AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 2003
REGISTRATION NO. 333-___________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
TENGASCO, INC.
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(Exact Name of registrant as Specified in Our Charter)
TENNESSEE 1311 87-0267438
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
603 MAIN AVENUE, SUITE 500
KNOXVILLE, TN 37902
(865) 523-1124
---------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
RICHARD T. WILLIAMS
TENGASCO, INC.
603 MAIN AVENUE, SUITE 500
KNOXVILLE, TN 37902
(865) 523-1124
---------------------------------------------------------------
(Name, Address Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copy To:
GARY J. SIMON
HUGHES HUBBARD & REED LLP
ONE BATTERY PARK PLAZA
NEW YORK, NY 10004
(212) 837-6000
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-----------------------
CALCULATION OF REGISTRATION FEE
==============================================================================================================================
AMOUNT PROPOSED MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) OFFERING PRICE (1) FEE
------------------------------------------------------------------------------------------------------------------------------
Nontransferable Common Stock Purchase Rights(2) 12,100,000 rights --- $0(3) $0(3)
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Common Stock, par value $.001 per share (4) 24,200,000 shares $0.94 $22,653,956(5) $1,833
==============================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) This registration statement relates to (a) nontransferable rights to
purchase shares of common stock of Tengasco, Inc., which rights will be
issued to holders of common stock and (b) the shares of common stock
deliverable upon exercise of the rights pursuant to the rights offering.
(3) The rights are being issued without consideration. Pursuant to Rule 457(g)
under the Securities Act of 1933, no separate registration fee is required
because the rights are being registered in the same registration statement
as the common stock underlying the rights.
(4) Represents the shares of common stock issuable upon the exercise of the
rights.
(5) Represents the gross proceeds from the assumed exercise of all rights
issued.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY OUR EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 17, 2003
PROSPECTUS
TENGASCO, INC.
SUBSCRIPTION RIGHTS
SHARES OF COMMON STOCK
We are distributing to holders of our outstanding common stock, at no
charge, nontransferable subscription rights to purchase up to an aggregate of
_______ shares of our common stock at a cash subscription price of $___ per
share. You will receive for each share of our common stock you own a right to
purchase two shares of our common stock at an exercise price of $___ for each
share purchased. If you exercise your rights in full, you may over-subscribe for
the purchase of additional shares that remain unsubscribed at the expiration of
the rights offering, subject to availability and allocation of shares among
persons exercising this over-subscription privilege. You will not be entitled to
receive any rights unless you hold of record shares of our common stock as of
the close of business on _____, 2003.
This rights offering is being made in order to obtain funds to pay non-bank
indebtedness, including to Dolphin Offshore Partners, L.P., which we refer to as
Dolphin, in the approximate amount of up to $_____ million, with the balance of
the net proceeds, if any, to be used to pay bank indebtedness and/or for working
capital purposes. Our Board of Directors has determined that this rights
offering is advisable under our present financial, operational and other
circumstances. Our Board of Directors has formed a special committee comprised
of disinterested directors charged with, among other things, recommending to the
full Board of Directors the financial and other terms of this rights offering.
Subject to the pricing of the rights offering, Dolphin, of which Peter E.
Salas, a director of Tengasco, is the general partner and which is deemed to
beneficially own approximately 20.1% of our outstanding common stock, may agree
to exercise its basic subscription and over-subscription privileges in full. We
reserve the right, in our sole discretion, to accept or reject in whole or in
part subscriptions by Dolphin.
The rights will expire if they are not exercised by 5:00 p.m., New York
City time, on _____, 2003, the expected expiration date of the rights offering.
We may extend the period for exercising the rights. Rights that are not
exercised by the expiration date of the rights offering will expire and will
have no value. Rights may not be sold or transferred except under the very
limited circumstances described later in this prospectus. You should carefully
consider whether to exercise your rights before the expiration date. Our board
of directors is making no recommendation regarding your exercise of rights.
Shares of our common stock are traded on the American Stock Exchange under
the symbol "TGC." On October 13, 2003, the last reported sales price for our
common stock was $0.94 per share.
AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. YOU SHOULD CAREFULLY
CONSIDER THE RISK FACTORS BEGINNING ON PAGE 14 OF THIS PROSPECTUS BEFORE
EXERCISING YOUR RIGHTS.
PROCEEDS OF OFFERING
Per Share Total
Subscription Price......................... $ $
Estimated Expenses......................... $ $
Net Proceeds to Tengasco................... $ $
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------
THE DATE OF THIS PROSPECTUS IS ______________ , 2003.
TABLE OF CONTENTS
Forward Looking Statements..........................2
Questions And Answers About The Rights Offering.....3
Summary.............................................8
Risk Factors.......................................14
Use Of Proceeds....................................19
Price Range Of Common Stock........................20
Capitalization.....................................21
Selected Consolidated Financial Data...............22
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations.............23
Quantitative And Qualitative Disclosure About
Market Risks....................................32
Business...........................................33
Production.........................................45
Legal Proceedings..................................47
Management.........................................48
Certain Relationships And Related Transactions.....53
Principal Stockholders.............................55
The Rights Offering................................57
Description Of Capital Stock.......................67
United States Federal Income Tax Consequences......70
Plan of Distribution...............................71
Tennessee Anti-Takeover Law........................71
Limitation Of Liability Of Directors...............72
Legal Matters......................................73
Experts............................................73
Where You Can Find More Information................73
Index To Financial Statements.....................F-1
FORWARD LOOKING STATEMENTS
The statements contained in this prospectus that are not purely historical
are forward-looking statements within the meaning of applicable securities laws.
Forward-looking statements include statements regarding our "expectations,"
"anticipations," "intentions," "beliefs," or "strategies" regarding the future.
Forward-looking statements also include statements regarding revenue, margins,
expenses, and earnings analysis for 2003 and thereafter; our going concern
qualification; oil and gas prices; reserve calculation and valuation;
exploration activities; development expenditures; costs of regulatory
compliance; environmental matters; technological developments; future products
or product development; our products and distribution development strategies;
potential acquisitions or strategic alliances; and liquidity and anticipated
cash needs and availability. All forward-looking statements included in this
prospectus are based on information available to us as of the date of this
prospectus, and we assume no obligation to update any such forward-looking
statements. Our actual results could differ materially from the forward-looking
statements. Among the factors that could cause results to differ materially are
the factors discussed in "Risk Factors."
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting future rates of production and the
timing of development expenditures. The total amount or timing of actual future
production may vary significantly from reserves and production estimates. The
drilling of exploratory wells can involve significant risks, including those
related to timing, success rates and cost overruns. Lease and rig availability,
complex geology and other factors can also affect these risks. Additionally,
fluctuations in oil and gas prices, or a prolonged period of low prices, may
substantially adversely affect our financial position, results of operations and
cash flows.
This prospectus is part of a registration statement filed with the SEC. You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with different information. This prospectus may
only be used where it is legal for us to sell these securities. You should not
assume that the information in this prospectus is accurate as of any date other
than the date on the front cover of those documents. Our business, financial
condition, results of operations and prospects may have changed since those
dates.
2
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING
Q. WHAT IS THE RIGHTS OFFERING?
A. The rights offering is a distribution to holders of our common stock at
no charge, of nontransferable subscription rights at the rate of one right (to
purchase two shares of our common stock) for each share of common stock owned as
of _______, 2003, the record date. Each right will be evidenced by a
nontransferable rights certificate.
Q. WHAT IS A SUBSCRIPTION RIGHT?
A. Each subscription right is a right to purchase two shares of our common
stock and carries with it a basic subscription privilege and an
over-subscription privilege.
Q. WHAT IS THE BASIC SUBSCRIPTION PRIVILEGE?
A. The basic subscription privilege of each right entitles you to purchase
two shares of our common stock at the subscription price of $___ in the
aggregate, or $__ per each share purchased. You must purchase both shares
relating to each outstanding share if you wish to exercise the subscription
privilege relating thereto. Fractional rights will be eliminated by rounding up
to the next higher whole right.
Q. WHAT IS THE OVER-SUBSCRIPTION PRIVILEGE?
A. We do not expect that all of our stockholders will exercise all of their
basic subscription rights. By extending over-subscription privileges to our
stockholders, we are providing stockholders that exercise all of their basic
subscription privileges with the opportunity to purchase those shares that are
not purchased by other stockholders through the exercise of their basic
subscription privileges. The over-subscription privilege of each right entitles
you, if you fully exercise your basic subscription privilege, to subscribe for
additional shares of our common stock unclaimed by other holders of rights in
the rights offering, at the same subscription price per share. If an
insufficient number of shares is available to fully satisfy all
over-subscription privilege requests, the available shares will be distributed
proportionately among rights holders who exercised their over-subscription
privilege based on the number of shares each rights holder subscribed for under
the basic subscription privilege. The subscription agent will return any excess
payments by mail without interest or deduction promptly after the expiration of
the rights offering.
Q. HOW LONG WILL THE RIGHTS OFFERING LAST?
A. You will be able to exercise your subscription rights only during a
limited period. If you do not exercise your subscription rights before 5:00
p.m., New York City time, on _____________, 2003, your subscription rights will
expire. We may, in our discretion, extend the rights offering until some later
time not later than _______, 2003.
Q. WHY IS TENGASCO ENGAGING IN A RIGHTS OFFERING?
A. The net proceeds of the rights offering will be used initially to pay
non-bank indebtedness, including to Dolphin, in the approximate amount of up to
$_____ million, with the balance of the proceeds, if any, to be used to repay
bank indebtedness and/or for working capital purposes including the drilling of
additional wells. The rights offering gives you the opportunity to participate
in this fund-raising effort and to purchase additional shares of our common
stock.
Q. WHAT HAPPENS IF I CHOOSE NOT TO EXERCISE MY SUBSCRIPTION RIGHTS?
A. You will retain your current number of shares of common stock even if
you do not exercise your subscription rights. If you choose not to exercise your
subscription rights, then the percentage of our common stock that you own will
decrease. Rights not exercised prior to the expiration of the rights offering
will expire.
3
Q. HOW DO I EXERCISE MY SUBSCRIPTION RIGHTS?
A. You may exercise your rights by properly completing and signing your
rights certificate. You must deliver your rights certificate with full payment
of the subscription price (including any amounts in respect of the
over-subscription privilege) to the subscription agent on or prior to the
expiration date. If you use the mail, we recommend that you use insured,
registered mail, return receipt requested. If you cannot deliver your rights
certificate to the subscription agent on time, you may follow the guaranteed
delivery procedures described under "The Rights Offering--Guaranteed Delivery
Procedures" beginning on page 56.
Q. WHAT SHOULD I DO IF I WANT TO PARTICIPATE IN THE RIGHTS OFFERING BUT MY
SHARES ARE HELD IN THE NAME OF MY BROKER, CUSTODIAN BANK OR OTHER NOMINEE?
A. If you hold shares of our common stock through a broker, custodian bank
or other nominee, we will ask your broker, custodian bank or other nominee to
notify you of the rights offering. If you wish to exercise your rights, you will
need to have your broker, custodian bank or other nominee act for you.
To indicate your decision, you should complete and return to your broker,
custodian bank or other nominee the form entitled "Beneficial Owner Election
Form." You should receive this form from your broker, custodian bank or other
nominee with the other rights offering materials. You should contact your
broker, custodian bank or other nominee if you believe you are entitled to
participate in the rights offering but you have not received this form.
Q. WHAT SHOULD I DO IF I WANT TO PARTICIPATE IN THE RIGHTS OFFERING AND I
AM A STOCKHOLDER IN A FOREIGN COUNTRY OR IN THE ARMED SERVICES?
A. The subscription agent will mail rights certificates to you if you are a
rights holder whose address is outside the United States or if you have an Army
Post Office or a Fleet Post Office address. To exercise your rights, you must
notify the subscription agent on or prior to 5:00 p.m., New York City time, on
_________ 2003, and take all other steps which are necessary to exercise your
rights, on or prior to that time. If you do not follow these procedures prior to
the expiration of the rights offering, your rights will expire.
Q. WHAT IF THE MARKET PRICE PER SHARE OF OUR COMMON STOCK IS LESS THAN THE
SUBSCRIPTION PRICE PER SHARE WHEN I AM DECIDING TO EXERCISE MY SUBSCRIPTION
RIGHTS?
A. Consult your broker. Depending on the market price of our common stock,
it most likely will be more cost effective for you to purchase shares of our
common stock on the American Stock Exchange rather than exercise your
subscription rights.
Q. WILL I BE CHARGED A SALES COMMISSION OR A FEE BY TENGASCO IF I EXERCISE
MY SUBSCRIPTION RIGHTS?
A. No. We will not charge a brokerage commission or a fee to rights holders
for exercising their rights. However, if you exercise your rights through a
broker or nominee, you will be responsible for any fees charged by your broker
or nominee.
Q. WHAT IS THE BOARD OF DIRECTORS' RECOMMENDATION REGARDING THE RIGHTS
OFFERING?
A. Our board of directors is not making any recommendation as to whether
you should exercise your subscription rights. You are urged to make your
decision based on your own assessment of the rights offering and Tengasco.
4
Q. HOW MANY SHARES MAY I PURCHASE?
A. You will receive one nontransferable subscription right for each share
of common stock that you owned on ________, 2003, the record date. Each
subscription right contains the basic subscription privilege and the
over-subscription privilege. Each basic subscription privilege entitles you to
purchase two shares of common stock for $___ per each share purchased.
Fractional rights will be eliminated by rounding up to the next higher whole
right. See "The Rights Offering - Subscription Privileges - Basic Subscription
Privilege."
The over-subscription privilege entitles you to subscribe for additional
shares of our common stock at the same subscription price per share on a
pro-rata basis to the number of shares you purchased under your basic
subscription privilege, provided you fully exercise your basic subscription
privilege. "Pro-rata" means in proportion to the number of shares of our common
stock that you and the other rights holders electing to exercise their
over-subscription privileges have purchased by exercising the basic subscription
privileges on their holdings of common stock. See "The Rights
Offering--Subscription Privileges--Over-Subscription Privilege."
Q. HOW WAS THE SUBSCRIPTION PRICE ESTABLISHED?
A. The subscription price per share will be approved by our board of
directors (with Mr. Salas not voting with respect to these matters) upon the
recommendation of a special committee of independent directors formed for that
purpose, among others. The special committee will consider a number of factors,
including the historic and then current market price of the common stock, our
business prospects, our recent and anticipated operating results, general
conditions in the securities markets and the energy markets, our need for
capital, alternatives available to us for raising capital, the amount of
proceeds desired, the pricing of similar transactions, the liquidity of our
common stock and the level of risk to our investors. See "Background of the
Rights Offering."
Q. IS EXERCISING MY SUBSCRIPTION RIGHTS RISKY?
A. Yes. The exercise of your rights involves risks. Exercising your rights
means buying additional shares of our common stock and should be considered as
carefully as you would consider any other equity investment. Among other things,
you should carefully consider the risks described under the heading "Risk
Factors," beginning on page 14.
Q. MAY I TRANSFER MY RIGHTS IF I DO NOT WANT TO PURCHASE ANY SHARES?
A. No. Should you choose not to exercise your rights, you may not sell,
give away or otherwise transfer your rights. However, rights will be
transferable to certain affiliates of the recipient and by operation of law -
for example, upon death of the recipient.
Q. AM I REQUIRED TO SUBSCRIBE IN THE RIGHTS OFFERING?
A. No.
Q. HOW MANY SHARES WILL BE OUTSTANDING AFTER THE RIGHTS OFFERING?
A. Assuming the rights offering is fully subscribed, the number of shares
of common stock that will be outstanding immediately after the rights offering
will be approximately 36 million shares, subject to any increase(s) that may
occur after the date of this prospectus as a result of the exercise, conversion
or exchange of outstanding stock options, convertible securities or exchangeable
securities.
Q. WHAT HAPPENS IF THE RIGHTS OFFERING IS NOT FULLY SUBSCRIBED AFTER
GIVING EFFECT TO THE OVER-SUBSCRIPTION PRIVILEGE?
A. Any rights not exercised after giving effect to the over-subscription
privilege will expire.
5
Q. HOW WILL THE RIGHTS OFFERING AFFECT OUR BOARD'SOWNERSHIP OF OUR COMMON
STOCK?
A. The members of our board of directors and their affiliates are deemed to
beneficially own 4,574,265 shares of our common stock, representing
approximately 38% of our outstanding common stock. Dolphin is deemed to
beneficially own 2,441,019 shares of our common stock, representing
approximately 20.1% of our common stock. See "Principal Stockholders."
If no rights holders other than Dolphin and its affiliates exercise their
rights in the rights offering, the members of our board of directors
collectively, on the one hand, and Dolphin, on the other hand, will, as a result
of Dolphin's subscription for and purchase of all unsubscribed shares, be deemed
to beneficially own approximately 28,505,655 and 26,541,013 shares,
respectively, representing the beneficial ownership of 77.4% and 72.8%,
respectively, of our outstanding common stock. If all rights holders exercise
their basic subscription privileges in full, then the members of our board of
directors collectively, on the one hand, and Dolphin, on the other hand, will
continue to beneficially own 37.6% and 20.1%, respectively, of our common stock.
See "Principal Stockholders."
Q. AFTER I EXERCISE MY RIGHTS, CAN I CHANGE MY MIND AND CANCEL MY
PURCHASE?
A. No. Once you send in your subscription certificate and payment you
cannot revoke the exercise of your rights, even if you later learn information
about us that you consider to be unfavorable and even if the market price of our
common stock is below the $____ per share subscription price. You should not
exercise your subscription rights unless you are certain that you wish to
purchase additional shares of our common stock at a price of $_____ per share.
See "The Rights Offering - No Revocation."
Q. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF EXERCISING MY
SUBSCRIPTION RIGHTS AS A HOLDER OF COMMON STOCK?
A. A holder of common stock will not recognize income or loss for federal
income tax purposes in connection with the receipt or exercise of subscription
rights in the rights offering. See "United States Federal Income Tax
Consequences" on page 70.
Q. WHEN WILL I RECEIVE MY NEW SHARES?
A. If you purchase shares of common stock through this rights offering, you
will receive certificates representing those shares as soon as practicable after
the expiration of the rights offering. Subject to state securities laws and
regulations, we have the discretion to delay allocation and distribution of any
shares you may elect to purchase by exercise of your basic or over-subscription
privilege in order to comply with state securities laws.
Q. WILL THE NEW SHARES BE INITIALLY LISTED ON THE AMERICAN STOCK EXCHANGE
AND TREATED LIKE OTHER SHARES?
A. Yes. Our common stock is traded on the American Stock Exchange under the
symbol "TGC." On October 13, 2003, the last reported sales price of our common
stock on the AMEX was $0.94 per share.
Q. IF THE RIGHTS OFFERING IS NOT COMPLETED, WILL MY SUBSCRIPTION PAYMENT
BE REFUNDED TO ME?
A. Yes. The subscription agent will hold all funds it receives in escrow
until completion of the rights offering. If the right offering is not completed,
the subscription agent will return promptly, without interest, all subscription
payments.
6
Q. WHAT SHOULD I DO IF I HAVE OTHER QUESTIONS?
A. If you have questions or need assistance, please contact ___________,
the subscription agent, at: ( )_____-_____. Banks and brokerage firms please
call ( )_____-_____. For a more complete description of the rights offering,
see "The Rights Offering" beginning on page 57.
7
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information that is important to you.
This prospectus includes information about our business and our financial and
operating data. Before making an investment decision, we encourage you to read
the entire prospectus carefully, including the risks discussed in the "Risk
Factors" section. We also encourage you to review our financial statements and
the other information us provide in the reports and other documents that we file
with the SEC, as described under "Where You Can Find More Information."
Our Company
We are in the business of exploring for, producing and transporting oil and
natural gas in Tennessee and Kansas. We lease producing and non-producing
properties with a view toward exploration and development. Emphasis is also
placed on pipeline and other infrastructure facilities to provide transportation
services. We utilize seismic technology to improve the discovery and recovery of
reserves.
To date, we have drilled primarily on a portion of our Tennessee leases
known as the Swan Creek Field in Hancock County focused within what is known as
the Knox formation, one of the geologic formations in that field. During the
first six months of 2003, we produced an average of approximately 1.2 MMcf of
natural gas per day and approximately 2,345 barrels of oil per month from 23
producing gas wells and six producing oil wells in the Swan Creek Field. We also
operate wells in the State of Kansas. During the first six months of 2003, we
produced an average of approximately .13 MMcf of natural gas per day and 10,900
barrels of oil per month from 59 producing gas wells and 129 producing oil wells
in Kansas.
We were initially organized under the laws of the State of Utah on April
18, 1916, under the name "Gold Deposit Mining & Milling Company." We
subsequently changed our name to Onasco Companies, Inc. We were formed
originally for the purpose of mining, reducing and smelting mineral ores. On
November 10, 1972, we conveyed to an unaffiliated entity substantially all of
our assets and we ceased all business operations. From approximately 1983 to
1991, our operations were limited to seeking out the acquisition of assets,
property or businesses. In 1995 we began acquiring oil and gas assets and have
since focused our efforts on the operation of these assets as well as the
acquisition of additional oil and gas assets.
We are a Tennessee corporation, the address of our principal executive
office is 603 Main Avenue, Suite 500, Knoxville, TN 37902, and our telephone
number at that address is (865)523-1124.
THE RIGHTS OFFERING
You should read "Risk Factors" before you exercise your rights.
WHAT IS THE RIGHTS OFFERING? The rights offering is a distribution to
holders of our common stock, at no charge, of
nontransferable subscription rights at the
rate of one right (to purchase two shares of
our common stock) for each share of common
stock owned as of ________, 2003, the record
date. Each right will be evidenced by a
nontransferable rights certificate.
WHAT IS A SUBSCRIPTION RIGHT? Each subscription right is a right to
purchase two shares of our common stock and
carries with it a basic subscription
privilege and an over-subscription privilege.
WHAT IS THE BASIC SUBSCRIPTION The basic subscription privilege of each
PRIVILEGE? right entitles you to purchase two shares of
our common stock at the subscription price of
$___ in the aggregate, or $___ per each share
purchased. You must purchase both shares
relating to each outstanding share if you
wish to exercise the subscription privilege
relating thereto. Fractional rights will be
eliminated by rounding up to the next higher
whole right.
8
WHAT IS THE OVER-SUBSCRIPTION We do not expect that all of our stockholders
PRIVILEGE? will exercise all of their basic subscription
rights. By extending over-subscription
privileges to our stockholders, we are
providing stockholders that exercise all of
their basic subscription privileges with the
opportunity to purchase those shares that are
not purchased by other stockholders through
the exercise of their basic subscription
privileges. The over-subscription privilege
of each right entitles you, if you fully
exercise your basic subscription privilege,
to subscribe for additional shares of our
common stock unclaimed by other holders of
rights in the rights offering, at the same
subscription price per share. If an
insufficient number of shares is available to
fully satisfy all over-subscription privilege
requests, the available shares will be
distributed proportionately among rights
holders who exercised their over-subscription
privilege based on the number of shares each
rights holder subscribed for under the basic
subscription privilege. The subscription
agent will return any excess payments by mail
without interest or deduction promptly after
the expiration of the rights offering.
HOW LONG WILL THE RIGHTS You will be able to exercise your
OFFERING LAST? subscription rights only during a limited
period. If you do not exercise your
subscription rights before 5:00 p.m., New
York City time, on _____________, 2003, your
subscription rights will expire. We may, in
our discretion, extend the rights offering
until some later time not later than _______,
2003.
WHY IS TENGASCO ENGAGING IN A The net proceeds of the rights offering will
RIGHTS OFFERING? be used initially to pay non-bank
indebtedness, including to Dolphin, in the
aggregate amount of up to $4.5 million, with
the balance of the net proceeds, if any, to
be used to repay bank indebtedness and/or for
working capital purposes, including the
drilling of additional wells. The rights
offering gives you the opportunity to
participate in this fund-raising effort and
to purchase additional shares of our common
stock.
WHAT HAPPENS IF I CHOOSE NOT You will retain your current number of shares
TO EXERCISE MY SUBSCRIPTION of common stock even if you do not exercise
RIGHTS? your subscription rights. If you choose not
to exercise your subscription rights, then
the percentage of our common stock that you
own will decrease. Rights not exercised prior
to the expiration of the rights offering will
expire.
HOW DO I EXERCISE MY You may exercise your rights by properly
SUBSCRIPTION RIGHTS? completing and signing your rights
certificate. You must deliver your rights
certificate with full payment of the
subscription price (including any amounts in
respect of the over-subscription privilege)
to the subscription agent on or prior to the
expiration date. If you use the mail, we
recommend that you use insured, registered
mail, return receipt requested. If you cannot
deliver your rights certificate to the
subscription agent on time, you may follow
the guaranteed delivery procedures described
under "The Rights Offering--Guaranteed
Delivery Procedures" beginning on page 56.
9
WHAT SHOULD I DO IF I WANT TO If you hold shares of our common stock
PARTICIPATE IN THE RIGHTS through a broker, custodian bank or other
OFFERING BUT MY SHARES ARE nominee, we will ask your broker, custodian
HELD IN THE NAME OF MY bank or other nominee to notify you of the
BROKER, CUSTODIAN BANK OR rights offering. If you wish to exercise your
OTHER NOMINEE? rights, you will need to have your broker,
custodian bank or other nominee act for you.
To indicate your decision, you should
complete and return to your broker, custodian
bank or other nominee the form entitled
"Beneficial Owner Election Form." You should
receive this form from your broker, custodian
bank or other nominee with the other rights
offering materials. You should contact your
broker, custodian bank or other nominee if
you believe you are entitled to participate
in the rights offering but you have not
received this form.
WHAT SHOULD I DO IF I WANT TO The subscription agent will mail rights
PARTICIPATE IN THE RIGHTS certificates to you if you are a rights
OFFERING AND I AM A holder whose address is outside the United
STOCKHOLDER IN A FOREIGN States or if you have an Army Post Office or
COUNTRY OR IN THE ARMED a Fleet Post Office address. To exercise your
SERVICES? rights, you must notify the subscription
agent on or prior to 5:00 p.m., New York City
time, on _________ 2003, and take all other
steps which are necessary to exercise your
rights, on or prior to that time. If you do
not follow these procedures prior to the
expiration of the rights offering, your
rights will expire.
WHAT IF THE MARKET PRICE PER Consult your broker. Depending on the market
SHARE OF OUR COMMON STOCK IS price of our common stock, it most likely
LESS THAN THE SUBSCRIPTION will be more cost effective for you to
PRICE PER SHARE WHEN I AM purchase shares of our common stock on the
DECIDING TO EXERCISE MY American Stock Exchange rather than exercise
SUBSCRIPTION RIGHTS? your subscription rights.
WILL I BE CHARGED A SALES No. We will not charge a brokerage commission
COMMISSION OR A FEE BY or a fee to rights holders for exercising
TENGASCO IF I EXERCISE MY their rights. However, if you exercise your
SUBSCRIPTION RIGHTS? rights through a broker or nominee, you will
be responsible for any fees charged by your
broker or nominee.
WHAT IS THE BOARD OF Our board of directors is not making any
DIRECTORS' RECOMMENDATION recommendation as to whether you should
REGARDING THE RIGHTS exercise your subscription rights. You are
OFFERING? urged to make your decision based on your own
assessment of the rights offering and
Tengasco.
HOW MANY SHARES MAY I You will receive one nontransferable
PURCHASE? subscription right for each share of common
stock that you owned on ____________, 2003,
the record date. Each subscription right
contains the basic subscription privilege and
the over-subscription privilege. Each basic
subscription privilege entitles you to
purchase two shares of common stock for $___
per each share purchased. Fractional rights
will be eliminated by rounding up to the next
higher whole right. See "The Rights Offering
- Subscription Privileges - Basic
Subscription Privilege."
The over-subscription privilege entitles you
to subscribe for additional shares of our
common stock at the same subscription price
per share on a pro-rata basis to the number
of shares you purchased under your basic
subscription privilege, provided you fully
exercise your basic
10
subscription privilege. "Pro-rata" means in
proportion to the number of shares of our
common stock that you and the other rights
holders electing to exercise their
over-subscription privileges have purchased
by exercising the basic subscription
privileges on their holdings of common stock.
See "The Rights Offering--Subscription
Privileges--Over-Subscription Privilege."
HOW WAS THE SUBSCRIPTION The subscription price per share was approved
PRICE ESTABLISHED? by our board of directors (with Mr. Salas not
voting with respect to these matters) upon
the recommendation of a special committee of
independent directors formed for that
purpose, among others. The special committee
will consider a number of factors, including
the historic and then current market price of
the common stock, our business prospects, our
recent and anticipated operating results,
general conditions in the securities markets
and the energy markets, our need for capital,
alternatives available to us for raising
capital, the amount of proceeds desired, the
pricing of similar transactions, the
liquidity of our common stock and the level
of risk to our investors. See "Background of
the Rights Offering."
IS EXERCISING MY SUBSCRIPTION Yes. The exercise of your rights involves
RIGHTS RISKY? risks. Exercising your rights means buying
additional shares of our common stock and
should be considered as carefully as you
would consider any other equity investment.
Among other things, you should carefully
consider the risks described under the
heading "Risk Factors," beginning on page 14.
MAY I TRANSFER MY RIGHTS IF I No. Should you choose not to exercise your
DO NOT WANT TO PURCHASE ANY rights, you may not sell, give away or
SHARES? otherwise transfer your rights. However,
rights will be transferable to certain
affiliates of the recipient and by operation
of law - for example, upon death of the
recipient.
AM I REQUIRED TO SUBSCRIBE IN No.
THE RIGHTS OFFERING?
HOW MANY SHARES WILL BE Assuming the rights offering is fully
OUTSTANDING AFTER THE RIGHTS subscribed, the number of shares of common
OFFERING? stock that will be outstanding immediately
after the rights offering will be
approximately 36 million shares, subject to
any increase(s) that may occur after the date
of this prospectus as a result of the
exercise, conversion or exchange of
outstanding stock options, convertible
securities or exchangeable securities.
WHAT HAPPENS IF THE RIGHTS Any rights not exercised after giving effect
OFFERING IS NOT FULLY to the over-subscription privilege will
SUBSCRIBED AFTER GIVING expire.
EFFECT TO THE
OVER-SUBSCRIPTION PRIVILEGE?
HOW WILL THE RIGHTS OFFERING The members of our board of directors and
AFFECT OUR BOARD'S OWNERSHIP their affiliates are deemed to beneficially
OF OUR COMMON STOCK? own 4,574,265 shares of our common stock,
representing approximately 38% of our
outstanding common stock. Dolphin is deemed
to beneficially own 2,441,019 shares of our
common stock, representing approximately
20.1% of our outstanding common stock. See
"Principal Stockholders."
11
If no rights holders other than Dolphin
exercise their rights in the rights offering,
the members of our board of directors
collectively, on the one hand, and Dolphin,
on the other hand, will, as a result of
Dolphin's subscription for and purchase of
all unsubscribed shares, be deemed to
beneficially own approximately 28,505,655 and
26,541,013 shares, respectively, representing
the beneficial ownership of 77.4% and 72.8%,
respectively, of our outstanding common
stock. If all rights holders exercise their
basic subscription privileges in full, then
the members of our board of directors
collectively, on the one hand, and Dolphin,
on the other hand, will continue to
beneficially own 37.6% and 20.1%,
respectively, of our common stock. See
"Principal Stockholders."
AFTER I EXERCISE MY RIGHTS, No. Once you send in your subscription
CAN I CHANGE MY MIND AND certificate and payment you cannot revoke the
CANCEL MY PURCHASE? exercise of your rights, even if you later
learn information about us that you consider
to be unfavorable and even if the market
price of our common stock is below the $___
per share subscription price. You should not
exercise your subscription rights unless you
are certain that you wish to purchase
additional shares of our common stock at a
price of $_____ per share. See "The Rights
Offering - No Revocation."
WHAT ARE THE FEDERAL INCOME A holder of common stock will not recognize
TAX CONSEQUENCES OF income or loss for federal income tax
EXERCISING MY SUBSCRIPTION purposes in connection with the receipt or
RIGHTS AS A HOLDER OF COMMON exercise of subscription rights in the rights
STOCK? offering. See "United States Federal Income
Tax Consequences" on page 70.
WHEN WILL I RECEIVE MY NEW If you purchase shares of common stock
SHARES? through this rights offering, you will
receive certificates representing those
shares as soon as practicable after the
expiration of the rights offering. Subject to
state securities laws and regulations, we
have the discretion to delay allocation and
distribution of any shares you may elect to
purchase by exercise of your basic or
over-subscription privilege in order to
comply with state securities laws.
WILL THE NEW SHARES BE Yes. Our common stock is traded on the
INITIALLY LISTED ON THE American Stock Exchange under the symbol
AMERICAN STOCK EXCHANGE AND "TGC." On October 13, 2003, the last reported
TREATED LIKE OTHER SHARES? sales price of our common stock on the AMEX
was $0.94 per share.
IF THE RIGHTS OFFERING IS NOT Yes. The subscription agent will hold all
COMPLETED, WILL MY funds it receives in escrow until completion
SUBSCRIPTION PAYMENT BE of the rights offering. If the right offering
REFUNDED TO ME? is not completed, the subscription agent will
return promptly, without interest, all
subscription payments.
WHAT SHOULD I DO IF I HAVE If you have questions or need assistance,
OTHER QUESTIONS? please contact Mellon Investor Services LLC,
the subscription agent, at: (800) 370-1163.
Banks and brokerage firms please call ( )
_____-_____. For a more complete description
of the rights offering, see "The Rights
Offering" beginning on page 57.
AMERICAN STOCK EXCHANGE TGC
TRADING SYMBOL:
12
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and notes thereto, and other
financial information included elsewhere in this prospectus. Our consolidated
statement of loss data set forth below for the years ended December 31, 2002 and
2001 and 2000 and the consolidated balance sheet data as of December 31, 2002
and 2001 have been derived from our audited consolidated financial statements
which are included elsewhere in this prospectus. The consolidated statement of
loss data set forth below for the years ended December 31, 1999 and 1998 and the
consolidated balance sheet data as of December 31, 2000, 1999 and 1998 have been
derived from our audited consolidated financial statements that are not included
in this prospectus. The balance sheet data and the statement of loss data as of
and for the six months ended June 30, 2003 and 2002 have been derived from our
unaudited financial statements, included elsewhere in this prospectus, which we
believe have been prepared on the same basis as the audited financial statements
and include all adjustments, consisting of normal recurring adjustments, which
we consider necessary for a fair presentation of the summary financial data
shown.
Year Ended December 31, (1) Six Months Ended June 30,
----------------------------------------------------------------------- --------------------------
2002 2001 2000 1999 1998 2003 2002
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
LOSS STATEMENT DATA
Oil and Gas Revenues $ 5,437,723 $ 6,656,758 $ 5,241,076 $ 3,017,252 $ 2,078,101 $ 3,360,763 $ 2,408,917
Production Costs and Taxes $ 3,094,731 $ 2,951,746 $ 2,614,414 $ 2,564,932 $ 1,943,944 $ 1,627,879 $ 1,269,304
Depreciation, Depletion and
Amortization $ 2,413,597 $ 1,849,963 $ 371,249 $ 283,907 $ 290,030 $ 1,259,138 $ 974,696
General and Administrative $ 1,868,141 $ 2,957,871 $ 2,602,311 $ 1,961,348 $ 1,372,132 $ 810,495 $ 1,126,109
Interest Expense $ 578,039 $ 850,965 $ 415,376 $ 417,497 $ 574,906 $ 294,098 $ 301,664
Net Loss Before Cumulative
Effect of a Change in
Accounting Principle $(3,154,555) $(2,262,787) $(1,541,884) $(2,671,923) $(3,083,638) $ (986,738) $(1,726,065)
Cumulative Effect of a
Change in Accounting
Principle -- -- -- -- -- $ (351,204) --
Net Loss Attributable to
Common Stockholders $(3,661,334) $(2,653,970) $(1,799,441) $(2,791,270) $(3,083,638) $(1,606,331) $(1,964,465)
Earnings Per Share Data:
Net Loss Before Cumulative
Effect of a Change in
Accounting Principle Per
Share $ (0.33) $ (0.26) $ (0.19) $ (0.33) $ (0.42) $ (0.09) $ (0.18)
Cumulative Effect of a
Change in Accounting
Principle Per Share -- -- -- -- -- $ (0.03) --
Net Loss Attributable to
Common Stockholders Per
Share $ (0.33) $ (0.26) $ (0.19) $ (0.33) $ (0.42) $ (0.14) $ (0.18)
As of December 31, (2) (3) Six Months
---------------------------------------------------------------------------- Ended
2002 2001 2000 1999 1998 June 30, 2003
(unaudited)
BALANCE SHEET DATA.
Working Capital Deficit $ (7,998,835) $ (6,326,204) $ (708,317) $ (1,406,263) $ (1,929,215) $ (9,194,357)
Oil and Gas Properties, Net $ 13,864,321 $ 13,269,930 $ 9,790,047 $ 8,444,036 $ 7,747,655 $ 13,422,702
Pipeline Facilities, Net $ 15,372,843 $ 15,039,762 $ 11,047,038 $ 4,212,842 $ 4,019,209 $ 15,439,812
Total Assets $ 32,584,391 $ 32,128,245 $ 25,224,724 $ 15,182,712 $ 13,525,777 $ 32,178,382
Debt $ 9,867,454 $ 10,302,588 $ 9,217,085 $ 4,894,378 $ 4,693,865 $ 10,089,210
Asset Retirement Obligations -- -- -- -- -- $ 648,079
Mandatorily Redeemable $ 6,762,218 $ 5,459,050 $ 3,938,900 $ 1,988,900 $ 800,000 $ 6,870,694
Preferred Stock
Stockholders Equity $ 14,210,623 $ 14,991,847 $ 10,864,202 $ 7,453,930 $ 7,245,090 $ 13,090,438
(1) All references in this table to common stock and per share data have been
retroactively adjusted to reflect the 5% stock dividend declared by the
Company effective as of September 4, 2001.
(2) With respect to the pipeline facilities, during the years ended December
31, 2000, 1999, and 1998, this information included portions which were
under construction.
(3) No cash dividends have been declared or paid by the Company for the periods
presented.
13
RISK FACTORS
This offering and an investment in the shares of our common stock involve a
high degree of risk. You should carefully consider the following factors and
other information presented or incorporated by reference in this prospectus
before deciding to invest in our common stock. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us may also impair our operations and
business. If we do not successfully address any one or more of the risks
described below, there could be a material adverse effect on our financial
condition, operating results and business. We cannot assure you that we will
successfully address these risks.
RISKS RELATED TO OUR BUSINESS
GOING CONCERN QUALIFICATION; SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR
ADDITIONAL FINANCING.
We must make substantial capital expenditures for the acquisition,
exploration and development of oil and gas reserves. Historically, we have paid
for these expenditures with cash from operating activities, proceeds from debt
and equity financings and asset sales. Our ability to re-work existing wells and
complete our drilling program in the Swan Creek Field is dependent upon our
ability to fund these expenditures. Although we anticipated that by this time we
would be able to fund the completion of our drilling program in the Swan Creek
Field from revenues from the sales of gas, we are unable to do so. Further, the
availability under our credit facility with Bank One has been revoked by Bank
One. As a result of Bank One's revocation of the credit facility and the
corresponding demand for repayment, combined with the fact that we are still in
the early stages of our oil and gas operating history, during which time we have
a history of losses from operations and have an accumulated deficit of
$(29,491,533) and a working capital deficit of $(9,194,357) as of June 30, 2003,
our independent certified public accountants have indicated in their report on
our Consolidated Financial Statements for the year ended December 31, 2002, that
these circumstances raise substantial doubt about our ability to continue as a
going concern, which depends upon our ability to obtain long-term debt or raise
capital to satisfy our cash flow requirements. At the present time and until we
are able to increase our production and sales of gas, we must obtain the
necessary funds to complete our drilling program from other sources such as this
offering as well as other equity investments, bank loans or joint ventures with
other companies, as to which there can be no assurances. In addition, our
revenues or cash flows could decline in the future because of lower oil and gas
prices or for other reasons. If our revenues or cash flows decrease and we are
unable to procure additional financing, this would require us to reduce
production over time, which would adversely impact our ability to continue in
business. Where we are not the majority owner or operator of an oil and gas
project, we may have no control over the timing or amount of capital
expenditures required with the particular project. If we cannot fund our capital
expenditures in such projects, our interests in such projects may be reduced or
forfeited. In addition to the foregoing operational cash requirements, we have a
significant amount of loans and other obligations either currently due or
maturing by January 4, 2004. These loans, excluding our obligations to Bank One,
and other obligations include interest-bearing loans in excess of $4 million, of
which approximately $2 million is owed to Dolphin, past due accounts payable in
excess of $800,000, interest payments in excess of $300,000, and preferred
dividends in arrears in excess of $600,000. If we are unable to procure
additional funding in addition to the net proceeds of this offering, then we may
not be able to continue as a going concern. There can be no assurance that the
proceeds of this offering will be sufficient to pay all of our loans and
obligations currently due or maturing as described above or that we will be able
to obtain any additional funding required as described above.
VOLATILE OIL AND GAS PRICES CAN MATERIALLY AFFECT US.
Our future financial condition and results of operations will depend upon
the prices obtainable for our oil and natural gas production and the costs of
finding, acquiring. developing and producing reserves. Prices for oil and
natural gas are subject to fluctuations in response to relatively minor changes
in supply, market uncertainty and a variety of additional factors that are
beyond our control. These factors include worldwide political instability
(especially in the Middle East and other oil-producing regions), the foreign
supply of oil and gas, the price of foreign imports, the level of drilling
activity, the level of consumer product demand, government regulations and
taxes, the price and availability of alternative fuels and the overall economic
environment. A substantial or extended decline in oil and gas prices would have
a material adverse effect on our financial position, results of operations,
quantities of oil and gas that may be economically produced, and access to
capital. Oil and natural gas prices have historically
14
been and are likely to continue to be volatile. This volatility makes it
difficult to estimate with precision the value of producing properties in
acquisitions and to budget and project the return on exploration and development
projects involving our oil and gas properties. In addition, unusually volatile
prices often disrupt the market for oil and gas properties, as buyers and
sellers have more difficulty agreeing on the purchase price of properties.
UNCERTAINTY IN CALCULATING RESERVES; RATES OF PRODUCTION; DEVELOPMENT
EXPENDITURES; CASH FLOWS.
There are numerous uncertainties inherent in estimating quantities of oil
and natural gas reserves of any category and in projecting future rates of
production and timing of development expenditures, which underlie the reserve
estimates, including many factors beyond our control. Reserve data represent
only estimates. In addition, the estimates of future net cash flows from our
proved reserves and their present value are based upon various assumptions about
future production levels, prices and costs that may prove to be incorrect over
time. Any significant variance from the assumptions could result in the actual
quantity of our reserves and future net cash flows from being materially
different from the estimates. In addition, our estimated reserves may be subject
to downward or upward revision based upon production history, results of future
exploration and development, prevailing oil and gas prices, operating and
development costs and other factors.
OIL AND GAS OPERATIONS INVOLVE SUBSTANTIAL COSTS AND ARE SUBJECT TO VARIOUS
ECONOMIC RISKS.
Our oil and gas operations are subject to the economic risks typically
associated with exploration, development and production activities, including
the necessity of significant expenditures to locate and acquire producing
properties and to drill exploratory wells. In conducting exploration and
development activities, the presence of unanticipated pressure or irregularities
in formations, miscalculations or accidents may cause our exploration,
development and production activities to be unsuccessful. This could result in a
total loss of our investment. In addition, the cost and timing of drilling,
completing and operating wells is often uncertain.
COSTS INCURRED TO CONFORM TO GOVERNMENT REGULATION OF THE OIL AND GAS
INDUSTRY.
Our exploration, production and marketing operations are regulated
extensively at the federal, state and local levels. We have made and will
continue to make large expenditures in our efforts to comply with the
requirements of environmental and other regulations. Further, the oil and gas
regulatory environment could change in ways that might substantially increase
these costs. Hydrocarbon-producing states regulate conservation practices and
the protection of correlative rights. These regulations affect our operations
and limit the quantity of hydrocarbons we may produce and sell. In addition, at
the federal level, the Federal Energy Regulatory Commission regulates interstate
transportation of natural gas under the Natural Gas Act. Other regulated matters
include marketing, pricing, transportation and valuation of royalty payments.
COSTS INCURRED RELATED TO ENVIRONMENTAL MATTERS.
Our operations are subject to numerous and frequently changing laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. We own or lease, and have in the
past owned or leased, properties that have been used for the exploration and
production of oil and gas and these properties and the wastes disposed on these
properties may be subject to the Comprehensive Environmental Response,
Compensation and Liability Act, the Oil Pollution Act of 1990, the resource
Conservation and Recovery Act, the Federal Water Pollution Control Act and
analogous state laws. Under such laws, we could be required to remove or
remediate previously released wastes or property contamination.
Laws and regulations protecting the environment have generally become more
stringent and, may in some cases, impose "strict liability" for environmental
damage. Strict liability means that we may be held liable for damage without
regard to whether we were negligent or otherwise at fault. Environmental laws
and regulations may expose us to liability for the conduct of or conditions
caused by others or for acts that were in compliance with all applicable laws at
the time they were performed. Failure to comply with these laws and regulations
may result in the imposition of administrative, civil and criminal penalties.
While we believe that our operations are in substantial compliance with
existing requirements of governmental bodies, our ability to conduct continued
operations is subject to satisfying applicable regulatory and permitting
controls. Our current permits and authorizations and ability to get future
permits and authorizations may be
15
susceptible, on a going forward basis, to increased scrutiny, greater complexity
resulting in increased costs or delays in receiving appropriate authorizations.
INSURANCE DOES NOT COVER ALL RISKS.
Exploration for and production of oil and natural gas can be hazardous,
involving unforeseen occurrences such as blowouts, cratering, fires and loss of
well control, which can result in damage to or destruction of wells or
production facilities, injury to persons, loss of life, or damage to property or
the environment. We maintain insurance against certain losses or liabilities
arising from our operations in accordance with customary industry practices and
in amounts that management believes to be prudent; however, insurance is not
available to us against all operational risks.
HEDGING MAY PREVENT US FROM FULLY BENEFITING FROM PRICE INCREASES.
We do not presently have any hedging agreements or plans to enter into any
hedging activities. However, to the extent that we do enter into such agreements
or undertake such activities, we may be prevented from realizing the benefit of
price increases above the levels of the hedges. In addition, we are subject to
basis risk when we engage in hedging transactions, particularly where
transportation constraints restrict our ability to deliver oil and gas volumes
at the delivery point to which the hedging transaction is indexed.
GENERAL ECONOMIC CONDITIONS.
Virtually all of our operations are subject to the risks and uncertainties
of adverse changes in general economic conditions, the outcome of pending and/or
potential legal or regulatory proceedings, changes in environmental, tax, labor
and other laws and regulations to which we are subject, and the condition of the
capital markets utilized
COMPETITION.
Our business is highly competitive. In seeking any other suitable oil and
gas properties for acquisition, or drilling rig operators and related personnel
and equipment, we will be competing with a number of other companies, including
large oil and gas companies and other independent operators with substantially
greater financial and technical resources and longer history and experience in
property acquisition and operation.
DEPENDENCE ON KEY PERSONNEL.
Members of present management and certain company employees have
substantial expertise in the areas of endeavor presently conducted and to be
engaged in by us. To the extent that their services become unavailable, we will
be required to retain other qualified personnel. There can be no assurance that
we will be able to recruit and hire qualified persons upon acceptable terms.
RISKS RELATING TO THIS RIGHTS OFFERING
THE SUBSCRIPTION PRICE DETERMINED FOR THIS OFFERING IS NOT AN INDICATION OF
OUR VALUE OR THE VALUE OF OUR COMMON STOCK.
The subscription price for this rights offering is $___ for each share
purchased. The subscription price was determined by a special committee of our
Board of Directors formed for that purpose, among others, and recommended to our
full Board of Directors and does not necessarily bear any relationship to the
book value of our assets, past operations, cash flows, losses, financial
condition or any other established criteria for value. You should not consider
the subscription price as an indication of our value. After the date of this
prospectus, our common stock may trade at prices above or below the subscription
price.
16
IF YOU EXERCISE YOUR RIGHTS, YOU MAY LOSE MONEY IF THERE IS A DECLINE IN
THE TRADING PRICE OF OUR SHARES OF COMMON STOCK.
The trading price of our common stock in the future may decline below the
subscription price. We cannot assure you that the subscription price will remain
below any future trading price for the shares of our common stock. Future prices
of the shares of our common stock may adjust positively or negatively depending
on various factors including our future revenues and earnings, changes in
earnings estimates by analysts, our ability to meet analysts' earnings
estimates, speculation in the trade or business press about our operations, and
overall conditions affecting our businesses, economic trends and the securities
markets.
YOU MAY NOT REVOKE THE EXERCISE OF YOUR RIGHTS EVEN IF THERE IS A DECLINE
IN OUR COMMON STOCK PRICE PRIOR TO THE EXPIRATION DATE OF THE SUBSCRIPTION
PERIOD.
Even if our common stock price declines below the subscription price for
the common stock, resulting in a loss on your investment upon the exercise of
rights to acquire shares of our common stock, you may not revoke or change your
exercise of rights after you send in your subscription forms and payment.
YOU MAY NOT REVOKE THE EXERCISE OF YOUR RIGHTS EVEN IF WE DECIDE TO EXTEND
THE EXPIRATION DATE OF THE SUBSCRIPTION PERIOD.
We may, in our discretion, extend the expiration date of the subscription
period to a date no later than ________, 2003. During any potential extension of
time, our common stock price may decline below the subscription price and result
in a loss on your investment upon the exercise of rights to acquire shares of
our common stock. If the expiration date is extended after you send in your
subscription forms and payment, you still may not revoke or change your exercise
of rights.
YOU WILL NOT RECEIVE INTEREST ON SUBSCRIPTION FUNDS RETURNED TO YOU.
If we cancel the rights offering, neither we nor the subscription agent
will have any obligation with respect to the subscription rights except to
return, without interest, any subscription payments to you.
BECAUSE WE MAY TERMINATE THE OFFERING, YOUR PARTICIPATION IN THE OFFERING
IS NOT ASSURED.
Once you exercise your subscription rights, you may not revoke the exercise
for any reason unless we amend the offering. If we decide to terminate the
offering, we will not have any obligation with respect to the subscription
rights except to return any subscription payments, without interest.
YOU NEED TO ACT PROMPTLY AND FOLLOW SUBSCRIPTION INSTRUCTIONS.
Stockholders who desire to purchase shares in this rights offering must act
promptly to ensure that all required forms and payments are actually received by
the subscription agent prior to 5:00 p.m., New York City time, on______, 2003,
the expiration date. If you fail to complete and sign the required subscription
forms, send an incorrect payment amount, or otherwise fail to follow the
subscription procedures that apply to your desired transaction the subscription
agent may, depending on the circumstances, reject your subscription or accept it
to the extent of the payment received. Neither we nor our subscription agent
undertakes to you concerning, or attempt to correct, an incomplete or incorrect
subscription form or payment. We have the sole discretion to determine whether a
subscription exercise properly follows the subscription procedures.
OUR ABILITY TO USE OUR NET OPERATING LOSS CARRYFORWARDS MAY BE
SUBSTANTIALLY REDUCED AS A RESULT OF THIS OFFERING.
Section 382 of the Internal Revenue Code of 1986 imposes a limitation on a
corporation's use of net operating loss ("NOL") carryforwards if the corporation
has undergone an "ownership change." Depending on a number of circumstances,
including the extent to which the rights offered hereby are exercised out of
proportion to existing common stock ownership, this offering may create an
ownership change in us for purposes of Section 382 and therefore substantially
reduce the amount of NOL carryforwards that we may use in future years to offset
our taxable income. At December 31, 2002, we had federal tax NOL carryforwards
of $7,139,000. However, because
17
we previously have taken a full valuation reserve for our deferred tax assets on
our financial statements, an ownership change would not have an immediate impact
on our reported earnings for financial accounting purposes.
18
USE OF PROCEEDS
Assuming that stockholders exercise subscription rights for all of the
common stock that we are offering, we will receive gross proceeds of
approximately $___ million. Dolphin and its affiliates, subject to the pricing
of the rights offering, may agree that it will exercise its basic subscription
and over-subscription privileges in full. In that event, we would expect to
receive proceeds of at least $___ million from the rights offering, before any
purchases by any other rights holders. See "The Rights Offering - Proposed
Commitment Agreement." We will pay estimated expenses of approximately $150,000
in connection with the rights offering. We intend to use the net proceeds from
this offering initially to pay non-bank indebtedness, including to Dolphin in
the aggregate amount of up to $_____ million, and to apply the balance of such
proceeds, if any, to repay bank indebtedness to some extent and/or for working
capital purposes, including the drilling of additional wells. There can be no
assurance that the net proceeds of this offering will provide sufficient working
capital to us for any minimum period of time. See "Risk Factors - Going Concern
Qualification; Significant Capital Requirements; Need for Additional Financing."
19
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the American Stock Exchange under the symbol
"TGC." The following table sets forth the high and low closing sales prices per
share of our common stock for the periods indicated. The prices for the first
three quarters of 2001 have been retroactively adjusted by a 5% reduction to
take into account the 5% stock dividend declared by us payable on October 1,
2001 to all stockholders of record as of September 4, 2001.
HIGH LOW
---- ---
Year Ending December 31, 2003
First Quarter........................................ $2.00 $1.00
Second Quarter....................................... 1.23 0.36
Third Quarter........................................ 1.28 0.65
Fourth Quarter (through October 13, 2003)............ 0.94 0.77
Year Ended December 31, 2002
First Quarter........................................ 8.19 5.80
Second Quarter....................................... 6.49 2.71
Third Quarter........................................ 3.45 2.20
Fourth Quarter....................................... 2.90 1.05
Year Ended December 31, 2001
First Quarter........................................ 14.20 9.69
Second Quarter....................................... 15.01 11.16
Third Quarter........................................ 13.69 7.60
Fourth Quarter....................................... 10.54 7.39
20
CAPITALIZATION
The following table sets forth our summary capitalization as of June 30,
2003, and our summary capitalization as of June 30, 2003 as adjusted to reflect
the sale of__ shares of our common stock (the maximum number of shares offered)
in this rights offering at an offering price of $___ per share and the
application of the estimated net proceeds therefrom, after deducting estimated
offering expenses of $150,000.
June 30, 2003
----------------------------
As
Actual Adjusted
------------ ------------
Total Debt:
Long-term debt, less current maturities .............................. $ 614,181 $ 614,181
------------ ------------
Mandatorily Redeemable Preferred Stock:
Cumulative convertible redeemable preferred; redemption value
$7,072,000; 70,720 shares outstanding ................................ 6,870,694 6,870,694
------------ ------------
Stockholders Equity:
Common Stock, $0.001 par value, 50,000,000 shares authorized ......... 12,019
Additional paid-in capital ........................................... 42,831,339
Treasury stock, at cost .............................................. (145,887) (145,887)
Accumulated other comprehensive loss ................................. (115,500) (115,500)
Accumulated deficit .................................................. (29,491,533) (29,491,533)
------------ ------------
Total stockholders' equity .................................. 13,090,438
------------ ------------
Total capitalization ...................................................... $ 20,575,313 $
============ ============
21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and notes thereto, and other
financial information included elsewhere in this prospectus. Our consolidated
statement of loss data set forth below for the years ended December 31, 2002,
2001 and 2000 and the consolidated balance sheet data as of December 31, 2002
and 2001 have been derived from our audited consolidated financial statements
which are included elsewhere in this prospectus. The consolidated statement of
loss data set forth below for the years ended December 31, 1999 and 1998 and the
consolidated balance sheet data as of December 31, 2000, 1999, and 1998 have
been derived from our audited consolidated financial statements that are not
included in this prospectus. The balance sheet data and the statement of loss
data as of and for the six months ended June 30, 2003 and 2002 have been derived
from our unaudited financial statements included elsewhere in this prospectus,
which we believe have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, which we consider necessary for a fair presentation of the selected
financial data shown.
Year Ended December 31, (1) Six Months Ended June 30,
----------------------------------------------------------------------- --------------------------
2002 2001 2000 1999 1998 2003 2002
(unaudited)
LOSS STATEMENT DATA
Oil and Gas Revenues $ 5,437,723 $ 6,656,758 $ 5,241,076 $ 3,017,252 $ 2,078,101 $ 3,360,763 $ 2,408,917
Production Costs and Taxes $ 3,094,731 $ 2,951,746 $ 2,614,414 $ 2,564,932 $ 1,943,944 $ 1,627,879 $ 1,269,304
Depreciation, Depletion and
Amortization $ 2,413,597 $ 1,849,963 $ 371,249 $ 283,907 $ 290,030 $ 1,259,138 $ 974,696
General and Administrative $ 1,868,141 $ 2,957,871 $ 2,602,311 $ 1,961,348 $ 1,372,132 $ 810,495 $ 1,126,109
Interest Expense $ 578,039 $ 850,965 $ 415,376 $ 417,497 $ 574,906 $ 294,098 $ 301,664
Net Loss Before
Cumulative Effect of a
Change in Accounting
Principle $(3,154,555) $(2,262,787) $(1,541,884) $(2,671,923) $(3,083,638) $ (986,738) $(1,726,065)
Cumulative Effect of a
Change in Accounting
Principle -- -- -- -- -- $ (351,204) --
Net Loss Attributable to
Common Stockholders $(3,661,334) $(2,653,970) $(1,799,441) $(2,791,270) $(3,083,638) $(1,606,331) $(1,964,465)
Earnings Per Share Data:
Net Loss Before
Cumulative Effect of a
Change in Accounting
Principle
Per Share $ (0.33) $ (0.26) $ (0.19) $ (0.33) $ (0.42) $ (0.09) $ (0.18)
Cumulative Effect of a
Change in Accounting
Principle Per Share -- -- -- -- -- $ (0.03) --
Net Loss Attributable to
Common Stockholders Per
Share $ (0.33) $ (0.26) $ (0.19) $ (0.33) $ (0.42) $ (0.14) $ (0.18)
As of December 31, (2) (3) Six Months
---------------------------------------------------------------------------- Ended
2002 2001 2000 1999 1998 June 30, 2003
(unaudited)
BALANCE SHEET DATA
Working Capital Deficit $ (7,998,835) $ (6,326,204) $ (708,317) $ (1,406,263) $ (1,929,215) $ (9,194,357)
Oil and Gas Properties, Net $ 13,864,321 $ 13,269,930 $ 9,790,047 $ 8,444,036 $ 7,747,655 $ 13,422,702
Pipeline Facilities, Net $ 15,372,843 $ 15,039,762 $ 11,047,038 $ 4,212,842 $ 4,019,209 $ 15,439,812
Total Assets $ 32,584,391 $ 32,128,245 $ 25,224,724 $ 15,182,712 $ 13,525,777 $ 32,178,382
Debt $ 9,867,454 $ 10,302,588 $ 9,217,085 $ 4,894,378 $ 4,693,865 $ 10,089,210
Asset Retirement Obligations -- -- -- -- -- $ 648,079
Mandatorily Redeemable
Preferred Stock $ 6,762,218 $ 5,459,050 $ 3,938,900 $ 1,988,900 $ 800,000 $ 6,870,694
Stockholders Equity $ 14,210,623 $ 14,991,847 $ 10,864,202 $ 7,453,930 $ 7,245,090 $ 13,090,438
(1) All references in this table to common stock and per share data have been
retroactively adjusted to reflect the 5% stock dividend declared by the
Company effective as of September 4, 2001.
(2) With respect to the pipeline facilities, during the years ended December
31, 2000, 1999, and 1998, this included portions which were under
construction.
(3) No cash dividends have been declared or paid by the Company for the periods
presented.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section should be read in conjunction with our consolidated financial
statements included elsewhere in this prospectus. Comments on the results of
operations and financial condition below refer to our continuing operations.
OVERVIEW
We are in the business of exploring for, producing and transporting oil and
natural gas in Tennessee and Kansas. We lease producing and non-producing
properties with a view toward exploration and development. Emphasis is also
placed on pipeline and other infrastructure facilities to provide transportation
services. We utilize seismic technology to maximize the recovery of reserves.
Our activities in the oil and gas business commenced in May 1995 with the
acquisition of oil and gas leases in Hancock, Claiborne, Knox, Jefferson and
Union counties in Tennessee. Our current lease position in these areas in
Tennessee is approximately 41,088 acres. In addition, in 1997, we acquired
approximately 32,000 acres of leases in the vicinity of Hays, Kansas.
To date, we have drilled primarily on a portion of our Tennessee leases
known as the Swan Creek Field in Hancock County focused within what is known as
the Knox formation, one of the geologic formations in that field. During the
first six months of 2003, we produced an average of approximately 1.2 MMcf of
natural gas per day and approximately 2,345 barrels of oil per month from 23
producing gas wells and six producing oil wells in the Swan Creek Field. We also
operate wells in the State of Kansas. During the first six months of 2003, we
produced an average of approximately .13 MMcf of natural gas per day and 10,900
barrels of oil per month from 59 producing gas wells and 129 producing oil wells
in Kansas.
We must make substantial capital expenditures for the acquisition,
exploration and development of oil and gas reserves. Historically, we have paid
for these expenditures with cash from operating activities, proceeds from debt
and equity financings and asset sales. Our ability to re-work existing wells and
complete our drilling program in the Swan Creek Field is dependent upon our
ability to fund these expenditures. Although we anticipated that by this time we
would be able to fund the completion of our drilling program in the Swan Creek
Field from revenues from the sales of gas, we are unable to do so. Further, our
credit facility with Bank One has been revoked by Bank One. As a result of Bank
One's revocation of the credit facility and the corresponding demand for
payment, combined with the fact that we are still in the early stages of our oil
and gas operating history, during which time we have a history of losses from
operations and have an accumulated deficit of $(29,491,533) and a working
capital deficit of $(9,194,357) as of June 30, 2003, our independent certified
public accountants have indicated in their report on our Consolidated Financial
Statements for the year ended December 31, 2002, that these circumstances raise
substantial doubt about our ability to continue as a going concern, which
depends upon our ability to obtain long-term debt or raise capital to satisfy
our cash flow requirements. At the present time and until we are able to
increase our production and sales of gas and to resolve our dispute with Bank
One, we must obtain the necessary funds to proceed with our drilling program
from other sources such as equity investment, bank loan or a joint venture with
other companies, as to which there can be no assurances. Although we intend to
apply the net proceeds from this offering initially to repay non-bank
indebtedness and to apply the balance of such proceeds, if any, to repay in part
bank indebtedness and/or other working capital purposes, including the drilling
of additional wells, there can be no assurances that such net proceeds will be
sufficient for such purposes or that we will be able to resolve the financial
difficulties currently preventing us from drilling additional wells and
increasing production volumes of natural gas from the Swan Creek Field. In
addition, our revenues or cash flows could be reduced because of lower oil and
gas prices or for some other reason. There can be no assurances that we will be
able to obtain additional funding. Further, in certain projects where we are not
the majority owner or operator and we may have no control over the timing or
amount of capital expenditures associated with those projects. If we cannot fund
such capital expenditures, our interests in those projects would likely be
reduced or forfeited. In addition to the foregoing operational cash
requirements, we have a significant amount of loans and other obligations either
currently due or maturing by January 4, 2004. These loans, excluding our
obligations to Bank One, and other obligations include interest-bearing loans in
excess of $4 million principal amount, approximately $2 million of which is owed
to Dolphin, past due accounts payable in excess of $800,000, interest payments
in excess of $300,000, and preferred
23
dividends in arrears in excess of $600,000, as well as the negative operating
cash flow referred to above in excess of $500,000. If we are unable to procure
additional funding in addition to the act proceeds of this offering, then we may
not be able to continue as a going concern. There can be no assurance that the
proceeds of this offering will be sufficient to pay all of our loans and
obligations currently due or maturing as described above or that we will be able
to obtain any additional funding required as described above.
A reporting issue has arisen regarding the application of certain
provisions of SFAS No. 141 and SFAS No. 142 to companies in the extractive
industries, including oil and gas companies. The issue is whether SFAS No. 142
requires registrants to classify the costs of mineral rights held under lease or
other contractual arrangement associated with extracting oil and gas as
intangible assets in the balance sheet, apart from other capitalized oil and gas
property costs, and provide specific footnote disclosures. Historically, we have
included the costs of such mineral rights associated with extracting oil and gas
as a component of oil and gas properties. If it is ultimately determined that
SFAS No. 142 requires oil and gas companies to classify costs of mineral rights
held under lease or other contractual arrangement associated with extracting oil
and gas as a separate intangible assets line item on the balance sheet, we would
be required to reclassify approximately $421,000 at June 30, 2003 and $346,000
at December 31, 2002, respectively, out of oil and gas properties and into a
separate intangible assets line item. Our cash flows and results of operations
would not be affected since such intangible assets would continue to be depleted
and assessed for impairment in accordance with full cost accounting rules.
Further, we do not believe the classification of the costs of mineral rights
associated with extracting oil and gas as intangible assets would have any
impact on compliance with covenants under our debt agreements.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Kansas During the first six months of 2003, we produced and sold 65,457
barrels of oil and 129,995 Mcf of natural gas from our Kansas Properties, which
are comprised of 149 producing oil wells and 59 producing gas wells. The first
six months production of 65,457 barrels of oil compares to 72,124 barrels
produced in the first six months of 2002. The first six months production of
129,995 Mcf of gas compares to 146,783 Mcf produced in the first six months of
2002. In summary, the first six months production reflected expected continued
relatively stable production levels from the Kansas Properties, which have been
in production for many years. The decrease in production reflects a normal
decline curve for the Kansas properties. The revenues from the Kansas properties
were $2,049,781 in the first six months of 2003 as compared to $1,559,361 for
the first six months of 2002. The increase in revenues is due to a significant
increase in the price of oil and gas during the period.
Tennessee During the first six months of 2003, we produced gas from 23
wells in the Swan Creek Field, which gas was sold to our two industrial
customers in Kingsport, Tennessee, BAE SYSTEMS Ordnance Systems Inc. as operator
of the Holston Army Ammunition Plant, or BAE, and Eastman Chemical Company.
Natural gas production from the Swan Creek Field for the first six months of
2003 was an average of 1.150 million cubic feet per day during that period as
compared to 2.270 million cubic feet per day during the first six months of
2002. The first six months production reflected expected natural decline in
production from the existing Swan Creek gas wells, which were first brought into
production in mid-2001 upon completion of our pipeline. Although this decline is
normal, the reduced production volume was not replaced as we had expected by
additional drilling. In order for overall field production to remain steady or
grow, new wells must be brought online. We expect that any of the new wells we
drill would also experience the same harmonic (i.e. a relatively steep initial
decline curve followed by longer periods of relatively flat or stable
production) decline like other natural wells in formations similar to the Knox
formation, so continuous drilling is vital to maintaining or increasing initial
levels of production. We have not drilled any new wells to date in 2003. We
anticipate, although there can be no assurance, that the natural decline of
production from existing wells is now predictable in Swan Creek, that the total
volume of our reserves remain largely intact, and that these reserves could be
extracted through existing wells and also by steady additional drilling brought
on by reliable financial arrangements to fund drilling. The decrease in our
pipeline transportation revenues is directly related to the decrease in our gas
production volumes.
We recognized $3,360,763 in oil and gas revenues from our Kansas Properties
and the Swan Creek Field during the first six months of 2003 compared to
$2,408,917 in the first six months of 2002. The increase in revenues was due to
a significant increase in price from oil and gas sales. Oil prices averaged
$28.90 per barrel in 2003 as
24
compared to $21.54 during the comparable period in 2002. Gas prices averaged
$5.71 per Mcf in 2003 as compared to $2.80 during the comparable period in 2002.
The Swan Creek Field produced 207,056 Mcf and 408,593 Mcf in the first six
months of 2003 and 2002, respectively. This decrease was due to the declines in
production, which could not be offset due to the lack of funds to continue
drilling new wells.
We realized a net loss attributable to common stockholders of $1,606,331
(($0.14) per share of common stock) during the first six months of 2003 compared
to a net loss in the first six months of 2002 attributable to common
stockholders of $1,964,465 (($0.18) per share of common stock). A non-cash
charge of $351,204 was recognized as a cumulative effect of a change in
accounting principle during the first quarter of 2003 relating to the
implementation of SFAS 143. See "--Recent Accounting Pronouncements" and the
Notes to the Consolidated Financial Statements contained elsewhere in this
Prospectus.
Production costs and taxes in the first six months of 2003 of $1,627,079
were consistent with production costs and taxes of $1,269,304 in the first six
months of 2002. The difference of $358,575 was due to a reclassification of
insurance cost relating to field activities of $176,258 from general and
administrative to production costs. Part of the increase in production costs in
2003 was due to the fact that our field personnel cost was capitalized as we
were drilling new wells in 2002, as compared to 2003 when all employees were
working to maintain production. Field salaries in Swan Creek was $152,217 in the
first six months of 2003.
Depreciation, Depletion, and Amortization expense for the first six months
of 2003 was $1,259,138 compared to $974,696 in the first six months of 2002. The
December 31, 2002, Ryder Scott Company, L.P. reserve reports were used as a
basis for the 2003 estimate. We review our depletion analysis and industry oil
and gas prices on a quarterly basis to ensure that the depletion estimate is
reasonable. The depletion taken in the first six months of 2003 was $700,000 as
compared to $500,000 in the first six months of 2002. We also amortized $104,422
of loan fees relating to the Bank One loan and convertible notes in the first
six months of 2003 as compared to $86,360 in the same period of 2002.
During the first six months of 2003, we reduced our general and
administrative costs significantly by $315,614 from those of the first six
months of 2002. Management has made an effort to control costs in every aspect
of its operations. Some of these cost reductions included the closing of our New
York office and a reduction in personnel from 2002 levels. Professional fees
have remained at a high level, primarily due to costs incurred for legal and
accounting services as a result of the Bank One lawsuit. Dividends on preferred
stock have increased from $238,400 in 2002 to $268,389 in 2003 as a result of
the increase in the amount of preferred stock outstanding from new private
placements occurring during the second six months of 2002. Our 2003 public
relations costs were reduced by $132,112 from those of 2002 as part of our
efforts to cut costs.
Dividends on preferred stock increased from $238,400 in the first six
months of 2002 to $268,389 in the first six months of 2003 as a result of the
increase over the periods in the amount of outstanding preferred stock.
FISCAL YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
We realized oil and gas revenues of $5,437,723 in 2002 as compared to
$6,656,758 in 2001 and $5,241,076 in 2000. The decrease in revenues in 2002 from
2001 was due to a decrease in volumes produced in 2002 from the volumes produced
in 2001. Gas produced from the Swan Creek Field was 717,701 MCF in 2002 as
compared to 966,967 MCF in 2001, resulting in approximately $800,000 in reduced
revenues. Oil production from the Swan Creek Field was 20,122 barrels in 2002,
down from 30,323 barrels in 2001, resulting in approximately $200,000 in reduced
revenues. Gas production from the Kansas Properties was 287,198 MCF in 2002
compared to 324,915 MCF in 2001, resulting in approximately $100,000 in reduced
revenues. Oil production from the Kansas Properties was 137,851 barrels in 2002
compared to 147,029 barrels in 2001, resulting in approximately $200,000 in
reduced revenues. The reason for the decrease in volumes produced in 2002 was
our disputed credit reduction by Bank One, which significantly limited our
ability to drill new wells to maintain or increase production volumes. The
increased revenues in 2001 of $6,656,758 compared to $5,241,076 in 2000 was
primarily due to gas sales from the Swan Creek field of $2,563,935 being made
for the first time during 2001. However, oil sales decreased by approximately
$951,000 in 2001 from 2000 levels due to price decreases, as the number of
barrels produced remained constant.
25
Our subsidiary, TPC, had pipeline transportation revenues of $259,677 in
2002, a decrease compared to $296,331 in 2001, the first year of transportation
revenues.
Our production costs and taxes have increased each year from 2000 to 2002
as additional costs have been incurred to maintain the Kansas Properties and to
begin production from the Swan Creek Field in 2001 and to maintain it in 2002.
The production costs and taxes increased from $2,951,746 in 2001 to $3,094,731
in 2002. An increase in 2001 of $337,332 in production costs and taxes as
compared to 2000 was due primarily to the commencement of production from the
Swan Creek Field.
Depletion, depreciation, and amortization increased significantly in 2002
to $2,413,597 over 2001 and 2000 levels of $1,849,963 and $371,249,
respectively. The primary reason for the increase from 2002 over 2001 was due to
depreciation being taken for the first time for a full year on our pipeline
facilities in 2002, whereas only a half year of depreciation was taken in 2001
after the pipeline was placed in service in mid-year. Also, approximately
$186,000 of loan fees were amortized in 2002. The primary increase in 2001 from
2000 was due to significant increases in depletion expense during 2001
($1,142,000) as a result of the following: decreases in reserve estimates on oil
and gas properties arising from declining commodity prices; certain of our gas
wells had decreased production levels at year-end due to problems encountered
with liquids in the wells. This decreased production level at year-end was
factored into the estimated future proved reserves calculation performed as of
December 31, 2001, resulting in a lower future proved reserves estimate.
Additionally, in 2001 we depreciated the pipeline for the first time ($220,371).
We significantly reduced our general administrative costs to $1,868,141 in
2002 from $2,957,871 in 2001. Management has made a significant effort to
control costs in every aspect of its operations. Some of these cost reductions
include the closing of the New York office and a reduction in personnel from
2001 levels. General and administrative expenses had increased to $2,957,871 in
2001 from $2,602,311 in 2000. The increases in 2001 from 2000 were attributable
to an increase in insurance of approximately $400,000 in 2001 to expand coverage
including blowout insurance and the addition of company provided medical
insurance for employees.
Interest expense for 2002 decreased significantly over 2001 levels due to
the reduced interest rate on the Bank One loan over the rate applicable under
previous financing arrangements. Interest expense in 2002 was $578,039 compared
to $850,965 in 2001. Interest expense for 2001 had in turn increased
significantly from $415,376 in 2000. This increase was due to additional
interest cost associated with financing for the completion of Phase II of our
65-mile pipeline. The increase in 2001 was reduced by interest cost of
approximately $148,000 which was capitalized in the first three months of 2001
during construction of the pipeline. Interest of $128,000 was capitalized in
2000.
Public relations costs were significantly reduced in 2002 to $193,229 from
$293,448 in 2001 as we applied cost saving methods in the preparation of our
annual report to stockholders and in publishing of press releases. Public
relations costs increased to $293,448 in 2001 as compared to 2000 costs of
$106,195 due to costs associated with producing the annual report, the proxy
statement and press releases.
Professional fees increased to $707,296 in 2002 from $355,480 in 2001 due
to legal and accounting services primarily related to the Bank One litigation
and new accounting regulations. Professional fees had decreased substantially in
2001 from 2000 fees of $719,320 which included a charge in 2000 of $242,000 for
stock options issued in 2000 to non-employees.
Dividends on preferred stock increased to $506,789 in 2002 from $391,183 in
2001 and from $257,557, in 2000 as a result in the increase in the amount of
preferred stock outstanding.
LIQUIDITY AND CAPITAL RESOURCES
In November 2001, Bank One extended to us a line of credit of up to $35
million. The initial borrowing base under such credit agreement was $10 million.
On November 9, 2001, following drawdowns on the facility to pay certain
obligations, outstanding borrowings under the credit facility were $7,901,776.
In April 2002, we received a notice from Bank One stating that it had
redetermined and reduced the borrowing base under the credit agreement to
approximately $3.1 million and requiring a $6 million reduction of the
outstanding loan. The schedule of reserve
26
reports required by the Credit Agreement upon which such redeterminations were
to be based specifically established a procedure involving an automatic monthly
principal payment of $200,000 commencing February 1, 2002. As of June 30, 2003,
the outstanding principal balance under the credit agreement was approximately
$6.9 million.
As a result of Bank One's unexpected reduction of the borrowing base and
the corresponding demand for payment of $6 million, combined with the fact that
we are still in the early stages of our oil and gas operating history during
which time we have had a history of losses from operations and have an
accumulated deficit of $(29,491,533) and a working capital deficit of
$(9,194,357) as of June 30, 2003, our independent auditors indicated in their
report on the audit of our consolidated financial statements for the year ended
December 31, 2002 that our ability to continue as a going concern is uncertain.
Our ability to continue as a going concern depends upon our ability to obtain
long-term debt or raise capital and satisfy cash flow requirements.
In May 2002, we filed suit against Bank One in federal court in the Eastern
District of Tennessee, Northeastern Division at Greeneville, Tennessee to
restrain Bank One from taking any steps pursuant to the credit agreement to
enforce its demand that we reduce our loan obligation or else be deemed in
default and for actual and punitive damages resulting from the demand. See
"Legal Proceedings" for a discussion of this action. Although the parties
continue to discuss settlement of all outstanding issues, no settlement has been
reached. At a scheduling conference held by the Court in February 2003, a
procedural schedule was set as requested by us leading toward a trial date of
November 18, 2003 in the event settlement is not concluded. Even if we conclude
a settlement with Bank One, we do not anticipate that we will be able to either
increase the borrowing base under the Bank One credit agreement or borrow any
additional sums from Bank One. To fund additional drilling and to provide
additional working capital, we are required to pursue other options. Although we
intend to apply the net proceeds from this offering initially to repay
outstanding non-bank indebtedness and to apply the balance of such proceeds, if
any, to repay bank indebtedness to some extent and/or to fund the drilling of
additional wells, there can be no assurances that such net proceeds will be
sufficient for such purposes or that we will be able to resolve the difficulties
currently preventing us from drilling additional wells and increasing production
volumes of natural gas from the Swan Creek Field. See "Use of Proceeds."
We believe that the total volume of our reserves in the Swan Creek Field
remains largely intact and that these reserves can be extracted through existing
wells and by steady additional drilling brought on by reliable financial
arrangements. We plan to drill up to 20 additional wells in this field and have
obtained approval from the Tennessee regulatory authorities with jurisdiction
over spacing of wells to drill on smaller spacing units in the field,
effectively allowing more wells to be drilled and the reservoir to produce more
quickly but with no decrease in the long term efficiency of production of the
maximum amount of reserves from the reservoir. We are hopeful that production
from these new wells will be in line with the production from its more
productive existing wells in the Swan Creek Field and will have a noticeable
effect on increasing the total production from the field.
Similarly, if funding for additional drilling becomes sufficiently
available, as to which there can be no assurance, we plan to drill wells in five
new locations in Ellis and Rush Counties, Kansas on existing leases in response
to drilling activity in the area establishing new areas of oil production.
Although we drilled a well in Kansas in 2001 and completed the well as an oil
well, we were not able to drill any new wells in Kansas in or since 2002 due to
lack of funds.
As of June 30, 2003, we had total stockholders' equity of $13,090,438 on
total assets of $32,178,382. We had a net working capital deficiency at June 30,
2003 of $(9,194,357) as compared to a net deficiency of $(7,998,835) at December
31, 2002.
Net cash used in operating activities increased from $221,176 in 2001 to
$566,017 in 2002 and decreased from $779,327 during the first six months of 2002
to net cash provided by operating activities during the first six months of 2003
of $6,016. Our net loss in 2002 increased to $(3,154,555) in 2002 from
$(2,262,787) in 2001 and decreased from $(1,726,065) during the first six months
of 2002 to $(986,738) during the first six months of 2003.
Net cash used in investing activities amounted to $2,889,937 for 2002
compared to net cash used in the amount of $9,408,684 for 2001 and $348,443 for
the first six months of 2003 compared to $1,464,553 for the first six months of
2002. The decrease in net cash used for investing activities during 2002 is
primarily attributable to the
27
construction of Phase II of the pipeline of $4,213,095 in 2001 as compared to
$841,750 in 2002 and additions to oil and gas properties of $4,821,883 in 2001
as compared to $1,982,529 in 2002.
Net cash provided by financing activities decreased to $3,246,633 in 2002
from $8,419,336 in 2001 and to $541,355 during the first six months of 2003 from
$1,951,514 during the first six months of 2002. The decrease over the full years
was due, in part, to our inability to enter into new financing arrangements in
2002 as a result of our dispute with Bank One as discussed above. The decrease
over the six-month periods was a result, in part, of the private placements of
common stock and preferred stock during the earlier period in the amount of
$2,440,166 as compared to only $250,000 during the recent period. In 2001 the
primary sources of financing included proceeds from borrowings of $10,442,068 as
compared to $2,063,139 in 2002 and net proceeds of issuances of common stock of
$3,900,000 in 2001 as compared to $2,677,000 in 2002. In addition, proceeds from
exercise of options were $2,341,000 in 2001 as compared to zero in 2002 as the
market price of our stock fell below the exercise price of the earlier granted
options. The primary use of cash in financing activities in 2001 was the use of
the funds received from Bank One to repay our prior borrowings of $8,833,325 as
compared to 2002 when $2,378,273 was used primarily to make payments to Bank
One.
CRITICAL ACCOUNTING POLICIES
Our Company's accounting policies are described in the Notes to
Consolidated Financial Statements contained in this Prospectus. We prepare our
Consolidated Financial Statements in conformity with accounting principles
generally accepted in the United States of America, which requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ fro those estimates. We consider
the following policies to be the most critical in understanding the judgments
that are involved in preparing our financial statements and the uncertainties
that could impact our results of operations, financial condition and cash flows.
FULL COST METHOD OF ACCOUNTING
We follow the full cost method of accounting for oil and gas property
acquisition, exploration and development activities. Under this method, all
productive and non-productive 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, daily rentals and the costs of drilling, completing and
equipping oil and gas wells. We capitalized $13,475, $1,982,529, $4,821,883 and
$1,456,996 of these costs for the first six months of 2003 and for the year
ended December 31, 2002, 2001 and 2000, respectively. Costs, however, associated
with production and general corporate activities are expensed in the period
incurred. Interest costs related to unproved properties and properties under
development are also capitalized to oil and gas properties. Gains or losses are
recognized only upon sales or dispositions of significant amounts of oil and gas
reserves representing an entire cost center. Proceeds from all other sales or
dispositions are treated as reductions to capitalized costs.
OIL AND GAS RESERVES/DEPLETION DEPRECIATION AND AMORTIZATION OF OIL AND GAS
PROPERTIES
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.
Our proved oil and gas reserves as at December 31, 2002 were estimated by
Ryder Scott Company, L.P., oil and gas consultants. The Company's discounted
present value of its proved oil and gas reserves requires subjective judgments.
Estimates of our reserves are in part forecasts based on engineering data,
projected future rates of production and timing of future expenditures. The
process of estimating oil and gas reserves requires substantial judgment,
resulting in imprecise determinations, particularly for new discoveries.
Different reserve engineers may make different estimates of reserve quantities
based on the same data. The passage of time provides more qualitative
information regarding estimates of reserves and revisions are made to prior
estimates to reflect updated information. Given the volatility of oil and gas
prices, it is also reasonably possible that our estimate of discounted net cash
flows from proved oil and gas reserves could change in the near term. If oil and
gas prices decline
28
significantly this will result in a reduction of the valuation of our reserves.
For 2002, Ryder Scott Company, L.P., based on production results and the
increase of oil and gas prices, increased our estimated value of reserves of gas
in the Swan Creek Field from its reserve report for the year ended December 31,
2001. See "Business--Reserve Analyses."
CONTINGENCIES
We account for contingencies in accordance with Financial Accounting
Standards Board Statement of Financial Accounting Standards ("SFAS") No. 5,
"Accounting Contingencies." SFAS No. 5 requires that we record an estimated loss
from a loss contingency when information available prior to the issuance of our
financial statements indicate that it is probable an asset has been impaired or
a liability has been incurred at the date of the financial statements and the
amount of the loss can be reasonably estimated. Accounting for contingencies
such as environmental, legal and income tax matters requires our management to
use its judgment. While our management believes that our accrual for these
matters are adequate, if the actual loss from a loss contingency is
significantly different from the estimated loss, our results of operations may
be over or understated. The primary area in which we have to estimate contingent
liabilities is with respect to legal actions brought against us. See "Legal
Proceedings."
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and SFAS
No.142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination and SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other assets. These
standards require all future business combinations to be accounted for using the
purchase method of accounting. Goodwill will no longer be amortized but instead
will be subject to impairment tests at least annually. We were required to adopt
SFAS No. 141 on July 1, 2001, and to adopt SFAS 142 on a prospective basis as of
January 1, 2002. We have not effected a business combination and carry no
goodwill on our balance sheet; accordingly, the adoption of these standards did
not have an effect on our financial position or results of operations.
A reporting issue has arisen regarding the application of certain
provisions of SFAS No. 141 and SFAS No. 142 to companies in the extractive
industries, including oil and gas companies. The issue is whether SFAS No. 142
requires registrants to classify the costs of mineral rights held under lease or
other contractual arrangement associated with extracting oil and gas as
intangible assets in the balance sheet, apart from other capitalized oil and gas
property costs, and provide specific footnote disclosures. Historically, we have
included the costs of such mineral rights associated with extracting oil and gas
as a component of oil and gas properties. If it is ultimately determined that
SFAS No. 142 requires oil and gas companies to classify costs of mineral rights
held under lease or other contractual arrangement associated with extracting oil
and gas as a separate intangible assets line item on the balance sheet, we would
be required to reclassify approximately $421,000 at June 30, 2003 and $346,000
at December 31, 2002, respectively, out of oil and gas properties and into a
separate intangible assets line item. Our cash flows and results of operations
would not be affected since such intangible assets would continue to be depleted
and assessed for impairment in accordance with full cost accounting rules.
Further, we do not believe the classification of the costs of mineral rights
associated with extracting oil and gas as intangible assets would have any
impact on compliance with covenants under our debt agreements.
In 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement requires companies to record the present value of
obligations associated with the retirement of tangible long-lived assets in the
period in which it is incurred. The liability is capitalized as part of the
related long-lived asset's carrying amount. Over time, accretion of the
liability is recognized as an operating expense and the capitalized cost is
depreciated over the expected useful life of the related asset. Our asset
retirement obligations relate primarily to the plugging dismantlement, removal,
site reclamation and similar activities of its oil and gas properties. Prior to
adoption of this statement, such obligations were accrued ratably over the
productive lives of the assets through its depreciation, depletion and
amortization for oil and gas properties without recording a separate liability
for such amounts. The
29
impact of implying SFAS No. 143 as of January 1, 2003 and June 30, 2003 is
discussed in the Notes to the Consolidated Financial Statements contained
elsewhere in this Prospectus.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, addresses accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and expands on the guidance provided by SFAS No. 121 with
respect to cash flow estimations. SFAS No. 144 becomes effective for our fiscal
year beginning January 1, 2003. Management does not expect that adoption of this
standard will have a material impact on our financial position or results of
operations.
The FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections, on April
30, 2002. SFAS No. 145 will be effective for fiscal years beginning after May
15, 2002. This statement rescinds SFAS No. 4, Reporting Gains and Losses From
Extinguishment of Debt, and requires that all gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB No. 30. Applying APB No. 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual or infrequent or that meet the criteria for classification as an
extraordinary item. Any gain or loss on extinguishment of debt that was
classified, as an extraordinary item in prior periods presented that does not
meet the criteria in APB No. 30 for classification as an extraordinary item must
be reclassified. There is no current impact of adoption on our financial
position or results of operations.
The FASB issued Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, in June 2002. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs incurred in a Restructuring). SFAS No. 146 applies to
costs incurred in an "exit activity", which includes, but is not limited to, a
restructuring, or a "disposal activity" covered by SFAS No. 144.
SFAS No. 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. Previously,
under Issue 94-3, a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. Statement No. 146 also establishes that
fair value is the objective for initial measurement of the liability. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. Management does not expect that adoption
of this standard will have a material effect on our financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002. We have not guaranteed the debts of others, therefore, this
interpretation is not expected to have a material effect on our financial
statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Management has adopted certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002 and
are included in the Notes to Consolidated Financial Statements contained
elsewhere in this Prospectus.
30
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51. Interpretation No. 46 requires a company to consolidate a variable
interest entity if the company has a variable interest (or combination of
variable interests) that will absorb a majority of the entity's expected losses
if they occur, receive a majority of the entity's expected residual returns if
they occur, or both. A direct or indirect ability to make decisions that
significantly affect the results of the activities of a variable interest entity
is a strong indication that a company has one or both of the characteristics
that would require consolidation of the variable interest entity. Interpretation
No. 46 also requires additional disclosures regarding variable interest
entities. The new interpretation is effective immediately for variable interest
entities created after January 31, 2003, and is effective in the first interim
or annual period beginning after December 15, 2003, for variable interest
entities in which a company holds a variable interest that it acquired before
February 1, 2003. Management does not expect that adoption of this
interpretation will have a material effect on our financial position or results
of operations.
31
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISKS
COMMODITY RISK
Our major market risk exposure is in the pricing applicable to our oil and
gas production. Realized pricing is primarily driven by the prevailing worldwide
price for crude oil and spot prices applicable to natural gas production.
Historically, prices received for oil and gas production have been volatile and
unpredictable and price volatility is expected to continue. Monthly oil price
realizations ranged from a low of $18.56 per barrel to a high of $27.49 per
barrel during 2002 and from a low of $23.44 per barrel to a high of $33.60 per
barrel during the first six months of 2003. Gas price realizations ranged from a
monthly low of $1.91 per Mcf to a monthly high of $4.01 per Mcf during 2002 and
from a monthly low of $4.16 per Mcf to a monthly high of $9.11 per Mcf during
the first six months of 2003.
As required by our credit agreement with Bank One, we entered into hedge
agreements on December 28, 2001 on notional volumes of oil and natural gas
production for the first six months of 2002 in order to manage some exposure to
oil and gas price fluctuations. Realized gains or losses from our price risk
management activities were recognized in oil and gas production revenues when
the associated production occurred. Notional volumes associated with our
derivative contracts were 27,000 barrels and 630,000 MMBTU's for oil and natural
gas, respectively. We do not generally hold or issue derivative instruments for
trading purposes. These hedge agreements expired in June 2002 and have not been
renewed. Hedging activities resulted in a loss to the Company of approximately
$118,000 for the year ended December 31, 2002 and had no impact on operations
for the first six months of 2003. We currently have no hedging arrangements.
INTEREST RATE RISK
At December 31, 2002, we had debt outstanding of approximately $9.9
million. The interest rate on the revolving credit facility of $7.5 million is
variable based on the financial institution's prime rate plus 0.25%. The
remaining debt of $2.4 million has fixed interest rates ranging from 6% to
11.95%. As a result, our annual interest costs in 2002 fluctuated based on
short-term interest rates. The impact of interest expense and our cash flows of
a ten percent increase in the financial institution's prime rate (approximately
0.5 basis points) would be approximately $32,000, assuming borrowed amounts
under the credit facility remain at $7.5 million. We did not have any open
derivative contracts relating to interest rates at June 30, 2003.
32
BUSINESS
OVERVIEW
We are in the business of exploring for, producing and transporting oil and
natural gas in Tennessee and Kansas. We lease producing and non-producing
properties with a view toward exploration and development. Emphasis is also
placed on pipeline and other infrastructure facilities to provide transportation
services. We utilize seismic technology to improve the recovery of reserves.
Our activities in the oil and gas business commenced in May 1995 with the
acquisition of oil and gas leases in Hancock, Claiborne, Knox, Jefferson and
Union counties in Tennessee. Our current lease position in these areas in
Tennessee is approximately 41,088 acres.
To date, we have drilled primarily on a portion of our Tennessee leases
known as the Swan Creek Field in Hancock County focused within what is known as
the Knox formation, one of the geologic formations in that field. During the
first six months of 2003, we produced an average of approximately 1.2 MMcf of
natural gas per day and 2,345 barrels of oil per month from 22 producing gas
wells and six producing oil wells in the Swan Creek Field. Revenues from the
Swan Creek Field were an average of approximately $218,000 per month during the
first six months of 2003.
In 2001, our wholly-owned subsidiary, Tengasco Pipeline Corporation, or
TPC, completed a 65-mile intrastate pipeline from the Swan Creek Field to
Kingsport, Tennessee. Until our pipeline was completed, the gas wells that had
been drilled in the Swan Creek Field could not be placed into actual production
and the gas transported and sold to our industrial customers in Kingsport. We
initially believed that the production of natural gas from the Swan Creek Field
would be significantly higher than the actually experienced production. The
reasons for the lower production volumes include initial production problems
caused by naturally occurring fluids entering the well bore, slower than
anticipated production of the wells due to underground reservoir characteristics
that became apparent only when the wells were placed into actual production, and
our inability to drill additional wells due to shortage of available capital. We
have taken steps to minimize fluid problems in existing wells by mechanical
means and to avoid them in future wells by drilling and completion techniques.
Management believes, however, that the only way to increase production volumes
of gas from this field is to drill additional wells to drain the underground
reservoirs of the full reserves of gas, and our ability to do so is dependent
upon raising additional capital for drilling. Although we intend to apply the
net proceeds from this offering initially to repay outstanding non-bank
indebtedness and to apply the balance of such proceeds, if any, to repay in part
bank indebtedness and/or to fund in part the drilling of additional wells, there
can be no assurances that such net proceeds will be sufficient for such purposes
or that we will be able to resolve the difficulties currently preventing us from
drilling additional wells and increasing production volumes of natural gas from
the Swan Creek Field.
In 1998, we acquired from AFG Energy, Inc., or AFG, a private company,
approximately 32,000 acres of leases in the vicinity of Hays, Kansas. Included
in that acquisition were 273 wells, including 208 working wells, of which 149
were producing oil wells and 59 were producing gas wells, a related 50-mile
pipeline and gathering system, three compressors and 11 vehicles. The total
purchase price of these assets was approximately $5.5 million. During the first
six months of 2003, our Kansas properties produced an average of approximately
..13 MMcf of natural gas per day and 10,800 barrels of oil per month. Net
revenues from our Kansas properties were an average of approximately $342,000
per month during the first six months of 2003.
HISTORY OF THE COMPANY
We were initially organized under the laws of the State of Utah in 1916,
under the name "Gold Deposit Mining & Milling Company." We were formed for the
purpose of mining, reducing and smelting mineral ores. In 1972, we conveyed to
an unaffiliated entity substantially all of our assets and we ceased all
business operations. From approximately 1983 to 1991, our operations were
limited to seeking out the acquisition of assets, property or businesses.
33
In 1995, we acquired certain oil and gas leases, equipment, securities and
vehicles owned by Industrial Resources Corporation, a Kentucky corporation,
changed our name from "Onasco Companies, Inc." to "Tengasco, Inc.", and changed
our domicile from the State of Utah to the State of Tennessee by merging into
Tengasco, Inc., a Tennessee corporation, formed by us solely for this purpose.
During 1996, we formed TPC to manage the construction and operation of our
pipeline, as well as other pipelines planned for the future.
GENERAL
THE SWAN CREEK FIELD
Amoco Production Company, during the late 1970's and early 1980's acquired
approximately 50,500 acres of oil and gas leases in the Eastern Overthrust in
the Appalachian Basin, including the area now referred to as the Swan Creek
Field. In 1982, Amoco successfully drilled two natural gas discovery wells in
the Swan Creek Field to the Knox Formation at approximately 5,000 feet of total
depth. These wells, once completed, had a high pressure and apparent volume of
deliverability of natural gas. In the mid-1980's, however, a substantial decline
in worldwide oil and gas prices occurred and further exacerbated the high cost
of constructing a necessary 23-mile pipeline across three rugged mountain ranges
and crossing the environmentally protected Clinch River from Sneedville to the
closest market in Rogersville, Tennessee. In 1987, Amoco farmed out our leases
to Eastern American Energy Company which held the leases until July 1995. In
July 1995 we commenced a legal action, under laws passed by the Tennessee
legislature, as to our right to lease Amoco's prior acreage. In July 1995
pursuant to such action, we acquired the Swan Creek leases. These leases provide
for a landowner royalty of 12.5%.
Swan Creek Pipeline Facilities. In July 1998, we completed Phase I of our
pipeline from the Swan Creek Field, a 30-mile pipeline made of six- and
eight-inch steel pipe running from the Swan Creek Field into the main city gate
of Rogersville, Tennessee. With the assistance of the Tennessee Valley
Authority, or TVA, we were successful in utilizing TVA's right-of-way along its
main power line grid from the Swan Creek Field to the Hawkins County Gas Utility
District located in Rogersville. The cost of constructing Phase I of the
pipeline was approximately $4,200,000.
In April 2000, construction commenced on Phase II of our pipeline. This was
an additional 35 miles of eight- and 12-inch pipe laid at a cost of
approximately $11.1 million extending our pipeline from a point near the
terminus of Phase I and connecting to an existing pipeline and meter station at
Eastman Chemical Company's chemical plant. The pipeline system was completed in
March 2001 at an overall cost of approximately $15.3 million and extends 65
miles from our Swan Creek Field to Kingsport, Tennessee.
Swan Creek Contractual Arrangements. In November 1999, we entered into an
agreement with Eastman Chemical Company that provides that we will deliver daily
from the Swan Creek Field to Eastman's plant in Kingsport a minimum of the
lesser of (i) 5,000 MMBtu's (MMBtu means one million British thermal units,
which is the equivalent of approximately one thousand cubic feet of gas) or (ii)
forty percent (40%) of the natural gas requirements of Eastman's plant and a
maximum of 15,000 MMBtu's per day. Under the terms of the agreement, we had the
option to install facilities to treat the delivered gas so that the total
non-hydrocarbon content of the delivered gas is not greater than two percent
(2%). This would have allowed the gas to be used in certain processes in the
Eastman plant requiring low levels of non-hydrocarbons. If we elected to perform
this option by installing additional facilities, the minimum daily amount of gas
to be purchased by Eastman from us would increase to the lesser of (i)10,000
MMBtu's or (ii) eighty percent (80%) of the natural gas requirements of
Eastman's chemical plant.
In March 2000, we signed an amendment to the agreement with Eastman
permitting us a further option with respect to the allowable level of
non-hydrocarbons in the delivered gas from the Swan Creek Field. This amendment
gives us the further option to tender gas without treatment, at a minimum volume
of 10,000 MMBtu's per day, in consideration of which we agreed to accept a price
reduction of five cents per MMBtu for the volumes per day between 5,000 and
10,000 MMBtu's per day under the pricing structure in place under the original
agreement. To date, to our knowledge, none of the gas sold by us to Eastman
exceeds the allowable level of non-hydrocarbons permitted under the agreement
and no such gas requires treatment.
34
Under the agreement as amended in March 2000, Eastman agreed to pay us the
index price plus $0.10 for all natural gas quantities up to 5,000 MMBtu's
delivered per day, the index price plus $0.05 for all quantities in excess of
5,000 MMBtu's per day and the index price for all quantities in excess of 15,000
MMBtu's per day. The index price means the price per MMBtu published in
McGraw-Hill's INSIDE F.E.R.C Gas Market Report equal to the Henry Hub price
index as shown in the table labeled Market Center Spot Gas Prices. The agreement
with Eastman is for an initial term of twenty years and will be automatically
extended, if the parties agree, for successive terms of one year. The initial
term of the agreement commenced in March 2001.
In January 2000, TPC, signed a franchise agreement to install and operate
new natural gas utility services for residential, commercial and industrial
users in Hancock County, Tennessee for the Powell Valley Utility District, which
we refer to as the District. The District had no existing natural gas facilities
and the system to be installed by TPC was initially intended to extend to
schools and small customers and gradually be expanded over time to serve as many
of the 6,900 residents of the County as is economically feasible. TPC purchases
gas from us on behalf of the District, which gas is to be resold at an average
retail price of about $8.00 Mcf. Under the franchise agreement, which has an
initial term of ten years and may be renewed by us for an additional ten years,
TPC will receive 95% of the gross proceeds of the sale of gas for our services
under the agreement. In June 2000, TPC began installation of the necessary
facilities to begin to serve up to 1,500 residential and industrial consumers in
the City of Sneedville, county seat of Hancock County. Our existing eight-inch
main line from our Swan Creek Field passes through the city limit of Sneedville.
A one-half mile of interconnecting pipeline from our existing pipeline was
installed, as well as an additional four miles of pipeline as the initial phase
of the distribution system. The construction was completed and delivery of
initial volumes of gas into the system from the Swan Creek field occurred in
December 2000. The cost of construction of these facilities was approximately
$133,000. Upon enactment of initial rate schedules by the District, initial
sales began in January 2001 to a small number of residential and small
commercial customers.
In March 2002, we began delivering gas to our first commercial customer,
Kiefer Built, Inc, an Iowa-based manufacturer of livestock and industrial
trailers, in a new industrial park in Sneedville. Although there can be no
assurance, we hope to be able to supply gas to other District customers who may
move into that industrial park. At this time, however, no gas sales agreements
for large volume or base load sales have been signed and there can be no
assurances that such agreements will be signed and if signed, we are not able to
predict when such sales may begin, if at all, or what the overall volumes of gas
sold may be. Due to the small number of existing customers and relatively high
operating costs, we experienced a loss of approximately $35,000 attributable to
the operation of this system in 2002. Although there can be no assurance, we
intend to either expand the operation of this system so as to increase revenues
or to sell these assets to neighboring utilities or the City of Sneedville. In
the event of such a sale, we could still sell gas to the District.
In March 2001, we signed a contract to supply natural gas to BAE Systems
Ordnance Systems Inc., or BAE, operator of the Holston Army Ammunition Plant in
Kingsport, Tennessee for a period of twenty years. Natural gas is used at the
Holston Army ammunition facility to fire boilers and furnaces for steam
production and process operations utilized in the manufacture of explosives by
BAE for the United States military. Under the agreement, BAE's daily purchases
of natural gas may be between 1.8 million and five million cubic feet, and
volume could, although there can be no assurance, increase over the life of the
agreement as BAE conducts additional operations at the Holston facility. The
contract calls for a price based on the monthly published index price for spot
sales of gas at the Henry Hub plus five cents per MMBtu in the same manner as
the price is calculated in the contract between us and Eastman.
We have the only gas pipeline located on the grounds of the 6,000-acre
Holston facility. A portion of the Holston facility is being developed by BAE as
the new Holston Business and Technology Park, which is expected to serve as a
location for additional commercial and industrial customers. Although there can
be no assurance, our presence at the Holston Business and Technology Park is
expected to position us to provide gas service to those customers and we
understand that our presence is considered by BAE to be a favorable factor in
the development of the Park.
Swan Creek Production And Development. We began delivering gas through our
pipeline to BAE in April 2001 and to Eastman in May 2001. Daily production in
June 2001 averaged 4,936.2 Mcf and in July 2001 daily production averages
increased to 5,497 Mcf per day. Although our gas production in mid-2001 was at
anticipated
35
levels, we were unable to maintain those production levels for the remainder of
2001 and since then. This was due primarily to three problems:
o initial fluid problems in some wells;
o natural and expected production declines from the type of reservoir
that exists in the Swan Creek field; and
o our inability to offset expected natural declines in production by
drilling new wells because of inadequate capital.
As to the first of these problems, we experienced the in-flow of
substantially more fluids in the existing wells than had been expected when they
were first brought into continuous production in 2001. These fluids entered the
wells from the boreholes. The fluids obstructed and significantly reduced the
flow of gas from the existing wells in the Swan Creek Field and required
substantial additional work and repairs to increase the production from existing
wells. First, we installed a drip tank system to eliminate the fluids in the
pipeline. Next, we installed mechanical devices in many of the existing wells to
reduce the fluid problems. Many of the existing wells had to be shut down while
the repairs were made. Gas lifts have been installed in 15 of our existing wells
and act as mechanisms to remove the fluids and stabilize erratic behavior, such
as large swings in individual well production. These measures have had only
limited success in increasing production from existing wells. We expect that
techniques used in addressing these fluid problems will be applied in our future
wells in the Swan Creek Field and we anticipate, although there can be no
assurance, that this will minimize or prevent these problems.
As to the second problem, we experienced an expected and we believe normal
decline in initial production from existing wells in the newly-producing Swan
Creek Field. We believe that all types of gas wells experience some type of
decline as in the course of initial production. These declines were expected and
do not diminish either the shut-in pressure or our actual reserves in the Swan
Creek Field. The declines, however, suggest the production rates from some of
our smaller wells will continue to be slower, which may result in such wells
lasting longer than we originally expected.
As to the third problem, the declines in production have not been addressed
and replaced by additional drilling as we had planned. We believe that in order
for overall field production to remain steady or grow in a field such as the
Swan Creek Field, new wells must be brought online to offset the normal
production declines in wells as described above. We anticipate, although there
can be no assurances, that any new wells drilled by us would experience a
similar harmonic (i.e. a relatively steep initial decline curve followed by
longer periods of relatively flat or stable production) decline as a normal
function. Consequently, continuous drilling is important to maintaining or
increasing initial levels of production. Only two gas wells were added by us in
2002. We anticipate that the natural decline of production from existing wells
is now predictable in the Swan Creek Field, that the total volume of our
reserves remains largely intact, and that these reserves can be extracted
through both existing wells and by additional well drilled by us, subject to the
availability of requisite funding. Although we intend to apply the net proceeds
from this offering initially to repay outstanding non-bank indebtedness and to
apply the balance of such proceeds, if any, to repay in part bank indebtedness
and/or to fund such net proceeds will be sufficient for such purposes or that
the drilling of additional wells, there can be no assurance that such net
proceeds will be sufficient for such purposes or that we will have or be able to
further raise sufficient capital to fund our proposed drilling program to
successfully increase production from the Swan Creek Field.
Due to natural and expected declines that continue to occur in ongoing
production from any oil and gas well, some additional declines are expected to
occur in production from our existing wells in the Swan Creek Field. Although
there can be no assurance, we expect these natural declines to be less than the
decline experienced to date, and that ongoing production from existing wells
will tend to level off. This expectation is based on two factors:
o first, repairs have been performed on many of the existing wells, and
o second, the natural production decline from any well is normally
greatest during the initial producing periods, which initial periods
have largely elapsed.
36
Natural gas production from the Swan Creek Field during 2002 averaged 2.567
million cubic feet per day in the first quarter; 2.553 million cubic feet per
day in the second quarter; 2.224 million cubic feet per day in the third
quarter; and, 1.467 million cubic feet per day in the fourth quarter. Natural
gas production from the Swan Creek Field for the first six months of 2003
averaged 1.150 million cubic feet per day. This production history reflects a
combination of natural and expected decline from initial production from
existing wells, partially offset in the second and third quarters by the
addition of production from two new gas wells. During the fourth quarter of 2002
and the first six months of 2003, no wells were added to offset the natural and
expected declines in production from existing wells.
We also experienced reductions or declines in our sales volumes during
certain times in 2002 for reasons unrelated to the production capability of our
wells or fields. These declines were caused by reductions in our customers'
usage requirements and/or by delivery restrictions. During a period in 2002,
Eastman temporarily ceased purchases from us because we were delivering most of
our then available volumes to supply BAE's newly-increased requirements. During
that period, we were unable to sell to Eastman all volumes of gas exceeding
BAE's increased requirements, although we were able to produce these volumes,
because Eastman requires a minimum volume for its meters that available volumes
did not meet and a uniform rate of delivery that taking short-term volumes would
interrupt. During the time Eastman was not purchasing gas from us, BAE purchased
additional volumes until BAE experienced a partial equipment outage in July 2002
and reduced our purchased volumes. As a result of these occurrences, which were
not within our control, our sales volume to BAE and Eastman in July 2002
declined to 42,382 Mcf or an average of 1,367 Mcf per day. In order to increase
the volumes of gas for delivery from the Swan Creek Field, we must drill
additional wells. However, even if additional wells are drilled, we anticipate
based on all information acquired to date, although there can be no assurance,
that deliverability from the Swan Creek Field, once stabilized, may not exceed
approximately three million cubic feet per day, and there can be no assurances
as to any minimum productivity.
During 2002, we had 30 producing gas wells and seven producing oil wells in
the Swan Creek Field. Miller Petroleum, Inc. and others had a participating
interest in twelve of these wells. In total, we have completed 45 wells in the
Swan Creek Field. The majority of these gas wells were drilled prior to the
completion of the pipeline system so only test data was available prior to full
production. Of the completed wells, twelve are shut-in or currently not
producing because these wells are either not presently producing commercial
quantities of hydrocarbons, or are awaiting workover or tie-in to our pipeline.
However, certain of these wells may not be tied in to our pipeline since the
expense of connection over rough terrain may not be justified in view of the
expected volumes to be produced. During the first six months of 2003, we
produced gas from 23 gas wells in the Swan Creek Field.
We were not able to drill a substantial number of additional gas or oil
wells at Swan Creek in 2002 because we did not have sufficient funds to do so.
Although we had expected to commence and continue our drilling program in 2002,
we were forced to postpone any further drilling until additional funds are
available and our dispute with Bank One is resolved, as to which there can be no
assurance. Because the Knox formation has been defined by the accumulation of
data from previously drilled wells and seismic data, new locations and new wells
when drilled are expected, although there can be no assurances, to contribute to
achieving increases in production totals. We believe, although there can be no
assurance, that new wells can be strategically based on information we have
developed from our existing wells as to the shape and key producing horizons of
the Knox formation. We have obtained approval from the Tennessee regulatory
authorities with jurisdiction over spacing of wells to drill additional wells on
smaller spacing in the field, effectively allowing more wells to be drilled and
the reservoir to produce more quickly but with no decrease in the long term
efficiency of production of the maximum amount of reserves from the reservoir.
We are hopeful that production from these new wells will be in line with our
more productive existing wells in the Swan Creek Field and will have a
noticeable effect on increasing the total production from the Field. Although
there can be no assurance, our strategy is that once this work is completed and
the new wells are drilled production from the Swan Creek Field will increase.
Even if such production increases, however, the deliverability from the Swan
Creek Field will not be sufficient to meet our entire daily requirements under
the contracts with BAE and Eastman.
Our strategy also includes commencing drilling in other formations in our
Swan Creek Field. To date, drilling in the Swan Creek Field has focused on
production of gas primarily from the Knox formation. Immediately adjacent to
this formation, however, and shallower over these formations, are other
formations that we believe, although there can be no assurance, have a potential
for gas production. These other formations hold the possibility for yielding
37
both oil and gas and have produced some gas to date and have not been a primary
target for gas production. The shallower depths needed for drilling in these
other formations and the moderate gas production from them may make the
production of additional gas feasible. As noted above, we can not proceed with
such drilling until such time as funding is available, as to which there can be
no assurance.
THE KANSAS PROPERTIES
In 1997, we acquired the Kansas Properties, which presently include 134
producing oil wells and 51 producing gas wells in the vicinity of Hays, Kansas
and a gathering system including 50 miles of pipeline. We also acquired 37 other
wells, which now serve as saltwater disposal wells in the vicinity of Hays,
Kansas. Saltwater wells are used to store saltwater encountered in the drilling
process that would otherwise have to be transported out of the area. These
saltwater disposal wells reduce operating costs by eliminating the need for
transport. The aggregate production for the Kansas Properties at present is
approximately 800 Mcf and 336 barrels of oil per day. Revenue for the Kansas
Properties was approximately $275,000 per month in 2002.
We employ a full time geologist in Kansas to oversee operations of the
Kansas Properties. We have identified five new locations for drilling wells in
Ellis and Rush Counties, Kansas on our existing leases in response to drilling
activity in the area indicating new areas of production. In 2001 we successfully
drilled the Dick No. 7 well in Kansas and completed the well as an oil well. We
did not drill any new wells in Kansas in 2002 or the first six months of 2003
due to lack of funds available for such drilling. We are also engaged in
gathering for a fee the gas produced from wells owned by others located in
Kansas adjacent to our wells and near our gathering lines. Our plans for our
Kansas properties include maintaining the current productive capacity of our
existing wells through normal workovers and maintenance of the wells, performing
gathering or sales services for adjacent producers, and expanding our own
production through drilling these additional wells. Such plans are subject to
the availability of funds, in addition to the funds raised by this offering, to
finance the work.
In addition, there are several capital development projects that we have
considered with respect to the Kansas Properties, including recompletion of
wells and major workovers to increase current production. Although there can be
no assurances, these projects when completed might increase production in
Kansas. Management, however, has made the decision not to undertake any of these
projects, as we do not presently have the necessary funds. We will, however,
reconsider our decision if such funds become available.
OTHER AREAS OF DEVELOPMENT
We are presently exploring other geological structures in the East
Tennessee area that are similar to the Swan Creek Field and which we believe,
although there can be no assurance, have a high probability of producing
hydrocarbons. We have either acquired seismic data on these structures from
third-party sources or are conducting our own seismic studies with our own
trucks and equipment. The seismic analysis is continuing and related leasing
activities have begun based on initial analysis of seismic results. We plan to
conduct exploration activities in these areas. The first of these locations was
in Cocke County, Tennessee which is approximately 40 miles southeast of the Swan
Creek Field. In 2002, we, in conjunction with Southeast Gas & Oil Corp. of
Newport, Tennessee, drilled an approximately 6,000-foot exploratory well to the
Knox formation. This well did not result in any commercial quantities of
hydrocarbons. Although these and other exploratory efforts have commenced or are
under consideration, there can be no assurances that any such efforts will be
completed or will be commercially successful.
GOVERNMENTAL REGULATIONS
We are subject to numerous state and federal regulations, environmental and
otherwise, that may have a substantial negative effect on our ability to operate
at a profit. For a discussion of the risks involved as a result of such
regulations, see, "Effect of Existing or Probable Governmental Regulations on
Business" below.
38
PRINCIPAL PRODUCTS OR SERVICES AND MARKETS
The principal markets for our crude oil are local refining companies, local
utilities and private industry end- users. The principal markets for our natural
gas are local utilities, private industry end-users and natural gas marketing
companies.
Gas production from the Swan Creek Field can presently be delivered through
our completed pipeline to the Powell Valley Utility District in Hancock County,
Eastman and BAE in Sullivan County, as well as other industrial customers in the
Kingsport area. We believe, although there can be no assurance, that we have
acquired all necessary regulatory approvals and necessary property rights for
the pipeline system. Our pipeline would not only provide transportation service
for gas produced from our wells, but would provide transportation of gas for
small independent producers in the local area as well. We also could, although
there can be no assurance, sell our products to certain local towns, industries
and utility districts.
Natural gas from the Kansas Properties is delivered to Kansas-Nebraska
Energy, Inc. in Bushton, Kansas. At present, crude oil is sold to the National
Cooperative Refining Association in McPherson, Kansas, 120 miles from Hays.
National Cooperative is solely responsible for transportation of the oil it
purchases whether by truck or pipeline.
DRILLING EQUIPMENT
We purchased an Ingersoll Rand RD20 drilling rig and related equipment from
Ratliff Farms, Inc., an affiliate of Malcolm E. Ratliff, who at that time was
our Chief Executive Officer and Chairman of the Board of Directors. We also
receive contract drilling services from Miller Petroleum, Inc. and Union
Drilling in the Swan Creek Field.
DISTRIBUTION METHODS OF PRODUCTS OR SERVICES
Crude oil is normally delivered to refineries in Tennessee and Kansas by
tank truck and natural gas is distributed and transported via pipeline.
COMPETITIVE BUSINESS CONDITIONS, COMPETITIVE POSITION IN THE INDUSTRY AND
METHODS OF COMPETITION
Our contemplated oil and gas exploration activities in the States of
Tennessee and Kansas will be undertaken in a highly competitive and speculative
business atmosphere. In seeking any other suitable oil and gas properties for
acquisition, we will be competing with a number of other companies, including
large oil and gas companies and other independent operators with greater
financial resources. Management does not believe that our initial competitive
position in the oil and gas industry will be significant.
Our principal competitors in the State of Tennessee are Nami Resources,
LLC, Miller Petroleum, Inc., Knox Energy Development and Penn Virginia
Corporation. We believe that we are in a favorable position in the area in which
our pipeline is located. Within that area, we own leases on approximately 41,088
acres.
There are numerous producers in the area of the Kansas Properties. Some are
larger with greater technological and financial resources.
Although we do not now foresee any difficulties in procuring drilling rigs
or the manpower to run them in the area of our operation, several factors,
including increased competition in the area, may limit the availability of
drilling rigs, rig operators and related personnel and/or equipment in the
future. Such limitations would have a natural adverse effect on our operations.
The prices of our products are controlled by the world oil market and the
United States natural gas market. Thus, competitive pricing behaviors are
considered unlikely; however, competition in the oil and gas exploration
industry exists in the form of competition to acquire the most promising acreage
blocks and obtaining the most favorable prices for transporting the product. We
believe that we are well-positioned in these areas because of the
39
transmission lines that run through and adjacent to the properties leased by us
and because we hold relatively large acreage blocks in our areas of current
operation.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND NAMES OF PRINCIPAL SUPPLIERS
Excluding the development of oil and gas reserves and the production of oil
and gas, our operations are not dependent on the acquisition of any raw
materials.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
We presently are dependent upon a small number of customers for the sale of
gas from the Swan Creek Field, principally Eastman and BAE, and other industrial
customers in the Kingsport area with which we may enter into gas sales
contracts.
Natural gas from the Kansas Properties is delivered to Kansas-Nebraska
Energy, Inc. in Bushton, Kansas. At present, crude oil from the Kansas
Properties is being trucked and transported through pipelines to the National
Cooperative Refining Association in McPherson, Kansas, 120 miles from Hays,
Kansas. National Cooperative is solely responsible for transportation of
products whether by truck or pipeline.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR
LABOR CONTRACTS, INCLUDING DURATION
Royalty agreements relating to oil and gas production are standard in the
industry. The amounts of our royalty payments vary from lease to lease.
NEED FOR GOVERNMENTAL APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES
Although none of the principal products offered by us require governmental
approval, permits are required for drilling oil or gas wells.
The transportation service offered by TPC is subject to regulation by the
Tennessee Regulatory Authority to the extent of certain construction, safety,
tariff rates and charges, and nondiscrimination requirements under state law.
These requirements are typical of those imposed on regulated utilities. TPC has
been granted a certificate of public convenience and necessity to operate as a
pipeline utility in Hancock, Hawkins, and Claiborne counties, Tennessee. In
addition, TPC was authorized to construct and operate the portion of Phase II of
the pipeline to Eastman by resolution of the City of Kingsport in May, 2000.
This resolution was approved by the Tennessee Regulatory Authority as required
by state law. All approvals for our pipeline have been granted.
The City of Kingsport, Tennessee has also enacted an ordinance granting to
TPC a franchise for twenty years to construct, maintain and operate a gas system
to import, transport, and sell natural gas to the City of Kingsport and
inhabitants, institutions and businesses for domestic, commercial, industrial
and institutional uses. This ordinance and the franchise agreement it authorizes
also require approval of the Tennessee Regulatory Authority under state law. We
will not initiate the required approval process for the ordinance and franchise
agreement until such time that we can supply gas to the City of Kingsport.
Although we anticipate that regulatory approval will be granted, there can be no
assurance that it will be granted, or that such approval may be granted in a
timely manner, or that such approval may not be limited in some manner by the
Tennessee Regulatory Authority.
EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON BUSINESS
Exploration and production activities relating to oil and gas leases are
subject to numerous environmental laws, rules and regulations. The Federal Clean
Water Act requires us to construct a fresh water containment barrier between the
surface of each drilling site and the underlying water table. This involves the
insertion of a seven-inch diameter steel casing into each well, with cement on
the outside of the casing. We have complied with this environmental regulation,
the cost of which is approximately $10,000 per well.
40
The State of Tennessee also requires the posting of a bond to ensure that
our wells are properly plugged when abandoned. A separate $2,000 bond is
required for each well drilled. We currently have the requisite amount of bonds
on deposit with the State of Tennessee.
As part of our purchase of the Kansas Properties we acquired a statewide
permit to drill in Kansas. Applications under such permit are applied for and
issued within one to two weeks prior to drilling. At the present time, the State
of Kansas does not require the posting of a bond either for permitting or to
insure that our wells are properly plugged when abandoned. All of the wells in
the Kansas Properties have all permits required and we believe that we are in
substantial compliance with the laws of the State of Kansas.
Our exploration, production and marketing operations are regulated
extensively at the federal, state and local levels. We have made and will
continue to make expenditures in our efforts to comply with the requirements of
environmental and other regulations. Further, the oil and gas regulatory
environment could change in ways that might substantially increase these costs.
Hydrocarbon-producing states regulate conservation practices and the protection
of correlative rights. These regulations affect our operations and limit the
quantity of hydrocarbons we may produce and sell. In addition, at the federal
level, the Federal Energy Regulatory Commission regulates interstate
transportation of natural gas under the Natural Gas Act. Other regulated matters
include marketing, pricing, transportation and valuation of royalty payments.
Our operations are subject to numerous and frequently changing laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. We own or lease, and have in the
past owned or leased, properties that have been used for the exploration and
production of oil and gas and these properties and the wastes disposed on these
properties may be subject to the Comprehensive Environmental Response,
Compensation and Liability Act, the Oil Pollution Act of 1990, the Resource
Conservation and Recovery Act, the Federal Water Pollution Control Act and
analogous state laws. Under such laws, we could be required to remove or
remediate previously released wastes or property contamination.
Laws and regulations protecting the environment have generally become more
stringent and, may in some cases, impose "strict liability" for environmental
damage. Strict liability means that we may be held liable for damage without
regard to whether we were negligent or otherwise at fault. Environmental laws
and regulations may expose us to liability for the conduct of or conditions
caused by others or for acts that were in compliance with all applicable laws at
the time they were performed. Failure to comply with these laws and regulations
may result in the imposition of administrative, civil and criminal penalties.
While we believe that our operations are in substantial compliance with
existing requirements of governmental bodies, our ability to conduct continued
operations is subject to satisfying applicable regulatory and permitting
controls. Our current permits and authorizations and ability to get future
permits and authorizations may be susceptible, on a going forward basis, to
increased scrutiny, greater complexity resulting in increased costs or delays in
receiving appropriate authorizations.
The foregoing is only a brief summary of some of the existing environmental
laws, rules and regulations to which our business operations are subject, and
there are many others, the effects of which could have an adverse impact on us.
Future legislation in this area will no doubt be enacted and revisions will be
made in current laws. No assurance can be given as to what effect these present
and future laws, rules and regulations will have on our current and future
operations.
RESEARCH AND DEVELOPMENT
We have not expended any material amount in research and development
activities during the last two fiscal years. Research done in conjunction with
our exploration activities would consist primarily of conducting seismic surveys
on the lease blocks. This work would be performed by our geology and engineering
personnel and other employees and would not be expected to have a material cost
of above their standard salaries.
41
NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES
We presently have 25 full time employees and no part-time employees.
PROPERTY LOCATION, FACILITIES, SIZE AND NATURE OF OWNERSHIP
Swan Creek Field. Our Swan Creek leases are on approximately 41,088 acres
in Hancock, Claiborne, Knox, Jefferson, Morgan and Union Counties in Tennessee.
The initial terms of these leases vary from one to five years. Some of them will
terminate unless we have commenced drilling. In 2002, we reduced the acreage
comprising the Swan Creek Field from approximately 50,500 acres to the present
41,088 acres. This reduction in acreage was a result of our improved
understanding of the geological and geophysical makeup of the Swan Creek Field.
We believe that the acreage eliminated from the field does not have the
potential to produce commercial quantities of oil or gas and that the reduction
of this acreage does not affect the reserves of the Swan Creek Field. Further,
the elimination of the leases for this acreage is expected to result in cost
savings to us.
Morita Properties, Inc., an affiliate of Shigemi Morita, a former Director,
currently has a 25% working interest in nine of our existing wells, and a 50%
working interest and 6% working interest, respectively, in two of our other
existing wells. All of these wells are located in the Swan Creek Field and all
but two are presently producing wells. In addition, to those interests, Morita
Properties, Inc. previously owned a 25% working interest in three of our other
existing wells and 12.5% working interest in another of our wells all of which
subsequently have been sold.
An individual who is not an affiliate of us purchased 25% working interests
in two other wells located in the Swan Creek Field that are presently producing
wells.
Another individual has a 29% revenue interest in a producing well located
in the Swan Creek Field by virtue of having contributed her unleased acreage to
the drilling unit and paying her proportionate share of the drilling costs of
the well. We were obligated to allow that individual to participate on that
basis in accordance with both customary industry practice and the requirements
of the procedures of the Tennessee Oil and Gas Board in a forced pooling action
brought by us to require the acreage to be included in the unit so that the well
could be drilled. The forced pooling procedure was concluded by her contribution
of acreage and agreement to pay proportionate share of drilling costs.
We also entered into a farmout agreement with Miller Petroleum, Inc. for
ten wells to be drilled in the Swan Creek Field and we have an option to award
up to an additional ten future wells. All locations were to be mutually agreed
upon. Net revenues, as defined, are to be 81.25% to Miller. Our subsidiary TPC
will transport Miller's gas. We reserved all offset locations to wells drilled
under the farmout agreement. All ten wells have been drilled under the farmout
agreement. We acquired back from Miller a 50% working interest in nine of those
ten wells in addition to our rights under the farmout agreement. In addition, we
along with Miller have drilled two additional wells on a 50-50 basis, although
we declined to exercise our option for a ten-well extension of the farmout
agreement. Of the wells in which Miller owns an interest, six are presently
producing.
Other than the working interests described or referred to above, we retain
all other working interests in wells drilled or to be drilled in the Swan Creek
Field.
Other working interest owners in oil and gas wells in which we have working
interests are entitled to market their respective shares of production to
purchasers other than purchasers with whom we have contracted. Absent such
contractual arrangements being made by the working interest owners, we are
authorized but are not required to provide a market for oil or gas attributable
to working interest owners' production. At this time, we have not agreed to
market gas for any working interest owner to customers other than our customers.
If we agree to market gas for working interest owners to our customers, we will
have to agree, at that time, to the terms of such marketing arrangements and it
is possible that as a result of such arrangements, our revenues from such
customers may be correspondingly reduced. If the working interest owners make
their own arrangements to market their natural gas to other end users along the
pipeline which have been served by East Tennessee Natural Gas, an interstate
pipeline, such gas would be transported by TPC at published tariff rates. The
current published tariff rate is for firm transportation at a demand charge of
five cents per MMBtu per day plus a commodity charge of $0.80 per MMBtu.
42
If the working interest owners do not market their production, either
independently or through us, then their interest will be treated as not yet
produced and will be balanced either when marketing arrangements are made by
such working interest owners or when the well ceases to produce in accordance
with customary industry practice.
Kansas Properties. The Kansas Properties contain 138 leases totaling 32,158
acres in the vicinity of Hays, Kansas. The original terms on these leases were
from one to ten years and in most cases have expired. Most of these leases,
however, are still in effect because they are being held by production. We
maintain a 100% working interest in most wells. The leases provide for a
landowner royalty of 12.5%. Some wells are subject to an overriding royalty
interest from 0.5% to 9%.
Although we do not pay any taxes on our Swan Creek Leases, we pay ad
valorem taxes on our Kansas Properties. We have general liability insurance for
the Kansas Properties and the Swan Creek Field.
We lease our principal executive offices, consisting of approximately 5,647
square feet located at 603 Main Avenue, Suite 500, Knoxville, Tennessee at a
rental of $4,705.83 per month and an office in Hays, Kansas at a rental of $500
per month. During 2002 and the first six months of 2003, we closed a field
office in Sneedville, Tennessee and an office in New York City we had previously
leased at an aggregate rental of $3,100 per month.
RESERVE ANALYSES
Ryder Scott Company, L.P. of Houston, Texas has performed reserve analyses
of all our productive leases. Ryder Scott Company, L.P. and its employees and
its registered petroleum engineers have no interest in the Company, and
performed these services at their standard rates. The net reserve values used
hereafter were obtained from a reserve report dated February 10, 2003, which we
refer to as the Report, prepared by Ryder Scott Company, L.P. as of December 31,
2002. In substance, the Report used estimates of oil and gas reserves based upon
standard petroleum engineering methods which include production data, decline
curve analysis, volumetric calculations, pressure history, analogy, various
correlations and technical judgment. Information for this purpose was obtained
from owners of interests in the areas involved, state regulatory agencies,
commercial services, outside operators and files of Ryder Scott Company, L.P.
The net reserve values in the Report were adjusted to take into account the
working interests that have been sold by us in various wells in the Swan Creek
Field. The Report provides that proved reserves in the Swan Creek Field are
30,360 MMcf of natural gas and 226,456 barrels of oil. According to the Report,
the value of the future gross revenues of our interest in the Swan Creek Field
as of December 31, 2002 is $103,667,886 before production taxes and $100,557,852
after production taxes. The Report further provides that as of December 31, 2002
the value of the future net income before income taxes of our interest in the
Swan Creek Field is $80,798,842 and discounting the future net income by 10%
results in a present value of $36,230,728.
The Report reflects that the amount of proved natural gas net reserves in
the Swan Creek Field of 23,499 MMcf remained essentially unchanged from net
reserves of 23,006 MMcf reported in the Ryder Scott Company, L.P. report dated
March 28, 2002 reporting values as of December 31, 2001. The Report also
reflects a decrease in the amount of proved oil reserves to 167,432 barrels in
2002 from 224,745 barrels reported in the earlier Ryder Scott Company, L.P.
report for values as of December 31, 2001. This decrease was primarily due to
estimates for the Colson #1 well which was included in the earlier Ryder Scott
Company, L.P. report as of December 31, 2001, but was not included in the
current Report as that well was subsequently taken off-line and reclassified as
unproved. The Report reflects an increase from the Ryder Scott Company, L.P.
Report for the year ended December 31, 2001 in the value of the future gross
revenues of our interest in the Swan Creek Field from $57,832,005 to
$103,667,886 before production taxes and $56,097,044 after production taxes to
$100,557,852. The Report also indicates an increase in the discounted (at 10%
per annum compounded monthly) present value of the reserves of the Swan Creek
Field from $19,302,590 as of December 31, 2001 to $36,230,728 as of December 31,
2002. These increases in values reported by Ryder Scott Company, L.P. in the
Report are due to an increase in oil and gas prices for 2002 making a larger
portion of the Field's undeveloped reserves more economical for future
development. Gas prices for the year-end 2001 Ryder Scott Company, L.P. report
utilized gas prices of $2.35 per Mcf and oil prices of $16.25 per barrel as
opposed to the $4.22 per Mcf price and $26.90 per barrel price utilized in the
current Report for the year ended December 31, 2002. In addition, we drilled two
wells in 2002, the Colson #2 and the Paul Reed #9, which added 936 MMcf to our
gas reserves in the Swan Creek Field.
43
Ryder Scott Company, L.P. also performed a reserve analysis of the Kansas
Properties. The Report provides that as of December 31, 2002 the net proved
reserves for the Kansas Properties are 3,100 MMcf of natural gas and 1,308,467
barrels of oil. According to the Report, the value of the future gross revenues
of our interest in the Kansas Properties as of December 31, 2002 is $48,511,771
before production taxes and 48,066,045 after production taxes. The Report
further provides that as of December 31, 2002 the value of the future net income
before income taxes of our interest in the Kansas Properties is $18,163,162 and,
discounting the future net income by 10% results in a present value of
$10,417,292.
The current Report reflects a substantial increase from the Ryder Scott
Company, L.P. report analyzing the reserves of the Kansas Properties as of
December 31, 2001 in (i) the number of barrels of oil attributed to our net
interest in the Kansas Properties from 831,930 barrels to 1,308,467 barrels and
(ii) the value of the future gross revenues of our interest in the Kansas
Properties from $20,463,797 to $48,511,771 before production taxes and
$19,586,607 after production taxes to $48,066,045. The current Report also
indicates an increase in the discounted (at 10% per annum compounded monthly)
net present value of our oil and gas reserves in the Kansas Properties from
$2,431,317 as of December 31, 2001 to $10,417,292 as of December 31, 2002. These
increases are due primarily to two factors. First, the increased price and
future speculative market for energy prices have driven both oil and gas prices
higher. The 2001 Ryder Scott Company, L.P. report used a gas price of $2.13 per
Mcf in determining the value of reserves in contrast to the $4.13 per Mcf price
used in the current Report and an oil price of $17.24 per barrel in 2001
contrasted to the $27.29 per barrel price used in 2002. Second, an increase in
the number of barrels occurred because the current Report for December 31, 2002
included the production and reserves from approximately thirty producing oil
wells that had not been included in the prior Ryder Scott Company, L.P. report
for December 31, 2001. At the time of the earlier report, the calculated
operating expenses for those producing wells matched or exceeded the oil price
utilized in that report and therefore, those wells were not considered
commercially viable for purposes of that earlier report. As a result of the
increase in the price of oil, those wells and associated reserves are included
in the current Report. We anticipate that future reports of the net present
value of the Kansas Properties should remain stable, and may even increase and
will continue to include the consideration of reserves attributable to all of
our wells in Kansas, which are still producing in accordance with their extended
production history, provided that the market price of oil and gas remains
constant or increases.
We believe that the reserve analysis reports prepared by Ryder Scott
Company, L.P. for us for the Swan Creek Field and Kansas Properties provide an
essential basis for review and consideration of our producing properties by all
potential industry partners and all financial institutions across the country.
It is standard in the industry for reserve analyses such as these to be used as
a basis for financing of drilling costs. Reserve analyses, however, are at best
speculative, especially when based upon limited production; no assurance can be
given that the reserves attributed to these leases exist or will be economically
recoverable. The result of any reserve analysis is dependent upon the forecast
of product prices utilized in the analysis which may be more or less than the
actual price received during the period in which production occurs.
We have not filed the reserve analysis reports prepared by Ryder Scott
Company, L.P. or any other reserve reports with any Federal authority or agency
other than the Securities and Exchange Commission. We, however, have filed the
information in the Report of our reserves with the Energy Information Service of
the Department of Energy in compliance with that agency's statutory function of
surveying oil and gas reserves nationwide.
44
PRODUCTION
The following tables summarize for the past three fiscal years the volumes
of oil and gas produced to our interests, our operating costs and our average
sales prices for our oil and gas. The information does not include volumes
produced to royalty interests or other working interests.
TENNESSEE
COST OF
YEAR ENDED PRODUCTION AVERAGE
DECEMBER 31 PRODUCTION (PER BOE)(2) SALES PRICE
----------- ---------- ------------ -----------
OIL GAS OIL GAS
(BBL) (MCF) (BBL) (PER MCF)
-------------- -------------- ----------------- --------------
2002............. 15,111.54 521,834.35 $ 4.10(2) $21.85 $3.22
2001............. 22,776.21 703,073.56 $ 0.31 $16.05 $2.55
2000............. 37,210.67 2,411.00 $ 0.69 $20.32 $2.86
Gas volumes and prices for 2000 reflect only the nominal purchases made by
Hawkins County Gas Utility District upon completion of Phase I of Tengasco
Pipeline Company's pipeline system.
---------------------------
(1) A "BOE" is a barrel of oil equivalent. A barrel of oil contains
approximately 6 Mcf of natural gas by heating content. The volumes of gas
produced have been converted into "barrels of oil equivalent" for the purposes
of calculating costs of production.
(2) The increase in cost of production in 2002 was a result of this being the
first full year of production in the Swan Creek Field.
KANSAS
COST OF
YEAR ENDED PRODUCTION AVERAGE
DECEMBER 31 PRODUCTION (PER BOE)(2) SALES PRICE
----------- ---------- ------------ -----------
OIL GAS OIL GAS
(BBL) (MCF) (BBL) (PER MCF)
--------------- ------------- -------------- -----------------
2002................ 105,473.54 246,510.98 $ 8.71 $23.89 $2.96
2001................ 112,495.88 278,884.66 $10.72 $23.50 $4.12
2000................ 111,734.81 291,096.22 $ 9.68 $28.06 $3.75
OIL AND GAS DRILLING ACTIVITIES
Our oil and gas developmental drilling for the past three fiscal years are
as set forth in the following tables. During the fiscal years ending December
31, 2000 and 2001 we did not drill any exploratory wells. In 2002, we drilled
one exploratory well in Cocke County, Tennessee which did not result in finding
commercial quantities of hydrocarbons. The information should not be considered
indicative of future performance, nor should it be assumed that there is
necessarily any correlation between the number of wells drilled, quantities of
reserves found or economic value.
45
GROSS AND NET WELLS
The following tables set forth for the fiscal years ending December 31,
2000, 2001, and 2002 the number of gross and net development wells drilled by
us. The dry hole set forth in the table below is the Cocke County well referred
to above. The term gross wells means the total number of wells in which we own
an interest, while the term net wells means the sum of the fractional working
interests we own in gross wells.
Year ended December 31,
---------------------------------------------------------------------------
2002 2001 2000
----------------- ------------------ -------------------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
TENNESSEE
Productive Wells............. 3 2.625 19 11.42 9 4.0515
Dry Holes.................... 1 .50 0 0 0 0
KANSAS
Productive Wells............. 0 0 3 2.594 0 0
Dry Holes.................... 0 0 0 0 0 0
PRODUCTIVE WELLS
The following table sets information regarding the number of productive
wells in which we held a working interest as of December 31, 2002. Productive
wells are either producing wells or wells capable of commercial production
although currently shut-in. One or more completions in the same bore hole are
counted as one well.
Gas Oil
---------------------- -----------------------
Gross Net Gross Net
----- --- ----- ---
Tennessee........................... 31 18.9 12 6.18
Kansas.............................. 52 43.45 128 110.5
DEVELOPED AND UNDEVELOPED OIL AND GAS ACREAGE
As of December 31, 2002, we owned working interests in the following
developed and undeveloped oil and gas acreage. Net acres refer to our interest
less the interest of royalty and other working interest owners.
Developed Undeveloped
--------------------------------- ---------------------------------
Gross Acres Net Acres Gross Acres Net Acres
----------- --------- ----------- ---------
Tennessee................... 1,840.00 1,065.38 41,088 35,952
Kansas...................... 9,666.00 8,080.44 22,711 18,995.48
46
LEGAL PROCEEDINGS
Except as described hereafter, we are not a party to any pending material
legal proceeding. To the knowledge of management, no federal, state or local
governmental agency is presently contemplating any proceeding against us which
would have a result materially adverse on us. To the knowledge of management, no
director, executive officer or affiliate of the company or owner of record or
beneficially of more than 5% of our common stock is a party adverse to us or has
a material interest adverse to us in any proceeding.
In November 2001, we signed a credit facility with Bank One, N.A. in
Houston, Texas whereby Bank One extended to us a revolving line of credit of up
to $35 million. The initial borrowing base under the facility was $10 million.
In April 2002, we received a notice from Bank One stating that it had
redetermined and reduced the then-existing borrowing base under the credit
agreement by $6 million to approximately $3.1 million. Bank One demanded that we
pay the $6 million within thirty days. In May 2002, we filed suit in federal
court in the Eastern District of Tennessee, Northeastern Division at Greeneville
to restrain Bank One from taking any steps to enforce its demand that we reduce
our loan obligation or else be deemed in default and for damages resulting from
the demand. We sought a jury trial and actual damages sustained by it as a
result of the wrongful demand in the amount of $51 million plus punitive damages
in the amount of $100 million.
In July 2002, Bank One filed its answer and counterclaim, alleging that its
actions were proper under the terms of the credit agreement and seeking to
recover all amounts it alleges to be owed under the credit agreement, including
principal, accrued interest, expenses and attorney's fees in the approximate
amount of $9 million. No hearings have occurred or been scheduled in the court
proceeding. We have filed initial written discovery requests upon Bank One. We
have continued to pay $200,000 per month of principal due under the original
terms of the credit agreement, plus interest, and have reduced the principal now
outstanding to approximately $7.1 million. Although the parties continue to
discuss settlement of all outstanding issues, no settlement has been concluded.
At a scheduling conference held by the Court in February 2003, a procedural
schedule was set as requested by us leading toward a trial date of November 18,
2003 in the event settlement is not concluded.
In November 2002, we and our then Chief Executive Officer, Malcolm E.
Ratliff, were served with a complaint filed in the United States District Court
for the Eastern District of Tennessee, Knoxville, entitled PAUL MILLER V. M. E.
RATLIFF AND TENGASCO, INC., DOCKET NUMBER 3:02-CV-644. The complaint seeks
certification of a class action to recover on behalf of the class of all persons
who purchased shares of our common stock between August 1, 2001 and April 23,
2002, damages in an amount not specified that were allegedly caused by
violations of the federal securities laws, specifically Rule 10b-5 under the
Securities Exchange Act of 1934 as to us and Mr. Ratliff, and Section 20(a) of
that Act as to Mr. Ratliff. The complaint alleges that documents and statements
made to the investing public by us and Mr. Ratliff misrepresented material facts
regarding our business and finances. We believe that the allegations in the
complaint are without merit. We intend to vigorously defend against all of the
allegations. We have filed a motion to dismiss the action based on the failure
of the complaint to meet the requirements of the Securities Litigation Reform
Act of 1995.
We, our former Chief Executive Officer, Malcolm E. Ratliff, and one of our
attorneys, Morton S. Robson, were named as defendants in an action commenced in
the Supreme Court of the State of New York, New York County entitled MAUREEN
COLEMAN, JOHN O. KOHLER, CHARLES MASSOUD, JONATHAN SARLIN, VON GRAFFENRIED A.G.
AND VPM VERWATUNGS A.G., PLAINTIFFS V. TENGASCO, INC., MORTON S. ROBSON AND
MALCOLM E. RATLIFF, DEFENDANTS, INDEX NO. 603009/98. In that action, the
plaintiffs, stockholders of the Company, allege that they were entitled to sell
their shares of our common stock in the open market pursuant to Rule 144
promulgated under the Securities Act of 1933, but they were precluded from doing
so by the defendants' purported wrongful refusal to remove the restrictive
legends from their shares. The plaintiffs own in the aggregate 35,000 shares of
our common stock. The plaintiffs are seeking damages in an amount equal to the
difference between the amount for which they would have been able to sell their
shares if the defendants had acted to remove the restrictive legends when
requested and the amount they will receive on the sale of their shares. The
plaintiffs are also seeking punitive damages in an amount they claim to be in
excess of $500,000, together with interest, costs and disbursements of bringing
the action, including reasonable attorneys fees. We do not believe that we
wrongfully withheld our approval of the removal of the restrictive legends at
the times such removal was requested by the stockholders. The plaintiffs have
not taken any action in this matter for several years.
47
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors.
Name Age Position
---- --- --------
Richard T. Williams(3)(4) 52 Chairman of the Board and Chief
Executive Officer
Jeffrey R. Bailey(3)(4) 46 President and Director
Mark A. Ruth 44 Chief Financial Officer
Robert M. Carter 66 President - Tengasco Pipeline
Corporation
Cary V. Sorensen 54 General Counsel, Vice President and
Secretary
Stephen W. Akos(1)(2) 49 Director
Joseph Earl Armstrong(3) 46 Director
John A. Clendening(1)(2)(4) 70 Director
Robert L. Devereux(1) (2) 43 Director
Bill W. Harbert 80 Director
Peter E. Salas 49 Director
Charles M. Stivers(1) 40 Director
-----------------
(1) Audit Committee, Compensation Committee and Special Committee Member
(2) Stock Option Committee Member
(3) Field Safety Committee Member
(4) Frontier Exploration Committee Member
DR. RICHARD T. WILLIAMS has been a member of the faculty of the Department
of Geological Sciences at The University of Tennessee in Knoxville, Tennessee,
since 1987, after holding faculty positions at West Virginia University and the
University of South Carolina since 1979. He has been engaged in reflection
seismology and geophysical studies in the Appalachian Overthrust since 1980. He
earned his Ph.D. in Geophysics from Virginia Tech in 1979. Dr. Williams was
elected as a director effective June 28, 2002. He was appointed Chief Operating
Officer on January 10, 2003, and on February 3, 2003, he was elected our Chief
Executive Officer.
JEFFREY R. BAILEY graduated in 1980 from New Mexico Institute of Mining and
Technology with a B.S. degree in Geological Engineering. Upon graduation he
joined Gearhart Industries as a field engineer working in Texas, New Mexico,
Kansas, Oklahoma and Arkansas. Gearhart Industries later merged with Halliburton
Company. In 1993 after 13 years working in various field operations and
management roles primarily focused on reservoir evaluation, log analysis and log
data acquisition he assumed a global role with Halliburton as a Petrophysics
instructor in Fort Worth, Texas. His duties were to teach Halliburton personnel
and customers around the world log analysis and competition technology and to
review analytical reservoir problems. In this role Mr. Bailey had the
opportunity to review reservoirs in Europe, Latin America, Asia Pacific and the
Middle East developing a special expertise in carbonate reservoirs. In 1997 he
became technical manager for Halliburton in Mexico focusing on finding
engineering solutions to the production challenges of large carbonate reservoirs
in Mexico. He joined us as our Chief Geological Engineer on March 1, 2002. He
was elected our President on July 17, 2002 and as a director on February 28,
2003.
MARK A. RUTH is a certified public accountant with 21 years accounting
experience. He received a B.S. degree in accounting with honors from the
University of Tennessee at Knoxville. He has served as a project controls
engineer for Bechtel Jacobs Company, LLC; business manager and finance officer
for Lockheed Martin Energy Systems; settlement department head and senior
accountant for the Federal Deposit Insurance Corporation; senior financial
analyst/internal auditor for Phillips Consumer Electronics Corporation; and, as
an auditor for Arthur Andersen and Company. From December 14, 1998 to August 31,
1999 he served as the Company's Chief Financial Officer. On August 31, 1999 he
was elected as a Vice-President of the Company and on November 8, 1999 he was
again appointed as the Company's Chief Financial Office, which office he has
occupied since then.
48
ROBERT M. CARTER attended Tennessee Wesleyan College and Middle Tennessee
State College between 1954 and 1957. For 35 years he was an owner of Carter
Lumber & Building Supply Company and Carter Warehouse in Loudon County,
Tennessee. He has been with us since 1995 and during that time has been involved
in many phases of our business, including pipeline construction, leasing,
financing and the negotiation of acquisitions. Mr. Carter was elected
Vice-President in March, 1996, Executive Vice-President in April 1997 and
President on March 13, 1998 until he resigned from that position on October 19,
1999. On August 8, 2000 he again was elected as President and served in that
capacity until July 31, 2001. He has served as President of Tengasco Pipeline
Corporation, our wholly-owned subsidiary, from June 1, 1998 to the present.
CARY V. SORENSEN is a 1976 graduate of the University of Texas School of
Law and has undergraduate and graduate degrees from North Texas State University
and Catholic University in Washington, D.C. Prior to joining us in July 1999, he
had been continuously engaged in the practice of law in Houston, Texas relating
to the energy industry since 1977, both in private law firms and a corporate law
department, most recently serving for seven years as senior counsel with the
litigation department of a major Houston energy corporation before entering
private practice in June 1996. He has represented many of the major oil
companies headquartered in Houston, as well as local distribution companies and
electric utilities in a variety of litigation and administrative cases before
state and federal courts and agencies in numerous states. These matters involved
gas contracts, gas marketing, exploration and production disputes involving
royalties or operating interests, land titles, oil pipelines and gas pipeline
tariff matters at the state and federal levels, and general operation and
regulation of interstate and intrastate gas pipelines. He has served as General
Counsel of the Company since July 9, 1999.
STEPHEN W. AKOS has over twenty years experience in the financial services
industry with an expertise in fixed income securities. Since August of 2000, he
has been First Vice President, Institutional Fixed Income Sales, Robert W. Baird
& Co., St. Louis, Missouri. Prior to 2000, he held executive positions with
Mercantile Bank and Mark Twain Bank since 1993. Before 1993 he was a broker and
held a series of executive positions at brokerage firms Dean Witter, Shearson
Lehman Hutton, Drexel Burnham Lambert, and Kidder Peabody in St. Louis. He
received an MBA in Finance from Washington University in 1979, and a B.S. in
Business Administration, Accounting, from Washington University in 1976. He was
elected as a director on February 28, 2003.
JOSEPH EARL ARMSTRONG is a resident of Knoxville, Tennessee. He is a
graduate of the University of Tennessee and Morristown College where he received
a Bachelor of Science Degree in Business Administration. From 1988 to the
present, he has been an elected State Representation for Legislative District 15
in Tennessee. He has served as director since 1997.
DR. JOHN A. CLENDENING received B.S (1958), M.S. (1960) and Ph. D. (1970)
degrees in geology from West Virginia University. He was employed as a
Palynologist-Coal Geologist at the West Virginia Geological Survey from 1960
until 1968. He joined Amoco in 1968 and remained with Amoco as a senior
geological associate until 1972. Dr. Clendening has served as President and
other offices of the American Association of Stratigraphic Palynologists and the
Society of Organic Petrologists. From 1992 - 1998 he was engaged in association
with Laird Exploration Co., Inc. of Houston, Texas, directing exploration and
production in south central Kentucky. In 1999 he purchased all the assets of
Laird Exploration in south central Kentucky and operates independently. While
with Amoco Dr. Clendening was instrumental in Amoco's acquisition in the early
1970's of large land acreage holdings in Northeast Tennessee, based upon his
geological studies and recommendations. His work led directly to the discovery
of what is now our Paul Reed # 1 well. He further recognized the area to have
significant oil and gas potential and is credited with discovery of the field
which is now known as our Swan Creek Field. Dr. Clendening previously served as
a director from September 1998 to August 2000. He was again elected as a
director on February 28, 2003.
ROBERT L. DEVEREUX graduated in 1982 from St. Louis University with a
Bachelor's Degree in Business Administration with a major in finance. He
received his law degree from St. Louis University in 1985. For the past eighteen
years, Mr. Devereux has been actively engaged in the practice of law,
specializing in commercial litigation. Since 1994, he has been a principal in
the law firm of Devereux Murphy LLC located in St. Louis, Missouri. For the past
eight years Mr. Devereux has also been a principal of and has served as the
Chief Executive Officer of Gateway Title Company, Inc. He was elected as a
director on February 28, 2003.
49
BILL L. HARBERT earned a B.S. degree in civil engineering from Auburn
University in 1948. In 1949 he was one of the founders of Harbert Construction
Company. He managed that company's construction operations, both domestic and
foreign, and served as our Executive Vice-President until 1979. From 1979 until
July, 1990 he served as President and Chief Operating Officer and from July 1990
through December 1991 he served as Vice Chairman of the Board of Harbert
International, Inc. He then purchased a majority of the international operations
of Harbert International, Inc. and formed Bill Harbert International
Construction, Inc. He served as Chairman and Chief Executive Officer of that
corporation until retiring from us in 2000. Mr. Harbert's companies built
pipeline projects in the United States and throughout the world. They also built
many other projects including bridges, commercial buildings, waste water
treatment plants, airports, including an air base in Negev, Israel and embassies
for the United States government in, among other places, Tel Aviv, Hong Kong,
and Baku. Mr. Harbert has also served as president (1979) and Director (1980) of
the Pipe Line Contractors Association, USA and for seven years as Director,
Second Vice-President and First Vice-President (2001-2002) of the International
Pipe Line Contractors Association. Mr. Harbert has been active in service to a
variety of business associations, charities and the arts in the Birmingham area
for many years. He was elected as a director on April 2, 2002.
PETER E. SALAS has been President of Dolphin Asset Management Corp. and
associated companies since 1988. Prior to establishing Dolphin, he was with J.P.
Morgan Investment Management, Inc. for ten years, becoming Co-manager, Small
Company Fund and Director-Small Cap Research. He received an A.B. degree in
Economics from Harvard in 1978. Mr. Salas was elected as a director on October
8, 2002.
CHARLES M. STIVERS is a Certified Public Accountant with 18 years
accounting experience. In 1984 he received a B.S. degree in accounting from
Eastern Kentucky University. From 1983 through July 1986 he served as Treasurer
and CEO for Clay Resource Company. From August 1986 through August 1989 he
served as a senior tax and audit specialist for Gallaher and Company. From
September 1989 to date he has owned and operated Charles M. Stivers, C.P.A., a
regional accounting firm. Mr. Stiver's firm specializes in the oil and gas
industry and has clients in eight states. The oil and gas work performed by his
firm includes all forms of SEC audit work, SEC quarterly financial statement
filings, oil and gas consulting work and income tax services. Mr. Stiver's firm
has also represented oil and gas companies with respect to Federal and State
income tax disputes in 15 states over the past 12 years. In September 2001, he
was elected as a director and is the chairman of our audit committee.
EXECUTIVE COMPENSATION
The following sets forth certain information regarding compensation awarded
to, earned by or paid to, and options granted to, repriced or exercised by, the
Company's Chief Executive Officers during fiscal years ended December 31, 2002,
December 31, 2001 and December 31, 2000. During that period, none of the
Company's other executive officers earned compensation in excess of $100,000 per
annum for services rendered to us in any capacity.
Summary Compensation Table
Securities
Restricted Underlying
Name and Other Annual Stock Options/ All Other
Principal Position(1) Year Salary Bonus Compensation Awards SARS(#) Payouts Compensation
--------------------- ---- ------ ----- ------------ ------ ------- ------- ------------
Malcolm E. Ratliff 2002 $80,000 $0 $0 -0- 59,062 -0- -0-
Chief Executive Officer 2001 $80,000 $0 $1,000 -0- 52,500 -0- -0-
2000 $70,000 $0 $500 -0- 52,500 -0- -0-
--------------
(1) Malcolm E. Ratliff served as our Chief Executive Officer throughout 2002.
Richard T. Williams, our current Chief Executive Officer replaced Mr.
Ratliff on February 3, 2003.
REPRICING OF OPTIONS IN FISCAL 2002
We did not adjust or amend the exercise price of any options previously
granted to any of our directors or executive officers during Fiscal 2002.
50
OPTION GRANTS FOR FISCAL 2002
The following table sets forth information concerning options to purchase
shares of our common stock granted to the named executive officer in 2002.
Individual Grants
----------------- Potential Realizable
Number of Percent of Total Value At Assumed
Securities Options/SARs Annual Rates of Stock
Underlying Granted to Exercise or Price Appreciation(1)
Options/SARs Employees in Base Price Expiration ---------------------
Name Granted (#) Fiscal 2002 ($/Sh) Date 5%($) 10%($)
----- ----------- ----------- ------ ---- ------- ----------
Malcolm E. Ratliff 6,562 4% $2.86 8/4/05 $2,952 $6,233
------------
(1) These options expired by their terms 90 days following the resignation
on March 10, 2003 of Mr. Ratliff from our Board of Directors.
AGGREGATE OPTION EXERCISES FOR FISCAL 2002 AND YEAR END OPTION VALUES
The following table sets forth the number of shares received upon exercise
of stock options by the names executive officer during the last completed fiscal
year and the aggregate options to purchase shares of our common stock held by
the named executive officer at December 31, 2002.
Number of Securities (1)
Underlying Unexercised Value (2) of Unexercised
Options/SARs at December In-the-Money Options/SARs
Shares 31, 2002 at December 31,2002
Acquired Value ($)
Name On Exercise Realized (3) Exercisable/Unexercisable Exercisable/Unexercisable(4)
---- ----------- ------------ ------------------------- ----------------------------
Malcolm E. Ratliff -0- -0- 59,062/-0- $-0-/-0-
------------
(1) Number of shares underlying the unexercised options has been retroactively
adjusted for a 5% stock dividend declared by us as of September 4, 2001.
(2) Unexercised options are in-the-money if the fair market value of the
underlying securities exceeds the exercise price of the option. The fair market
value of the Common Stock was $1.10 per share on December 31, 2002, as reported
by The American Stock Exchange. The exercise price of the unexercised options
granted to Malcolm E. Ratliff, the Chief Executive Officer of the Company, were
$8.69 and $2.86 per share. As a result, the unexercised options are for purposes
of this table deemed to have no value.
(3) Value realized in dollars is based upon the difference between the fair
market value of the underlying securities on the date of exercise, and the
exercise price of the option.
(4) These options expired by their terms 90 days following the resignation on
March 10, 2003 of Mr. Ratliff from our Board of Directors.
LONG TERM INCENTIVE PLANS
We do not have any long-term incentive programs or plans. We adopted an
employee health insurance plan in August 2001. We do not presently have a
pension or similar plan for our directors, executive officers or employees.
Management is considering adopting a 401(k) plan and full liability insurance
for directors and executive officers. However, there are no immediate plans to
do so at this time.
51
COMPENSATION OF DIRECTORS
The Board of Directors has resolved to compensate members of the Board of
Directors for attendance at meetings at the rate of $250 per day, together with
direct out-of-pocket expenses incurred in attendance at the meetings, including
travel. The Directors, however, have waived such fees due to them as of this
date for prior meetings.
Members of the Board of Directors may also be requested to perform
consulting or other professional services for us from time to time. The Board of
Directors has reserved to itself the right to review all directors' entitlement
to compensation on an ad hoc basis.
Directors who are on our Audit, Compensation and Stock Option Committees
are independent and therefore, do not receive any consulting, advisory or
compensatory fees from us. However, such board members may receive fees from us
for their services on those committees. The Company intends to implement a plan
for the payment of those committee members for their services on an annual
basis.
EMPLOYMENT CONTRACTS
We have entered into an employment contract with our Chief Executive
Officer, Richard T. Williams, for a period of two years through December 31,
2004 at an annual salary of $80,000. There are presently no other employment
contracts relating to any member of management. However, depending upon our
operations and requirements, we may offer long term contracts to directors,
executive officers or key employees in the future.
52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On each of January 21, 2002 and April 9, 2002, Bill L. Harbert, who owns
more than ten percent of our outstanding common stock and is now, but was not at
those dates, a director, purchased from us in a private placement, 100,000
shares of our common stock, at prices of $6.32 and $4.80 per share,
respectively. The proceeds from those private placements were used as working
capital.
On July 5, 2002 and July 23, 2002, Dolphin Offshore Partners, L.P., which
we refer to as Dolphin and which owns more than ten percent of our outstanding
common stock, and whose general partner, Peter E. Salas, is a director,
purchased from us in a private placement, 400,000 and 250,000 shares of our
common stock, respectively, at a price of $2.50 per share. The proceeds from
those private placements were used as working capital.
On August 8, 2002, Dolphin purchased 718,820 shares of our common stock in
an open market transaction. In connection with that purchase, Dolphin entered
into an agreement, which was later amended in October 2002, with Industrial
Resources Corporation, which we refer to as IRC, which owns more than ten
percent of our outstanding common stock and whose sole stockholder and
president, Malcolm E. Ratliff, was at the time of this transaction our Chief
Executive Officer and a director. Pursuant to that agreement, Dolphin granted
IRC an option commencing on April 11, 2003 and expiring on May 12, 2003 to
purchase up to 373,900 shares of our common stock that had been purchased by
Dolphin at a price of $2.386 per share. The agreement further provided that if
the option were not exercised during the option period, then IRC could then be
required by Dolphin to purchase from Dolphin at price of $2.495 per share the
same number of shares that had been the subject of the option. We were not a
party to this agreement. As a result of IRC's default on this obligation, in
June 2003, Dolphin received 400,000 shares of our common stock from an escrow
account established by IRC.
In October 2002, Dolphin in consideration of a loan to us was issued an
unsecured convertible promissory note from us in the principal amount of
$500,000 bearing 8% interest, with interest only payable quarterly and principal
payable January 4, 2004. The principal amount of the note is convertible into
our common stock at the rate of $2.88 per share. The proceeds from this loan
were used to provide working capital for our operations.
In December 2002, Dolphin loaned us the sum of $250,000, which funds were
used to pay the principal and interest due that month from us to Bank One and to
provide working capital. We issued a promissory note to Dolphin bearing interest
at the rate of 12% per annum, with interest only payable quarterly and the
principal balance payable on January 4, 2004. The obligations under the loan are
secured by an undivided 10% interest in our Tennessee and Kansas pipelines.
In January 2003, Bill L. Harbert, a director, purchased 227,275 shares of
our common stock from us in a private placement at a price of $1.10 per share.
The proceeds from this sale were used by us to pay the principal and interest
due that month from us to Bank One and to provide working capital.
On each of February 3, 2003 and February 28, 2003, Dolphin loaned us the
sum of $250,000, which we used to pay the principal and interest due from us to
Bank One for February and March 2003, respectively, and for working capital.
Each of these loans is evidenced by a separate promissory note bearing interest
at the rate of 12% per annum, with payments of interest only payable quarterly
and the principal balance payable on January 4, 2004. The obligations under the
loans are secured by an undivided 10% interest in our Tennessee and Kansas
pipelines.
On May 20, 2003, Dolphin loaned us the sum of $750,000 and Jeffrey R.
Bailey, our President and a director, loaned us $84,000, which aggregate amount
of $834,000 we used to pay the principal and interest due from us to Bank One
for June 2003 and for working capital. These loans are evidenced by separate
promissory notes bearing interest at the rate of 12% per annum, with payments of
interest only payable quarterly and the principal balance payable on January 4,
2004. The obligations under the loans are secured by an undivided 30% and 3.36%
interest, respectively, in our Tennessee and Kansas pipelines.
On August 6, 2003, Dolphin loaned us the sum of $150,000, which we used for
working capital. This loan is evidenced by a separate promissory note bearing
interest at the rate of 12% per annum, with payments of interest
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only payable quarterly and the principal balance payable on January 4, 2004. The
obligations under the loan are secured by an undivided 6% interest in our
Tennessee and Kansas pipelines
From April 1 through June 30, 2003, we issued 10,363 shares of our common
stock to holders of our Series A 8% Cumulative Convertible Preferred Stock in
lieu of cash quarterly interest payments due to those holders. Also during that
period, certain members of our board of directors exercised options granted to
them pursuant to the Tengasco, Inc. Stock Incentive Plan and purchased the
following number of shares of our common stock at the exercise price of $0.50
per share. Richard T. Williams - 10,000 shares, Bill L. Harbert - 24,000 shares
and John A. Clendening - 24,000 shares.
In this offering Dolphin, as well as our directors (certain of whom are
also officers), will have the right to purchase additional shares of common
stock at the offering price in an amount proportional to their existing
interests. These officers, directors, and affiliated companies would receive the
same terms as the other stockholders in this rights offering; except that
Dolphin may also enter into the proposed commitment agreement. See "The Rights
Offering - Effects of Rights Offering on Dolphin's Securities and Ownership and
- Proposed Commitment Agreement."
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PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of October 13, 2003,
concerning the beneficial ownership of our common stock by (a) each director,
(b) each executive officer named in our summary compensation table above, (c)
all directors and executive officers as a group, and (d) each person known by us
to beneficially own more than five percent of our common stock. Unless otherwise
indicated, each of the persons named below has sole voting power and sole
investment power with respect to the shares set forth opposite his or her name
and has an address at c/o Tengasco, Inc. 603 Main Avenue, Knoxville, Tennessee
37902.
Name of Amount Beneficially Percent of
Beneficial Owner Owned (1)(2) Class (%)
---------------- ------------ ---------
Stephen W. Akos........................................ 47,439(1) *
Joseph Earl Armstrong.................................. 81,450(2) *
Jeffrey R. Bailey...................................... 83,125(3) *
John A. Clendening..................................... 24,000 *
Robert L. Devereux..................................... 80,882(4) *
Dolphin Offshore Partners, L.P......................... 2,441,019(5) 20.1
Bill L. Harbert....................................... 1,513,496(6) 12.4
Malcolm E. Ratliff..................................... 2,250,442(7) 18.4
Peter E. Salas......................................... 2,465,019(8) 20.2
Charles M. Stivers..................................... 37,125(9) *
Richard T. Williams.................................... 73,125(10) *
All Officers and Directors as a group.................. 4,574,265(11) 37.6
------------
* Indicates holdings of less than 1%.
(1) Consists of 14,081 shares held directly (certain of which are jointly owned
with spouse); options to purchase 24,000 shares and 9,358 shares underlying
convertible promissory notes owned jointly with his spouse and by a limited
partnership. The shares underlying the note held by the limited partnership
have been adjusted to reflect Mr. Akos' ownership interest in the limited
partnership.
(2) Consists of 4,950 shares held directly and options to purchase 76,500
shares.
(3) Consists of 10,000 shares held directly and options to purchase 73,125
shares.
(4) Consists of 34,562 shares held directly and jointly with his spouse;
options to purchase 24,000 shares; 12,448 shares underlying a convertible
note held jointly with his spouse; 6,753 shares owned by a limited
liability company; and 3,119 shares underlying a convertible promissory
note held by a limited liability company. The shares owned by the limited
liability company and underlying the note held by the limited liability
company have been adjusted to reflect Mr. Devereux's ownership interest in
the limited liability company.
(5) Mr. Salas, a director, is the general partner and controlling person of
Dolphin. The share amount indicated consists of 2,139,720 shares held by
Dolphin; 10,500 shares underlying a warrant held by Dolphin; 173,611 shares
underlying a convertible promissory note held by Dolphin; and 117,188
shares underlying 9,000 shares of our series B 8% cumulative convertible
preferred stock held directly by Dolphin that are convertible into our
common stock. The indicated amount includes 400,000 shares transferred in
May 2003 to Dolphin from
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Industrial Resources Corporation, a corporation that we believe is
affiliated with M.E. Ratliff, pursuant to the terms of an agreement between
that corporation and Dolphin. The Company was not a party to that
agreement.
(6) Consists of 1,428,942 shares held directly, 71,429 shares underlying 5,000
shares of our series A 8% cumulative convertible preferred stock held
directly, which shares are convertible into our common stock, and an option
to purchase 13,125 shares.
(7) Includes 80,171 shares owned directly and an option to purchase 59,062
shares held by Mr. Ratliff, 1,249,744 shares owned by Industrial Resources
Corporation, which is controlled by Mr. Ratliff, 1,289,072 shares owned by
Ratliff Farms, Inc., which is controlled by Mr. Ratliff, and 31,500 shares
owned directly by a trust of which Mr. Ratliff's wife is a trustee and the
children of Mr. Ratliff are the beneficiaries. The information regarding
these shares was previously provided to us by Mr. Ratliff when he was our
Chairman of the Board and Chief Executive Officer. We are not aware of any
changes in the information, except for the transfer of 400,000 shares from
Industrial Resources Corporation to Dolphin described in footnote 5 above.
(8) Mr. Salas, a director, is the general partner and controlling person of
Dolphin. Consists of 2,139,720 shares held by Dolphin; options held by Mr.
Salas to purchase 24,000 shares; a warrant held by Dolphin to purchase
10,500 shares at $7.68 per share; 173,611 shares underlying a convertible
promissory note held by Dolphin; and 117,188 shares underlying 9,000 shares
of our series B 8% cumulative convertible preferred stock held by Dolphin,
which shares are convertible into our common stock at the rate of $7.68 per
share.
(9) Consists of 24,000 shares and options to purchase 13,125 shares.
(10) Consists of 10,000 shares and options to purchase 63,125 shares.
(11) Consists of shares held directly and indirectly by management, including
Messrs. Ruth and Sorensen, shares held by Dolphin, shares underlying
options, shares underlying warrants, shares underlying convertible
promissory notes and shares underlying convertible preferred stock.
56
THE RIGHTS OFFERING
BACKGROUND OF THE RIGHTS OFFERING
Our Board of Directors has proposed that we attempt to raise equity capital
through a rights offering to all of our stockholders and to use the proceeds
from the equity financing to repay certain long term indebtedness to Dolphin and
others and, if proceeds are sufficient, to repay a portion of under our senior
secured credit facility and/or to finance the drilling of additional wells.
The primary reason for authorizing the rights offering is to pay non-bank
indebtedness, including to Dolphin in the approximate amount of up to $_____
million, with the balance of the net proceeds, if any, to be used to pay bank
indebtedness to some extent and/or for working capital purposes, including the
drilling of additional wells. The board determined that the rights offering with
Dolphin possibly having certain rights to purchase unsubscribed shares is
advisable for these purposes under our present financial, operating and other
circumstances.
In preliminarily approving the rights offering as proposed, our Board of
Directors considered a number of factors, including the following:
o the need to pay our outstanding indebtedness, including to Dolphin, and
repaying certain other outstanding indebtedness, including perhaps a
portion of our credit facility with Bank One and/or providing certain,
albeit not necessarily sufficient, capital usable toward resuming our
drilling program;
o the difficulty of refinancing our outstanding indebtedness;
o the possible need to refinance all or a portion of the credit facility
in light of the impediment to other capital-raising created by the
dispute with Bank One;
o the commercial and other risks and uncertainties associated with a
restructuring or recapitalization and the impact of those alternatives
on our shareholders and our creditors;
o the possible willingness of Dolphin, subject to the pricing of the
rights offering, to agree to purchase shares in the rights offering;
and
o the belief that the transaction was the best alternative reasonably
available to us from the perspective of our public shareholders.
The preceding discussion of the information and factors considered and
given weight by our Board of Directors is not intended to be exhaustive.
However, our board of directors believe that the discussion includes all of the
material factors that they considered. In reaching their decisions to approve
and to recommend approval of the rights offering and Dolphin's possible purchase
of shares in the rights offering, our Board of Directors did not assign any
relative or specific weights to the factors they considered. Individual
directors may have given different weights to different factors.
An investment in our common stock must be made according to your own
evaluation of your best interests. Accordingly, our Board of Directors does not
make any recommendation to you about whether you should exercise your rights.
Neither have we retained a financial advisor to make any recommendation to you
about whether you should exercise your rights.
Our Board of Directors has formed a special committee consisting of Stephen
W. Akos, John A. Clendening and Robert L. Devereux, none of whom has any
personal interest in the rights offering, except by virtue of their beneficial
membership of shares of our common stock. The special committee has been charged
with determining the terms, including the financial terms, of the rights
offering and making recommendations regarding such terms to the Board of
Directors. It is anticipated that Mr. Salas, in light of his discussions with us
regarding his possible
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commitment to participate in the rights offering and his significant ownership
of our common stock, will not vote with respect to the Board of Directors'
approval of such terms.
THE RIGHTS
We will distribute to each holder of record of our common stock on _____,
2003, at no charge, one nontransferable subscription right for each share of our
common stock they own. The rights will be evidenced by rights certificates. Each
right will allow such holder to purchase two additional shares of our common
stock at a price of $___ per such purchased share.
EXPIRATION OF THE RIGHTS OFFERING
You may exercise your subscription privilege at any time before 12:00
midnight, New York City time, on ______, 2003, the expiration date for the
rights offering. If you do not exercise your rights before the expiration date,
your unexercised rights will be null and void. We will not be obligated to honor
your exercise of rights if the subscription agent receives the documents
relating to your exercise after the rights offering expires, regardless of when
you transmitted the documents, except when you have timely transmitted the
documents under the guaranteed delivery procedures described below. We may
extend the expiration date by giving oral or written notice to the subscription
agent on or before the scheduled expiration date. If we elect to extend the
expiration of the rights offering, we will issue a press release announcing the
extension no later than 9:00 a.m., New York City time, on the next business day
after the most recently announced expiration date.
SUBSCRIPTION PRIVILEGES
Basic subscription privilege. With your basic subscription privilege, you
may purchase two shares of our common stock per right, upon delivery of the
required documents and payment of the subscription price of $___ in the
aggregate, or $___ per share. You must purchase both shares underlying a right
if you want to exercise that right. Fractional rights will be rounded up to the
next higher whole right. The number of rights subject to the rights offering has
been arbitrarily increased by ______ rights to cover increases resulting from
rounding up. You are not required to exercise all of your rights. We will
deliver to you certificates representing the shares that you purchased with your
basic subscription privilege as soon as practicable after the rights offering
has expired.
Over-Subscription Privilege. Subject to the allocation described below,
each subscription right also grants each rights holder an over-subscription
privilege to purchase additional shares of common stock that are not purchased
by other rights holders pursuant to the other rights holders' basic subscription
privileges. You are entitled to exercise your over-subscription privilege only
if you exercise your basic subscription privilege in full.
If you wish to exercise your over-subscription privilege, you should
indicate the number of additional shares that you would like to purchase in the
space provided on your subscription certificate. When you send in your
subscription certificate, you must also send the full purchase price for the
number of additional shares that you have requested to purchase (in addition to
the payment due for shares purchased through your basic subscription privilege).
If the number of shares remaining after the exercise of all basic subscription
privileges is not sufficient to satisfy all requests for shares pursuant to
over-subscription privileges, you will be allocated additional shares pro-rata
(subject to elimination of fractional shares), based on the number of shares you
purchased through the basic subscription privilege in proportion to the total
number of shares that you and other over-subscribing shareholders purchased
through the basic subscription privilege. However, if your pro-rata allocation
exceeds the number of shares you requested on your subscription certificate,
then you will receive only the number of shares that you requested, and the
remaining shares from your pro-rata allocation will be divided among other
rights holders exercising their over-subscription privileges.
As soon as practicable after the expiration date, Mellon Investor Services
LLC, acting as our subscription agent, will determine the number of shares of
common stock that you may purchase pursuant to the over-subscription privilege.
You will receive certificates representing these shares as soon as practicable
after the expiration date. If you request and pay for more shares than are
allocated to you, we will refund that overpayment, without interest. In
connection with the exercise of the over-subscription privilege, banks, brokers
and other nominee holders of
58
subscription rights who act on behalf of beneficial owners will be required to
certify to us and to the subscription agent as to the aggregate number of
subscription rights that have been exercised, and the number of shares of common
stock that are being requested through the over-subscription privilege, by each
beneficial owner on whose behalf the nominee holder is acting.
Dolphin, subject to the pricing of the rights offering, may agree to
exercise all of his or its rights.
NON-TRANSFERABILITY OF THE RIGHTS
Except in the limited circumstances described below, only you may exercise
the basic subscription privilege and the over-subscription privilege. You may
not sell, give away or otherwise transfer the basic subscription privilege or
the over-subscription privilege.
Notwithstanding the foregoing, you may transfer your rights to any
affiliate of yours and your rights also may be transferred by operation of law;
for example a transfer of rights to the estate of the recipient upon the death
of the recipient would be permitted. If the rights are transferred as permitted,
evidence satisfactory to us that the transfer was proper must be received by us
prior to the expiration date of the rights offering.
METHOD OF SUBSCRIPTION--EXERCISE OF RIGHTS
You may exercise your rights by delivering the following to the
subscription agent, at or prior to 12:00 midnight, New York City time, on
________, 2003, the date on which the rights expire:
o your properly completed and executed rights certificate with any
required signature guarantees or other supplemental documentation; and
o your full subscription price payment for each share subscribed for
under your basic subscription privilege and your over-subscription
privilege.
METHOD OF PAYMENT
Your payment of the subscription price must be made in U.S. dollars for the
full number of shares of common stock you are subscribing for by either:
o check or bank draft drawn upon a U.S. bank or postal, telegraphic or
express money order payable to the subscription agent; or
o wire transfer of immediately available funds, to the subscription
account maintained by the subscription agent at _______.
RECEIPT OF PAYMENT
Your payment will be considered received by the subscription agent only
upon:
o receipt by the subscription agent of any uncertified check, or
certified check or bank draft drawn upon a U.S. bank or of any postal,
telegraphic or express money order; or
o receipt of collected funds in the subscription account designated
above.
DELIVERY OF SUBSCRIPTION MATERIALS AND PAYMENT
You should deliver your rights certificate and payment of the subscription
price or, if applicable, notice of guaranteed delivery, to the subscription
agent by one of the methods described below:
59
If by mail, by hand or by overnight courier to: Mellon Investor Services
LLC, P.O. Box 3315, South Hackensack, NJ 07606
You may call the subscription agent at (800) 370-1163.
Your delivery to an address other than the address set forth above will not
constitute valid delivery.
CALCULATION OF RIGHTS EXERCISED
If you do not indicate the number of rights being exercised, or do not
forward full payment of the total subscription price for the number of rights
that you indicate are being exercised, then you will be deemed to have exercised
your basic subscription privilege with respect to the maximum number of rights
that may be exercised with the aggregate subscription price payment you
delivered to the subscription agent. If we do not apply your full subscription
price payment to your purchase of shares of our common stock, we will return the
excess amount to you by mail without interest or deduction as soon as
practicable after the expiration date of the rights offering.
YOUR FUNDS WILL BE HELD BY THE SUBSCRIPTION AGENT UNTIL SHARES OF COMMON STOCK
ARE ISSUED
The subscription agent will hold your payment of the subscription price
payment in a segregated account with other payments received from other rights
holders until we issue your shares to you.
SIGNATURE GUARANTEE MAY BE REQUIRED
Your signature on each rights certificate must be guaranteed by an eligible
institution such as a member firm of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc., or from a
commercial bank or trust company having an office or correspondent in the United
States, subject to standards and procedures adopted by the subscription agent,
unless:
o your rights certificate provides that shares are to be delivered to you
as record holder of those rights; or
o you are an eligible institution.
NOTICE TO BENEFICIAL HOLDERS
If you are a broker, a trustee or a depositary for securities who holds
shares of our common stock for the account of others on _______, 2003, the
record date for the rights offering, you should notify the respective beneficial
owners of such shares of the rights offering as soon as possible to find out
their intentions with respect to exercising their rights. You should obtain
instructions from the beneficial owners with respect to the rights, as set forth
in the instructions we have provided to you for your distribution to beneficial
owners. If the beneficial owner so instructs, you should complete the
appropriate rights certificates and submit them to the subscription agent with
the proper payment. If you hold shares of our common stock for the account(s) of
more than one beneficial owner, you may exercise the number of rights to which
all such beneficial owners in the aggregate otherwise would have been entitled
had they been direct record holders of our common stock on the record date for
the rights offering, provided that, you, as a nominee record holder, make a
proper showing to the subscription agent by submitting the form entitled
"Nominee Holder Certification" which we will provide to you with your rights
offering materials.
BENEFICIAL OWNERS
If you are a beneficial owner of shares of our common stock or will receive
your rights through a broker, custodian bank or other nominee, we will ask your
broker, custodian bank or other nominee to notify you of this rights offering.
If you wish to exercise your rights, you will need to have your broker,
custodian bank or other nominee act for you. If you hold certificates of our
common stock directly and would prefer to have your broker, custodian bank or
other nominee exercise your rights, you should contact your nominee and request
it to effect the transaction for you. To indicate your decision with respect to
your rights, you should complete and return to your
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broker, custodian bank or other nominee the form entitled "Beneficial Owners
Election Form." You should receive this form from your broker, custodian bank or
other nominee with the other rights offering materials. If you wish to obtain a
separate rights certificate, you should contact the nominee as soon as possible
and request that a separate rights certificate be issued to you.
INSTRUCTIONS FOR COMPLETING YOUR RIGHTS CERTIFICATE
You should read and follow the instructions accompanying the rights
certificate(s) carefully.
If you want to exercise your rights, you should send your rights
certificate(s) with your subscription price payment to the subscription agent.
Do not send your rights certificate(s) and subscription price payment to us.
You are responsible for the method of delivery of your rights
certificate(s) with your subscription price payment to the subscription agent.
If you send your rights certificate(s) and subscription price payment by mail,
we recommend that you send them by registered mail, properly insured, with
return receipt requested. You should allow a sufficient number of days to ensure
delivery to the subscription agent prior to the time the rights offering
expires.
DETERMINATIONS REGARDING THE EXERCISE OF YOUR RIGHTS
We will decide all questions concerning the timeliness, validity, form and
eligibility of your exercise of your rights and our determinations will be final
and binding. We, in our sole discretion, may waive any defect or irregularity,
or permit a defect or irregularity to be corrected within such time as we may
determine. We may reject the exercise of any of your rights because of any
defect or irregularity. We will not receive or accept any subscription until all
irregularities have been waived by us or cured by you within such time as we
decide, in our sole discretion.
Neither we nor the subscription agent will be under any duty to notify you
of any defect or irregularity in connection with your submission of rights
certificates and we will not be liable for failure to notify you of any defect
or irregularity. We reserve the right to reject your exercise of rights if your
exercise is not in accordance with the terms of the rights offering or in proper
form. We will also not accept your exercise of rights if our issuance of shares
of our common stock to you could be deemed unlawful under applicable law or is
materially burdensome to us.
REGULATORY LIMITATION
We will not be required to issue to you shares of common stock pursuant to
the rights offering if, in our opinion, you would be required to obtain prior
clearance or approval from any state or federal regulatory authority to own or
control such shares if, at the time the subscription rights expire, you have not
obtained such clearance or approval.
GUARANTEED DELIVERY PROCEDURES
If you wish to exercise your rights, but you do not have sufficient time to
deliver the rights certificate evidencing your rights to the subscription agent
on or before the time your rights expire, you may exercise your rights by the
following guaranteed delivery procedures:
o deliver your subscription price payment in full for each share you
subscribed for under your subscription privileges in the manner set
forth in "Method of Payment" on page 54 to the subscription agent on
or prior to the expiration date;
o deliver the form entitled "Notice of Guaranteed Delivery,"
substantially in the form provided with the "Instructions as to Use of
Tengasco Rights Certificates" distributed with your rights
certificates at or prior to the expiration date; and
o deliver the properly completed rights certificate evidencing your
rights being exercised and the related nominee holder certification,
if applicable, with any required signatures
61
guaranteed, to the subscription agent within three business days
following the date of your Notice of Guaranteed Delivery.
Your Notice of Guaranteed Delivery must be delivered in substantially the
same form provided with the Instructions as to the Use of Tengasco Rights
Certificates, which will be distributed to you with your rights certificate.
Your Notice of Guaranteed Delivery must come from an eligible institution, or
other eligible guarantee institutions which are members of, or participants in,
a signature guarantee program acceptable to the subscription agent.
In your Notice of Guaranteed Delivery, you must state:
o your name;
o the number of rights represented by your rights certificates and the
number of shares of our common stock you are subscribing for under
your basic subscription privilege; and
o your guarantee that you will deliver to the subscription agent any
rights certificates evidencing the rights you are exercising within
three business days following the date the subscription agent receives
your Notice of Guaranteed Delivery.
You may deliver your Notice of Guaranteed Delivery to the subscription
agent in the same manner as your rights certificates at the address set forth
above under "--Delivery of Subscription Materials and Payment." Alternatively,
you may transmit your Notice of Guaranteed Delivery to the subscription agent by
facsimile transmission (Facsimile No.: (___) ____-_____). To confirm facsimile
deliveries, you may call (___) __________.
The subscription agent will send you additional copies of the form of
Notice of Guaranteed Delivery if you need them. Please call (__) __________ to
request any copies of the form of Notice of Guaranteed Delivery. Banks and
brokerage firms please call (800) _______ to request any copies of the form of
Notice of Guaranteed Delivery.
QUESTIONS ABOUT EXERCISING RIGHTS
If you have any questions or require assistance regarding the method of
exercising your rights or requests for additional copies of this prospectus, the
Instructions as to the Use of Tengasco Rights Certificates or the Notice of
Guaranteed Delivery, you should contact the subscription agent at the following
address and telephone number: Mellon Investor Services LLP, P.O. Box 3315, South
Hackensack, NJ 07606, (800) 370-1163.
SUBSCRIPTION AGENT
We have appointed Mellon Investor Services LLC to act as subscription agent
for the rights offering. We will pay all fees and expenses of the subscription
agent related to the rights offering and have also agreed to indemnify the
subscription agent from liabilities which it may incur in connection with the
rights offering.
NO REVOCATION
Once you have exercised your subscription privileges, you may not revoke
your exercise. Rights not exercised prior to the expiration date of the rights
offering will expire.
PROCEDURES FOR DTC PARTICIPANTS
We expect that your exercise of your basic subscription privilege may be
made through the facilities of the Depository Trust Company. If your rights are
held of record through DTC, you may exercise your basic subscription privilege
and your over-subscription privilege by instructing DTC to transfer your rights
from your account to the account of the subscription agent, together with
certification as to the aggregate number of rights you are exercising and the
number of shares of our common stock you are subscribing for under your basic
subscription
62
privilege and your over-subscription privilege, if any, and your subscription
price payment for each share you subscribed for pursuant to your basic
subscription privilege and your over-subscription privilege.
No change will be made to the cash subscription price by reason of changes
in the trading price of our common stock prior to the closing of the rights
offering.
FOREIGN AND OTHER SHAREHOLDERS
Rights certificates will be mailed to rights holders whose addresses are
outside the United States or who have an Army Post Office or Fleet Post Office
address. To exercise such rights, you must notify the subscription agent, and
take all other steps that are necessary to exercise your rights on or prior to
the expiration date of the rights offering. If the procedures set forth in the
preceding sentence are not followed prior to the expiration date your rights
will expire.
EXPIRATION DATE, EXTENSIONS AND TERMINATION
We may extend the rights offering and the period for exercising your
rights, in our sole discretion. The rights will expire at 12:00 midnight, New
York City time, on _________ 2003, unless we decide to extend the rights
offering. If the commencement of the rights offering is delayed, the expiration
date will be similarly extended. If you do not exercise your basic subscription
privilege prior to that time, your rights will be null and void. We will not be
required to issue shares of common stock to you if the subscription agent
receives your subscription certificate or your payment after that time,
regardless of when you sent the subscription certificate and payment, unless you
send the documents in compliance with the guaranteed delivery procedures
described above.
SHARES OF COMMON STOCK OUTSTANDING AFTER THE RIGHTS OFFERING
Approximately 36 million shares of our common stock will be issued and
outstanding after the rights offering, assuming exercise in full of all rights.
Approximately 12 million shares are issued and outstanding as of the date
hereof.
EFFECTS OF RIGHTS OFFERING ON OUR STOCK OPTION PLANS AND OTHER PLANS
As of June 30, 2003, there were outstanding options to purchase
approximately 717,000 shares of our common stock issued or committed to be
issued pursuant to stock options granted by the Company and its predecessors.
None of the outstanding options have antidilution or other provisions for
adjustment to exercise price or number of shares which will be automatically
triggered by the rights offering. Each outstanding and unexercised option will
remain unchanged and will be exercisable for the same number of shares of common
stock and at the same exercise price as before the rights offering.
EFFECTS OF RIGHTS OFFERING ON OUR PREFERRED STOCK
As of October 13, 2003, there were issued and outstanding an aggregate of
70,720 shares of our preferred stock as follows:
o 28,679 shares of our Series A Cumulative Convertible Preferred Stock,
with each share having a liquidation preference of $100 and
convertible into shares of our common stock at an initial conversion
rate of $7.00 of liquidation preference per one share of common stock.
As a result of adjustments made to date pursuant to the anti-dilution
provisions of such preferred stock, the current conversion rate is
$5.13 of liquidation preference per one share of common stock.
Assuming that the rights offering is exercised in full, as a result of
such anti-dilution provisions the conversion rate will be further
reduced to $__ of liquidation preference per one share of common
stock.
o 27,550 shares of our Series B Cumulative Convertible Preferred Stock,
with each share having a liquidation preference of $100 and
convertible into shares of our common stock at an
63
initial conversion rate of $9.00 of liquidation preference per one
share of common stock. As a result of adjustments made to date
pursuant to the anti-dilution provisions of such preferred stock, the
current conversion rate is $7.68 or $11.04 of liquidation preference
per one share of common stock, depending upon when such preferred
stock was issued. Assuming that the rights offering is exercised in
full, as a result of such anti-dilution provisions the conversion rate
will be further reduced to $__ or $__of liquidation preference per one
share of common stock, depending on when such preferred stock was
issued.
o 14,491 shares of our Series C Cumulative Convertible Preferred Stock,
with each share having a liquidation preference of $100 and
convertible into shares of our common stock at an initial conversion
rate of $5.00 of liquidation preference per one share of common stock.
As a result of adjustments made to date pursuant to the anti-dilution
provisions of such preferred stock, the current conversion rate is
$4.69 of liquidation preference per one share of common stock.
Assuming that the rights offering is exercised in full, as a result of
such anti-dilution provisions the conversion rate will be further
reduced to $__ of liquidation preference per one share of common
stock.
See "Description of Capital Stock."
EFFECTS OF RIGHTS OFFERING ON DOLPHIN'S SECURITIES AND OWNERSHIP
Dolphin, subject to the pricing of the rights offering, may agree to
exercise all of its rights. Set forth below, for illustrative purposes only,
scenarios which indicate the effect the rights offering and related share
issuance could have on Dolphin's relative voting and economic interest. As of
the date of this prospectus, by virtue of his position with Dolphin, Mr. Salas,
controls approximately 14.6% of the voting power of our outstanding common stock
and is deemed to beneficially own approximately 20.2% of our outstanding common
stock.
SCENARIO A -- All shares of common stock offered in the rights offering are
fully subscribed.
SCENARIO B -Dolphin is the only rights holder to acquire shares of common
stock pursuant to the rights offering.
Dolphin's Economic
Ownership Percentage
--------------------
Total Rights Dolphin's Dolphin's Maximum
Scenario Offered Rights Exercised Cash Raised Voting % Dilution Undiluted
-------- ------- ---------------- ----------- -------- -------- ---------
A
B
OTHER MATTERS
We are not making this rights offering in any state or other jurisdiction
in which it is unlawful to do so, nor are we selling or accepting any offers to
purchase any shares of our common stock from rights holders who are residents of
those states or other jurisdictions. We may delay the commencement of the rights
offering in those states or other jurisdictions, or change the terms of the
rights offering, in order to comply with the securities law requirements of
those states or other jurisdictions. We may decline to make modifications to the
terms of the rights offering requested by those states or other jurisdictions,
in which case, if you are a resident in those states or jurisdictions, you will
not be eligible to participate in the rights offering.
PROPOSED COMMITMENT AGREEMENT
We have not yet entered into any agreement with Dolphin, but we may do so
prior to the date of this prospectus, subject to the pricing of the rights
offering. Under the proposed commitment agreement, Dolphin would agree to
exercise all of its rights in the initial subscription and in the
over-subscription. Under the proposed commitment
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agreement, the subscription price would be equal to the subscription price
applicable to all shareholders under the rights offering.
Dolphin, which is deemed to beneficially own 2,441,019 shares, or
approximately 20.1%, of our outstanding common stock, including 2,139,720
directly-owned shares, representing approximately 14.6% of our outstanding
voting stock, would agree with us to exercise all of its rights, including
over-subscription rights. Mr. Salas, a director, is also the general partner and
controlling person of Dolphin. By virtue of his position at Dolphin, Mr. Salas
has the power to vote and dispose of all of Dolphin's shares of our stock.
REPRESENTATIONS AND WARRANTIES
Under the proposed commitment agreement, we would be
expected to make representations and warranties relating to:
o our organization, good standing, qualification and other corporate
matters;
o our power and authority to execute, deliver and perform our
obligations in connection with the rights offering;
o required consents and approvals, and absence of violations of laws;
o the due authorization of the issuance of the rights and the common
stock;
o that we are not an "investment company" or a "public utility holding
company;" and
o brokers.
Dolphin would be expected to make representations and
warranties relating to:
o its organization, good standing, qualification and other corporate
matters;
o its authority to execute, deliver and perform its obligations in
connection with the rights offering;
o required consents and approvals, and absence of violations of laws;
o brokers; and
o its understanding of the investment risks associated with the rights
and the common stock it would be purchasing pursuant to the proposed
commitment agreement.
CONDITIONS TO CLOSING.
Execution of the proposed commitment agreement would not, by itself,
obligate the parties to consummate the rights offering. Each party's obligation
to consummate the rights offering would be conditioned upon the following
closing conditions:
o no legal or judicial barriers to the rights offering;
o effectiveness of the registration statement, with no stop order issued
or threatened by the SEC;
o the accuracy of the representations and warranties of the other
parties; and
o receipt of required consents, approvals, authorizations, waivers and
amendments.
65
Dolphin's obligations to consummate the purchase of securities provided for
in the proposed commitment agreement would also be conditioned upon the
following closing conditions:
o completion of the rights offering in conformity with the requirements
provided in the registration statement;
o approval of the common stock issuable upon exercise of the rights for
listing on the American Stock Exchange;
TERMINATION OF THE PROPOSED COMMITMENT AGREEMENT
The proposed commitment agreement would be terminable at any time following
its execution but prior to the closing of the rights offering by:
o the mutual consent of us and Dolphin;
o either us or Dolphin if any governmental entity has issued a final and
nonappealable order enjoining the issuance of the rights and shares of
common stock or the consummation of the transaction;
o by Dolphin if:
- any of our representations and warranties fail to be true and
correct and such failure causes a material adverse effect; or
- we breach or fail to comply in any material respect with our
obligations under the agreement and do not cure such breach or
failure within 15 days after notice by Dolphin ; and
o by us if:
- any of the representations and warranties of Dolphin fail to be
true and correct and such failure causes a material adverse
effect; or
- Dolphin breaches or fails to comply in any material respect with
its obligations under the agreement and does not cure such breach
or failure within 15 days after notice by us.
The foregoing brief description of the proposed commitment agreement is
qualified in its entirety by the text of the proposed commitment agreement,
which would be filed as an exhibit to the registration statement that includes
this prospectus. Until it is executed by all parties, there can be no assurance
that the terms of the proposed commitment agreement would not materially change
from those described above. See "Where You Can Find More Information" on page 73
of this prospectus.
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DESCRIPTION OF CAPITAL STOCK
As of October 13, 2003, our authorized capital stock consisted of
50,000,000 shares of common stock, par value $0.001 per share, and 25,000,000
shares of preferred stock, par value $0.001 per share. As of that date, we had
12,049,977 shares of common stock outstanding and an aggregate of 70,720 shares
of preferred stock outstanding. The following is a summary of the material terms
of our capital stock. This summary does not purport to be complete or to contain
all the information that may be important to you, and is qualified in our
entirety by reference to our articles of incorporation, as amended, and bylaws,
as amended. We encourage you to read the provisions of these documents to the
extent they relate to your individual investment strategy.
PREFERRED STOCK
Our articles of incorporation authorize us to issue preferred stock in one
or more series having designations, rights, and preferences determined from time
to time by our Board of Directors. Accordingly, subject to applicable stock
exchange rules and the terms of existing preferred stock, our Board of Directors
is empowered, without the approval of the holders of common stock, to issue
shares of preferred stock with dividend, liquidation, conversion, voting, or
other rights that could adversely affect the voting power or other rights of the
holders of common stock. In some cases, the issuance of preferred stock could
delay a change of control of us or make it harder to remove incumbent
management. Preferred stock could also restrict dividend payments to holders of
our common stock. To date, we have issued shares of preferred stock as described
below.
Series A 8% Cumulative Convertible Preferred Stock. We have outstanding
28,679 shares of our Series A Preferred Stock, with each share having a
liquidation preference of $100. The Series A Preferred Stock has no voting
rights prior to the conversion of such shares into shares of our common stock.
Each $100 liquidation preference of Series A Preferred Stock is convertible at
the election of the holder into shares of our common stock at an initial rate of
$7.00 of liquidation preference of the Series A Preferred Stock per one share of
our common stock. The conversion price will be adjusted downwards in the event
of the issuance of any new shares of our common stock, or options or securities
exercisable, convertible or exchangeable into new shares of our common stock, at
a price per share of common stock less than $7.00, subject to further
adjustment. As a result of adjustments already made to date to the initial
conversion rate, the current conversion rate is $5.13 of liquidation preference
of the Series A Preferred Stock per one share of our common stock. Assuming that
the rights offering is exercised in full, as a result thereof the conversion
rate of the Series A Preferred Stock will be further reduced to $___ of
liquidation preference per one share of our common stock.
The holders of the Series A Preferred Stock are entitled to a cumulative
dividend at a rate of 8% of the liquidation preference per share per annum,
payable quarterly on each March 31, June 30, September 30 and December 31, but
only when, as and if declared by the Board of Directors out of funds legally
available therefor. All accrued but unpaid dividends accrue interest after the
respective payment date at a rate of 8% per annum. In the event that we fail to
make any two of six consecutive quarterly dividend payments on the Series A
Preferred Stock, the holders of the Series A Preferred Stock have the right to
appoint directors that will constitute a majority of our board of directors.
That appointed majority of our board of directors would remain until all accrued
and unpaid dividends on the Series A Preferred Stock have been paid. During
2002, we failed to pay the third and fourth quarterly dividend payments on the
Series A Preferred Stock. In February 2003, the holders of the Series A
Preferred Stock designated four members of the board of directors, who were
elected to vacancies on the board and who currently serve.
We may redeem all, but not less than all, of the outstanding shares of
Series A Preferred Stock upon the payment of the per share liquidation
preference, plus accrued and unpaid dividends, subject to certain circumstances,
including that our common stock has a closing sale price greater than 150% of
the then conversion rate for the Series A Preferred Stock for sixty consecutive
trading days prior to the date of redemption. In addition, we are required to
redeem one-twentieth of the maximum number of shares of Series A Preferred Stock
outstanding commencing on October 1, 2003 and each quarterly date thereafter
that such shares are outstanding.
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If we adopt a plan of liquidation or of dissolution, or commence a
voluntary case under the federal bankruptcy laws or similar laws or upon the
occurrence of specified similar events, then the holders of Series A Preferred
Stock shall have a liquidation preference over all other outstanding shares of
our preferred stock.
Series B 8% Cumulative Convertible Preferred Stock. We have outstanding
27,550 shares of our Series B Preferred Stock, with each share having a
liquidation preference of $100. The Series B Preferred Stock has no voting
rights prior to the conversion of such shares into shares of our common stock.
Each $100 liquidation preference of Series B Preferred Stock is convertible at
the election of the holder into shares of our common stock at an initial rate of
$9.00 of liquidation preference of the Series B Preferred Stock per one share of
our common stock. In addition, such conversion may be required by us as to all,
but not less than all, of the outstanding Series B Preferred Stock in the event
that our common stock has a closing sale price greater than 150% of the then
conversion rate for the Series B Preferred Stock for twenty consecutive trading
days prior to such forced conversion. The conversion price will be adjusted
downwards in the event of the issuance of any new shares of common stock, or
options or securities exercisable, convertible or exchangeable into new shares
of our common stock, at a price per share of common stock less than $9.00,
subject to further adjustment. As a result of adjustments already made to date
to the initial conversion price, the current conversion rate is either $7.68 or
$11.04 per one share of our common stock, depending upon when the Series B
Preferred Stock was issued. Assuming that the rights offering is exercised in
full, as a result thereof the conversion rate of the Series B Preferred Stock
will be further reduced to either $___ or $___ of liquidation preference per one
share of our common stock, depending on when the Series B Preferred Stock was
issued.
The holders of the Series B Preferred Stock are entitled to a cumulative
dividend at a rate of 8% of the liquidation preference per share per annum,
payable quarterly on each March 31, June 30, September 30 and December 31, but
only when, as and if declared by the Board of Directors out of funds legally
available therefor. All accrued but unpaid dividends accrue interest after the
respective payment date at a rate of 8% per annum.
We may redeem all, but not less than all, of the outstanding shares of
Series B Preferred Stock upon the payment of the per share liquidation
preference, plus accrued and unpaid dividends, subject to certain circumstances,
including that our common stock has a closing sale price greater than 150% of
the then conversion rate for the Series B Preferred Stock for sixty consecutive
trading days prior to the date of redemption. In addition, we are required to
redeem all of the outstanding Series B Preferred Stock at a price per share
equal to the liquidation preference, plus any and all accrued and unpaid
dividends, on the fifth anniversary of the first issuance of the Series B
Preferred Stock, which anniversary will be in March 2005.
If we adopt a plan of liquidation or of dissolution, or commence a
voluntary case under the federal bankruptcy laws or similar laws or upon the
occurrence of specified similar events, then the holders of Series B Preferred
Stock shall have a liquidation preference equal to the liquidation preference of
all other outstanding shares of our preferred stock, other than the Series A
Preferred Stock, which is senior to the Series B Preferred Stock in this
respect.
Series C 6% Cumulative Convertible Preferred Stock. We have outstanding
14,491 shares of our Series C Preferred Stock, with each share having a
liquidation preference of $100. The Series C Preferred Stock has no voting
rights prior to the conversion of such shares into shares of our common stock.
Each $100 liquidation preference of Series C Preferred Stock is convertible at
the election of the holder into shares of our common stock at an initial rate of
$5.00 of liquidation preference of the Series C Preferred Stock per one share of
our common stock. In addition, such conversion may be required by us as to all,
but not less than all, of the outstanding Series C Preferred Stock in the event
that our common stock has a closing sale price greater than 150% of the then
conversion rate for the Series C Preferred Stock for twenty consecutive trading
days prior to such forced conversion. The conversion price will be adjusted
downwards in the event of the issuance of any new shares of common stock, or
options or securities exercisable, convertible or exchangeable into new shares
of our common stock, at a price per share of common stock less than $5.00,
subject to further adjustment. As a result of adjustments already made to date
to the initial conversion price, the current conversion rate is $4.69 per one
share of our common stock. Assuming that the rights offering is exercised in
full, as a result thereof the conversion rate of the Series C Preferred Stock
will be further reduced to $___ of liquidation preference per one share of our
common stock.
The holders of the Series C Preferred Stock are entitled to a cumulative
dividend at a rate of 6% of the liquidation preference per share per annum,
payable quarterly on each March 31, June 30, September 30 and
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December 31, but only when, as and if declared by the Board of Directors out of
funds legally available therefor. All accrued but unpaid dividends accrue
interest after the respective payment date at a rate of 6% per annum.
We may redeem all, but not less than all, of the outstanding shares of
Series C Preferred Stock upon the payment of the per share liquidation
preference, plus accrued and unpaid dividends, subject to certain circumstances,
including that our common stock has a closing sale price greater than 150% of
the then conversion rate for the Series C Preferred Stock for sixty consecutive
trading days prior to the date of redemption. In addition, we are required to
redeem all of the outstanding Series C Preferred Stock at a price per share
equal to the liquidation preference, plus any and all accrued and unpaid
dividends, on the fifth anniversary of the first issuance of the Series C
Preferred Stock, which anniversary will be in July 2006.
If we adopt a plan of liquidation or of dissolution, or commence a
voluntary case under the federal bankruptcy laws or similar laws or upon the
occurrence of specified similar events, then the holders of Series B Preferred
Stock shall have a liquidation preference equal to the liquidation preference of
all other outstanding shares of our preferred stock, other than the Series A
Preferred Stock, which is senior to the Series C Preferred Stock in this
respect.
COMMON STOCK
Voting Rights. Each share of our common stock is entitled to one vote in
the election of Directors and other matters. A majority of shares of our voting
stock constitute a quorum at any meeting of stockholders. Common stockholders
are not entitled to cumulative voting rights.
Dividends. Subject to the preferential rights of any outstanding shares of
preferred stock and the restrictive terms of our credit agreement, which
prohibit the payment of dividends, dividends may be paid to holders of common
stock as may be declared by our Board of Directors out of funds legally
available for that purpose. We do not intend to pay dividends at the present
time or in the foreseeable future.
Liquidation. If we liquidate, dissolve or wind-up our business, either
voluntarily or not, common stockholders will receive pro rata all assets
remaining after we pay our creditors and the holders of our preferred stock as
described above.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income tax
consequences of the rights offering to holders of common stock that hold such
stock as a capital asset for federal income tax purposes. This discussion is
based on laws, regulations, rulings and decisions in effect on the date hereof,
all of which are subject to change (possibly with retroactive effect) and to
differing interpretations. This discussion applies only to holders that are U.S.
persons, which is defined as a citizen or resident of the United States, a
domestic partnership, a domestic corporation, any estate the income of which is
subject to U.S. federal income taxation regardless of its source, and any trust
so long as a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust.
This discussion does not address all aspects of federal income taxation
that may be relevant to holders in light of their particular circumstances or to
holders who may be subject to special tax treatment under the Internal Revenue
Code of 1986, as amended, including holders who are dealers in securities or
foreign currency, foreign persons (defined as all persons other than U.S.
persons), insurance companies, tax-exempt organizations, banks, financial
institutions, broker-dealers, holders who hold common stock as part of a hedge,
straddle, conversion or other risk reduction transaction, or holders that
acquired common stock pursuant to the exercise of compensatory stock options or
warrants or otherwise as compensation.
We have not sought, and will not seek, an opinion of counsel or a ruling
from the Internal Revenue Service regarding the federal income tax consequences
of the rights offering or the related share issuance. The following summary does
not address the tax consequences of the rights offering or the related share
issuance under foreign, state, or local tax laws. ACCORDINGLY, EACH HOLDER OF
COMMON STOCK SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX
CONSEQUENCES OF THE RIGHTS OFFERING OR THE RELATED SHARE ISSUANCE TO SUCH
HOLDER.
The federal income tax consequences for a holder of common stock on a
receipt of subscription rights under the rights offering are as follows:
A holder will not recognize taxable income for federal income tax purposes
in connection with the receipt of subscription rights in the rights offering.
Except as provided in the following sentence, the tax basis of the
subscription rights received by a holder in the rights offering will be zero. If
either (i) the fair market value of the subscription rights on the date such
subscription rights are distributed is equal to at least 15% of the fair market
value on such date of the common stock with respect to which the subscription
rights are received or (ii) the holder elects, by attaching a statement to its
federal income tax return for the taxable year in which the subscription rights
are received, to allocate part of the tax basis of such common stock to the
subscription rights, then upon exercise or transfer of the subscription rights,
the holder's tax basis in the common stock will be allocated between the common
stock and the subscription rights in proportion to their respective fair market
values on the date the subscription rights are distributed. A holder's holding
period for the subscription rights received in the rights offering will include
the holder's holding period for the common stock with respect to which the
subscription rights were received. We do not expect that the value of the rights
will exceed 15% of the fair market value of the common stock with respect to
which the subscription rights are received.
A holder that allows the subscription rights received in the rights
offering to expire will not recognize any gain or loss, and the tax basis of the
common stock owned by such holder with respect to which such subscription rights
were distributed will be equal to the tax basis of such common stock immediately
before the receipt of the subscription rights in the rights offering.
A holder will not recognize any gain or loss upon the exercise of the
subscription rights received in the rights offering.
The tax basis of the common stock acquired through exercise of the
subscription rights will equal the sum of the subscription price for the common
stock and the holder's tax basis, if any, in the rights as described above.
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The holding period for the common stock acquired through exercise of the
subscription rights will begin on the date the subscription rights are
exercised.
PLAN OF DISTRIBUTION
On or about _________, 2003, we will distribute the subscription rights,
subscription certificates, and copies of this prospectus to persons that owned
shares of common stock on _______, 2003. If you wish to exercise your
subscription rights and purchase shares of common stock, you should complete the
subscription certificate and return it with payment for the shares, to the
subscription agent, Mellon Investor Services LLC, at the address on page 55. If
you have any questions, you should contact _______________, [title], at the
telephone number and address on page 57.
We have agreed to pay the subscription agent a fee plus certain expenses,
which we estimate will total approximately $______. We estimate that our total
expenses in connection with the rights offering will be approximately $______.
TENNESSEE ANTI-TAKEOVER LAW
The Tennessee Control Share Acquisition Act which strips a purchaser's
shares of voting rights any time an acquisition of shares in a Tennessee
corporation brings the purchaser's voting power to one-fifth, one-third or a
majority of all voting power. The purchaser's voting rights can be reinstated
only after a majority vote of the other stockholders. The purchaser may demand a
special meeting of stockholders to conduct such a vote. A corporation may or may
not redeem the purchaser's shares if the purchaser's shares are not granted
voting rights. The Tennessee Control Share Acquisition Act applies only to a
Tennessee corporation that has adopted a provision in its charter or bylaws
expressly declaring that the Tennessee Control Share Acquisition Act applies to
it. The Tennessee Control Share Acquisition Act currently does not apply to the
Company .
The Tennessee Greenmail Act applies to any corporation chartered under the
laws of Tennessee which has a class of voting stock registered or traded on a
national securities exchange or registered with the U.S. Securities Exchange
Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934. The
Tennessee Greenmail Act provides that it is unlawful for any corporation to
purchase, either directly or indirectly, any of its shares at a price above
their market value, from any person who holds more than three percent of the
class of the securities purchased if such person has held shares or less than
two years, unless either the purchase is first approved by the affirmative vote
of a majority of the outstanding shares of each class of voting stock issued by
the corporation or the corporation makes an offer of at least equal value per
share to all stockholders of the class.
The Tennessee Investor Protection Act applies to tender offers directed at
corporations that have substantial assets in Tennessee and that are either
incorporated in or have a principal office in Tennessee. The Act requires an
offeror making a tender offer for such a corporation to file a registration
statement with the Commissioner of Commerce and Insurance. If the offeror
intends to gain control of the corporation, the registration statement must
indicate any plans the offeror has for the corporation. The Commissioner may
require additional information material to the takeover offer and may call for
hearings. The Act does not apply to an offeror if the target corporation's board
of directors recommends the offer to its stockholders. The Tennessee Investor
Protection Act also requires the offeror and the corporation to deliver to the
Commissioner all solicitation materials used in connection with the tender
offer. This act also prohibits fraudulent, deceptive or manipulative acts or
practices by the offeror or the target corporation. The Tennessee Business
Combination Act requires a five-year moratorium on transactions between certain
Tennessee corporations and an "interested stockholder" (generally, a 10% or
greater stockholder) unless the transaction or the stockholder's becoming an
"interested stockholder" is approved by the directors before the stockholder
attains the status of "interested stockholder." A corporation that would
otherwise be covered by this Act may exempt itself from the Act by adopting a
charter provision specifically stating the corporation's option to be exempt.
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LIMITATION OF LIABILITY OF DIRECTORS
All directors are indemnified by us, both by operation of Tennessee Code
Annotated Sections 48-18-501 through 509 and since 1995 by resolution of our
board of directors, against liability and expenses including attorney's fees
incurred by them as a result of serving on our board of directors. The statutory
provisions require a finding that the conduct of the director was in good faith
and in the best interest of the company and does not extend to cases where a
director is found to be liable to the company itself. Such a finding may be made
by uninvolved directors, a committee of the board or independent counsel.
Tennessee Code Annotated Section 48-15-503 provides for the indemnification
of directors and of corporate officers where the director or officer is
successful in defense of any proceeding he or she became involved in as a result
of being or having been in such position, unless the corporate charter forbids
such indemnification. Our corporate chart contains no such bar or prohibition of
indemnification of our directors or officers.
Tennessee statutes further provide that the rights to indemnification of a
director do not preclude other bases of indemnification, whether such rights
arise by charter, bylaws, shareholder resolution, agreement or board resolution,
provided there is no breach of duty of loyalty to the company, bad faith,
intentional misconduct or knowing violation of law. Accordingly, our board of
directors on August 17, 1995, unanimously resolved to indemnify directors and
executive officers on a mandatory basis to the fullest extent of the laws
referenced above for the entire period a party is subject to any possible legal
action or claim by reason of having so served.
Tennessee law permits, but does not require, insurance to be obtained to
fund indemnity obligations. We do not have any such insurance.
Holders of common stock have no preemptive, subscription, redemption, or
conversion rights.
The transfer agent and registrar for the common stock is Mellon Investor
Services LLC.
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LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of common stock offered by this Prospectus will be passed upon for us by
Cary V. Sorensen, Esq.
EXPERTS
Our consolidated financial statements as of December 31, 2002 and 2001 and
for each of the three years in the period ended December 31, 2002 included in
this Prospectus and in the Registration Statement on Form S-1 have been so
included in reliance upon the reports of BDO Seidman LLP, independent certified
public accountants to the extent and for the periods set forth in their reports
(which contain an explanatory paragraph regarding the Company's ability to
continue as a going concern), given upon the authority of said firm as experts
in accounting and auditing.
Reserve analyses and information as of December 31, 2002, included in this
Prospectus and the Registration Statement on Form S-1 have been so included in
reliance on the reserve reports dated February 10, 2003 and March 28, 2003,
respectively, prepared by Ryder Scott Company, L.P. of Houston, Texas.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934. Accordingly, we file reports, proxy statements and other
information with the SEC. You may read and copy any materials that we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549 upon payment of the prescribed fees. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,
proxy information statements and other materials that are filed through the
SEC's Electronic Data Gathering, Analysis, and Retrieval, or EDGAR, system. You
can access this web site at http://www.sec.gov.
We have filed a registration statement on Form S-1 with the SEC with
respect to this rights offering. This prospectus is a part of the registration
statement, but does not contain all of the information included in the
registration statement. You may wish to inspect the registration statement and
the exhibit to that registration statement for further information with respect
to us and the securities offered in this prospectus. Copies of the registration
statement and the exhibit to such registration statement are on file at the
offices of the SEC and may be obtained upon payment of the prescribed fee or may
be examined without charge at the public reference facilities of the SEC
described above. Statements contained in this prospectus concerning the
provisions of documents are necessarily summaries of the material provisions of
such documents, and each statement is qualified in our entirety by reference to
the copy of the applicable document filed with the SEC.
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INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report................................. F-2
Consolidated Financial Statements
Consolidated Balance Sheets.............................. F-3 and F-4
Consolidated Statements of Loss.......................... F-5
Consolidated Statements of Stockholders' Equity.......... F-6 and F-7
Consolidated Statements of Cash Flows.................... F-8 through F-10
Notes to Consolidated Financial Statements............... F-11 through F-33
F-1
Independent Auditors' Report
Board of Directors
Tengasco, Inc. and Subsidiaries
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheets of Tengasco, Inc.
and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of loss, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tengasco, Inc. and
Subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit of $27,776,726. Additionally, during 2002, the
Company's primary lender has classified the remaining amount of $7,501,777 as
immediately due and payable, resulting in a significant working capital
deficiency. Such matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Atlanta, Georgia
February 27, 2003
F-2
CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001 June 30, 2003
------------------------------------------------------------------------------------------------------------------
(unaudited)
Assets (Note 1)
Current
Cash and cash equivalents $ 184,130 $ 393,451 $ 383,058
Investments 34,500 150,000 34,500
Accounts receivable 730,667 661,475 758,040
Participant receivables 70,605 84,097 60,696
Inventory 262,748 159,364 262,748
Current portion of loan fees, net 323,856 - 261,591
------------------------------------------------------------------------------------------------------------------
Total current assets 1,606,506 1,448,387 1,760,633
Oil and gas properties, net (on the basis
Of full cost accounting) (Note 4) 13,864,321 13,269,930 13,422,702
Completed pipeline facilities, net
(Note 5) 15,372,843 15,039,762 15,439,812
Other property and equipment, net (Note 6) 1,685,950 1,680,104 1,549,102
Restricted cash 0 120,872 0
Loan fees, net of accumulated amortization
of $13,384 and $21,590, respectively 40,158 496,577 0
Other assets 14,613 72,613 6,033
------------------------------------------------------------------------------------------------------------------
$32,584,391 $32,128,245 $32,178,382
==================================================================================================================
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001 June 30, 2003
------------------------------------------------------------------------------------------------------------------
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt
(Note 1) $ 7,861,245 $ 6,399,831 $ 7,391,029
Accounts payable - trade 1,396,761 1,208,164 788,723
Accrued interest payable 61,141 54,138 112,671
Accrued dividends payable (Note 9) 254,389 112,458 352,469
Current maturities of long term debt to related
parties - - 2,084,000
Other accrued liabilities 31,805 - 226,098
------------------------------------------------------------------------------------------------------------------
Total current liabilities 9,605,341 7,774,591 10,954,990
Long term debt to related parties (Note 7) 750,000 - -
Asset retirement obligations (Note 16) - - 648,079
Long term debt, less current maturities (Note 7) 1,256,209 3,902,757 614,181
------------------------------------------------------------------------------------------------------------------
Total liabilities 11,611,550 11,677,348 12,217,250
------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 1 and 8)
Mandatorily redeemable preferred stock, $.001 par value;
authorized 25,000,000 shares (Note 9):
Series A 8% cumulative, convertible,
mandatorily redeemable; 28,679 and shares
outstanding; redemption value $2,867,900 2,867,900 2,867,900 2,976,376
Series B 8% cumulative, convertible,
mandatorily redeemable; 27,550 shares
outstanding; redemption value $2,755,000,
net of related commissions 2,591,150 2,591,150 2,591,150
Series C 6% cumulative, convertible,
mandatorily redeemable; 14,491 shares
outstanding; redemption value $1,449,100,
net of related commissions 1,303,168 - 1,303,168
------------------------------------------------------------------------------------------------------------------
Total mandatorily redeemable preferred stock 6,762,218 5,459,050 6,870,694
------------------------------------------------------------------------------------------------------------------
Stockholders' equity (Notes 10 and 11)
Common stock, $.001 par value; authorized
50,000,000 shares; 11,459,279, 10,560,605
And 12,018,477 shares issued, respectively 11,460 10,561 12,019
Additional paid-in capital 42,237,276 39,242,555 42,831,339
Accumulated deficit (27,776,726) (24,115,382) (29,491,533)
Accumulated other comprehensive loss (115,500) - (115,500)
Treasury Stock, at cost, 14,500 shares (145,887) (145,887) (145,887)
------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,210,623 14,991,847 13,090,438
------------------------------------------------------------------------------------------------------------------
$ 32,584,391 $ 32,128,245 $32,178,382
==================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF LOSS
Six Months Ended June 30,
Year Ended December 31, 2002 2001 2000 2003 2002
-------------------------------------------------------------------------------------------------------------------
(unaudited)
Revenues and other income
Oil and gas revenues $5,437,723 $6,656,758 $5,241,076 $3,360,763 2,408,917
Pipeline transportation
revenues 259,677 296,331 - 92,723 141,245
Interest Income 3,078 43,597 45,905 507 1,695
-------------------------------------------------------------------------------------------------------------------
Total revenues and other
income 5,700,478 6,996,686 5,286,981 3,453,993 2,551,857
-------------------------------------------------------------------------------------------------------------------
Costs and expenses
Production costs and
taxes 3,094,731 2,951,746 2,614,414 1,627,879 1,269,304
Depreciation, depletion
and amortization
(Notes 4, 5 and 6) 2,413,597 1,849,963 371,249 1,259,138 974,696
General and
administrative costs 1,868,141 2,957,871 2,602,311 810,495 1,126,109
Interest expense 578,039 850,965 415,376 294,098 301,664
Public relations 193,229 293,448 106,195 28,177 160,289
Professional fees 707,296 355,480 719,320 420,944 445,860
-------------------------------------------------------------------------------------------------------------------
Total costs and expenses 8,855,033 9,259,473 6,828,865 4,440,731 4,277,922
-------------------------------------------------------------------------------------------------------------------
Net loss before cumulative
effect of a change in
accounting principle (3,154,555) (2,262,787) (1,541,884) (986,738) (1,726,065)
Cumulative effect of a
change in accounting
principle (Note 16) - - - (351,204) -
-------------------------------------------------------------------------------------------------------------------
Net loss (3,154,555) (2,262,787) (1,541,884) (1,337,942) (1,726,065)
Dividends on preferred
Stock (506,789) (391,183) (257,557) (268,389) (238,400)
-------------------------------------------------------------------------------------------------------------------
Net loss attributable to
common stockholders $(3,661,344) $ (2,653,970) $(1,799,441) (1,606,331) (1,964,465)
===================================================================================================================
Earnings per share data:
Net loss before cumulative
effect of a change in
accounting principle $ (0.29) $ (0.22) $ (0.17) $ (0.09) $ (0.16)
Cumulative effect of change
in accounting principle - - - $ (0.03) -
Net loss $ (0.29) $ (0.22) $ (0.17) $ (0.12) $ (0.16)
Dividends on preferred stock $ (0.04) $ (0.04) $ (0.02) $ (0.02) $ (0.02)
Net loss attributable to
common stockholder $ (0.33) $ (0.26) $ (0.19) $ (0.14) $ (0.18)
Weighted average shares
Outstanding 11,062,436 10,235,253 9,253,622 11,854,950 10,714,087
===================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
-------------------------------- Paid-In
Share Amount Capital
----- ------ -------
Balance, January 1, 2000 8,532,882 $ 8,533 $20,732,759
Net loss - - -
Common stock issued on conversion of debt 73,669 74 449,920
Common stock issued for exercised options 20,715 21 179,992
Common stock issued on conversion of preferred stock 8,818 9 49,991
Stock option awards for professional services - - 242,000
Common stock issued in private placements, net of related expense 654,098 654 4,245,054
Stock issued for services 5,376 5 41,993
Dividends on convertible redeemable preferred stock - - -
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 9,295,558 9,296 25,941,709
Net loss - - -
Common stock issued with 5% stock dividend (Note 10) 498,016 498 6,374,111
Common stock issued on conversion of debt 93,069 93 523,157
Common stock issued for exercised options 274,932 275 2,340,725
Common stock issued on conversion of preferred stock 12,347 13 70,988
Common stock issued for services 10,000 10 69,990
Common stock issued in private placements, net of
related expense 374,733 374 3,899,624
Common stock issued as a charitable donation 1,950 2 22,251
Treasury stock purchased - - -
Dividends on convertible redeemable preferred stock - - -
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 10,560,605 10,561 39,242,555
Net loss - - -
Comprehensive loss
Net loss - - -
Other comprehensive loss - - -
Comprehensive loss - - -
Common stock issued in private placements, net of
related expenses 850,000 850 2,676,150
Common stock issued on conversion of debt 20,592 20 119,980
Common stock issued in purchase of equipment 19,582 20 149,980
Common stock issued for services 8,500 9 48,611
Dividends on convertible redeemable preferred stock - - -
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 11,459,279 $11,460 $42,237,276
Net loss (unaudited) - - -
Common stock issued in private placement net of
related expenses (unaudited) 227,275 227 249,773
Common stock issued for exercised options (unaudited) 58,000 58 28,942
Common stock issued in conversion of debt (unaudited) 60,528 61 69,538
Common stock issued for preferred dividend in arrears 154,824 154 170,155
(unaudited)
Common stock issued for charity (unaudited) 3,571 4 5,710
Accretion of issue cost on preferred stock (unaudited) - - -
Common stock issued for services (unaudited) 55,000 55 69,945
Dividends on convertible redeemable preferred stock (unaudited) - - -
--------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 (unaudited)
12,018,477 12,019 42,831,339
==========================================================================================================================
F-6
Accumulated
Other
Comprehensive Accumulated Comprehensive Treasury Stock
Income (Loss) Deficit Loss Shares Amount Total
------------- ------- ---- ------ ------ -----
$ - $(13,287,362) - $ $ 7,453,930
-
- (1,541,884) - - (1,541,884)
- - - - 449,994
- - - - 180,013
- - - - 50,000
- - - - 242,000
- - - - 4,245,708
- - - - 41,998
- (257,557) - - (257,557)
-----------------------------------------------------------------------------------------------------------------------
- (15,086,803) - - 10,864,202
(2,262,787) - - (2,262,787)
- (6,374,609) - - -
- - - - 523,250
- - - - 2,341,000
- - - - 71,001
- - - 70,000
- - - - 3,899,998
- - - - 22,253
- - 14,500 (145,887) (145,887)
- (391,183) - - (391,183)
-----------------------------------------------------------------------------------------------------------------------
- (24,115,382) 14,500 (145,887) 14,991,847
- (3,154,555) - - (3,154,555)
- - (3,154,555) - - -
(115,500) - (115,500) - - (115,500)
------------------
- - (3,270,055) - - -
- - - 2,677,000
- - - 120,000
- - - 150,000
- - - 48,620
- (506,789) - - (506,789)
-----------------------------------------------------------------------------------------------------------------------
(115,500) $(27,776,726) 14,500 $(145,887) $14,210,623
- (1,337,942) - - (1,337,942)
- - - - 250,000
- - - - 29,000
- - - - 69,599
- - - - 170,309
- - - - 5,714
- (108,476) - - (108,476)
- - - - 70,000
- (268,389) - - (268,389)
-----------------------------------------------------------------------------------------------------------------------
$(115,500) $(29,491,533) 14,500 $(145,887) $13,090,438
=======================================================================================================================
See accompanying notes to consolidated financial statements.
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
Years ended December 31, 2002 2001 2000 2003 2002
--------------------------------------------------------------------------------------------------------------------
(unaudited)
Operating activities:
Net loss $(3,154,555) $(2,262,787) $(1,541,884) $(1,337,942) $ (1,726,065)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Cumulative effect of
change in accounting
principle - - - 351,204 -
Depreciation, depletion
and amortization 2,413,597 1,849,963 371,249 1,259,138 974,696
Charitable donation and
services paid in stock or
stock options - - - 104,714 48,621
Compensation and
services paid in stock
options, stock warrants
and common stock 48,620 92,253 284,000 - -
Gain on sale of equipment - (132,943) - - -
Changes in assets and
liabilities:
Accounts receivable (69,192) 3,814 (301,421) (27,373) (24,054)
Participant receivables 13,492 - - 9,909 (33,990)
Inventory (103,384) 91,981 8,408 - -
Other assets 58,000 - - - -
Accounts payable -
Trade 188,597 191,702 364,553 (608,038) (26,245)
Accrued interest
Payable 7,003 (2,519) 135,435 51,530 -
Other accrued liabilities 31,805 (52,640) (140,955) 194,294 (5,825)
Accrued dividends
Payable - - - - 13,535
Other - - - 8,580 -
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (566,017) (221,176) (820,615) 6,016 (779,327)
--------------------------------------------------------------------------------------------------------------------
Investing activities:
Additions to other property
and equipment (214,897) (285,722) (1,276,783) - (118,356)
Net additions to oil and gas
Properties (1,982,529) (4,821,883) (1,456,996) (13,474) (1,020,026)
Additions to pipeline (841,750) (4,213,095) (6,834,196) (334,969) (349,918)
facilities
Decrease (increase) in
restricted cash 120,872 (120,872) 625,000 - 45,855
Other 28,367 32,888 6,112 - (22,108)
--------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities (2,889,937) (9,408,684) (8,936,863) (348,443) (1,464,553)
--------------------------------------------------------------------------------------------------------------------
F-8
Six Months Ended June 30,
Years ended December 31, 2002 2001 2000 2003 2002
-----------------------------------------------------------------------------------------------------------------------
(unaudited)
Financing activities:
Proceeds from exercise of
Options - $ 2,341,000 $ 180,013 - -
Proceeds from borrowings $ 2,063,139 10,442,068 6,493,563 1,334,000 1,018,356
Repayments of borrowings (2,378,273) (8,833,325) (1,720,856) (1,042,645) (1,268,608)
Net proceeds from issuance of
common stock 2,677,000 3,900,000 4,245,700 250,000 1,111,998
Proceeds from private
placements of convertible
redeemable preferred stock, net 1,303,168 1,591,150 2,000,000 - 1,328,168
Dividends on convertible
redeemable preferred stock (364,858) (357,503) (257,557) - (238,400)
Purchase of treasury stock - (145,887) - - -
Payment of loan fees (53,543) (518,167) - - -
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 3,246,633 8,419,336 10,940,863 541,355 1,951,514
-----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash
equivalents (209,321) (1,210,524) 1,183,385 198,928 (292,366)
Cash and cash equivalents,
beginning of year 393,451 1,603,975 420,590 184,130 393,451
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 184,130 $ 393,451 $ 1,603,975 $383,058 $101,085
=======================================================================================================================
Supplemental disclosure of non-
cash investing and financing
activities:
During 2001, the Company
issued a 5% stock
dividend of 498,016 $ $ $ $
shares - $ 6,374,609 - - -
During 2001 and 2000, the
Company converted
preferred stock to $ $ $ $
common stock - $ 71,000 50,000 - -
During 2002, 2001 and
2000, respectively,
the Company issued
common stock on
conversion of debt $ 120,000 $ 523,250 $ 450,000 $ 69,599 $ 120,000
During 2002, 2001 and 2000, respectively, the Company issued common stock
and stock options for services received and
charitable contributions
made $ 48,621 $ 92,253 $ 284,000 $104,714 $ 48,621
During 2001, the Company
sold equipment
for equity investments $ $ $ $
- $ 150,000 - - -
During 2002, the Company
purchased equipment $ $ $
by issuing common stock $ 150,000 - - - $ 150,000
F-9
Six Months Ended June 30,
Years ended December 31, 2002 2001 2000 2003 2002
-----------------------------------------------------------------------------------------------------------------------
(unaudited)
During 2003, the Company
issued stock for preferred $ $ $ $
dividends in arrears - - - $170,309 -
During 2003, the Company
incurred accretion of issue $ $ $ $
cost on preferred stock - - - $(108,476) -
During 2003, the Company
declared dividends on $ $ $ $
preferred stock - - - $268,389 -
---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
1. GOING CONCERN The accompanying consolidated financial
UNCERTAINTY statements have been prepared in
conformity with accounting principles
generally accepted in the United States
of America, which contemplate
continuation of the Company as a going
concern and assume realization of
assets and the satisfaction of
liabilities in the normal course of
business. The Company continues to be
in the early stages of its oil and gas
related operating history as it
endeavors to expand its operations
through the continuation of its
drilling program in the Tennessee Swan
Creek Field. Accordingly, the Company
has incurred continuous losses through
these operating stages and had an
accumulated deficit of $27,776,726 and
a working capital deficit of
$7,998,835, as of December 31, 2002,
and an accumulated deficit of
$29,491,533 and a working capital
deficit of $9,194,357, as of June 30,
2003. During 2002, the Company was
informed by its primary lender that the
entire amount of its outstanding credit
facility was immediately due and
payable, as provided for in the Credit
Agreement (see Note 7). These
circumstances raise substantial doubt
about the Company's ability to continue
as a going concern.
The Company has disputed its obligation
to make this payment and is attempting
to resolve the dispute or to obtain
alternative refinancing arrangements to
repay this current obligation. There
can be no assurance that the Company
will be successful in its plans to
obtain the financing necessary to
satisfy their current obligations.
2. 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."
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
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. The
Company operates as one reportable
business segment, based on the
similarity of activities.
During 1996, the Company formed
Tengasco Pipeline Corporation ("TPC"),
a wholly-owned subsidiary, to manage
the construction and operation of a
65-mile gas pipeline as well as other
pipelines planned for the future.
During 2001, TPC began transmission of
natural gas through its pipeline to
customers of Tengasco.
BASIS OF PRESENTATION
The consolidated financial statements
include the accounts of the Company,
Tengasco Pipeline Corporation and
Tennessee Land and Mineral, Inc. All
significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
The accompanying financial statements
are prepared in conformity with
accounting principles generally
accepted in the United States of
America which require 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.
REVENUE RECOGNITION
The Company recognizes revenues at the
time of exchange of goods and services.
CASH AND CASH EQUIVALENTS
The Company considers all investments
with a maturity of three months or less
when purchased to be cash equivalents.
INVESTMENT SECURITIES
Investment securities available for
sale are reported at fair value, with
unrealized gains and losses, when
material, reported as a separate
component of stockholders' equity, net
of the related tax effect. Other
comprehensive losses of $115,500 were
recorded during the year ended December
31, 2002 resulting from a decrease in
the fair value of the securities.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
INVENTORY
Inventory consists primarily of crude
oil in tanks and is carried at market
value.
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 representing an
entire cost center. 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. These reserves were estimated
by Ryder Scott Company, Petroleum
Consultants in 2000, 2001 and 2002.
The capitalized oil and gas property,
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
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. No ceiling
writedown was recorded in 2002, 2001 or
2000.
PIPELINE FACILITIES
Phase I of the pipeline was completed
during 1999. Phase II of the pipeline
was completed on March 8, 2001. Both
phases of the
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
pipeline were placed into service upon
completion of Phase II. The pipeline is
being depreciated over its estimated
useful life of 30 years, beginning at
the time it was placed in service.
OTHER PROPERTY AND EQUIPMENT
Other property and equipment are
carried at cost. The Company provides
for depreciation of other property and
equipment using the straight-line
method over the estimated useful lives
of the assets which range from five to
ten years.
IMPAIRMENT OF LONG-LIVED ASSETS AND
LONG-LIVED ASSETS TO BE DISPOSED OF
Management believes that carrying
amounts of all of the Company's
long-lived assets will be fully
recovered over the course of the
Company's normal future operations.
Accordingly, the accompanying financial
statements reflect no charges or
allowances for impairment.
STOCK-BASED COMPENSATION
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:
Six Months Ended Six Months Ended
2002 2001 2000 June 30, 2003 June 30, 2002
--------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Net loss attributable
to common
shareholders
As reported $(3,661,344) $(2,653,970) $(1,799,441) $(1,606,331) $(1,964,465)
Stock based (77,821) (257,328) 2,253,011 (47,209) (194,446)
compensation
Pro forma $(3,739,165) (2,911,298) (4,052,452) $(1,653,540) $(2,158,911)
--------------------------------------------------------------------------------------------------------------------
Basic and diluted loss
per share
As reported $ (0.33) $ (0.26) $ (0.19) $(0.14) $(0.18)
Pro forma (0.34) (0.28) (0.44) $(0.14) $(0.18)
--------------------------------------------------------------------------------------------------------------------
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
ACCOUNTS RECEIVABLE
Senior management reviews accounts
receivable on a monthly basis to
determine if any receivables will
potentially be uncollectible. We
include any accounts receivable
balances that are determined to be
uncollectible, along with a general
reserve, in our overall allowance for
doubtful accounts. After all attempts
to collect a receivable have failed,
the receivable is written off against
the allowance. Based on the information
available to us, we believe no
allowance for doubtful accounts as of
December 31, 2002 is necessary.
However, actual write-offs may occur.
INCOME TAXES
The Company accounts for income taxes
using the "asset and liability method."
Accordingly, deferred tax liabilities
and assets are determined based on the
temporary differences between the
financial reporting and tax bases of
assets and liabilities, using enacted
tax rates in effect for the year in
which the differences are expected to
reverse. Deferred tax assets arise
primarily from net operating loss
carryforwards. Management evaluates the
likelihood of realization of such
assets at year end reserving any such
amounts not likely to be recovered in
future periods.
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
insurance limit.
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.
The Company has entered into contracts
to supply two manufacturers with
natural gas from the Swan Creek field
through the Company's pipeline. These
customers are the Company's primary
customers of natural gas sales.
Additionally, the Company sells a
majority of its crude oil primarily to
two customers, one each in Tennessee
and Kansas. Although management
believes that customers could be
replaced in the ordinary course of
business, if the present customers were
to discontinue business with the
Company, it could have a significant
adverse effect on the Company's
projected results of operations.
LOSS PER COMMON SHARE
Basic loss per share is computed by
dividing loss available to
F-15
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 does not differ
from basic loss per share since the
effect of all common stock equivalents
is anti-dilutive. Basic and diluted
loss per share are based upon
11,062,436 shares for the year ended
December 31, 2002, 10,235,253 shares
for the year ended December 31, 2001,
and 9,253,622 shares for the year ended
December 31, 2000.
Basic and diluted loss per share are
based upon 11,854,950 and 10,714,087
weighted average shares outstanding for
the six months ended June 30, 2003 and
2002. Diluted loss per share does not
consider approximately 1,473,000,
1,473,000, 943,000 and 1,001,000
potential weighted average common
shares for the six months ended June
30, 2003 and the years ended December
31, 2002, 2001 and 2000, respectively,
related primarily to common stock
options and convertible preferred stock
and debt. These shares were not
included in the computation of the
diluted loss per share amount because
the Company was in a net loss position
and, thus, any potential common shares
were anti-dilutive. All share and per
share amounts have been adjusted to
reflect the 5% stock dividend.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash
equivalents, investments and short-term
debt approximate their carrying values
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, which approximate carrying
values.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting
Standards Board issued Statement of
Financial Accounting Standard (SFAS)
No. 141, "Business Combinations" and
SFAS No.142, "Goodwill and Other
Intangible Assets". SFAS No. 141
addresses the initial recognition and
measurement of goodwill and other
intangible assets acquired in a
business combination and SFAS No. 142
addresses the initial recognition and
measurement of intangible assets
acquired outside of a business
combination whether acquired
individually or with a group of other
assets. These standards require all
future business combinations to be
accounted for using the purchase method
of accounting. Goodwill will no longer
be amortized but instead will be
subject to impairment tests at least
annually. The Company was required to
adopt SFAS No. 141 on July 1, 2001, and
to adopt SFAS 142 on a prospective
basis as of January 1, 2002. The
Company has not effected a business
combination and carries no goodwill on
its balance sheet; accordingly, the
adoption of these standards did not
have an effect on the Company's
financial position or results of
operations.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
A reporting issue has arisen regarding
the application of certain provisions
of SFAS No. 141 and SFAS No. 142 to
companies in the extractive industries,
including oil and gas companies. The
issue is whether SFAS No. 142 requires
registrants to classify the costs of
mineral rights held under lease or
other contractual arrangement
associated with extracting oil and gas
as intangible assets in the balance
sheet, apart from other capitalized oil
and gas property costs, and provide
specific footnote disclosures.
Historically, the Company has included
the costs of such mineral rights
associated with extracting oil and gas
as a component of oil and gas
properties. If it is ultimately
determined that SFAS No. 142 requires
oil and gas companies to classify costs
of mineral rights held under lease or
other contractual arrangement
associated with extracting oil and gas
as a separate intangible assets line
item on the balance sheet, the Company
would be required to reclassify
approximately $421,000 at June 30, 2003
and $346,000 at December 31, 2002,
respectively, out of oil and gas
properties and into a separate
intangible assets line item. The
Company's cash flows and results of
operations would not be affected since
such intangible assets would continue
to be depleted and assessed for
impairment in accordance with full cost
accounting rules. Further, the Company
does not believe the classification of
the costs of mineral rights associated
with extracting oil and gas as
intangible assets would have any impact
on compliance with covenants under its
debt agreements.
In 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses
financial accounting and reporting for
obligations associated with the
retirement of tangible long-lived
assets and the associated asset
retirement costs. This statement
requires companies to record the
present value of obligations associated
with the retirement of tangible
long-lived assets in the period in
which it is incurred. The liability is
capitalized as part of the related
long-lived asset's carrying amount.
Over time, accretion of the liability
is recognized as an operating expense
and the capitalized cost is depreciated
over the expected useful life of the
related asset. The Company's asset
retirement obligations relate primarily
to the plugging dismantlement, removal,
site reclamation and similar activities
of its oil and gas properties. Prior to
adoption of this statement, such
obligations were accrued ratably over
the productive lives of the assets
through its depreciation, depletion and
amortization for oil and gas properties
without recording a separate liability
for such amounts. The impact of
implying SFAS No. 143 as of January 1,
2003 and June 30, 2003 is discussed
below in Note 16 to the Consolidated
Financial Statements.
SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived
Assets, addresses accounting and
reporting for the impairment or
disposal of long-lived assets. SFAS No.
144
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed
Of. SFAS No. 144 establishes a single
accounting model for long-lived assets
to be disposed of by sale and expands
on the guidance provided by SFAS No.
121 with respect to cash flow
estimations. SFAS No. 144 becomes
effective for the Company's fiscal year
beginning January 1, 2003. Management
does not expect that adoption of this
standard will have a material impact on
the Company's financial position or
results of operations.
The FASB issued Statement No. 145,
Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, on
April 30, 2002. SFAS No. 145 will be
effective for fiscal years beginning
after May 15, 2002. This statement
rescinds SFAS No. 4, Reporting Gains
and Losses From Extinguishment of Debt,
and requires that all gains and losses
from extinguishment of debt should be
classified as extraordinary items only
if they meet the criteria in APB No.
30. Applying APB No. 30 will
distinguish transactions that are part
of an entity's recurring operations
from those that are unusual or
infrequent or that meet the criteria
for classification as an extraordinary
item. Any gain or loss on
extinguishment of debt that was
classified, as an extraordinary item in
prior periods presented that does not
meet the criteria in APB No. 30 for
classification as an extraordinary item
must be reclassified. There is no
current impact of adoption on the
Company's financial position or results
of operations.
The FASB issued Statement No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities, in June
2002. SFAS No. 146 addresses financial
accounting and reporting for costs
associated with exit or disposal
activities and nullifies Emerging
Issues Task Force Issue No. 94-3,
Liability Recognition for Certain
Employee Termination Benefits and Other
Costs to Exit an Activity (including
Certain Costs incurred in a
Restructuring). SFAS No. 146 applies to
costs incurred in an "exit activity",
which includes, but is not limited to,
a restructuring, or a "disposal
activity" covered by SFAS No. 144.
SFAS No. 146 requires that a liability
for a cost associated with an exit or
disposal activity be recognized when
the liability is incurred. Previously,
under Issue 94-3, a liability for an
exit cost was recognized at the date of
an entity's commitment to an exit plan.
Statement No. 146 also establishes that
fair value is the objective for initial
measurement of the liability. The
provisions of SFAS No. 146 are
effective for exit or disposal
activities that are initiated after
December 31, 2002. Management does not
expect that adoption of this standard
will have a material effect on the
Company's financial position or results
of operations.
In November 2002, the FASB issued
Interpretation No. 45,
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to
Others, an interpretation of FASB
Statements No. 5, 57 and 107 and a
rescission of FASB Interpretation No.
34. This Interpretation elaborates on
the disclosures to be made by a
guarantor in its interim and annual
financial statements about its
obligations under guarantees issued.
The Interpretation also clarifies that
a guarantor is required to recognize,
at inception of a guarantee, a
liability for the fair value of the
obligation undertaken. The initial
recognition and measurement provisions
of the Interpretation are applicable to
guarantees issued or modified after
December 31, 2002. The Company has not
guaranteed the debts of others,
therefore, this interpretation is not
expected to have a material effect on
Tengasco's financial statements.
In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation - Transition and
Disclosure, an amendment of FASB
Statement No. 123. This Statement
amends FASB Statement No. 123,
Accounting for Stock-Based
Compensation, to provide alternative
methods of transition for a voluntary
change to the fair value method of
accounting for stock-based employee
compensation. In addition, this
Statement amends the disclosure
requirements of Statement No. 123 to
require prominent disclosures in both
annual and interim financial
statements. Management has adopted
certain of the disclosure modifications
are required for fiscal years ending
after December 15, 2002 and are
included in the notes to the
accompanying consolidated financial
statements.
In January 2003, the FASB issued
Interpretation No. 46, Consolidation of
Variable Interest Entities, an
Interpretation of Accounting Research
Bulletin No. 51. Interpretation No. 46
requires a company to consolidate a
variable interest entity if the company
has a variable interest (or combination
of variable interests) that will absorb
a majority of the entity's expected
losses if they occur, receive a
majority of the entity's expected
residual returns if they occur, or
both. A direct or indirect ability to
make decisions that significantly
affect the results of the activities of
a variable interest entity is a strong
indication that a company has one or
both of the characteristics that would
require consolidation of the variable
interest entity. Interpretation No. 46
also requires additional disclosures
regarding variable interest entities.
The new interpretation is effective
immediately for variable interest
entities created after January 31,
2003, and is effective in the first
interim or annual period beginning
after June 15, 2003, for variable
interest entities in which a company
holds a variable interest that it
acquired before February 1, 2003.
Management does not expect that
adoption of this interpretation will
have a material effect on the Company's
financial position or results of
operations.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
RECLASSIFICATIONS
Certain prior year amounts have been
reclassified to conform with current
year presentation.
3. RELATED PARTY During 2002 the Company received debt
TRANSACTIONS financing from a director totaling
$750,000 to fund operating cash flow
needs and to finance continued
development of the Swan Creek field.
Interest incurred on this debt was
approximately $15,000 for the year
ended December 31, 2002. See Note 7.
During 2002, the Company borrowed
$110,000 from a former director. The
advance was non-interest bearing and
was repaid in July 2002.
During 2001, the Company repaid all
principal and interest due to related
parties, using the proceeds from the
line of credit with Bank One. Interest
incurred to related parties was
approximately $15,000, $546,000 and
$135,000 for the years ended December
31, 2002, 2001 and 2000, respectively.
During 2001, the Company converted debt
of $200,000 payable to a director into
42,017 shares of common stock.
During 2000, the Company paid
approximately $270,000 in consulting
fees and commissions on equity
transactions to a member of the Board
of Directors.
4. OIL AND GAS The following table sets forth
PROPERTIES information concerning the Company's
oil and gas properties:
December 31, 2002 2001
---------------------------------------------------------------------------
Oil and gas properties, at cost $17,099,753 $15,117,224
Accumulation depreciation,
depletion and amortization (3,235,432) (1,847,294)
---------------------------------------------------------------------------
Oil and gas properties, net $13,864,321 $13,269,930
---------------------------------------------------------------------------
During the years ended December 31,
2002, 2001 and 2000, the Company
recorded depletion expense of
approximately $1,388,000, $1,342,000
and $197,000, respectively.
5. PIPELINE FACILITIES In 1996, the Company began construction
of a 65-mile gas pipeline (1)
connecting the Swan Creek development
project to a gas purchaser and (2)
enabling the Company to develop gas
distribution business opportunities in
the future. Phase I, a 30-mile portion
of the pipeline, was completed in 1998.
Phase II of the pipeline, the remaining
35 miles, was completed in March 2001.
The estimated
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
useful life of the pipeline for
depreciation purposes is 30 years. The
Company recorded approximately $220,000
and $509,000, respectively in
depreciation expense related to the
pipeline for the years ended December
31, 2002 and 2001. No depreciation
expense was recorded in 2000 as the
pipeline was not yet complete.
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 and
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.
6. OTHER PROPERTY Other property and equipment consisted
AND EQUIPMENT of the following:
December 31, 2002 2001
---------------------------------------------------------------------------
Machinery and equipment $1,887,190 $1,737,189
Vehicles 675,411 610,510
Other 63,734 63,739
---------------------------------------------------------------------------
2,626,335 2,411,438
Less accumulated depreciation (940,385) (731,334)
---------------------------------------------------------------------------
Other property and equipment - net $1,685,950 $1,680,104
---------------------------------------------------------------------------
7. LONG TERM DEBT Long-term debt to unrelated entities
consisted of the following:
June 30,
December 31, 2002 2001 2003
---------------------------------------------------------------------------
(unaudited)
Revolving line of credit with a bank,
due November 2004. The loan agreement
provides for increases or decreases to
the borrowing base as changes in proved
oil and gas reserves or other
production levels arise. Borrowings
bear interest at the bank's prime rate
plus 0.25% (4.5% at December 31, 2002).
Collateralized by the oil and gas
properties and the related
operations and revenues. $7,501,777 $9,101,777 $6,301,777
Unsecured note payable to an
institution, with $65,000 principal
payments due quarterly beginning
January 1, 2000; remaining balance due
October 2004; with interest payable
monthly at 8% per annum. Note is
convertible into common stock of the
Company at a rate of $6.25 per share
of common stock. 480,000 720,000 360,000
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
Convertible notes payable to five
individuals; due January 2004, with
interest payable quarterly at 8% per
annum. Notes are convertible into
common stock of the Company at a rate
of $3.00 per share of common stock. 650,000 - 650,000
Unsecured note payable to an
institution due May 1, 2004, with
interest payable annually at 4.75% per
annum. - - 297,170
Note payable to a financial
institution, with $1,773 principal
payments due monthly beginning January
7, 2002 through December 7, 2006.
Interest is payable monthly commencing
on January 7, 2002 at 7.5% per annum.
Note is guaranteed by a major
shareholder and is collateralized by
certain assets of the Company. 73,335 87,500 65,322
Installment notes bearing interest at
the rate of 3.9% to 11.95% per annum
collateralized by vehicles and
equipment with monthly payments
including interest of approximately
$10,000 due various periods through
2006. 412,342 393,311 330,941
---------------------------------------------------------------------------
Total long term debt 9,117,454 10,302,588 8,005,210
Less current maturities (7,861,245) (6,399,831)(7,391,029)
---------------------------------------------------------------------------
Long term debt, less current maturities $ 1,256,209 $3,902,757 $ 614,181
===========================================================================
The Company is subject to certain
financial (ratio) covenants and
restrictions on indebtedness, dividend
payments, financial guarantees,
business combinations, reporting
requirements and other related items on
the revolving line of credit with a
bank. As of December 31, 2002, the
Company is not in compliance with all
covenants. During 2002, as a result of
ongoing negotiations to refinance or
repay the debt, the bank declared all
amounts immediately due and payable.
The Company is presently paying
$200,000 per month. As a result of
ongoing negotiations with Bank One,
management has reclassified the loan
fees associated with this note to a
current asset as it is likely that
these fees will be fully amortized in
2003.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
Long-term debt to related parties
consisted of the following:
December 31, 2002 2001 June 30,
2003
---------------------------------------------------------------------------
(unaudited)
Unsecured note payable to a director
due January 2004, with interest payable
quarterly at 8% per annum. Note is
convertible into common stock of the
Company at a rate of $2.88 per
share of common stock. $500,000 $ - $ 500,000
Notes payable to a director due
January 2004, with interest payable
quarterly at 12% per annum. Note is
secured by 10% of the pipeline. 250,000 - 1,584,000
---------------------------------------------------------------------------
Total long term debt to related
Parties 750,000 - 2,084,000
Less current maturities - - (2,084,000)
---------------------------------------------------------------------------
Long term debt to related parties,
less current maturities $750,000 $ - $ -
===========================================================================
The aggregate maturities of long term
debt due to related parties and others
as of December 31, 2002, are as
follows:
Year Amount
---------------------------------------------------------------------------
2003 $7,861,245
2004 1,720,468
2005 101,468
2006 101,803
Thereafter 82,470
---------------------------------------------------------------------------
$9,867,454
===========================================================================
8. COMMITMENTS The Company is a party to lawsuits in
AND CONTINGENCIES the ordinary course of its business.
While the damages sought in some of
these actions are material, the Company
does not believe that it is probable
that the outcome of any individual
action will have a material adverse
effect, or that it is likely that
adverse outcomes of individually
insignificant actions will be
significant enough, in number or
magnitude, to have a material adverse
effect in the aggregate on its
financial statements.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
In the ordinary course of business the
Company has entered into various
equipment and office leases which have
remaining terms ranging from one to
four years. Approximate future minimum
lease payments to be made under
noncancellable operating leases are as
follows:
Year Amount
---------------------------------------
2003 $ 60,158
2004 59,210
2005 56,970
2006 500
---------------------------------------
$176,838
=======================================
Office rent expense was approximately
$84,000, $91,000 and $86,000 for each
of the three years ended December 31,
2002, 2001 and 2000, respectively.
9. CUMULATIVE Shares of both Series A and B Preferred
CONVERTIBLE Stock are or will be immediately
REDEEMABLE convertible into shares of Common
PREFERRED STOCK Stock. Each $100 liquidation preference
share of preferred stock is convertible
at a rate of $7.00 for the Series A per
share of common stock. For the Series
B, the conversion rate is the average
market price of the Company's common
stock for 30 days before the sale of
the Series B preferred stock with a
minimum conversion price of $9.00 per
share. The conversion rate is subject
to downward adjustment if the Company
subsequently issues shares of common
stock for consideration less than $7.00
and $9.00 for the Series A and
Preferred Stock, respectively, per
share. The conversion prices will be
adjusted prospectively for stock
dividends and splits.
The holders of both the Series A and
Series B Preferred Stock are entitled
to a cumulative dividend of 8% per
quarter. However, the payment of the
dividends on the Series B Preferred
Stock is subordinate to that of the
Series A Preferred Stock. In the event
that the Company does not make any two
of six consecutive quarterly dividend
payments, the holders of the Series A
Preferred Stock may appoint those
directors which would constitute of
majority of the Board of Directors. In
such a scenario, the holders of the
Preferred Shares would be entitled to
elect a majority of the Board of
Directors until all accrued and unpaid
dividends have been paid.
The Company failed to pay the 3rd and
4th quarterly dividend payments of the
Series A preferred stock during 2002.
As a result, in February 2003, the
Series A shareholders exercised their
rights to place four new members on the
Board of Directors. As of June 30,
2003, cumulative accrued and unpaid
dividends on the Series A and B
Preferred Stock amounted to $308,996.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
The Company may redeem both of the
Series A and B Preferred Stock upon
payment of $100 per share plus any
accrued and unpaid dividends. Further,
with respect to the Series A Preferred
Stock, commencing on October 1, 2003
and at each quarterly date thereafter
while the Series A Preferred Stock is
outstanding, the Company is required to
redeem one-twentieth of the maximum
number of Series A Preferred Stock
outstanding. With respect to the Series
B Preferred Stock, on the fifth
anniversary after issuance (March
2005), the Company is required to
redeem all outstanding Series B
Preferred Stock.
During 2002, the Board of Directors
authorized the sale of up to 50,000
shares of Series C Preferred Stock at
$100 per share. The Company issued
14,491 shares, resulting in net
proceeds after commissions of
$1,303,168. The Series C Preferred
Stock accrues a 6% cumulative dividend
on the outstanding balance, payable
quarterly. As of June 30, 2003,
cumulative accrued and unpaid dividends
on the Series C Preferred Stock
amounted to $43,473. These dividends
are subordinate to the dividends
payable to the Series A and Series B
Preferred Stock holders. This stock is
convertible into the Company's common
stock at the average stock trading
price 30 days prior to the closing of
the sales of all the Series C Preferred
Stock being offered or $5.00 per share,
whichever is greater. The Company is
required to redeem any remaining Series
C Preferred Stock and any accrued and
unpaid dividends in July 2006.
10. STOCK DIVIDEND On August 1, 2001, the Company paid a
5% stock dividend distributable on
October 1, 2001 to shareholders of
record of the Company's common stock on
September 4, 2001. Based on the number
of common shares outstanding on the
record date, the Company issued 498,016
new shares. All references in the
accompanying financial statements to
the number of common shares and per
share amounts are based on the
increased number of shares giving
retroactive effect to the stock
dividend.
11. STOCK OPTIONS In October 2000, the Company approved a
Stock Incentive Plan. The Plan is
effective for a ten-year period
commencing on October 25, 2000 and
ending on October 24, 2010. The
aggregate number of shares of Common
Stock as to which options and Stock
Appreciation Rights may be granted to
Employees under the plan shall not
exceed 1,000,000. Options are not
transferable, fully vest after two
years of employment with the Company,
are exercisable for 3 months after
voluntary resignation from the Company,
and terminate immediately upon
involuntary termination from the
Company. The purchase price of shares
subject to this Nonqualified Stock
Option Plan shall be determined at the
time the options are granted, but are
not permitted to be less than 85% of
the Fair Market Value of such shares on
the date of grant. Furthermore, an
employee in the plan may not,
immediately
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
prior to the grant of an Incentive
Stock Option hereunder, own stock in
the Company representing more than ten
percent of the total voting power of
all classes of stock of the Company
unless the per share option price
specified by the Board for the
Incentive Stock Options granted such
and Employee is at least 110% of the
Fair Market Value of the Company's
stock on the date of grant and such
option, by its terms, is not
exercisable after the expiration of 5
years from the date such stock option
is granted.
Stock option activity in 2002, 2001 and
2000 is summarized below:
2002 2001 2000
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------------------------------------------
Outstanding,
beginning
of year 516,028 $9.23 1,017,450 $ 8.54 530,250 $6.91
Granted 160,742 2.86 78,750 12.39 855,451 8.69
Exercised - - (256,772) 8.69 (21,751) 8.69
Expired/canceled - - (323,400) 7.85 (346,500) 6.91
------------- ------------- -------------
Outstanding,
end of year 676,770 7.71 516,028 9.23 1,017,450 8.54
--------------------------------------------------------------------------------------------------------------------
Exercisable,
end of year 676,770 $7.71 474,889 $ 9.21 930,258 $8.49
====================================================================================================================
------------------------------------------------------- -----------------
Options Options
Outstanding Exercisable
------------------------------------------------------- -----------------
Weighted Average
Remaining
Weighted Average Contractual Life
Exercise Price Shares (years) Shares
------------------------------------------------------- -----------------
$ 2.86 160,742 2.67 160,742
$ 8.69 437,278 0.85 437,278
$ 14.44 21,000 1.13 21,000
$ 11.05 47,250 1.30 47,250
$ 12.70 10,500 1.71 10,500
-------------------
Total $ 7.71 676,770 676,770
============================================================================================
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
The weighted average fair value per share
of options granted during 2002, 2001 and
2000 is $1.45, $3.62, and $3.41
respectively, calculated using the
Black-Scholes Option-Pricing model.
No compensation expense related to stock
options were incurred in 2002, 2001 or
2000. The Company issued 70,715 options to
non-employees and non-directors in 2000.
The expense of $242,000 for these options
has been included in professional fees
expense because the options were issued to
providers of such services. The expense was
calculated using a fair market value of the
options based on the Black-Scholes
option-pricing model assumptions discussed
below.
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 2002, 2001 and 2000; Expected
volatility of 74.2% for 2002, 50% for 2001
and 50% for 2000; a risk free interest rate
of 3.67% in 2002, 3.67% in 2001 and 5.86%
in 2000; and an expected option life of 3
years for 2002, 2001 and 2000.
12. INCOME TAXES The Company has no taxable income during
the three year period ended December 31,
2002.
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:
December 31, 2002 2001 2000
--------------------------------------------------------------------------------
Statutory rate 34% 34% 34%
Tax benefit at statutory rate $(1,073,000) $(769,000) $(452,500)
State income tax benefit (189,000) (136,000) (75,500)
Other - - 24,000
Increase in deferred tax asset
Valuation allowance 1,262,000 905,000 504,000
--------------------------------------------------------------------------------
Total income tax provision $ - $ - $ -
================================================================================
December 31, 2002 2001 2000
--------------------------------------------------------------------------------
Net operating loss carryforward $7,139,000 $ 5,877,000 $4,972,000
Capital loss carryforward 263,000 263,000 263,000
--------------------------------------------------------------------------------
7,402,000 6,140,000 5,235,000
Valuation allowance (7,402,000) (6,140,000) (5,235,000)
--------------------------------------------------------------------------------
Net deferred taxes $ - $ - $ -
================================================================================
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
The Company recorded a valuation allowance
at December 31, 2002, 2001 and 2000 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.
Potential future reversal of the portion of
the valuation allowance relative to
deferred tax asset resulting from the
exercise of stock options will be recorded
as additional paid in capital realized
As of December 31, 2002, the Company had
net operating loss carryforwards of
approximately $18,217,000, which will
expire between 2010 and 2022, if not
utilized.
13. SUPPLEMENTAL CASH The Company paid approximately $571,000,
FLOW INFORMATION $853,500 and $544,000 for interest in 2002,
2001 and 2000, respectively. The Company
capitalized approximately $148,000 and
$128,000 of this amount in 2001 and 2000,
respectively. No interest was capitalized
during 2002. The Company paid no income
taxes in 2002, 2001 and 2000.
14. QUARTERLY DATA AND The following table sets forth, for the
SHARE INFORMATION fiscal periods indicated, selected
(UNAUDITED) consolidated financial data.
FISCAL YEAR ENDING DECEMBER 31, 2003
--------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------------------
Revenues $1,971,603 $1,482,390 - -
Net Income (loss) (659,350) (678,592) - -
Net Income (loss) attributable to common
Stockholders (793,545) (812,786) - -
Earnings (loss) per common share
Basic and diluted $ (0.07) $ (0.07) - -
--------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------------------
Revenues $ 1,176,482 $ 1,297,668 $1,507,308 $1,719,020
Net loss (818,341) (858,197) (721,879) (756,138)
Net loss attributable to common
Stockholders (930,799) (984,139) (856,074) (890,332)
--------------------------------------------------------------------------------------------------------------------
Loss per common share
Basic and diluted $ (0.09) $ (0.09) $ (0.08) $ (0.07)
--------------------------------------------------------------------------------------------------------------------
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
FISCAL YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------------------
Revenues $1,448,318 $1,863,068 $2,583,758 $1,101,542
Net loss (368,768) (336,034) (378,597) (1,179,388)
Net loss attributable to common
Stockholders (447,546) (423,523) (491,055) (1,291,846)
--------------------------------------------------------------------------------------------------------------------
Loss per common share
Basic and diluted $ (0.05) $ (0.04) $ (0.05) $ (0,.12)
--------------------------------------------------------------------------------------------------------------------
Third quarter 2001 results reflect the
effect on depletion expense that resulted
from a decrease in reserve estimates
provided in a study performed by Ryder
Scott Company, L.P. and issued August 10,
2001. The amount recorded during this
quarter was $562,000 higher than the
quarterly estimates made by management
during the first three quarters as a result
of a change in estimate arising from new
information provided in the Ryder Scott
Company, L.P. Report. Amounts disclosed
above differ from those filed with the SEC
during the third quarter of 2001 as a
result of an error in recording this change
in estimate to depletion at the time of the
filing. Management has amended the
September 30, 2001 SEC Form 10-Q filing
during 2002.
15. SUPPLEMENTAL OIL AND Information with respect to the Company's
GAS INFORMATION 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
Ryder Scott Company, L.P. as of December
31, 2002, 2001 and 2000.
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, 2002, 2001 and 2000:
2002 2001 2000
-------------------------------------------------------------------------------
Property acquisition
Proved $ - $ - $ -
Unproved - - 5,702
Less - proceeds from
sales of properties (100,000) (750,000) (1,176,411)
Development costs 2,082,529 5,571,883 2,627,705
-------------------------------------------------------------------------------
$ 1,982,529 $ 4,821,883 $ 1,456,996
===============================================================================
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
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, 2002 2001 2000
-------------------------------------------------------------------------------
Revenues $ 5,437,723 $ 6,656,758 $ 5,241,076
Production costs and taxes (3,094,731) (2,951,746) (2,614,414)
Depreciation, depletion
and amortization (1,388,138) (1,342,000) (197,000)
-------------------------------------------------------------------------------
Income from oil and gas
producing activities $ 954,854 $ 2,363,012 $ 2,429,662
-------------------------------------------------------------------------------
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.
OIL AND GAS RESERVES (UNAUDITED)
The following table sets forth the
Company's net proved oil and gas reserves
at December 31, 2002, 2001 and 2000 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.
Reserves are measured in barrels (bbls) in
the case of oil, and units of one thousand
cubic feet (Mcf) in the case of gas.
Oil (bbls) Gas (Mcf)
-------------------------------------------------------------------------------
Proved reserves:
Balance, January 1, 2000 3,227,203 74,795,287
Discoveries and extensions 56,103 1,059,147
Revisions of previous estimates (1,309,366) (27,998,986)
Production (159,035) (315,577)
-------------------------------------------------------------------------------
Balance, December 31, 2000 1,814,905 47,539,871
Discoveries and extensions 62,254 4,915,431
Revisions of previous estimates (672,443) (25,263,634)
Production (148,041) (1,311,466)
-------------------------------------------------------------------------------
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
Balance, December 31, 2001 1,056,675 25,880,202
Discoveries and extensions 34,968 937,000
Revisions of previous estimates 542,229 786,430
Production (157,973) (1,004,899)
-------------------------------------------------------------------------------
Proved reserves at, December 31, 2002 1,475,899 26,598,733
-------------------------------------------------------------------------------
Proved developed producing
reserves at, December 31, 2002 1,108,293 6,592,711
-------------------------------------------------------------------------------
Proved developed producing
reserves at, December 31, 2001 767,126 7,157,183
-------------------------------------------------------------------------------
Proved developed producing
reserves at, December 31, 2000 1,553,759 2,888,769
-------------------------------------------------------------------------------
Of the Company's total proved reserves as
of December 31, 2002 and 2001 and 2000,
approximately 37%, 36% and 21%,
respectively, were classified as proved
developed producing, 19%, 26% and 34%,
respectively, were classified as proved
developed non-producing and 44%, 37% and
45%, respectively, 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 is presented in
the following table:
amounts in thousands
----------------------------------------------
December 31, 2002 2001 2000
-------------------------------------------------------------------------------
Future cash inflows $152,180 $ 78,296 $ 505,733
Future production
costs and taxes (41,870) (26,083) (41,689)
Future development costs (11,348) (6,384) (8,225)
Future income tax expenses - - (122,881)
-------------------------------------------------------------------------------
Net future cash flows 98,962 45,829 332,938
Discount at 10% for
timing of cash flows (52,314) (24,095) (97,195)
-------------------------------------------------------------------------------
Discounted future net
cash flows from
proved reserves $ 46,648 $ 21,734 $ 235,743
===============================================================================
F-31
The following unaudited table sets forth
the changes in the standardized measure of
discounted future net cash flows from
proved reserves during 2002, 2001 and 2000:
amounts in thousands
----------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------
Balance, beginning of year $ 21,734 $ 235,743 $ 100,882
Sales, net of production costs
and taxes (2,343) (3,705) (2,627)
Discoveries and extensions 1,686 4,167 1,778
Changes in prices and
production costs 20,586 (299,527) 360,082
Revisions of quantity 6,120 (33,449) (186,289)
estimates
Development costs incurred - 1,236
Interest factor - accretion
of discount 2,173 32,198 13,355
Net change in income taxes - 86,237 (53,572)
Changes in future
development costs (4,860) 2,666 (3,237)
Changes in production rates
and other 1,552 (2,596) 4,135
-------------------------------------------------------------------------------
Balance, end of year $ 46,648 $ 21,734 $ 235,743
===============================================================================
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, 2002, 2001 and 2000 were
$27.25, $17.03 and $25.62 per barrel of oil
and $4.01, $2.33 and $9.66 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. The
estimates of reserve values include
estimated future development costs that the
company does not currently have the ability
to fund. If the company is unable to obtain
additional funds, it may not be able to
develop its oil and natural gas properties
as estimated in its December 31, 2002
reserve report.
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-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
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. CUMULATIVE EFFECT OF A Effective January 1, 2003, the Company
CHANGE IN ACCOUNTING implemented the requirements of Statement
PRINCIPLE of Financial Accounting Standards No. 143
(SFAS 143), "Accounting for Asset
Retirement Obligations". Among other
things, SFAS 143 requires entities to
record a liability and corresponding
increase in long-lived assets for the
present value of material obligations
associated with the retirement of tangible
long-lived assets. Over the passage of
time, accretion of the liability is
recognized as an operating expense and the
capitalized cost is depleted over the
estimated useful life of the related asset.
Additionally, SFAS 143 requires that upon
initial application of these standards, the
Company must recognize a cumulative effect
of a change in accounting principle
corresponding to the accumulated accretion
and depletion expense that would have been
recognized had this standard been applied
at the time the long-lived assets were
acquired or constructed. The Company's
asset retirement obligations relate
primarily to the plugging, dismantling and
removal of wells drilled to date.
Using a credit-adjusted risk free rate of
12%, an estimated useful life of wells
ranging from 30 - 40 years, and estimated
plugging and abandonment costs ranging from
$5,000 per well to $10,000 per well, the
Company has recorded a non-cash charge
related to the cumulative effect of a
change in accounting principle as of
January 1, 2003 of $351,204 in its
statement of loss for the six-month period
ended June 30, 2003. Oil and gas properties
were increased by $260,191, which
represents the present value of all future
obligations to retire the wells at January
1, 2003, net of accumulated depletion on
this cost through that date. A
corresponding obligation totaling $611,395
has also been recorded as of January 1,
2003.
For the six month period ended June 30,
2003, the Company recorded accretion and
depletion expenses of $51,968 associated
with this liability and its corresponding
asset. These expenses are included in
depletion, depreciation, and amortization
in the consolidated statements of loss. Had
the provisions of this statement been
reflected in the financial statements for
the year ended December 31, 2002, an asset
retirement obligation of $476,536 would
have been recorded as of January 1, 2002.
The following is a roll-forward of activity
impacting the asset retirement obligation
for the six months ended June 30, 2003:
Balance, January 1, 2003: $611,395
Accretion expense through
June 30, 2003 36,684
--------
Balance, June 30, 2003 $648,079
========
F-33
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by us in connection with the issuance
and distribution of the securities being offered. All items below are estimates
other than the Securities and Exchange Commission registration fee and the AMEX
listing fee. The registrant will pay all of such expenses.
Securities and Exchange Commission registration fee $ 1,833
AMEX listing
fee*............................................................
Printing and engraving
expenses*.......................................................
Accounting fees and
expenses*.......................................................
Legal fees and
expenses*.......................................................
Subscription Agent fees and
expenses*.......................................................
Miscellaneous*..................................................
Total........................................ $150,000
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Tennessee Code Annotated Sections 48-18-502 through 509 grant Tennessee
corporations broad powers to indemnify their present and former directors and
officers and those of affiliated corporations against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with threatened, pending or completed actions,
suits or proceedings to which they are parties or are threatened to be made
parties by reason of being or having been such directors or officers, subject to
specified conditions and exclusions; give a director or officer who successfully
defends an action the right to be so indemnified; and permit a corporation to
buy directors' and officers' liability insurance. Such indemnification is not
exclusive of any other rights to which those indemnified may be entitled under
any by-laws, agreement, vote of stockholders or otherwise.
Tennessee Code Annotated Section 48-18-102(b) permits a Tennessee
corporation to include in its certificate of incorporation a provision
eliminating the potential monetary liability of a director to the corporation or
its stockholders for breach of fiduciary duty as a director, provided that such
provision may not eliminate the liability of a director (i) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (ii) for any transaction from which the director receives an
improper personal benefit or (iii) in connection with any proceeding in which
the director was adjudged liable to the corporation. The registrant's
certificate of incorporation does not provide that its directors shall not be
liable to it or its stockholders for a breach of their duties to the fullest
extent in which elimination or limitation of the liability of directors is
permitted by the foregoing Section, which does not apply to the registrant.
II-1
All directors are indemnified by the registrant, both by operation of
Tennessee Code Annotated Sections 48-18-501 through 509 and since 1995 by
resolution of the registrant's board of directors, against liability and
expenses including attorney's fees incurred by them as a result of serving on
the registrant's board of directors. The statutory provisions require a finding
that the conduct of the director was in good faith and in the best interest of
the company and does not extend to cases where a director is found to be liable
to the company itself. Such a finding may be made by uninvolved directors, a
committee of the board or independent counsel.
Tennessee Code Annotated Section 48-15-503 provides for the indemnification
of directors and of corporate officers where the director or officer is
successful in defense of any proceeding he or she became involved in as a result
of being or having been in such position, unless the corporate charter forbids
such indemnification. The registrant's corporate charter contains no such bar or
prohibition of indemnification of the registrant's directors or officers.
Tennessee statutes further provide that the rights to indemnification of a
director do not preclude other bases of indemnification, whether such rights
arise by charter, bylaws, shareholder resolution, agreement or board resolution,
provided there is no breach of duty of loyalty to the corporation, bad faith,
intentional misconduct or knowing violation of law. Accordingly, the
registrant's board of directors on August 17, 1995, unanimously resolved to
indemnify directors and executive officers on a mandatory basis to the fullest
extent of the laws referenced above for the entire period a party is subject to
any possible legal action or claim by reason of having so served.
Tennessee law permits, but does not require, insurance to be obtained to
fund indemnity obligations. The registrant does not have any such insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In approximately October 1998, the registrant sold 28,679 shares of its
Series A 8% Cumulative Convertible Preferred Stock to private investors for an
aggregate purchase price of $2,733,000, net of commissions to a placement agent
in the aggregate amount of approximately $135,000.
In approximately August 2000 and June 2001, the registrant sold 27,550
shares of its Series B 8% Cumulative Convertible Preferred Stock to private
investors for an aggregate purchase price of $2,614,600, net of commissions to a
placement agent in the aggregate amount of approximately 140,000.
In approximately May and June 2002, the registrant sold 14,491 shares of
its Series C 6% Cumulative Convertible Preferred Stock to private investors for
an aggregate purchase price of $1,303,168, net of commissions to a placement
agent in the aggregate amount of approximately $116,000.
On each of January 21, 2002 and April 9, 2002, Bill L. Harbert, who owns
more than ten percent of the registrant's outstanding common stock and is now,
but was not at those dates, a director of the registrant, purchased from the
registrant in a private placement, 100,000 shares of the registrant's common
stock, at prices of $6.32 and $4.80 per share, respectively.
On July 5, 2002 and July 23, 2002, Dolphin Offshore Partners, L.P.
("Dolphin"), which owns more than ten percent of the registrant's outstanding
common stock, and whose general partner, Peter E. Salas, is a director of the
registrant, purchased from the registrant in a private placement, 400,000 and
250,000 shares of the registrant's common stock, respectively, at a price of
$2.50 per share.
In October 2002, Dolphin loaned to the registrant $500,000 and was issued
an unsecured convertible promissory note by the registrant in the principal
amount of $500,000 bearing 8% interest, with interest only payable quarterly and
principal payable January 4, 2004.
In December 2002, Dolphin loaned to the registrant $250,000 and was issued
a secured promissory note bearing interest at the rate of 12% per annum, with
interest only payable quarterly and the principal balance payable on January 4,
2004.
II-2
In January 2003, Bill L. Harbert, a director of the registrant, purchased
227,275 shares of the registrant's common stock in a private placement at a
price of $1.10 per share.
On each of February 3, 2003 and February 28, 2003, Dolphin loaned to the
registrant $250,000 and for each of these loans was issued a separate secured
promissory note bearing interest at the rate of 12% per annum, with payments of
interest only payable quarterly and the principal balance payable on January 4,
2004
On May 20, 2003, Dolphin loaned to the registrant $750,000 and Jeffrey R.
Bailey, President and a director of the registrant, loaned to the registrant
$84,000 and each was issued a separate secured promissory note bearing interest
at the rate of 12% per annum, with payments of interest only payable quarterly
and the principal balance payable on January 4, 2004.
During the three months ended March 31, 2003, the registrant converted
$60,000 of indebtedness and $9,600 of accrued interest owed to the holders of
convertible notes into 60,528 shares of the registrant's common stock and issued
55,000 shares of its common stock for payment of consulting services valued at
$70,000.
During the six months ended June 30, 2003, the registrant converted $70,309
of accrued dividends payable on its outstanding preferred stock into an
aggregate of 154,824 shares of the registrant's common stock.
ITEM 16. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3.1 Charter (Incorporated by reference to Exhibit 3.7 to the
registrant's registration statement on Form 10-SB filed August
7, 1997 (the "Form 10-SB"))
3.2 Articles of Merger and Plan of Merger (taking into account the
formation of the Tennessee wholly-owned subsidiary for the
purpose of changing the Company's domicile and effecting
reverse split) (Incorporated by reference to Exhibit 3.8 to
the Form 10-SB)
3.3 Articles of Amendment to the Charter dated June 24, 1998
(Incorporated by reference to Exhibit 3.9 to the registrant's
annual report on Form 10-KSB filed April 15, 1999 (the "1998
Form 10-KSB"))
3.4 Articles of Amendment to the Charter dated October 30, 1998
(Incorporated by reference to Exhibit 3.10 to the 1998 Form
10-KSB)
3.5 Articles of Amendment to the Charter filed March 17, 2000
(Incorporated by reference to Exhibit 3.11 to the registrant's
annual report on Form 10-KSB filed April 14, 2000 (the "1999
Form 10-KSB"))
3.6 By-laws (Incorporated by reference to Exhibit 3.2 to the Form
10-SB)
4.1* Form of Rights Certificate
5.1* Opinion of Cary V. Sorensen, Esq.
10.1 Purchase Agreement with IRC (Incorporated by reference to
Exhibit 10.1(a) to the Form 10-SB)
10.2 Amendment to Purchase Agreement with IRC (Incorporated by
reference to Exhibit 10.1(b) to the Form 10-SB)
10.3 General Bill of Sale and Promissory Note (Incorporated by
reference to Exhibit 10.1(c) to the Form 10-SB)
10.4 Compensation Agreement - M.E. Ratliff (Incorporated by
reference to Exhibit 10.2(a) to the Form 10-SB)
10.5 Compensation Agreement - Jeffrey D. Jenson (Incorporated by
reference to Exhibit 10.2(b) to the Form 10-SB)
10.6 Compensation Agreement - Leonard W. Burningham (Incorporated
by reference to Exhibit 10.2(c) to the Form 10-SB)
10.7 Agreement with the Natural Gas Utility District of Hawkins
County, Tennessee (Incorporated by reference to Exhibit 10.3
to the Form 10-SB)
10.8 Agreement with Powell Valley Electric Cooperative, Inc.
(Incorporated by reference to Exhibit 10.4 to the Form 10-SB)
10.9 Agreement with Enserch Energy Services, Inc. (Incorporated by
reference to Exhibit 10.5 to the Form 10-SB)
II-3
10.10 Amendment Agreement dated October 19, 1999 between Tengasco,
Inc. and the Natural Gas Utility District of Hawkins County,
Tennessee (Incorporated by reference to Exhibit 10.9 to the
registrant's current report on Form 8-K filed October 25,
1999)
10.11 Natural Gas Sales Agreement dated November 18, 1999 between
Tengasco, Inc. and Eastman Chemical Company (Incorporated by
reference to Exhibit 10.10 to the registrant's current report
on Form 8-K filed November 23, 1999)
10.12 Agreement between A.M. Partners LLC and Tengasco, Inc. dated
October 6, 1999 (Incorporated by reference to Exhibit 10.11 to
the registrant's 1999 Form 10-KSB)
10.13 Agreement between Southcoast Capital LLC and Tengasco, Inc.
dated February 25, 2000 (Incorporated by reference to Exhibit
10.12 to the registrant's 1999 Form 10-KSB)
10.14 Franchise Agreement between Powell Valley Utility District and
Tengasco, Inc. dated January 25, 2000 (Incorporated by
reference to Exhibit 10.13 to the registrant's 1999 Form
10-KSB)
10.15 Amendment Agreement between Eastman Chemical Company and
Tengasco, Inc. dated March 27, 2000 (Incorporated by reference
to Exhibit 10.14 to the registrant's 1999 Form 10-KSB)
10.16 Loan Agreement between Tengasco Pipeline Corporation and
Morita Properties, Inc. dated August 16, 2000 (Incorporated by
reference to Exhibit 10.15 to the registrant's current report
on Form 8-K dated August 22, 2000 (the "2000 8-K"))
10.17 Promissory note made by Tengasco Pipeline Corporation and
Morita Properties, dated August 16, 2000 (Incorporated by
reference to Exhibit 10.15(a) to the 2000 8-K)
10.18 Throughput Agreement between Tengasco Pipeline Corporation and
Morita Properties, dated August 16, 2000 (Incorporated by
reference to Exhibit 10.15(b) to the 2000 8-K)
10.19 Loan Agreement between Tengasco Pipeline Corporation and
Edward W.T. Gray III dated August 16, 2000 (Incorporated by
reference to Exhibit 10.16 to the 2000 8-K)
10.20 Promissory note made by Tengasco Pipeline Corporation and
Edward W.T. Gray III dated August 16, 2000 (Incorporated by
reference to Exhibit 10.16(a) to the 2000 8-K)
10.21 Throughput Agreement between Tengasco Pipeline Corporation and
Edward W.T. Gray III dated August 16, 2000 (Incorporated by
reference to Exhibit 10.16(b) to the 2000 8-K)
10.22 Loan Agreement between Tengasco Pipeline Corporation and
Malcolm E. Ratliff dated August 16, 2000 (Incorporated by
reference to Exhibit 10.17 to the 2000 8-K)
10.23 Promissory note made by Tengasco Pipeline Corporation and
Malcolm E. Ratliff dated August 16, 2000 (Incorporated by
reference to Exhibit 10.17(a) to the 2000 8-K)
10.24 Throughput Agreement between Tengasco Pipeline Corporation and
Malcolm E. Ratliff dated August 16, 2000 (Incorporated by
reference to Exhibit 10.17(b) to the 2000 8-K)
10.25 Loan Agreement between Tengasco Pipeline Corporation and
Charles F. Smithers, Jr. dated August 16, 2000 (Incorporated
by reference to Exhibit 10.18 to the 2000 8-K)
10.26 Promissory note made by Tengasco Pipeline Corporation and
Charles F. Smithers, Jr. dated August 16, 2000 (Incorporated
by reference to Exhibit 10.18(a) to the 2000 8-K)
10.27 Throughput Agreement between Tengasco Pipeline Corporation and
Charles F. Smithers, Jr. dated August 16, 2000 (Incorporated
by reference to Exhibit 10.18(b) to the 2000 8-K)
10.28 Loan Agreement between Tengasco Pipeline Corporation and Nick
Nishiwaki dated August 16, 2000 (Incorporated by reference to
Exhibit 10.19 to the 2000 8-K)
10.29 Promissory note made by Tengasco Pipeline Corporation and Nick
Nishiwaki dated August 16, 2000 (Incorporated by reference to
Exhibit 10.19(a) to the 2000 8-K)
10.30 Throughput Agreement between Tengasco Pipeline Corporation and
Nick Nishiwaki dated August 16, 2000 (Incorporated by
reference to Exhibit 10.19(b) to the 2000 8-K)
10.31 Memorandum Agreement between Tengasco, Inc. and the University
of Tennessee dated February 13, 2001 (Incorporated by
reference to Exhibit 10.19 to the registrant's annual report
on Form 10-KSB filed April 10, 2001 (the "2000 Form 10-KSB"))
10.32 Natural Gas Sales Agreement between Tengasco, Inc. and BAE
SYSTEMS Ordnance Systems Inc. dated March 30, 2001
(Incorporated by reference to Exhibit 10.20 to the 2000 Form
10-KSB)
10.33 Reducing and Revolving Line of Credit Up to $35,000,000 from
Bank One, N.A. to Tengasco, Inc. Tennessee Land & Mineral
Corporation and Tengasco Pipeline Corporation
II-4
dated November 8, 2001 (Incorporated by reference to Exhibit
10.21 to the registrant's quarterly report on Form 10-Q filed
November 14, 2001)
10.34 Tengasco, Inc. Incentive Stock Plan (Incorporated by reference
to Exhibit 4.1 to the registrant's registration statement on
Form S-8 filed October 26, 2000)
10.35 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated October 7,
2002 in the principal amount of $500,000
10.36 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated December 4,
2002 in the principal amount of $250,000
10.37 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated February 3,
2003 in the principal amount of $250,000
10.38 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated February
28, 2003 in the principal amount of $250,000
10.39 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated May 20,
2003 in the principal amount of $750,000
10.40 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated August 6,
2003 in the principal amount of $150,000
10.41 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Jeffrey R. Bailey dated May 20, 2003 in the
principal amount of $84,000
21 List of subsidiaries (Incorporated by reference to Exhibit 21
to the registrant's annual report on Form 10-KSB filed March
31, 2003 (the "2002 Form 10-KSB"))
23.1* Consent of Cary V. Sorensen, Esq.
23.2 Consent of BDO Seidman
23.3 Consent of Ryder Scott Company, L.P.
24.1 Power of Attorney (see signature page)
99.1 Ryder Scott Company, L.P. Report dated March 28, 2002
(Incorporated by reference to Exhibit 99.15 to the
registrant's annual report on Form 10-KSB filed April 10,
2002)
99.2 Ryder Scott Company, L.P. Report dated February 10, 2003
(Incorporated by reference to Exhibit 99.17 to the 2002 Form
10-KSB)
99.3* Form of Instructions as to Use of Rights Certificates
99.4* Form of Notice of Guaranteed Delivery for Rights Certificate
99.5* Form of Letter to Stockholders Who Are Record Holders
99.6* Form of Letter to Stockholders Who Are Beneficial Holders
99.7* Form of Letter to Clients of Stockholders Who Are Beneficial
Holders
99.8* Form of Nominee Holder Certification Form
99.9* Substitute Form W-9 for Use with the Rights Offering
99.10* Form of Beneficial Owner Election Form
99.11* Commitment Agreement between Tengasco, Inc. and the
Stockholders Identified Therein
----------------
* To be filed by amendment
ITEM 17. UNDERTAKINGS.
(a) Regulation S-K, Item 512 Undertakings
(1) The undersigned registrant hereby undertakes:
(i) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(a) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any
II-5
increase or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(ii) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(iii) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(2) The undersigned registrant hereby undertakes
that:
(i) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the underwriters during
the subscription period, the amount of unsubscribed securities to be purchased
by the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from those
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us are against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this registration statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in the city of Knoxville, Tennessee.
TENGASCO INC.
By: /s/ Richard T. Williams
-------------------------------
Richard T. Williams
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints jointly and severally, Richard T. Williams and
Jeffrey R. Bailey, and each of them, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to sign any registration statement and amendments
thereto for the same offering pursuant to Rule 462(b) under the Securities Act
of 1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all which said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do, or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Richard T. Williams Chairman of the Board; Chief September 30, 2003
------------------------------------
Richard T. Williams Executive Officer (principal
executive officer)
/s/ Jeffrey R. Bailey Director; President September 30, 2003
------------------------------------
Jeffrey R. Bailey
/s/ Mark A. Ruth Chief Financial Officer September 30, 2003
------------------------------------
Mark A. Ruth (principal financial and
accounting officer)
/s/ Stephen W. Akos Director September 30, 2003
------------------------------------
Stephen W. Akos
/s/ Joseph Earl Armstrong Director September 30, 2003
------------------------------------
Joseph Earl Armstrong
/s/ John A. Clendening Director September 30, 2003
------------------------------------
John A. Clendening
/s/ Robert L. Devereux Director September 30, 2003
------------------------------------
Robert L. Devereux
II-7
SIGNATURE TITLE DATE
/s/ Bill L. Harbert Director September 30, 2003
------------------------------------
Bill L. Harbert
/s/ Peter E. Salas Director September 30, 2003
------------------------------------
Peter E. Salas
/s/ Charles M. Stivers Director September 30, 2003
------------------------------------
Charles M. Stivers
II-8
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
3.1 Charter (Incorporated by reference to Exhibit 3.7 to the
registrant's registration statement on Form 10-SB filed August
7, 1997 (the "Form 10-SB"))
3.2 Articles of Merger and Plan of Merger (taking into account the
formation of the Tennessee wholly-owned subsidiary for the
purpose of changing the Company's domicile and effecting
reverse split) (Incorporated by reference to Exhibit 3.8 to
the Form 10-SB)
3.3 Articles of Amendment to the Charter dated June 24, 1998
(Incorporated by reference to Exhibit 3.9 to the registrant's
annual report on Form 10-KSB filed April 15, 1999 (the "1998
Form 10-KSB"))
3.4 Articles of Amendment to the Charter dated October 30, 1998
(Incorporated by reference to Exhibit 3.10 to the 1998 Form
10-KSB)
3.5 Articles of Amendment to the Charter filed March 17, 2000
(Incorporated by reference to Exhibit 3.11 to the registrant's
annual report on Form 10-KSB filed April 14, 2000 (the "1999
Form 10-KSB"))
3.6 By-laws (Incorporated by reference to Exhibit 3.2 to the Form
10-SB)
4.1* Form of Rights Certificate
5.1* Opinion of Cary V. Sorensen, Esq.
10.1 Purchase Agreement with IRC (Incorporated by reference to
Exhibit 10.1(a) to the Form 10-SB)
10.2 Amendment to Purchase Agreement with IRC (Incorporated by
reference to Exhibit 10.1(b) to the Form 10-SB)
10.3 General Bill of Sale and Promissory Note (Incorporated by
reference to Exhibit 10.1(c) to the Form 10-SB)
10.4 Compensation Agreement - M.E. Ratliff (Incorporated by
reference to Exhibit 10.2(a) to the Form 10-SB)
10.5 Compensation Agreement - Jeffrey D. Jenson (Incorporated by
reference to Exhibit 10.2(b) to the Form 10-SB)
10.6 Compensation Agreement - Leonard W. Burningham (Incorporated
by reference to Exhibit 10.2(c) to the Form 10-SB)
10.7 Agreement with the Natural Gas Utility District of Hawkins
County, Tennessee (Incorporated by reference to Exhibit 10.3
to the Form 10-SB)
10.8 Agreement with Powell Valley Electric Cooperative, Inc.
(Incorporated by reference to Exhibit 10.4 to the Form 10-SB)
10.9 Agreement with Enserch Energy Services, Inc. (Incorporated by
reference to Exhibit 10.5 to the Form 10-SB)
10.10 Amendment Agreement dated October 19, 1999 between Tengasco,
Inc. and the Natural Gas Utility District of Hawkins County,
Tennessee (Incorporated by reference to Exhibit 10.9 to the
registrant's current report on Form 8-K filed October 25,
1999)
10.11 Natural Gas Sales Agreement dated November 18, 1999 between
Tengasco, Inc. and Eastman Chemical Company (Incorporated by
reference to Exhibit 10.10 to the registrant's current report
on Form 8-K filed November 23, 1999)
10.12 Agreement between A.M. Partners LLC and Tengasco, Inc. dated
October 6, 1999 (Incorporated by reference to Exhibit 10.11 to
the registrant's 1999 Form 10-KSB)
10.13 Agreement between Southcoast Capital LLC and Tengasco, Inc.
dated February 25, 2000 (Incorporated by reference to Exhibit
10.12 to the registrant's 1999 Form 10-KSB)
10.14 Franchise Agreement between Powell Valley Utility District and
Tengasco, Inc. dated January 25, 2000 (Incorporated by
reference to Exhibit 10.13 to the registrant's 1999 Form
10-KSB)
10.15 Amendment Agreement between Eastman Chemical Company and
Tengasco, Inc. dated March 27, 2000 (Incorporated by reference
to Exhibit 10.14 to the registrant's 1999 Form 10-KSB)
II-9
10.16 Loan Agreement between Tengasco Pipeline Corporation and
Morita Properties, Inc. dated August 16, 2000 (Incorporated by
reference to Exhibit 10.15 to the registrant's current report
on Form 8-K dated August 22, 2000 (the "2000 8-K"))
10.17 Promissory note made by Tengasco Pipeline Corporation and
Morita Properties, dated August 16, 2000 (Incorporated by
reference to Exhibit 10.15(a) to the 2000 8-K)
10.18 Throughput Agreement between Tengasco Pipeline Corporation and
Morita Properties, dated August 16, 2000 (Incorporated by
reference to Exhibit 10.15(b) to the 2000 8-K)
10.19 Loan Agreement between Tengasco Pipeline Corporation and
Edward W.T. Gray III dated August 16, 2000 (Incorporated by
reference to Exhibit 10.16 to the 2000 8-K)
10.20 Promissory note made by Tengasco Pipeline Corporation and
Edward W.T. Gray III dated August 16, 2000 (Incorporated by
reference to Exhibit 10.16(a) to the 2000 8-K)
10.21 Throughput Agreement between Tengasco Pipeline Corporation and
Edward W.T. Gray III dated August 16, 2000 (Incorporated by
reference to Exhibit 10.16(b) to the 2000 8-K)
10.22 Loan Agreement between Tengasco Pipeline Corporation and
Malcolm E. Ratliff dated August 16, 2000 (Incorporated by
reference to Exhibit 10.17 to the 2000 8-K)
10.23 Promissory note made by Tengasco Pipeline Corporation and
Malcolm E. Ratliff dated August 16, 2000 (Incorporated by
reference to Exhibit 10.17(a) to the 2000 8-K)
10.24 Throughput Agreement between Tengasco Pipeline Corporation and
Malcolm E. Ratliff dated August 16, 2000 (Incorporated by
reference to Exhibit 10.17(b) to the 2000 8-K)
10.25 Loan Agreement between Tengasco Pipeline Corporation and
Charles F. Smithers, Jr. dated August 16, 2000 (Incorporated
by reference to Exhibit 10.18 to the 2000 8-K)
10.26 Promissory note made by Tengasco Pipeline Corporation and
Charles F. Smithers, Jr. dated August 16, 2000 (Incorporated
by reference to Exhibit 10.18(a) to the 2000 8-K)
10.27 Throughput Agreement between Tengasco Pipeline Corporation and
Charles F. Smithers, Jr. dated August 16, 2000 (Incorporated
by reference to Exhibit 10.18(b) to the 2000 8-K)
10.28 Loan Agreement between Tengasco Pipeline Corporation and Nick
Nishiwaki dated August 16, 2000 (Incorporated by reference to
Exhibit 10.19 to the 2000 8-K)
10.29 Promissory note made by Tengasco Pipeline Corporation and Nick
Nishiwaki dated August 16, 2000 (Incorporated by reference to
Exhibit 10.19(a) to the 2000 8-K)
10.30 Throughput Agreement between Tengasco Pipeline Corporation and
Nick Nishiwaki dated August 16, 2000 (Incorporated by
reference to Exhibit 10.19(b) to the 2000 8-K)
10.31 Memorandum Agreement between Tengasco, Inc. and the University
of Tennessee dated February 13, 2001 (Incorporated by
reference to Exhibit 10.19 to the registrant's annual report
on Form 10-KSB filed April 10, 2001 (the "2000 Form 10-KSB"))
10.32 Natural Gas Sales Agreement between Tengasco, Inc. and BAE
SYSTEMS Ordnance Systems Inc. dated March 30, 2001
(Incorporated by reference to Exhibit 10.20 to the 2000 Form
10-KSB)
10.33 Reducing and Revolving Line of Credit Up to $35,000,000 from
Bank One, N.A. to Tengasco, Inc. Tennessee Land & Mineral
Corporation and Tengasco Pipeline Corporation dated November
8, 2001 (Incorporated by reference to Exhibit 10.21 to the
registrant's quarterly report on Form 10-Q filed November 14,
2001)
10.34 Tengasco, Inc. Incentive Stock Plan (Incorporated by reference
to Exhibit 4.1 to the registrant's registration statement on
Form S-8 filed October 26, 2000)
10.35 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated October 7,
2002 in the principal amount of $500,000
10.36 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated December 4,
2002 in the principal amount of $250,000
10.37 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated February 3,
2003 in the principal amount of $250,000
10.38 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated February
28, 2003 in the principal amount of $250,000
10.39 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated May 20,
2003 in the principal amount of $750,000
10.40 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated August 6,
2003 in the principal amount of $150,000
II-10
10.41 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Jeffrey R. Bailey dated May 20, 2003 in the
principal amount of $84,000
21 List of subsidiaries (Incorporated by reference to Exhibit 21
to the registrant's annual report on Form 10-KSB filed March
31, 2003 (the "2002 Form 10-KSB"))
23.1* Consent of Cary V. Sorensen, Esq.
23.2 Consent of BDO Seidman
23.3 Consent of Ryder Scott Company, L.P.
24.1 Power of Attorney (see signature page)
99.1 Ryder Scott Company, L.P. Report dated March 28, 2002
(Incorporated by reference to Exhibit 99.15 to the
registrant's annual report on Form 10-KSB filed April 10,
2002)
99.2 Ryder Scott Company, L.P. Report dated February 10, 2003
(Incorporated by reference to Exhibit 99.17 to the 2002 Form
10-KSB)
99.3* Form of Instructions as to Use of Rights Certificates
99.4* Form of Notice of Guaranteed Delivery for Rights Certificate
99.5* Form of Letter to Stockholders Who Are Record Holders
99.6* Form of Letter to Stockholders Who Are Beneficial Holders
99.7* Form of Letter to Clients of Stockholders Who Are Beneficial
Holders
99.8* Form of Nominee Holder Certification Form
99.9* Substitute Form W-9 for Use with the Rights Offering
99.10* Form of Beneficial Owner Election Form
99.11* Commitment Agreement between Tengasco, Inc. and the
Stockholders Identified Therein
----------------
* To be filed by amendment
II-11