------
Outstanding,
end of year 460,000 5.314 1,202,420 3.295
Exercisable,
end of year 354,583 5.440 538,805 1.882
------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
The following table summarizes
information about stock options
outstanding at December 31, 1997
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
--------------------------------------------- -----------------
Average
Remaining
Exercise Contractual
Price Shares Life Shares
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.000 355,000 0.48 years 249,792
6.375 105,000 1.27 years 104,791
------- -------
Total 460,000 354,583
----------------------------------------------------------------------------
</TABLE>
The fair value of stock options used to
compute compensation expense to
non-employees is the estimated present
value at grant date using the
Black-Scholes option-pricing model with
the following weighted average
assumptions for 1997 and 1996: expected
volatility of 54% for both years; a
risk-free interest rate of 5.76% in 1997
and 5.21% in 1996; and an expected
option life of 1.25 years in 1997 and
2.45 years in 1996. The amount of
compensation expense included in general
and administrative costs in the
accompanying consolidated statements of
loss was approximately $220,000 and
$372,000 at December 31, 1997 and 1996,
respectively.
Statement of Financial Accounting
Standards No. 123, (SFAS 123),
"Accounting for Stock-Based
Compensation" was implemented in January
1996. As permitted by SFAS 123, the
Company has continued to account for
stock compensation to employees by
applying the provisions of Accounting
Principles Board Opinion No. 25. If the
accounting provisions of SFAS 123 had
been adopted, net loss and loss per
share would have been as follows:
F-22
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss
As reported $(4,370,570) $(1,761,064)
Pro forma (4,507,821) (1,932,628)
-----------------------------------------------------------------------------
Basic and diluted loss per share
As reported $(0.71) $(0.32)
Pro forma (0.73) (0.36)
-----------------------------------------------------------------------------
</TABLE>
For employees, the fair value of stock
options used to compute pro forma net
loss and loss per share disclosures is
the estimated present value at grant
date using the Black-Scholes
option-pricing model with the following
weighted average assumptions for 1997
and 1996: Expected volatility of 54% for
both years; a risk free interest rate of
5.76% in 1997 and 5.52% in 1996; and an
expected option life of 1.25 years in
1997 and 2.72 years in 1996.
12. Income Taxes The Company had no taxable income
during the years ended December 31,
1997 and 1996.
A reconciliation of the statutory U.S.
Federal income tax and the income tax
provision included in the accompanying
consolidated statements of loss is as
follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34% 34%
Tax (benefit) at statutory rate $(1,486,000) $(599,000)
State income tax (benefit) (248,000) (99,000)
Nondeductible interest expense 126,000 -
Other (9,000) 3,000
Increase in deferred tax asset
valuation allowance 1,617,000 695,000
-----------------------------------------------------------------------------
Total income tax provision $ - $ -
-----------------------------------------------------------------------------
</TABLE>
F-23
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
The components of the net deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net operating loss carryforward $2,381,000 $ 798,000
Capital loss carryforward 270,000 238,000
Accrued expenses 323,000 223,000
-----------------------------------------------------------------------------
2,974,000 1,259,000
Valuation allowance (2,794,000) (1,177,000)
-----------------------------------------------------------------------------
180,000 82,000
-----------------------------------------------------------------------------
Deferred tax liability:
Oil and gas properties 155,000 81,000
Property and equipment 25,000 1,000
-----------------------------------------------------------------------------
180,000 82,000
-----------------------------------------------------------------------------
Net deferred taxes $ - $ -
-----------------------------------------------------------------------------
</TABLE>
The Company recorded a valuation
allowance at December 31, 1997 and 1996
equal to the excess of deferred tax
assets over deferred tax liabilities as
management is unable to determine that
these tax benefits are more likely than
not to be realized.
As of December 31, 1997, the Company had
net operating loss carryforwards for
federal income tax purposes of
approximately $5,954,000 which will
expire, if not utilized, as follows:
<TABLE>
<CAPTION>
Year Amount
-----------------------------------------------------------------------------
<S> <C> <C>
2010 $ 546,000
2011 1,378,000
2012 4,030,000
-----------------------------------------------------------------------------
Total $5,954,000
-----------------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
Additionally, at December 31, 1997, the
Company had capital loss carryforwards
of approximately $675,000 which will
expire, if not offset against capital
gains, as follows: 2001-$594,000,
2002-$81,000.
13. Subsequent Events In the first quarter of fiscal 1998, the
Company authorized the granting of up to
10,000 shares of common stock to the
spouse of a deceased officer of the
Company as a death benefit.
In the first quarter of fiscal 1998, the
Company granted options to purchase
26,167 shares of the Company's common
stock to a director of the Company at a
per share price of $5.00.
14. Supplemental
Disclosure
of Cash Flows The Company paid approximately $282,000
and $26,000 for interest in 1997 and
1996, respectively. The Company paid $0
for income taxes in 1997 and 1996.
In 1997, the Company issued 86,084
shares of common stock to extinguish
approximately $484,000 of debt. Loan
fees of approximately $194,000 were
incurred in connection with this
issuance of common stock.
The assets acquired and liabilities
incurred in connection with the purchase
of the Kansas Properties have not been
reflected in the accompanying 1997
Statement of Cash Flows as the
transaction, which was effective on
December 31, 1997, did not close until
March 1998 (see Note 3).
In 1996, the Company transferred
property and equipment with a net book
value of $46,539 to lenders in exchange
for debt reductions aggregating $42,865
resulting in a loss of $3,674.
In 1996, the Company issued 114,466
shares of common stock and common stock
subscribed to extinguish approximately
$1,060,000 of debt, which approximated
fair value of the shares.
F-25
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
15. Supplemental Oil and
Gas Information Information with respect to the
Company's oil and gas producing
activities is presented in the
following tables. Estimates of reserve
quantities, as well as future
production and discounted cash flows
before income taxes, were determined by
Coburn Petroleum Engineering ("Coburn")
and by Columbia Engineering,
independent petroleum engineers, as of
December 31, 1997 and by Coburn as of
December 31, 1996.
Oil and Gas Related Costs
The following table sets forth
information concerning costs related to
the Company's oil and gas property
acquisition, exploration and development
activities in the United States during
the years ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Property acquisition
Proved $5,406,080 $ 78,991
Unproved 50,424 25,274
Less - proceeds from sales of
properties (310,000) (100,000) )
Development costs 438,924 673,022
-----------------------------------------------------------------------------
$5,585,428 $ 677,287
-----------------------------------------------------------------------------
</TABLE>
Results of Operations from Oil and Gas
Producing Activities
The following table sets forth the
Company's results of operations from oil
and gas producing activities for the
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ - $ 26,253
Production costs and taxes (3,748) (17,138)
Depreciation, depletion and
amortization (44,673) (52,145)
-----------------------------------------------------------------------------
Results of operations before income
taxes (48,421) (43,030)
Income taxes - -
-----------------------------------------------------------------------------
</TABLE>
F-26
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<S> <C> <C> <C>
Results of operations from oil
and gas producing activities $(48,421) $ (43,030)
-----------------------------------------------------------------------------
</TABLE>
In the presentation above, no deduction
has been made for indirect costs such as
corporate overhead or interest expense.
No income taxes are reflected above due
to the Company's tax loss carryforwards.
For the year ended December 31, 1996,
the depreciation, depletion and
amortization rate per barrel of oil
equivalent production was $20.16. The
Company had no production of oil or gas
during 1997.
Oil and Gas Reserves (unaudited)
The following table sets forth the
Company's net proved oil and gas
reserves at December 31, 1997 and 1996
and the changes in net proved oil and
gas reserves for the years then ended.
Proved reserves represent the estimated
quantities of crude oil and natural gas
which geological and engineering data
demonstrate with reasonable certainty to
be recoverable in the future years from
known reservoirs under existing economic
and operating conditions. The reserve
information indicated below requires
substantial judgment on the part of the
reserve engineers, resulting in
estimates which are not subject to
precise determination. Accordingly, it
is expected that the estimates of
reserves will change as future
production and development information
becomes available and that revisions in
these estimates could be significant.
<TABLE>
<CAPTION>
Oil (bbls) Gas (Mcf)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Proved reserves
Balance, January 1, 1996 101,565 5,336,392
Acquisition of proved reserves - 17,212,571
Revisions of previous estimates - 33,902
Production - (15,510)
-----------------------------------------------------------------------------
Balance, December 31, 1996 101,565 22,567,355
Discoveries and extensions 198,065 75,476
Acquisition of proved reserves 1,884,448 2,654,250
Revisions of previous estimates (101,565) (4,679,460)
Production - -
-----------------------------------------------------------------------------
Balance, December 31, 1997 2,082,513 20,617,621
-----------------------------------------------------------------------------
Proved developed producing
reserves at, December 31, 1997 1,277,707 1,384,980
-----------------------------------------------------------------------------
</TABLE>
F-27
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<S> <C> <C> <C>
Proved developed producing reserves
at, December 31, 1996 - -
-----------------------------------------------------------------------------
</TABLE>
F-28
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
Of the Company's total proved reserves
as of December 31, 1997, approximately
27% were classified as proved developed
producing, 34% were classified as proved
developed non-producing and 39% were
classified as proved undeveloped. All of
the Company's reserves are located in
the continental United States.
Standardized Measure of Discounted
Future Net Cash Flows (unaudited)
The standardized measure of discounted
future net cash flows from the Company's
proved oil and gas reserves at December
31, 1997 and 1996 is presented in the
following table:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Future cash inflows $87,493,504 $84,106,507
Future production costs and taxes (21,813,667) (6,219,598)
Future development costs (2,873,550) (5,775,000)
Future income tax expenses (12,918,485) (18,909,520)
-----------------------------------------------------------------------------
Net future cash flows 49,887,802 53,202,389
Discount at 10% for timing of cash flows (17,864,113) (22,823,876)
-----------------------------------------------------------------------------
Discounted future net cash flows from
proved reserves $32,023,689 $30,378,513
-----------------------------------------------------------------------------
</TABLE>
The following table sets forth the
changes in the standardized measure of
discounted future net cash flows from
proved reserves during 1997 and 1996:
F-29
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $30,378,513 $ 3,663,462
-----------------------------------------------------------------------------
Sales, net of production costs
and taxes 3,748 (9,115)
Acquisition of proved reserves 10,351,389 33,874,577
Discoveries and extensions 1,984,106 -
Changes in prices and
production costs (13,640,812) 2,374,267
Revisions of quantity estimates (8,576,161) 42,164
Changes in development costs 3,882,741 -
Net change in income taxes 3,454,082 (9,975,394)
Interest factor - accretion of discount 4,134,810 465,765
Changes in production rates
and other 51,273 (57,213)
-----------------------------------------------------------------------------
Balance, end of year $32,023,689 $30,378,513
-----------------------------------------------------------------------------
</TABLE>
The acquisition of proved reserves in
1997 relates to the Kansas Properties
and the acquisition of proved reserves
in 1996 relates to the Swan Creek
development project.
Estimated future net cash flows
represent an estimate of future net
revenues from the production of proved
reserves using current sales prices,
along with estimates of the operating
costs, production taxes and future
development and abandonment costs (less
salvage value) necessary to produce such
reserves. The average prices used at
December 31, 1997 and 1996 were $16.53
and $19.10 per barrel of oil and $2.57
and $2.94 per mcf of gas, respectively.
No deduction has been made for
depreciation, depletion or any indirect
costs such as general corporate overhead
or interest expense.
Operating costs and production taxes are
estimated based on current costs with
respect to producing gas properties.
Future development costs are based on
the best estimate of such costs assuming
current economic and operating
conditions.
Income tax expense is computed based on
applying the appropriate statutory tax
rate to the excess of future cash
inflows less future production and
development costs over the current tax
basis of the properties involved, less
applicable carryforwards, for both
regular and alternative minimum tax.
F-30
<PAGE>
Tengasco, Inc.
Notes to Consolidated Financial Statements
The future net revenue information
assumes no escalation of costs or
prices, except for gas sales made under
terms of contracts which include fixed
and determinable escalation. Future
costs and prices could significantly
vary from current amounts and,
accordingly, revisions in the future
could be significant.
16. Restatement of 1997
Financial Statements The Company has restated the 1997
financial statements to reflect changes
to amounts recorded for interest
expense and additional paid-in capital
relative to the issuance of 86,084
shares of common stock to extinguish
approximately $484,000 of debt. The
value assigned to shares issued was
consistent with the value received in
the private placement of shares with
third parties (see Note 4).
With respect to the 1997 financial
statements, the restatement resulted in
the recording of additional interest
expense of $193,694 which increased the
net loss by $193,694 ($0.04 basic and
diluted loss per common share). The
restatement has no effect on total
stockholders' equity or on net cash used
in operating activities.
These matters are summarized in the
table below:
<TABLE>
<CAPTION>
Year ended December 31, 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Net loss as originally stated: $(4,176,876)
Adjustment: (193,694)
-----------------------------------------------------------------------------
Net loss as restated: $(4,370,570)
-----------------------------------------------------------------------------
Basic and diluted loss per common share:
Net loss per share as originally stated: $(0.67)
Adjustment: (0.04)
-----------------------------------------------------------------------------
Net loss per share, as restated $(0.71)
-----------------------------------------------------------------------------
</TABLE>
F-31
