U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 2000
Commission File No. 0-20975
TENGASCO, INC.
(Exact name of small business issuer as specified in its charter)
Tennessee 87-0267438
------------------------------ ---------------------------------
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
603 Main Avenue, Suite 500, Knoxville, TN 37902
-----------------------------------------------
(Address of principal executive offices)
(865-523-1124)
--------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 8,966,773 common shares at September
30, 2000.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
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TENGASCO, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
* Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999............................................. 3
* Consolidated Statements of Operations for the three
and nine Months Ended September 30, 2000 and 1999............. 5
* Consolidated Statements of Stockholders Equity for the
nine months Ended September 30, 2000.......................... 6
* Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999............................. 7
* Notes to Consolidated Financial Statements.................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................ 10
PART II. OTHER INFORMATION
* Submission of Matters to a Vote of Security Holders........... 14
* Signature..................................................... 15
2
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TENGASCO, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2000 1999
(Unaudited) (Audited)
----------- -----------
Current Assets:
Cash and cash equivalents $ 2,771,987 $ 420,590
Accounts receivable, net 690,084 533,983
Other current assets 332,856 259,753
----------- -----------
Total current assets 3,794,927 1,214,326
Oil and gas properties, net
(on the basis of full cost accounting) 9,240,718 8,444,036
Pipeline facilities, at cost 5,871,183 4,212,842
Property and equipment, net 1,977,295 574,895
Restricted Cash 0 625,000
Other 88,613 111,613
----------- -----------
$20,972,736 $15,182,712
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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TENGASCO, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDER'S EQUITY
September 30, December 31,
2000 1999
(Unaudited) (Audited)
----------- -----------
Current liabilities
Notes payable $ 0 $ 750,000
Current maturities of long-term debt 1,305,632 1,025,085
Accounts payable-trade 419,248 651,909
Accrued liabilities 59,978 193,595
----------- -----------
Total current liabilities 1,784,858 2,620,589
Long term debt, less current maturities 5,641,907 3,119,293
----------- -----------
Total liabilities 7,426,765 5,739,882
----------- -----------
Preferred Stock
Convertible redeemable preferred;
redemption value $3,938,900;
39,389 shares outstanding 3,938,800 1,988,900
----------- -----------
Stockholder's Equity
Common stock, $.001 per value,
50,000,000 shares authorized 8,967 8,533
Additional paid-in capital 23,429,025 20,732,759
Accumulated deficit (13,830,921) (13,287,362)
----------- -----------
Total stockholders' equity 9,607,071 7,453,930
----------- -----------
$20,972,736 $15,182,712
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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TENGASCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the For the
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Oil and gas revenues $1,666,583 $ 695,211 $4,116,778 $1,715,747
---------- ---------- ---------- -----------
Costs and other deductions
Productions costs and taxes 664,526 516,306 1,920,087 1,396,295
Depletion, depreciation
and amortization 63,000 97,340 189,000 251,540
Interest expense 95,686 69,231 299,844 370,685
General and administrative
costs 679,479 704,072 1,794,501 1,918,363
Legal and accounting 78,983 6,064 278,124 383,708
---------- ---------- ---------- -----------
Total costs and other
deductions 1,581,674 1,393,013 4,481,556 4,320,591
---------- ---------- ---------- -----------
Net income (loss) 84,909 (697,802) (364,778) (2,604,844)
Dividends on preferred stock 66,845 36,667 178,778 79,571
---------- ---------- ---------- -----------
Net income (loss) available
to common stockholders $ 18,064 $ (734,469) $ (543,556) $(2,684,415)
---------- ---------- ---------- -----------
Net income (loss) available
to common stockholders
per share basic and diluted $ 0.00 $ (0.09) $ (0.06) $ (0.34)
========== ========== ========== ===========
Weighted average shares
outstanding 8,945,643 7,873,735 8,945,643 7,873,735
---------- ---------- ---------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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TENGASCO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Unaudited)
Common Stock Additional
------------------ Paid in Accumulated
Shares Amount Capital Deficit
--------- ------ ----------- ------------
Balance December 31, 1999 8,532,882 $8,533 $20,732,759 $(13,287,362)
Common stock issued in 372,990 373 2,320,327 0
private placements
Common stock issued 52,083 52 325,948 0
on conversion of debt
Conversion of preferred 8,818 9 49,991 0
to common stock
Payment of dividends on
convertible preferred stock 0 0 0 (178,781)
Net loss for the nine months
ended September 30, 2000 0 0 0 (364,778)
--------- ------ ----------- -------------
Balance, September 30, 2000 8,966,773 $8,967 $23,429,025 $(13,830,921)
========= ====== =========== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
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TENGASCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30 2000 1999
----------- -----------
Operating activities
Net loss $ (364,778) $(2,604,844)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depletion, depreciation and amortization 189,000 251,540
Changes in assets and liabilities
Accounts receivable (156,101) 22,823
Other current assets (73,103) 0
Other assets 23,000 14,420
Accounts payable (232,661) (63,581)
Accrued liabilities (133,617) (142,610)
----------- -----------
Net cash used in operating activities (748,260) (2,522,252)
----------- -----------
Investing activities
Changes to property and equipment (1,402,400) (141,316)
Changes to oil and gas properties (796,682) (801,598)
Changes to pipeline facilities (1,658,341) (58,224)
Decrease in restricted cash 625,000 0
----------- -----------
Net cash used in investing activities (3,232,423) (1,001,138)
----------- -----------
Financing activities
Proceeds from borrowings 3,945,595 243,551
Repayments of borrowings (2,081,434) (560,728)
Dividends on convertible redeemable
preferred stock (178,781) 0
Proceeds from private placements
of common stock 2,696,700 2,340,432
Proceeds from private placement
of preferred stock 1,950,000 1,188,900
----------- -----------
Net cash provided by financing activities 6,332,080 3,212,155
----------- -----------
Net decrease in cash and cash
equivalents 2,351,397 (311,235)
Cash and cash equivalents, beginning of period 420,590 913,194
----------- -----------
Cash and cash equivalents, end of period $ 2,771,987 $ 601,959
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
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` Tengasco, Inc.
Notes to Consolidated Financial Statements
1. 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-QSB and
Item 310 (b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine months ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2000. For
further information, refer to the Company's consolidated financial
statements and footnotes thereto for the year ended December 31, 1999,
included in Form 10-KSB.
2. In August, 1997, The Company has issued fully paid 25% working interests in
six wells in the Swan Creek Field to Shigemi Morita, one of the Directors
of the Company, which were paid for in part by crediting Mr. Morita
$360,000 for placement fees in connection with private placements of the
Company's common stock which occurred during the fourth quarter of 1998 and
the first quarter of 1999. Mr. Morita was given an option that if it was
determined that a well(s) at the time of completion of the drilling was not
economically feasible and as such was subsequently plugged and abandoned,
he had 30 days, after written notice from the Company, to convert amounts
paid for that well (s) to restricted shares of the Company's common stock
at 70% of its then current market value. However, all six of the wells in
which Mr. Morita has a participation interest are producing, therefore his
options for these wells were not exercisable.
In December, 1999, Morita Properties, Inc., an affiliate of Mr. Morita,
purchased for the sum of $625,000 a 25% working interest on a turnkey basis
in two wells, Laura Jean Lawson #1 and Stephen Lawson #2, both of which are
in the Swan Creek Field, and a 50% working interest in a third well,
Springdale Land Company #1, which is a wildcat step-out well located
approximately ten miles from the existing production. In January and March
2000, Morita Properties, Inc. purchased for the sum of $250,000 on a
turnkey basis a 12.5% working interest in the Stephen Lawson #3 well and a
25% working interest in the Laura Jean Lawson #2 well. In April 2000,
Morita Properties, Inc. purchased for the sum of $125,000 a 25% working
interest in the R.D. Helton #2 well. In July 2000 Morita Properties, Inc.
purchased for the sum of $250,000 a 25% working interest in the Steve
Lawson #4 well and for the sum of $250,000 a 25% working interest in the
Hugh Roberts #1 well.
8
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In August 2000 Morita Properties, Inc. purchased for the sum of $125,000 a
25% working interest in the Hazel Sutton #1 well and for the sum of
$125,000 a 12.5% working interest in the Yeary #1 well, all of which are in
the Swan Creek Field. The purchases of these interests were concluded
before the respective wells were drilled and the purchaser assumed all the
attendant risks involved in normal and customary drilling operations,
including the risk of a dry hole. The Company is of the opinion it received
fair market value for the interests conveyed and the sale of such interests
was required to raise funds to allow drilling operations to continue.
3. 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 accrued interest at the rate of 9.5% per annum for the
period December 1998 to May 1999. After May 1999, the interest rate became
9.0% per annum. There was a balloon payment of $1,865,078 due in January
2000. The seller financed portion of the purchase price has been refinanced
by Arvest United Bank of Edmund, Oklahoma as evidenced by a note dated
November 23, 1999 in the amount of $1,883,650 to be paid in monthly
installments of principle and interest over a three year period. 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.
4. In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted
loss per share are based on 8,945,643 weighted average shares outstanding
for the quarter ended September 30, 2000 and 7,873,735 weighted average
shares outstanding for the quarter ended September 30, 1999. There were
475,827 and 475,827 potential weighted common shares outstanding at
September 30, 2000 and September 30, 1999, respectively, related to common
stock options and warrants. These shares were included in the computation
of the diluted income and loss per share amount.
5. Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 133, "Accounting for Derivatives and Hedging Activities", as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. Presently, the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of this new standard on
January 1, 2001, to affect its financial statements.
9
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Tengasco, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The Company is in the business of exploring for, producing and transporting oil
and natural gas in Tennessee and Kansas and marketing gas for others in
Tennessee. The Company has 208 producing oil and gas wells in Kansas and has 20
producing natural gas and five oil wells in Tennessee.
The Company intends to continue its 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:
(1) 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 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.
(2) The Company has successfully completed twenty gas wells in this area,
all of which have been flow tested by metering gas from the wells through a
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 five oil wells in the Swan Creek Field produce a total of 110 barrels per
day. To date, the Company has not drilled any dry wells.
In July 1998, the Company completed Phase I of its 8 inch 23 mile pipeline from
the Swan Creek Field to Rogersville, Tennessee. With the assistance of the
Tennessee Valley Authority, the Company was successful in utililizing TVA's
rights-of-way along its main power grid from the Swan Creek Field to
Rogersville, Tennessee.
The Company's plan of operations for the next two years calls for (i) the
completion of the second phase of the Company's pipeline ("Phase II") which is
an additional 28 miles of 12 inch pipeline at a cost of approximately $6,000,000
extending from a point near the terminus of Phase I of the pipeline and
connecting to an existing pipeline and meter station at the chemical plant of
Eastman Chemical Company ("Eastman") in Kingsport, Tennessee and, (ii) the
drilling of 50 additional wells on the Swan Creek Field at a cost of
approximately $250,000 per well.
10
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On August 16, 2000, Tengasco Pipeline Corporation ("TPC"), a wholly-owned
subsidiary of the Company, entered into loan agreements (the "Loan Agreements")
with five lenders (the "Lenders") for a loan (the "Loan") to finance the
completion of Phase II of the pipeline. Under the terms of the Loan Agreements,
the Lenders agreed to loan TPC a total of $5.6 million for the construction and
startup costs associated with Phase II. Repayment of the Loan is to be secured
only by a first lien upon the pipeline assets of TPC.
The Loan is to be repaid over a five-year term, accruing interest at 10.75% per
annum from the date of funding, with no penalty for prepayment, and the first
payment due in six months from closing. As additional consideration for making
the Loan, each Lender is to share on a pro-rata basis, a total throughput fee
for all of the Lenders of $.10 per MMBTU of natural gas delivered through the
completed pipeline system. The throughput agreement will cease to exist when the
Loan is paid in full.
The Lenders include Morita Properties, Inc., an affiliate of Shigemi Morita, a
Director of the Company who loaned TPC $500,000; Edward W.T. Gray III, a
Director of the Company who loaned TPC $1,000,000; and, Malcolm E. Ratliff,
Chairman of the Board of Directors and Chief Executive Officer of the Company
who is loaning TPC $2,000,000, with $500,000 having already been advanced and
the balance to be funded by November 15, 2000.
The balance of the Loan in the amount of $2,100,000 was made by two individuals,
both of whom are shareholders of the Company.
The Tennessee Department of Transportation has granted the Company the right to
lay Phase II of its pipeline along State Highway 11 to Kingsport, Tennessee.
Approximately 17 miles of Phase II of the pipeline has been completed and
tested. The remaining 11 miles is on schedule to be completed by December 31,
2000.
The Company has entered into an agreement with Eastman to supply substantial
amounts of natural gas to Eastman. At the present time, the company is capable
of producing substantially more gas than it is able to sell. Completion of Phase
II of the pipeline will allow the Company to deliver its gas to Eastman and sell
substantially more of its natural gas production from the Swan Creek Field. The
Company estimates that its ultimate deliverability will reach 80 to 100 Mmcf per
day or 2.5 to 3.1 Bcf per month once Phase II of its pipeline is completed. The
Company expects to reach this capacity on or about December 31, 2002. The
Company anticipates that its agreement with Eastman will require Eastman to
purchase 10,000 MMBTU of gas per day, to take effect upon completion of Phase II
of its pipeline.
11
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The Company does not presently have the funds needed to enable it to complete
its Swan Creek Field drilling program. The Company, however, anticipates that it
will be able to procure financing for its drilling program from funds available
either as a result of gas sales upon completion of Phase II of the pipeline or
from other sources. However, no assurance can be given that it will be
successful in obtaining such funds.
In connection with its acquisition of all of AFG'S assets, the Company acquired
208 working wells in Kansas. Pursuant to the acquisition agreement the Company
was entitled to all income from those wells as of January 1, 1998. The aggregate
consideration for the acquisition was of approximately $5.5 million.
The aggregate current production from the Kansas properties is approximately 1.0
million cubic feet of natural gas and 400 barrels of oil per day. Income from
the Kansas properties at the present time is approximately $400,000 per month.
Revenues from the Kansas Properties for the third quarter of 2000 continued to
increase due to the significant increase in oil prices during the quarter.
There are several capital investments that are available in the Kansas
Properties which include drilling wells, recompletion of wells and major
workovers to increase current production. These projects when completed may well
increase production in Kansas. However, the cost of major reworking of certain
existing wells is projected to be $1.4 million. Some of these workovers have
been performed and production increased as a result of these workovers.
Additional workovers are scheduled to be performed to increase production.
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.
12
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Results of Operations
The Company recognized $1,666,583 in revenues from the Kansas oil and gas field
and Swan Creek during the third quarter of 2000 compared to $695,211 in the
third quarter of 1999. This increased revenue resulted from the significant
increase in oil prices during the third quarter of 2000. Oil prices in the third
quarter of 1999 were approximately $17.00 per barrel whereas prices in 2000 were
approximately $31.00 per barrel. Also oil production from Swan Creek increased
from 5,346 barrels in the third quarter of 1999 to 14,441 barrels in the third
quarter of 2000. Production costs and taxes for the first nine months of 2000 of
$1,920,087, was higher compared to $1,396,295 in the third quarter of 1999. This
was due to some well work overs in Kansas in order to increase production.
Depreciation, Depletion and Amortization expense for the first nine months of
2000 was $189,000, compared to $251,540 for the first nine months of 1999, this
difference was due to a change in estimate.
Interest Expense for the first nine months of 2000 was $299,844, as compared to
$370,685 in 1999. This difference is due to interest that was paid in 1999 in
connection with the settlement of litigations brought against the Company by
Wallington Investments, Ltd. and Thieme Fonds. General and Administrative
Expenses for the first nine months of 2000 decreased $123,862 from the first
nine months of 1999 amount of $1,918,363. This decrease was due to cost saving
measures by management.
Legal and accounting fees decreased $105,584 for the first nine months of 2000.
The majority of this decrease was in legal services as several legal matters
were settled in 1999.
Year 2000 Risks
The Company achieved Year 2000 compliance for all internal systems and did not
suffer any adverse effects with respect thereto. The Company does not anticipate
any such problems in the future. The Company's Year 2000 compliance costs were
insignificant and, accordingly, did not have a material effect on its operating
results or financial position.
13
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PART II OTHER INFORMATION
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of the Company was held on
August 8, 2000.
(b) The first item voted on was the election of Directors. Joseph E.
Armstrong, Benton L. Becker, Edward W.T. Gray III, Robert D. Hatcher, Jr.,
Sanford E. McCormick, Shigemi Morita, Malcolm E. Ratliff and Allen J. Sweeney
were elected as Directors of the Company for a term of one year or until their
successors were elected and qualified. The results of voting were as follows:
6,264,102 votes for Joseph E. Armstrong and 1,094 withheld; 6,224,062 votes for
Benton L. Becker and 41,134 withheld; 6,264,062 votes for Edward W.T. Gray III
and 1,134 withheld; 6,245,102 votes for Robert D. Hatcher, Jr. and 20,094
withheld; 6,207,062 votes for Sanford E. McCormick and 58,134 withheld;
6,264,102 votes for Shigemi Morita and 1,094 withheld; 6,263,362 votes for
Malcolm E. Ratliff and 1,834 withheld; and, 6,256,661 votes for Allen J. Sweeney
and 8,535 withheld.
(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 2000. The results of the voting were as follows:
6,250,236 votes for the resolution,
4,000 votes against and
10,960 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.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Dated: November 8, 2000 TENGASCO, INC.
By: /s/ Robert M. Carter
-----------------------------------------
Robert M. Carter, President
By: /s/ Mark A. Ruth
-----------------------------------------
Mark A. Ruth, Chief Financial Officer
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