AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 2003
REGISTRATION NO. 333-109784
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
TENGASCO, INC.
-----------------------------------------------
(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 CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
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
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE (1) PRICE (1) FEE
------------------------ ----------------- ------------- ----------- ------------
Nontransferable Common
Stock Purchase Rights(2) 12,100,000 rights --- ---(3) ---(3)
Common Stock, par value
$.001 per share (4) 36,300,000 shares $.76 $27,588,000(5) $2,232(6)
(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.
(6)Includes $1,833, which was previously paid.
----------------------
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 DECEMBER __, 2003
PROSPECTUS
TENGASCO, INC.
12,100,000
SUBSCRIPTION RIGHTS
TO PURCHASE
36,300,000
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 36,300,000
shares of our common stock at a cash subscription price of $0.25 per share. You
will receive for each share of our common stock you own a right to purchase
three shares of our common stock at an exercise price of $0.25 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. In no event, however, may any
subscriber purchase shares of our common stock in the offering that, when
aggregated with all of the shares of our common stock otherwise owned by the
subscriber and his, her or its affiliates, would immediately following the
closing represent more than 50% of our issued and outstanding shares. 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 aggregate amount of up to approximately six million dollars
(including up to $2,625,000 in principal amount plus accrued interest to
Dolphin), with the balance of the net proceeds, if any, to be used to pay bank
indebtedness and/or for working capital purposes. Dolphin, of which Peter E.
Salas, a member of our Board of Directors, is the general partner and the
controlling person, is deemed to beneficially own approximately 19.8% of our
outstanding common stock. Our Board of Directors has determined that this rights
offering is advisable under our present financial, operational and other
circumstances. Our Board of Directors formed a special committee of its members
charged with, among other things, recommending to the full Board of Directors
the financial and other terms of this rights offering. We have no agreements
with any persons or entities, including Dolphin, members of our Board of
Directors, our management and any broker dealers, with respect to their exercise
of any rights offered hereby or their participation as an underwriter, broker or
dealer in this offering. See "The Rights Offering - Background of the Rights
Offering."
The rights will expire if they are not exercised by 5:00 p.m., New York City
time, on _____, 2003 [not later than 30 days after the date hereof], the
expected expiration date of the rights offering. We may extend the period for
exercising the rights for up to an additional 30 days. Subscription amounts
received will be held by the subscription agent until completion of the rights
offering, during which period the right holders will not earn interest on those
subscription amounts. 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. See "The Rights Offering." Our Board of Directors
makes no recommendation regarding your exercise of rights.
Shares of our common stock are traded on the American Stock Exchange, to
which application has been made for the listing of the shares offered hereby,
under the symbol "TGC." On December 23, 2003, the last reported sales price for
our common stock was $0.76 per share.
AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. YOU SHOULD CAREFULLY
CONSIDER THE RISK FACTORS BEGINNING ON PAGE 8 OF THIS PROSPECTUS BEFORE
EXERCISING YOUR RIGHTS.
PROCEEDS OF OFFERING
PER SHARE TOTAL
---------- ----------
Subscription Price........................... $0.25 $9,075,000
Estimated Expenses........................... $0.004 $150,000
Net Proceeds to Tengasco..................... $0.246 $8,925,000
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
Summary..............................1 Management.........................42
Risk Factors.........................8 Certain Relationships And Related
Forward Looking Statements..........13 Transactions.....................47
Use Of Proceeds.....................14 Principal Stockholders.............49
Price Range Of Common Stock.........15 The Rights Offering................51
Capitalization......................16 Description Of Capital Stock.......61
Selected Consolidated United States Federal Income Tax
Financial Data....................17 Consequences.....................64
Management's Discussion And Plan of Distribution...............65
Analysis Of Financial Condition Tennessee Anti-Takeover Law........65
And Results Of Operations.........18 Limitation Of Liability Of
Quantitative And Qualitative Directors........................65
Disclosure About Market Risks.....26 Legal Matters......................67
Business............................27 Experts............................67
Production..........................39 Where You Can Find More
Legal Proceedings...................41 Information......................67
Index to Financial Statements......F-1
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
nine months of 2003, we produced an average of approximately 1.2 million cubic
feet of natural gas per day and approximately 2,171 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 nine months of
2003, we produced an average of approximately .73 million cubic feet of natural
gas per day and 10,531 barrels of oil per month from 59 producing gas wells and
149 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 The rights offering is a distribution to
OFFERING? holders of our common stock, at no charge, of
nontransferable subscription rights at the rate of
one right (to purchase three 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 Each subscription right is a right to purchase
RIGHT? three shares of our common stock and carries
with it a basic subscription privilege and an
over-subscription privilege.
WHAT IS THE BASIC The basic subscription privilege of each right
SUBSCRIPTION PRIVILEGE? entitles you to purchase three shares of our
common stock at the subscription price of $0.75 in
the aggregate, or $0.25 per each share purchased.
You must purchase all three 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.
WHAT IS THE We do not expect that all of our stockholders
OVER-SUBSCRIPTION will exercise all of their basic subscription
PRIVILEGE? 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 subscription
OFFERING LAST? 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
[not later than 30 days after the date hereof],
your subscription rights will expire. We may, in
our discretion, extend the rights offering for up
to an additional 30 days.
IS THERE ANY LIMITATION Yes. In no event ma y any subscriber purchase
ON THE NUMBER OF MY shares of our common stock in the offering
RIGHTS THAT I MAY that, when aggregated with all of the shares of
EXERCISE? our common stock otherwise owned by the
subscriber and his, her or its affiliates, would
immediately following the closing represent more
than 50% of our issued and outstanding shares.
WHY IS TENGASCO ENGAGING The net proceeds of the rights offering will be
IN A RIGHTS OFFERING? used initially to pay non-bank indebtedness in
the aggregate amount of up to six million dollars
(including up to $2,625,000 in principal amount
plus accrued interest to Dolphin), 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 You will retain your current number of shares
NOT TO EXERCISE MY of common stock even if you do not exercise
SUBSCRIPTION 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 55.
WHAT SHOULD I DO IF I WANT If you hold shares of our common stock through a
TO PARTICIPATE IN THE broker, custodian bank or other nominee, we will
RIGHTS OFFERING BUT MY ask your broker, custodian bank or other nominee
SHARES ARE HELD IN THE to notify you of the rights offering. If you wish
NAME OF MY BROKER, to exercise your rights, you will need to have
CUSTODIAN BANK OR your broker, custodian bank or other nominee act
OTHER NOMINEE? 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 The subscription agent will mail rights
WANT TO PARTICIPATE IN certificates to you if you are a rights holder
THE RIGHTS OFFERING AND whose address is outside the United States or if
I AM A STOCKHOLDER IN A you have an Army Post Office or a Fleet Post
FOREIGN COUNTRY OR IN Office address. To exercise your rights, you must
THE ARMED SERVICES? 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 Consult your broker. Depending on the market price
PER SHARE OF OUR COMMON of our common stock, it most likely will be more
STOCK IS LESS THAN THE cost effective for you to purchase shares of our
SUBSCRIPTION PRICE PER common stock on the American Stock Exchange rather
SHARE WHEN I AM DECIDING than exercise your subscription rights.
TO EXERCISE MY
SUBSCRIPTION RIGHTS?
WILL I BE CHARGED A No. We will not charge a brokerage commission or a
SALES COMMISSION OR A fee to rights holders for exercising their rights.
FEE BY TENGASCO IF I However, if you exercise your rights through a
EXERCISE MY SUBSCRIPTION broker or nominee, you will be responsible for any
RIGHTS? fees charged by your broker or nominee.
WHAT IS THE BOARD OF Our board of directors is not making any
DIRECTORS' recommendation as to whether you should
RECOMMENDATION REGARDING exercise your subscription rights. You are
THE RIGHTS 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
three shares of common stock for $0.25 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 Privilege -Over-Subscription
Privilege."
HOW WAS THE SUBSCRIPTION The subscription price per share has been
PRICE ESTABLISHED? recommended to our Board of Directors by a
special committee of our Board charged with, among
other things, recommending to our Board the
financial and other terms of this offering. The
special committee considered 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. The
matters considered by the special committee in its
determination also included negotiations with a
representative of Dolphin, of which Mr. Salas is
the controlling person, as to a subscription price
at which Dolphin might participate in the
offering, although Dolphin has not entered into
any agreement with the Company with respect to
such participation. The special committee's
recommendations regarding subscription price per
share and other terms of the offering were finally
presented to our Board of Directors (with Mr.
Salas not participating with respect to these
matters) on December 23, 2003. In its
deliberations, the special committee was advised
by a financial adviser and by counsel. See "The
Rights Offering - Background of the Rights
Offering."
IS EXERCISING MY Yes. The exercise of your r ights involves
SUBSCRIPTION RIGHTS risks. Exercising your rights means buying
RISKY? 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 8.
MAY I TRANSFER MY RIGHTS No. Should you choose not to exercise your
IF I DO NOT WANT TO rights, you may not sell, give away or
PURCHASE ANY 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 No.
SUBSCRIBE IN THE RIGHTS
OFFERING?
HOW MANY SHARES WILL BE Assuming the rights offering is fully
OUTSTANDING AFTER THE subscribed, the number of shares of common
RIGHTS OFFERING? stock that will be outstanding immediately
after the rights offering will be approximately
48,400,000 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 Any rights not exercised after giving effect to
RIGHTS OFFERING IS NOT the over-subscription privilege will expire.
FULLY SUBSCRIBED AFTER
GIVING EFFECT TO THE
OVER-SUBSCRIPTION
PRIVILEGE?
HOW WILL THE RIGHTS The members of our board of directors and their
OFFERING AFFECT OUR affiliates are deemed to beneficially own
BOARD'S OWNERSHIP OF OUR 4,363,661 shares of our common stock,
COMMON STOCK? representing approximately 34.5% of our
outstanding common stock. Dolphin is deemed to
beneficially own 2,441,019 shares of our common
stock, representing approximately 19.8% of our
outstanding common stock. See "Principal
Stockholders."
If no rights holders other than Dolphin exercise
their rights in the rights offering, Dolphin will,
as a result of its subscription for and purchase
of the maximum number of unsubscribed shares, be
limited by the terms of this offering to ownership
of not more than 50% of our issued and outstanding
shares, when such ownership is aggregated with the
ownership of its affiliates. If no rights holders
other than all of the members of our board of
directors exercise their respective rights in the
rights offering, our board of directors
collectively will, as a result of its subscription
for and purchase of all unsubscribed shares, own
81.9% of our issued and outstanding shares and be
deemed to beneficially own approximately 84.1% of
our common stock. See "Principal Stockholders."
AFTER I EXERCISE MY No. Once you send in your subscription
RIGHTS, CAN I CHANGE MY certificate and payment you cannot revoke the
MIND AND CANCEL MY exercise of your rights, even if you later
PURCHASE? learn information about us that you consider to
be unfavorable and even if the market price of our
common stock is below the $0.25 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 $0.25 per share. See
"The Rights Offering - No Revocation."
WHAT ARE THE FEDERAL A holder of common stock will not recognize
INCOME TAX CONSEQUENCES OF income or loss for federal income tax purposes
EXERCISING MY SUBSCRIPTION in connection with the receipt or exercise of
RIGHTS AS A HOLDER OF subscription rights in the rights offering.
COMMON STOCK? See "United States Federal Income Tax
Consequences" on page 62.
WHEN WILL I RECEIVE MY If you purchase shares of common stock through
NEW SHARES? 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 "TGC."
AMERICAN STOCK EXCHANGE On December 23, 2003, the last reported sales
AND TREATED LIKE OTHER price of our common stock on the AMEX was $0.76
SHARES? per share.
IF THE RIGHTS OFFERING Yes. The subscription agent will hold all
IS NOT COMPLETED, WILL funds it receives in escrow until completion of
MY SUBSCRIPTION PAYMENT the rights offering. If the right offering is
BE REFUNDED TO ME? not completed, the subscription agent will
return promptly, without interest, all
subscription payments.
WHAT SHOULD I DO IF I If you have questions or need assistance,
HAVE OTHER QUESTIONS? please contact Mellon Investor Services LLC,
the subscription agent, at: (800) 932-6798.
For a more complete description of the rights
offering, see "The Rights Offering" beginning on
page 50.
AMERICAN STOCK EXCHANGE TGC
TRADING SYMBOL:
TO WHOM SHOULD I SEND
FORMS AND PAYMENTS
MELLON BANK, N.A.
BY MAIL: BY HAND:
Mellon Bank, N.A. Mellon Bank, N.A.
c/o Mellon Investor Services LLC c/o Mellon Investor Services LLC
P.O. Box 3301 120 Broadway, 13th Floor
South Hackensack, NJ 07606 New York, New York 10271
Attention: Reorganization Dept. Attention: Reorganization Dept
BY OVERNIGHT COURIER:
Mellon Bank, N.A.
c/o Mellon Investor Services LLC
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Attention: Reorganization Dept.
For instructions on how your subscription payment should be sent to the
subscription agent, see "The Rights Offering - Required Forms of Payment
of Subscription Price" on page __.
If you have questions, need additional copies of offering documents or
otherwise need assistance, please contact the information agent for this
offering:
Mellon Investor Services LLC
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
800-932-6798
To ask other questions or to receive copies of our recent SEC filings,
you also can contact us by mail or telephone, or refer to the other
sources described under "Where You Can Find More Information" on the
inside back cover of this prospectus.
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 nine months ended September 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.
Nine Months Ended
Year Ended December 31,(1) September 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 $4,907,216 $3,859,050
Production Costs and Taxes $3,094,731 $2,951,746 $2,614,414 $2,564,932 $1,943,944 $2,571,898 $2,084,597
Depreciation, Depletion
and Amortization $2,413,597 $1,849,963 $371,249 $283,907 $290,030 $1,887,333 $1,731,182
General and
Administrative $1,868,141 $2,957,871 $2,602,311 $1,961,348 $1,372,132 $1,112,289 $1,527,988
Interest Expense $578,039 $850,965 $415,376 $417,497 $574,906 $462,518 $448,046
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) $(1,897,568) $(2,820,539)
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) $(2,248,772) $(2,820,539)
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) $(0.16) $(0.26)
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) $(0.19) $(0.26)
Nine Months
As of December 31, (2) (3) Ended
------------------------------------------------------------------------ September
2002 2001 2000 1999 1998 30, 2003
(unaudited)
BALANCE SHEET DATA.
Working Capital Deficit $(7,998,835) $(6,326,204) $(708,317) $(1,406,263) $(1,929,215) $(9,296,959)
Oil and Gas Properties,
Net $13,864,321 $13,269,930 $9,790,047 $8,444,036 $7,747,655 $13,096,898
Pipeline Facilities, Net $15,372,843 $15,039,762 $11,047,038 $4,212,842 $4,019,209 $15,312,212
Total Assets $32,584,391 $32,128,245 $25,224,724 $15,182,712 $13,525,777 $31,662,903
Debt $9,867,454 $10,302,588 $9,217,085 $4,894,378 $4,693,865 $9,549,053
Asset Retirement Obligations -- -- -- -- -- $666,421
Mandatorily Redeemable
Preferred Stock $6,762,218 $5,459,050 $3,938,900 $1,988,900 $800,000 $6,884,257
Stockholders Equity $14,210,623 $14,991,847 $10,864,202 $7,453,930 $7,245,090 $12,458,833
(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.
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. 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.
RISKS RELATED TO OUR BUSINESS
GOING CONCERN QUALIFICATION.
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
resume 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 of additional borrowings 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 $(30,147,538) and a working capital deficit of $(9,296,959) as of
September 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.
SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING.
At the present time and if and until we are able to increase our production
and sales of gas, we must obtain the necessary funds to proceed with our
drilling program from other sources, such as this offering as well as other
equity investments, bank loans or joint ventures with other companies. In
addition, our revenues or cash flows could decline in the future because of a
variety of reasons, including lower oil and gas prices or the inoperability of
some or all of our existing wells. If our revenues or cash flows decrease and/or
we are unable to procure additional financing, we would be required to reduce
production over time or would otherwise be adversely affected, 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 our
operational cash requirements, we have a significant amount of loans and other
obligations either currently due or maturing January 4, 2004 and April 4, 2004.
These loans, excluding our obligations to Bank One (in outstanding principal
amount in excess of $5 million), include interest-bearing loans in the aggregate
principal amount of approximately $4.3 million, of which approximately $2.6
million is owed to Dolphin) plus accrued interest and past due accounts payable
in the aggregate amount of approximately $1.7 million (including preferred
dividends in arrears in an aggregate amount in excess of $400,000). We cannot
assure you 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, in
either or which events we may not be able to continue as a going concern.
DECLINES IN OIL AND GAS PRICES WILL MATERIALLY ADVERSELY AFFECT US.
Our future financial condition and results of operations will depend in part
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 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 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.
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.
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. Insurance is not available to us against all operational risks.
WE ARE NOT COMPETITIVE WITH RESPECT TO ACQUISITIONS OR PERSONNEL.
The oil and gas business is highly competitive. In addition, we have a weak
financial condition. In seeking any suitable oil and gas properties for
acquisition, or drilling rig operators and related personnel and equipment, we
are not able to compete with most other companies, including large oil and gas
companies and other independent operators with 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. We do not know whether we would be able to
recruit and hire qualified persons upon acceptable terms. We do not maintain
"Key Person" insurance for any of our key employees.
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 has been determined to be
$0.25 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.
The matters considered by the special committee in its determination included
negotiations with a representative of Dolphin as to a subscription price at
which Dolphin might participate, although Dolphin has not entered into any
agreement with us with respect to such participation. 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 below the subscription price.
DELISTING OF OUR COMMON STOCK FROM AMEX, WHICH IS POSSIBLE, WOULD ADVERSELY
AFFECT US AND HOLDERS OF THOSE SHARES.
Our common stock is listed on the American Stock Exchange, which we refer to
as AMEX. To maintain listing of securities, AMEX requires satisfaction of
certain maintenance criteria that we are not sure that we will continue to be
able to satisfy. For example, AMEX may require prior shareholder approval of
this offering. If we are unable to satisfy such maintenance criteria in the
future, or if AMEX requires prior shareholder approval and we fail to comply,
our common stock may be delisted from trading on AMEX. If our common stock is
delisted from trading on AMEX, then trading, if any, would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or on
the "Electronic Bulletin Board" of the National Association of Securities
Dealers, Inc. (the "NASD") and consequently an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
our common stock.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Commission regulations generally
define a penny stock to be an equity security that has a market price of less
than $5.00 per share, subject to certain exception. Such exceptions include any
equity security listed on a national securities exchange and any equity security
issued by an issuer that has (i) net tangible assets of at least $2,000,000, if
such issuer has been in continuous operation for three years, (ii) net tangible
assets of at least $5,000,000, if such issuer has been in continuous operation
for less than three years, or (iii) average annual revenue of at least
$6,000,000, if such issuer has been in continuous operation for less than three
years. Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risks associated therewith.
In addition, if our common stock is not listed on AMEX, or if we do not meet
the other exceptions to the penny stock regulations cited above, trading in our
common stock, including exercising the rights offered hereby, would be covered
by the Commission's Rule 15g-9 under the Exchange Act for non-national
securities exchange listed securities. Under this rule, broker/dealers who
recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities also are exempt from this rule if the market price is
at least $5.00 per share.
If the our common stock becomes subject to the regulations applicable to
penny stocks, the market liquidity for our common stock could be adversely
affected. In such event, the regulations on penny stocks could limit the ability
of broker/dealers to sell our common stock and thus the ability of purchasers of
our common stock to sell their shares in the secondary market.
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 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 for up to an additional 30 days. 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 MUST CAREFULLY FOLLOW SUBSCRIPTION INSTRUCTIONS OR YOUR SUBSCRIPTION MAY
BE REJECTED.
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
[not later than 30 days after the date hereof], 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. Because 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.
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; liquidity and anticipated cash
needs and availability; prospects for success of this offering; impact of this
offering on our financial condition or prospects or the market for or price of
our common stock; and control of our company. 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 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.
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
$9,075,000. 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 in the aggregate amount of up to
approximately six million dollars (including up to $2,625,000 in principal
amount plus accrued interest to Dolphin), and to apply the balance of such
proceeds, if any, to repay bank indebtedness to some extent and/or for working
capital purposes, possibly including the drilling of additional wells. In the
event that less than all $9,075,000 of gross proceeds is received in the
offering, we intend to apply the received gross proceeds, unless the offering is
terminated by us by reason of the insufficiency of investor participation or any
other reason in our discretion, first for the repayment of non-bank
indebtedness, including to Dolphin, with secured non-bank indebtedness to be
repaid before unsecured non-bank indebtedness, and next to pay bank indebtedness
to some extent and/or for working capital purposes in our discretion. The
non-bank indebtedness to be discharged with the proceeds hereof includes secured
loans from Dolphin from time to time since December 2002 in the aggregate
principal amount of $2,125,000 bearing interest at 12% per annum and maturing
January 4, 2004, unsecured convertible loans from Dolphin and others in the
aggregate principal amount of $1,150,000 bearing interest at 8% per annum and
maturing January 4, 2004, and due and payable unsecured loans in the aggregate
principal amount of $300,000 bearing interest at 8% per annum (the lenders of
which include Messrs. Akos and Devereux), all of which loans were made to us to
provide working capital and to cover certain due and payable liabilities and
accounts payable. See `Certain Relationships and Related Transactions." 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" and "- Significant Capital Requirements;
Need for Additional Financing."
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 December 23, 2003)........... 0.94 0.63
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
CAPITALIZATION
The following table sets forth our summary capitalization as of September 30,
2003, and our summary capitalization as of September 30, 2003 as adjusted to
reflect the assumed sale of 36,300,000 shares of our common stock (the maximum
number of shares offered) in this rights offering at an offering price of $0.25
per share and the application of the estimated net proceeds therefrom, after
deducting estimated offering expenses of $150,000.
September 30, 2003
-----------------------
As
Actual Adjusted
--------- ----------
Total Debt:
Long-term debt, less current maturities.............. $ 590,055 $ 590,055
------------ -------------
Mandatorily Redeemable Preferred Stock:
Cumulative convertible redeemable preferred;
redemption value $7,072,000; 70,720 shares
outstanding.......................................... 6,884,257 6,884,257
Stockholders Equity:
Common Stock, $0.001 par value, 50,000,000
shares authorized.................................... 12,065 48,365
Additional paid-in capital........................... 42,855,693 51,744,393
Treasury stock, at cost.............................. (145,887) (145,887)
Accumulated other comprehensive loss................. (115,500) (115,500)
Accumulated deficit.................................. (30,147,538) (30,147,538)
------------ -------------
Total stockholders' equity..................... 12,458,833 21,383,833
------------ -------------
Total capitalization.................................... $19,933,145 $ 28,858,145
============ =============
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 nine months ended September 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.
Nine Months Ended
Year Ended December 31, (1) September 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 $4,907,216 $3,859,050
Production Costs and Taxes $3,094,731 $2,951,746 $2,614,414 $2,564,932 $1,943,944 $2,571,898 $2,084,597
Depreciation, Depletion
and Amortization $2,413,597 $1,849,963 $371,249 $283,907 $290,030 $1,887,333 $1,731,182
General and
Administrative $1,868,141 $2,957,871 $2,602,311 $1,961,348 $1,372,132 $1,112,289 $1,527,988
Interest Expense $578,039 $850,965 $415,376 $417,497 $574,906 $462,518 $448,046
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) $(1,897,568) $(2,820,539)
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) $(2,248,772) $(2,820,539)
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) $(0.16) $(0.26)
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) $(0.19) $(0.26)
Nine Months
As of December 31,(2)(3) Ended
------------------------------------------------------------------------- September 30,
2002 2001 2000 1999 1998 2003
(unaudited)
BALANCE SHEET DATA.
Working Capital Deficit $(7,998,835) $(6,326,204) $(708,317) $(1,406,263) $(1,929,215) $(9,296,959)
Oil and Gas Properties,
Net $13,864,321 $13,269,930 $9,790,047 $8,444,036 $7,747,655 $13,096,898
Pipeline Facilities, Net $15,372,843 $15,039,762 $11,047,038 $4,212,842 $4,019,209 $15,312,212
Total Assets $32,584,391 $32,128,245 $25,224,724 $15,182,712 $13,525,777 $31,662,903
Debt $9,867,454 $10,302,588 $9,217,085 $4,894,378 $4,693,865 $9,549,053
Asset Retirement Obligations -- -- -- -- -- $666,421
Mandatorily Redeemable
Preferred Stock $6,762,218 $5,459,050 $3,938,900 $1,988,900 $800,000 $6,884,257
Stockholders Equity $14,210,623 $14,991,847 $10,864,202 $7,453,930 $7,245,090 $12,458,833
(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.
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
nine months of 2003, we produced an average of approximately 1.2 million cubic
feet of natural gas per day and approximately 2,171 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 nine months of
2003, we produced an average of approximately .73 million cubic feet of natural
gas per day and 10,531 barrels of oil per month from 59 producing gas wells and
149 producing oil wells in Kansas.
The availability of additional borrowings 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 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 $(30,147,538) and a working capital deficit of
$(9,296,959) as of September 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. See "Risk Factors - Going Concern Qualification."
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 $453,000 at September 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
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
KANSAS During the first nine months of 2003, we produced and sold 94,782
barrels of oil and 196,373 Mcf of natural gas from our Kansas Properties, which
are comprised of 149 producing oil wells and 59 producing gas wells. The first
nine months production of 94,782 barrels of oil compares to 106,683 barrels
produced in the first nine months of 2002. The first nine months production of
196,373 Mcf of gas compares to 214,859 Mcf produced in the first nine months of
2002. In summary, the first nine 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 $2,959,430 in the first nine months of 2003 as compared to $2,438,136 for
the first nine 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 nine 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 nine months of 2003 was an
average of 1.195 million cubic feet per day during that period as compared to
2.114 million cubic feet per day during the first nine months of 2002. The first
nine 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. The decrease in our pipeline
transportation revenues is directly related to the decrease in our gas
production volumes.
We recognized $5,053,454 in oil and gas revenues from our Kansas Properties
and the Swan Creek Field during the first nine months of 2003 compared to
$4,059,165 in the first nine months of 2002. The increase in revenues was due to
a significant increase in price from oil and gas sales. Oil prices averaged
$28.60 per barrel in 2003 as compared to $22.98 during the comparable period in
2002. Gas prices averaged $5.31 per Mcf in 2003 as compared to $2.89 during the
comparable period in 2002. The Swan Creek Field produced 322,739 Mcf and 570,883
Mcf in the first nine 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 wells.
We realized a net loss attributable to common stockholders of $2,248,772
(($0.19) per share of common stock) during the first nine months of 2003
compared to a net loss in the first nine months of 2002 attributable to common
stockholders of $2,820,539 (($0.26) 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 nine months of 2003 of $2,571,898
were consistent with production costs and taxes of $2,084,597 in the first nine
months of 2002. The difference of $487,301 was due to a reclassification of
insurance cost relating to field activities of $148,098 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 $209,563 in the
first nine months of 2003. The remaining increase was due to increased property
taxes on the pipeline as a result of its higher assessed value after completion.
Depreciation, Depletion, and Amortization expense for the first nine months
of 2003 was $1,887,333 compared to $1,731,182 in the first nine 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 nine months of 2003 was $1,072,926
as compared to $1,019,138 in the first nine months of 2002. We also amortized
$153,633 of loan fees relating to the Bank One loan and convertible notes in the
first nine months of 2003 as compared to $129,540 in the same period of 2002.
During the first nine months of 2003, we reduced our general and
administrative costs significantly by $415,699 from those of the first nine
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 $372,595 during the first nine months of 2002 to
$402,583 during the first nine months of 2003 as a result of the increase in the
amount of preferred stock outstanding from new private placements occurring
during the second quarter of 2002. Our 2003 public relations costs were reduced
by $146,967 from those of 2002 as part of our efforts to cut costs.
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.
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.
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 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 December 1, 2003, the outstanding
principal balance under the credit agreement was approximately $5.1 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 August 2003, a
procedural schedule was set leading toward a trial date in June 2004 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."
If funding for drilling becomes sufficiently available, as to which there can
be no assurance, we plan to drill wells in the Swan Creek Field and in 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 September 30, 2003, we had total stockholders' equity of $12,458,833 on
total assets of $31,662,903. We had a net working capital deficiency at
September 30, 2003 of $(9,296,959) 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. Net cash used in operating activities was $(724,084) during
the first nine months of 2002 as compared to net cash provided by operating
activities during the first nine months of 2003 of $543,258. Our net loss in
2002 increased to $(3,154,555) from $(2,262,787) in 2001 and decreased from
$(2,447,944) during the first nine months of 2002 to $(1,494,985) during the
first nine 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 $386,681 for
the first nine months of 2003 as compared to $2,549,984 for the first nine
months of 2002. The decrease in net cash used for investing activities during
2002 is primarily attributable to the 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. Net cash used in financing activities amounted to
$8,522 during the first nine months of 2003 as compared to net cash provided by
financing activities of $3,203,156 during the first nine 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 nine-month periods was a result, in part,
of the private placements of common stock and preferred stock during the earlier
period in the aggregate amount of $3,980,168 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.
We must make substantial capital expenditures for the acquisition,
exploration and development of oil and gas reserves. We are presently unable to
fund the resumption of our drilling program in the Swan Creek Field. 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 this offering as
well 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 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 a variety of reasons, including lower oil and gas
prices or the inoperability of some or all of our existing wells, as to which
there can be no assurances. We do not know that we will be able to obtain
additional funding. In addition to our operational cash requirements, we have a
significant amount of loans and other obligations either currently due or
maturing January 4, 2004 and April 4, 2004. See "Risk Factors - Significant
Capital Requirements; Need for Additional Financing."
CRITICAL ACCOUNTING POLICIES
Our 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 $45,312, $1,982,529, $4,821,883 and
$1,456,996 of these costs for the first nine months of 2003 and for the years
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 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
A reporting issue has arisen regarding the application of certain provisions
of SAFS No. 141 and SFAS No. 142 to companies in the extracting industries
including oil and gas companies. The issue is whether SFAS No. 142 regulates
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
owned and provide specific footnote disclosures. Historically, we had 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 cost of mineral rights held
under lease or other contractual arrangement associated with extracting oil and
gas as a separate intangible asset line item on the balance sheet, we would be
required to reclassify approximately $453,000 at September 30, 2003 and $346,000
at December 31, 2002, respectively, out of oil and gas properties and into a
separate intangible asset line item. Our cash flows and results of operations
would not be affected since such intangible assets would continue to be depleted
and amortized for impairment in accordance with full cost accounting rules.
Further, we do not believe the classification of the cost 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 June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 cost. This statement requires
companies to record the present value of obligations associated with the
retirement of tangible long-lived assets in the periods in which it is incurred.
The liability is capitalized as part of the related long-lived assets carrying
amount. Over time, accretion of the liability is recognized as an operating
expense and the capitalized cost is depreciated over the expected useful life of
the related asset. Our asset retirement obligations relate primarily to the
plugging, dismantlement, removal site reclamation and similar activities of our
oil and gas properties. Prior to adoption of this statement, such obligations
were accrued ratably over the productive lives of the assets through our
depreciation, depletion and amortization for oil and gas properties without
recording a separate liability for such amounts. The impact of applying this
statement as of January 1, 2003 and September 30, 2003 is discussed in the Notes
to the Consolidated Financial Statements contained elsewhere in this Prospectus.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of SFAS No. 4, 44, 64, Amendment of SFAS No. 13, and Technical
Corrections" ("SFAS 145"). SFAS 4, which was amended by SFAS 64, required all
gains and losses from the extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect.
As a result of SFAS 145, the criteria in Accounting Principles Board opinion 30
will now be used to classify those gains and losses. SFAS 13 was amended to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
adoption of SFAS 145 will not have a current impact on our consolidated
financial statements.
In July 2002, FASB issued SFAS No. 146, Accounting for Cost Associated with
Exit or Disposal Activities. The standard requires companies to recognize cost
associated with exit or disposal activities when they are incurred rather than
at the date of commitment to an exit or disposal plan. Examples of cost covered
by the standard include lease termination costs and certain employee severance
costs that are associated with restructuring, discontinued operation, plant
closing, or other exit or disposal activity. Previous accounting guidance was
provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." Statement 146 replaces Issue 94-3.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We do not currently have any plans for exit
or disposal activities, and therefore do not expect this standard to have a
material effect on our consolidated financial statements upon adoption.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45.
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and here cognition/measurement requirements are effective on a
prospective basis for guarantees issued or modified after December 31, 2002. The
application of the requirements of FIN 45 did not have an impact on our
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123 ("Statement 148"). This amendment provides two additional methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. Additionally, more prominent disclosures
in both annual and interim financial statements are required for stock-based
employee compensation. The transition guidance and annual disclosure provisions
of Statement 148 are effective for fiscal years ending after December 15, 2002.
The interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of Statement 148 did not have a material impact on our consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51 "Consolidated Financial Statements" consolidation by
business enterprises of variable interest entities, which possess certain
characteristics. The Interpretation requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest entity must
be included in the consolidated financial statements with those of the business
enterprise. This Interpretation applies immediately to variable interest
entities created after January 31, 2003 and to variable interest entities in
which an enterprise obtains an interest after that date. We do not have any
ownership in any variable interest entities.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 requires three types of freestanding financial instruments to be
classified as liabilities in statements of financial position. One type is
mandatory redeemable shares, which the issuing company is obligated to buy back
in exchange for cash or other assets. A second type, which includes put options
and forward purchase contracts, involves instruments that do or may require the
issuer to buy back some of its shares in exchange for cash or other assets. The
third type of instrument is obligations that can be settled with shares, the
monetary value of which is fixed, tied solely or predominately to a variable
such as a market index, or varies inversely with the value of the issuer's
shares. The majority of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. In accordance with SFAS No. 150, we adopted this standard on July 1,
2003. Adoption of SFAS No. 150 did not have a material impact on our
consolidated financial statements.
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. Gas price realizations ranged from a monthly low of $1.91
per Mcf to a monthly high of $4.01 per Mcf during 2002.
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 nine 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 at December
31, 2002 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 September 30, 2003.
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
nine months of 2003, we produced an average of approximately 1.2 million cubic
feet of natural gas per day and 2,171 barrels of oil per month from 23 producing
gas wells and six producing oil wells in the Swan Creek Field.
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.
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 Eastman would
purchase daily from the Swan Creek Field at 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.
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 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
$300,000. 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 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.
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 nine months of 2003
averaged 1.195 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 nine 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 nine 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
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 nine 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.
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 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
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.
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.
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% overriding royalty in nine of our existing wells, and a 50%
overriding royalty and 6% overriding royalty, 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. 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 nine 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.
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.
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.
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
LEGAL PROCEEDINGS
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 $5.1 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 August 2003, a procedural
schedule was set leading toward a trial date in June 2004 in the event
settlement is not reached.
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 on
June 18, 1998 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.
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 45 Chief Financial Officer
Robert M. Carter 66 President - Tengasco Pipeline
Corporation
Cary V. Sorensen 55 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) 41 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. Mr. Bailey left Halliburton and 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 22 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.
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 and continuing a general civil law practice until
June 1999. 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. Between February 2000 and June 2000, Mr. Akos was
employed at J.C. Bradford & Co., an investment bank, as a Vice President and
Investment Limited Partner. Prior thereto commencing in 1993, he was a Vice
President with Mercantile Bank of St. Louis and its predecessor, Mark Twain
Bank. Before 1993 he was a broker, among other things, at brokerage firms Dean
Witter, Shearson Lehman Hutton, Drexel Burnham Lambert, and Kidder Peabody. 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 Representative 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 1992. 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.
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 $500 -0- 52,500 -0- -0-
--------------
(1) Malcolm E. Ratliff served as our Chief Executive Officer throughout 2002.
Richard T. Williams, our current Chief Executive Officer replaced Mr.
Ratliff on February 3, 2003.
OPTION GRANTS FOR FISCAL 2002
The following table sets forth information concerning options to purchase
shares of our common stock granted to the named executive officer in 2002.
INDIVIDUAL GRANTS
------------------------------ Potential Realizable
Number of Percent of Total Value At Assumed
Securities Options/SARs Annual Rates of Stock
Underlying Granted to Exercise or PRICE APPRECIATION(1)
Options/SARs Employees in Base Price Expiration ---------------------
NAME GRANTED (#) FISCAL 2002 ($/SH) DATE 5%($) 10%($)
----- ----------- ---------------- ----------- ---------- ---------- --------
Malcolm E. Ratliff 6,562 4% $2.86 8/4/05 $2,952 $6,233
------------
(1) These options expired by their terms 90 days following the resignation on
March 10, 2003 of Mr. Ratliff from our Board of Directors.
AGGREGATE OPTION EXERCISES FOR FISCAL 2002 AND YEAR END OPTION VALUES
The following table sets forth the number of shares received upon exercise of
stock options by the names executive officer during the last completed fiscal
year and the aggregate options to purchase shares of our common stock held by
the named executive officer at December 31, 2002.
Number of Securities (1)
Underlying Unexercised Value (2) of Unexercised
Options/SARs at In-the-Money Options/SARs
Shares December 31, 2002 at December 31,2002
Acquired Value ($)
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.
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, we have entered into transactions with related parties.
Certain of those transactions are described below. Our Board of Directors has
not adopted any general policy with respect to these transactions, many of which
were effected on our behalf by senior management prior to consideration by our
Board of Directors in light of senior management's perceived urgency of the
funding requirements, the availability of alternative sources and the terms of
such transactions, which senior management viewed as at least as favorable to us
as could have been obtained through arms-length negotiations with unaffiliated
third parties. In each of the loans to us by Dolphin as described below, Peter
Salas, a member of our Board, negotiated with our senior management as to the
terms thereof and did not participate in any Board action with respect thereto.
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. The market prices of our common stock as measured by the closing prices
on the American Stock Exchange on January 21 and April 9, 2002 were $7.74 and
$5.80 per share, respectively. We believe that these sales were made on terms at
least as favorable to us as could have been obtained through arm's length
negotiations with unaffiliated third parties.
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. The market prices of our
common stock as measured by the closing prices on the American Stock Exchange on
July 5 and 23, 2002 were $2.80 and $2.50 per share, respectively. We believe
that these sales were made on terms at least as favorable to us as could have
been obtained through arm's length negotiations with unaffiliated third parties.
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
with IRC's shares of our common stock as security for IRC's obligations to
Dolphin.
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. The market price of our
common stock as measured by the closing prices on the American Stock Exchange
during October 2002 ranged from $2.20 to $2.90 per share. We believe that this
sale was made on terms at least as favorable to us as could have been obtained
through arm's length negotiations with unaffiliated third parties.
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. The market price
of our common stock as measured by the closing price on the American Stock
Exchange on January 7, 2003, the date of the transaction, was $1.20 per share.
We believe that this sale was made on terms at least as favorable to us as could
have been obtained through arm's length negotiations with unaffiliated third
parties.
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 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 December 2002 through December 9, 2003, Dolphin acquired a total of 85%
undivided interest in our Tennessee and Kansas pipelines as collateral for a
series of seven loans. In the first five of these transactions, Peter E. Salas,
a member of our board and the general partner and controlling person of Dolphin,
negotiated the terms of the loans directly with our management on an arm's
length basis, which terms were approved by our management in view of our
immediate needs, financial condition and prospective alternatives and under
circumstances in which Dolphin was not generally engaged in the business of
lending money. These loans were made on terms that we believe were at least as
favorable to us as we could have obtained through arm's length negotiations with
unaffiliated third parties. Our board approved the sixth and seventh loans on
December 3 and 9, 2003, in the amounts of $225,000 and $250,000, respectively,
with no participation by Mr. Salas in the meeting or the vote, which was
unanimous by the seven other directors present at the meeting. In addition, we
have entered into a continuing security agreement, which was approved by our
board with no participation by Mr. Salas in the meeting or vote, which was
unanimous by the seven other directors present at the meeting, providing the
terms of Dolphin's security interest collateralizing all of its loans.
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, with such shares
valued at the market price thereof. 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. Dolphin and these officers and directors will receive the same
terms as the other stockholders in this rights offering. See "The Rights
Offering - Effects of Rights Offering on Dolphin's Securities and Ownership."
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of December __, 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................. 39,450(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) 19.8
Bill L. Harbert....................... 1,513,496(6) 12.5
Malcolm E. Ratliff.................... 2,250,487(7) 18.7
Peter E. Salas........................ 2,465,019(8) 19.9
Charles M. Stivers.................... 37,125(9) *
Richard T. Williams................... 73,125(10) *
All Officers and Directors as a group. 4,363,661 34.5
------------
* 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 34,500
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 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 by Mr. Ratliff and 849,744 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.
THE RIGHTS OFFERING
Background of the Rights Offering
Our Board of Directors proposed that we attempt to raise equity capital
through a rights offering to all of our stockholders. The primary reason for the
rights offering is to pay non-bank indebtedness in the approximate amount of up
to six million dollars (including up to $2,625,000 in principal amount plus
accrued interest to Dolphin), 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, possibly including the drilling of wells. The board's proposal was
based upon our financial, operating and other circumstances and the limited
prospects of capital-raising alternatives.
In proposing the rights offering, 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; 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. In reaching
its decision to propose 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.
Following its proposal of a rights offering, our Board of Directors formed a
special committee consisting of Stephen W. Akos, John A. Clendening, Robert L.
Devereux and Charles M. Stivers. None of these directors is an employee of us
nor has any personal interest in the rights offering, except by virtue of their
existing share ownership and the fact that Messrs. Akos and Devereux are owed
$25,000 and up to $100,000, respectively, pursuant to loans made to us by them
and others in 1998 in the aggregate principle amount of $300,000, which loans
remain due and payable. We intend to use the net proceeds of this offering to
repay these loans. The special committee has been charged by the Board with
determining the financial and other terms and feasibility of the rights offering
and making recommendations regarding such matters to the Board of Directors.
Although Mr. Salas participated in our Board's preliminary discussions regarding
a proposed rights offering, he has not participated in any Board discussions in
connection with the receipt of the special committee's determinations and
recommendations regarding the terms hereof and did not participate in any Board
discussions in connection with the receipt on December 23, 2003 of the special
committee's final determinations and recommendations regarding the terms hereof.
The subscription price per share has been recommended to our Board by the
special committee. In addition to the factors considered by the Board as
described above, the special committee considered a number of factors, including
the historic and then current market price of our 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. In particular, the special committee
also considered its arm's length negotiations with a representative of Dolphin,
of which Mr. Salas is the controlling person, regarding a subscription price at
which Dolphin might participate in the offering, although Dolphin has not
proposed or entered into any agreement with the special committee or us with
respect to such participation.
In connection with all of the foregoing considerations by the special
committee, it received the advice of both a financial advisor and counsel, each
of which was engaged specifically by the special committee for these purposes.
The special committee's recommendations regarding subscription price per share
and other terms of the offering were finally presented to our Board of Directors
(with Mr. Salas not participating with respect to these matters) on December 23,
2003.
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. In
addition, we have not retained a financial advisor to make any recommendation to
you about whether you should exercise your rights.
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 three additional shares of our common
stock at a price of $0.25 per such purchased share.
LIMITATION ON EXERCISE OF THE RIGHTS
In no event may any subscriber purchase shares of our common stock in the
offering that, when aggregated with all of the shares of our common stock
otherwise owned by the subscriber and his, her or its affiliates, would
immediately following the closing represent more than 50% of our issued and
outstanding shares.
EXPIRATION OF THE RIGHTS OFFERING
You may exercise your subscription privilege at any time before 5:00 p.m.,
New York City time, on ______, 2003 [not later than 30 days following the date
hereof], 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 up to
30 days 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.
NO INTEREST ON SUBSCRIPTION AMOUNTS
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 $0.25 per share subscription price, unless we amend the offering.
During this period of no revocation, subscription amounts received will be held
by the subscription agent until completion, expiration or termination of the
rights offering, during which period the rights holders will not earn interest
on those subscription amounts. Further, we may terminate the offering at any
time, for any reason at our sole discretion. Circumstances under which we may
terminate the rights offering include without limitation insufficient
subscription levels.
SUBSCRIPTION PRIVILEGES
BASIC SUBSCRIPTION PRIVILEGE. With your basic subscription privilege, you may
purchase three shares of our common stock per right, upon delivery of the
required documents and payment of the subscription price of $0.75 in the
aggregate, or $0.25 per share. You must purchase all three 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 to 12,100,000, which number exceeds the
number of outstanding shares of our common stock on the record date of
12,049,977, 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. If you exercise your basic subscription
privilege in full, you may also subscribe for additional shares that other
shareholders have not purchased under their basic subscription privilege. You
may purchase a percentage of the unsubscribed shares equal to the percentage of
shares purchased by you under the basic subscription privilege, as compared to
the total number of shares purchased by all shareholders, including you, who are
exercising their oversubscription privilege. If there are not enough shares
available to fill all subscriptions for additional shares, then the available
shares will be allocated pro rata, in successive rounds, based on the number of
shares each subscriber for additional shares has purchased under his, her or its
basic subscription privilege.
For example, if there are 900,000 available shares under the
oversubscription privilege and the only oversubscribing shareholders are a 10%
shareholder subscribing for 500,000 additional shares and a 5% shareholder
subscribing for 500,000 additional shares, then the 10% shareholder would
receive 500,000 shares and the 5% shareholder would receive the remaining
400,000 shares, as follows: the subscription agent will initially allocate
500,000 shares to the 10% shareholder and 250,000 to the 5% shareholder
according to their relative 2:1 ownership percentages and, thereafter, will
allocate the remaining shares to the 5% shareholder since he, she or it was the
only shareholder to subscribe for these shares. We will not allocate to you more
than the number of shares you have actually subscribed and paid for. As soon as
practicable after the expiration date, Mellon Bank, N.A., acting as our
subscription agent, will determine the number of shares that you may purchase
pursuant to the oversubscription privilege.
You are not entitled to exercise the oversubscription privilege unless you
have fully exercised your basic subscription privilege. For this purpose, you
would only count the shares you own in your own name, and not other shares that
might, for example, be jointly held by you with a spouse, held as a custodian
for someone else, or held in an individual retirement account.
You can elect to exercise the oversubscription privilege only at the same
time you exercise your basic subscription privilege in full.
In exercising the oversubscription privilege, you must pay the full
subscription price for all of the shares you are electing to purchase. If we do
not allocate to you all of the shares you have subscribed for under the
oversubscription privilege, we will refund to you, by mail, any payment you have
made for shares which are not being made available to you, promptly after
completion of this offering. Interest will not be payable on amounts refunded.
Banks, brokers and other nominees who exercise the oversubscription privilege
on behalf of beneficial owners of shares must report certain information to us
and the subscription agent, Mellon Bank, N.A., and report certain other
information received from each beneficial owner exercising shares. Generally,
banks, brokers and other nominees must report:
o the number of shares held on the record date on behalf of each
beneficial owner;
o the number of shares as to which the basic subscription privilege has
been exercised on behalf of each beneficial owner;
o that each beneficial owner's basic subscription privilege, held in the
same capacity, has been exercised in full; and
o the number of shares subscribed for, pursuant to the oversubscription
privilege, by each beneficial owner, if any.
If you complete the portion of the subscription certificate required for you
to exercise the oversubscription privilege, you will be representing and
certifying that you have fully exercised your basic subscription privilege as
described above. You must exercise your oversubscription privilege at the same
time you exercise your basic subscription privilege.
In some circumstances, in order to comply with applicable state securities
laws, we may not be able to honor your basic and/or oversubscription privileges,
even if we have shares available and the above conditions are met.
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 5:00 p.m., New York City time, on ________, 2003 [not
later than 30 days after the date hereof], 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.
MAILING OF SUBSCRIPTION CERTIFICATES AND RECORD HOLDERS
We are sending a subscription certificate to each record holder, together
with this prospectus and related instructions to exercise the rights. In order
to exercise rights, you must fill out and sign the subscription certificate and
timely deliver it to the subscription agent, together with full payment for the
shares to be purchased. Only the holders of record of our common stock as of the
close of business as of the record date may exercise rights.
A depository bank, trust company or securities broker or dealer which is a
record holder for more than one beneficial owner of shares may divide or
consolidate subscription certificates to represent shares held as of the record
date by their beneficial owners, upon providing the subscription agent with
certain required information.
If you own shares held in a brokerage, bank or other custodial or nominee
account, in order to exercise your rights you must promptly send the proper
instruction form to the person holding your shares. Your broker, dealer,
depository or custodian bank or other person holding your shares is the record
holder of your shares and will have to act on your behalf in order for you to
exercise your rights. We have asked your broker, dealer or other nominee holder
of our common stock to contact the beneficial owner(s) thereof and provide them
with instructions concerning the rights the beneficial owner(s) it represents
are entitled to exercise.
PROCEDURES TO EXERCISE RIGHTS
Please do not send subscription certificates or related forms to us. Please
send the properly completed and executed form of subscription certificate with
full payment to the subscription agent for this offering, Mellon Bank, N.A., or
to the record holder of your shares (such as your broker, nominee or other
custodial holder, if applicable).
You should read carefully the subscription certificate and related
instructions and forms which accompany this prospectus. You should contact
Mellon Investor Services LLC, the information agent for this offering, at the
address and telephone number listed below under the caption "The Rights Offering
- Questions and Assistance Concerning the Rights," promptly with any questions
you may have.
You may exercise your rights by delivering to the subscription agent (or to
the record holder of your shares, if applicable), at the address specified below
and in the instructions accompanying this prospectus, on or prior to the
expiration date, the following:
o Properly completed and executed subscription certificate(s) which
evidence your rights. See "The Rights Offering - Delivery of
Subscription Certificates" below, for instructions on where to send
these;
o Any required signature guarantees; and
o Payment in full of the subscription price for each share you wish to
purchase under your basic subscription privilege and your
oversubscription privilege. See "The Rights Offering - Required Forms
of Payment of Subscription Price" below, for payment instructions.
REQUIRED FORMS OF PAYMENT OF SUBSCRIPTION PRICE
The subscription price is $0.25 per share subscribed for, payable in cash.
All payments must be cleared on or before the expiration date.
If you exercise any rights, you must deliver to the subscription agent (or
the record holder of your shares, if applicable) full payment in the form of a
personal check, certified or cashier's check or bank draft drawn upon a U.S.
bank, or a U.S. postal money order, payable to Mellon Investor Services LLC
(acting on behalf of Mellon Bank, N.A. as subscription agent).
In order for you to timely exercise your rights, the subscription agent must
actually receive good funds, in payment of the subscription price, before the
expiration date.
Funds paid by uncertified personal check may take at least five business days
to clear. Accordingly, if you pay the subscription price by means of uncertified
personal check, you should make payment sufficiently in advance of the
expiration date to ensure that your check actually clears and the payment is
received before such date. We are not responsible for any delay in payment by
you and suggest that you consider payment by means of certified or cashier's
check or bank draft drawn upon a U.S. bank, or a U.S. postal money order.
DELIVERY OF SUBSCRIPTION CERTIFICATES
All subscription certificates, payments of the subscription price and nominee
holder certifications and Depository Trust Company participant oversubscription
exercise forms, to the extent applicable to your exercise of rights, must be
delivered to the subscription agent, Mellon Bank, N.A., as follows:
BY MAIL: BY HAND:
Mellon Bank, N.A. Mellon Bank, N.A.
c/o Mellon Investor Services LLC c/o Mellon Investor Services LLC
P.O. Box 3301 120 Broadway, 13th Floor
South Hackensack, NJ 07606 New York, New York 10271
Attention: Reorganization Dept. Attention: Reorganization Dept
BY OVERNIGHT COURIER:
Mellon Bank, N.A.
c/o Mellon Investor Services LLC
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Attention: Reorganization Dept.
PROHIBITION ON FRACTIONAL SHARES
Each right entitles you to purchase three shares at the subscription price.
We will accept any inadvertent subscription indicating a purchase of fractional
shares, by rounding down to the nearest whole share and promptly refunding,
without interest, any payment received for a fractional share.
INSTRUCTIONS TO NOMINEE HOLDERS
If you are a broker, trustee, depository for securities or other nominee
holder for beneficial owners of our common stock, we are requesting that you
contact such beneficial owners as soon as possible to obtain instructions and
related certifications concerning their rights. Our request to you is further
explained in the suggested form of letter of instructions from nominee holders
to beneficial owners accompanying this prospectus.
To the extent so instructed, nominee holders should complete appropriate
subscription certificates on behalf of beneficial owners and, in the case of any
exercise of the oversubscription privilege, the related form of "Nominee Holder
Certification", and submit them on a timely basis to the subscription agent,
Mellon Bank, N.A., with the proper payment.
RISK OF LOSS ON DELIVERY OF SUBSCRIPTION CERTIFICATE FORMS AND PAYMENTS
Each holder of rights bears all risks of the method of delivery, to the
subscription agent, of subscription certificates and payments of the
subscription price. If subscription certificates and payments are sent by mail,
you are urged to send these by registered mail, properly insured, with return
receipt requested, and to allow a sufficient number of days to ensure delivery,
to the subscription agent, and clearance of payment prior to the expiration
date.
Because uncertified personal checks may take at least five business days to
clear, you are strongly urged to pay, or arrange for payment, by means of
certified or cashier's check or bank draft drawn upon a U.S. bank, or a U.S.
postal money order.
HOW PROCEDURAL AND OTHER QUESTIONS ARE RESOLVED
We are entitled to resolve all questions concerning the timeliness, validity,
form and eligibility of any exercise of rights. Our determination of such
questions will be final and binding. We, in our reasonable discretion, may waive
any defect or irregularity, or permit a defect or irregularity to be corrected
within such time as we may determine, or reject the purported exercise of any
right because of any defect or irregularity.
Subscription certificates will not be considered received or accepted until
all irregularities have been waived or cured within such time as we determine,
in our reasonable discretion. Neither we nor the subscription agent have any
duty to give you notification of any state required pre-clearance or approval,
nor any defect or irregularity in connection with the submission of subscription
certificates or any other required document or payment, although we may elect to
do so. Neither we nor the subscription agent will incur any liability for
failure to give such notification.
We reserve the right to reject any exercise of rights if the exercise does
not comply with the terms of this offering, is not in proper form, or if the
exercise of rights would be unlawful or materially burdensome to us.
ISSUANCE OF SHARES OF OUR COMMON STOCK
Shares of our common stock purchased in this offering will be issued as soon
as practicable after the expiration date. The subscription agent will deliver
subscription payments to us only after consummation of this offering and the
issuance of certificates to our shareholders that exercised rights.
FEES AND EXPENSES
We will pay all fees charged by the subscription agent and information agent.
You are responsible for paying any other commissions, fees, taxes or other
expenses incurred in connection with the exercise of your subscription rights.
None of the subscription agent, the information agent or us will pay these
expenses.
SUBSCRIPTION AGENT
We have appointed Mellon Bank, N.A. as subscription agent for this offering.
The subscription agent's addresses for packages sent by hand, mail or overnight
courier are:
BY MAIL: BY HAND:
Mellon Bank, N.A. Mellon Bank, N.A.
c/o Mellon Investor Services LLC c/o Mellon Investor Services LLC
P.O. Box 3301 120 Broadway, 13th Floor
South Hackensack, NJ 07606 New York, New York 10271
Attention: Reorganization Dept. Attention: Reorganization Dept.
BY OVERNIGHT COURIER:
Mellon Bank, N.A.
c/o Mellon Investor Services LLC
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Attention: Reorganization Dept.
The subscription agent's telephone number is 800-932-6798. You should deliver
your subscription certificate and payment of the subscription price only to the
subscription agent, except if your shares are held on record by a broker,
dealer, nominee or other custodial. We will pay the fees and expenses of the
subscription agent, information agent and printer, which we estimate will total
$15,000. We have also agreed to indemnify the subscription agent from any
liability which it may incur in connection with the offering.
IMPORTANT
Please carefully read the instructions accompanying the subscription
certificate and follow those instructions in detail. Do not send subscription
certificates directly to us. You are responsible for choosing the payment and
delivery method for your subscription certificate, and you bear the risks
associated with such delivery. If you choose to deliver your subscription
certificate and payment by mail, we recommend that you use registered mail,
properly insured, with return receipt requested. We also recommend that you mail
your subscription certificate and payment a sufficient number of days prior to
the record date. Because uncertified personal checks may take at least five
business days to clear, we strongly urge you to pay, or arrange for payment, by
means of certified or cashier's check or bank draft drawn upon a U.S. bank, or a
U.S. postal money order.
QUESTIONS AND ASSISTANCE CONCERNING THE RIGHTS
If you have any questions or need assistance concerning the procedures for
exercising your subscription rights, or if you would like additional copies of
this prospectus or the instructions, you should contact us or the information
agent, as follows:
--------------------------------------------------------------------------------
TENGASCO, INC. MELLON INVESTOR SERVICES LLC
603 Main Avenue 85 Challenger Road
Suite 500 Overpeck Centre
Knoxville, TN 37902 Ridgefield Park, NJ 07660
865-523-1124 800-932-6798
--------------------------------------------------------------------------------
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.
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.
EXPIRATION DATE, EXTENSIONS AND TERMINATION
We may extend the rights offering and the period for exercising your rights
for up to 30 days, in our sole discretion. The rights will expire at 5:00 p.m.,
New York City time, on _________ 2003 [not later than 30 days after the date
hereof], 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 48.2 million shares of our common stock will be issued and
outstanding after the rights offering, assuming exercise in full of all rights.
Approximately 12.1 million shares of our common stock are issued and outstanding
as of the date hereof.
EFFECTS OF RIGHTS OFFERING ON OUR STOCK OPTION PLANS AND OTHER PLANS
As of December 15, 2003, there were outstanding options to purchase
approximately 453,000 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 has 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 December 15, 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 $1.49 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 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 $3.01 or $2.11 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 $1.38 of liquidation preference per one share of common
stock.
See "Description of Capital Stock."
EFFECTS OF RIGHTS OFFERING ON DOLPHIN'S AND/OR OUR BOARD'S SECURITIES AND
OWNERSHIP.
Discussed below, for illustrative purposes only, are scenarios which indicate
the effect the rights offering and related share issuance could have on
Dolphin's and/or our entire Board's relative voting and economic interest.
Dolphin, which is controlled by Peter E. Salas, is discussed here in light of
his the status as one of our Board members and the controlling person of
Dolphin, which is our largest stockholder and a creditor to which we owe loans
in an aggregate principal amount of $2,625,000, plus accrued interest. As of the
date hereof, Dolphin owns approximately 17.8% of our outstanding common
stock and is deemed to beneficially own approximately 19.8% of our common stock.
As of the date hereof, our entire Board of Directors as a group, including Mr.
Salas, controls approximately 30.6% of our outstanding common stock and is
deemed to beneficially own approximately 34.5% of our common stock.
In the event that all shares of common stock offered in the rights offering
are fully subscribed, then Dolphin would purchase 6,419,160 shares in the
offering and would, immediately following closing, continue to own approximately
17.8% of our outstanding common stock and continue to be deemed to beneficially
own 19.8% of our common stock. In the event that Dolphin were the only rights
holder to acquire shares in the offering, then its ownership of outstanding
shares would be limited by the terms of this offering to not more than 50% of
all outstanding shares immediately following the closing. In the absence of this
limitation, Dolphin might have been able to obtain ownership of up to
approximately 79% of our outstanding shares in the event that it were the only
rights holder to exercise its rights.
In the event that all shares of common stock offered in the rights offering
are fully subscribed, then our entire board of directors collectively would
purchase 17,468,184 shares in the offering and would, immediately following
closing, continue to own approximately 30.6% of our outstanding common stock and
continue to be deemed to beneficially own approximately 34.5% of our common
stock. In the event that the entire board were the only rights holders to
acquire shares in the offering, then its aggregate ownership of outstanding
shares would be approximately 81.9%.
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.
DESCRIPTION OF CAPITAL STOCK
As of December 15, 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 $1.49 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.
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 $3.01 or $2.11 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 $1.38 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 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.
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.
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 53. If
you have any questions, you should contact.
We have agreed to pay the subscription agent a fee plus certain expenses,
which we estimate will total approximately $15,000. We estimate that our total
expenses in connection with the rights offering will be approximately $150,000.
TENNESSEE ANTI-TAKEOVER LAW
The Tennessee Control Share Acquisition Act 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 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. We do not believe that
the Act applies to us and that in any event this offering is exempt. 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.
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 charter 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.
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.
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-34
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
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
DECEMBER 31, 2002 2001 2003
================================================================================
(unaudited)
Assets (Note 1)
Current
Cash and cash equivalents $ 184,130 $ 393,451 $ 332,185
Investments 34,500 150,000 34,500
Accounts receivable 730,667 661,475 795,916
Participant receivables 70,605 84,097 63,297
Inventory 262,748 159,364 262,748
Current portion of loan fees, net 323,856 - 210,380
Other - - 67,352
--------------------------------------------------------------------------------
Total current assets 1,606,506 1,448,387 1,766,378
Oil and gas properties, net
(on the basis
Of full cost accounting) (Note 4) 13,864,321 13,269,930 13,096,898
Completed pipeline facilities, net
(Note 5) 15,372,843 15,039,762 15,312,212
Other property and equipment, net
(Note 6) 1,685,950 1,680,104 1,482,202
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 5,213
--------------------------------------------------------------------------------
$32,584,391 $32,128,245 $31,662,903
================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SEPTEMBER 30,
DECEMBER 31, 2002 2001 2003
================================================================================
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term
debt (Note 1) $ 7,861,245 $ 6,399,831 $ 6,724,998
Accounts payable - trade 1,396,761 1,208,164 839,553
Accrued interest payable 61,141 54,138 167,227
Accrued dividends payable (Note 9) 254,389 112,458 470,543
Current maturities of long term
debt to related parties - - 2,234,000
Other accrued liabilities 31,805 - 627,016
--------------------------------------------------------------------------------
Total current liabilities 9,605,341 7,774,591 11,063,337
Long term debt to related parties
(Note 7) 750,000 - -
Asset retirement obligations
(Note 16) - - 666,421
Long term debt, less current
maturities (Note 7) 1,256,209 3,902,757 590,055
--------------------------------------------------------------------------------
Total liabilities 11,611,550 11,677,348 12,319,813
--------------------------------------------------------------------------------
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 2,867,900
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 - 1,425,207
--------------------------------------------------------------------------------
Total mandatorily redeemable
preferred stock 6,762,218 5,459,050 6,884,257
--------------------------------------------------------------------------------
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 12,065
Additional paid-in capital 42,237,276 39,242,555 42,855,693
Accumulated deficit (27,776,726) (24,115,382) (30,147,538)
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 12,458,833
--------------------------------------------------------------------------------
$
$32,584,391 $32,128,245 $31,662,903
================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF LOSS
NINE 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 $4,907,216 $3,859,050
Pipeline transportation
revenues 259,677 296,331 - 145,472 197,333
Interest Income 3,078 43,597 45,905 766 2,782
-------------------------------------------------------------------------------------------------
Total revenues and other
income 5,700,478 6,996,686 5,286,981 5,053,454 4,059,165
-------------------------------------------------------------------------------------------------
Costs and expenses
Production costs and
taxes 3,094,731 2,951,746 2,614,414 2,571,898 2,084,597
Depreciation, depletion
and amortization
(Notes 4, 5 and 6) 2,413,597 1,849,963 371,249 1,887,333 1,731,182
General and
administrative costs 1,868,141 2,957,871 2,602,311 1,112,289 1,527,988
Interest expense 578,039 850,965 415,376 462,518 448,046
Public relations 193,229 293,448 106,195 29,131 176,098
Professional fees 707,296 355,480 719,320 485,270 539,198
-------------------------------------------------------------------------------------------------
Total costs and expenses 8,855,033 9,259,473 6,828,865 6,548,439 6,507,109
-------------------------------------------------------------------------------------------------
Net loss before cumulative
effect of a change in
accounting principle (3,154,555) (2,262,787) (1,541,884) (1,494,985) (2,447,944)
Cumulative effect of a
change in accounting
principle (Note 16) - - - (351,204) -
-------------------------------------------------------------------------------------------------
Net loss (3,154,555) (2,262,787) (1,541,884) (1,846,189) (2,447,944)
Dividends on preferred
Stock (506,789) (391,183) (257,557) 402,583 372,595
-------------------------------------------------------------------------------------------------
Net loss attributable to
common stockholders $(3,661,344) (2,653,970) $(1,799,441) $(2,248,772) $(2,820,539)
-------------------------------------------------------------------------------------------------
Earnings per share data:
Net loss before cumulative
effect of change in
accounting principle $ (0.29) $(0.22) $(0.17) $(0.13) $(0.22)
Cumulative effect of change
in accounting principle - - - $(0.03) -
Net loss (0.29) $(0.22) $(0.17) $(0.16) $(0.22)
Dividends on preferred stock (0.04) $(0.04) $(0.02) $(0.03) $(0.04)
Net loss attributable to
common stockholder (0.33) $(0.26) $(0.19) $(0.19) $(0.26)
Weighted average shares
Outstanding 11,062,436 10,235,253 9,253,622 11,919,477 10,933,588
=================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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) 94,000 94 46,906
Common stock issued in conversion of debt (unaudited) 60,528 61 69,538
Common stock issued for preferred dividend
in arrears (unaudited) 154,824 154 170,155
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
Common stock issued for litigation settlement (unaudited) 10,000 10 6,390
Dividends on convertible redeemable
preferred stock (unaudited) - - -
Cumulative effect of a change in accounting
principle (unaudited) - - -
----------------------------------------------------------------------------------------------
Balance, September 30, 2003 (unaudited) 12,064,477 12,065 42,855,693
==============================================================================================
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
- (1,494,985) - - (1,494,985)
- - - - 250,000
- - - - 47,000
- - - - 69,599
- - - - 170,309
- - - - 5,714
- (122,040) - - (122,040)
- - - - 70,000
- - - - 6,400
- (402,583) - - (402,583)
- (351,204) - - (351,204)
---------------------------------------------------------------------------------------
$(115,500) $(30,147,538) 14,500 $(145,887) $12,458,833
=======================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
YEARS ENDED DECEMBER 31, 2002 2001 2000 2003 2002
=============================================================================================================
(unaudited)
Operating activities:
Net loss $(3,154,555) $(2,262,787) $(1,541,884) $(1,494,985) $(2,447,944)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Cumulative effect of
change in accounting
principle - - - - -
Depreciation, depletion
and amortization 2,413,597 1,849,963 371,249 1,887,333 1,731,182
Charitable donation and
services paid in stock or
stock options - - - 122,714 48,620
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) (65,249) (41,340)
Participant receivables 13,492 - - 7,308 -
Inventory (103,384) 91,981 8,408 - -
Other assets 58,000 - - - -
Accounts payable--
Trade 188,597 191,702 364,553 (557,208) (5,021)
Accrued interest
Payable 7,003 (2,519) 135,435 106,086 (9,581)
Other accrued liabilities 31,805 (52,640) (140,955) 595,211 -
Other - - - (57,952) -
-------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (566,017) (221,176) (820,615) 543,258 (724,084)
-------------------------------------------------------------------------------------------------------------
Investing activities:
Additions to other property
and equipment (214,897) (285,722) (1,276,783) - (154,526)
Net additions to oil and gas
Properties (1,982,529) (4,821,883) (1,456,996) (45,312) (1,796,600)
Additions to pipeline facilities (841,750) (4,213,095) (6,834,196) (341,369) (739,162)
Decrease (increase) in
restricted cash 120,872 (120,872) 625,000 - 120,872
Other 28,367 32,888 6,112 - 19,432
-------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,889,937) (9,408,684) (8,936,863) (386,681) (2,549,984)
-------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 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 1,484,000 1,703,103
Repayments of borrowings (2,378,273) (8,833,325) (1,720,856) (1,742,522) (2,129,259)
Net proceeds from issuance of
common stock 2,677,000 3,900,000 4,245,700 250,000 2,677,000
Proceeds from private
placements of convertible
redeemable preferred stock, net 1,303,168 1,591,150 2,000,000 - 1,303,168
Dividends on convertible
redeemable preferred stock (364,858) (357,503) (257,557) - (350,859)
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 (8,522) 3,203,156
-------------------------------------------------------------------------------------------------------------
Net change in cash and cash
equivalents (209,321) (1,210,524) 1,183,385 148,055 (70,912)
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 $332,185 $322,539
=============================================================================================================
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 $ 48,620 $ 92,253 $ 284,000 $122,714 $ 48,620
During 2001, the Company
sold equipment
for equity investments $ - $ 150,000 $ - $ - $150,000
During 2002, the Company
purchased equipment
by issuing common stock $ 150,000 $ - $ - $150,000 $ -
NINE MONTHS ENDED
SEPTEMBER 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 $ - $ - $ - $(122,040) $ -
During 2003, the Company
declared dividends on
preferred stock $ - $ - $ - $(402,583) $ -
=============================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
1. GOING CONCERN The accompanying consolidated financial statements have been
UNCERTAINTY 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 $30,147,538 and a working capital
deficit of $9,296,959, as of September 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 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."
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
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 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months
ended September 30, 2003 and 2002 are unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001 2000 2003 2002
===================================================================================================
(unaudited) (unaudited)
Net loss attributable
to common shareholders
as reported $(3,661,344) $(2,653,970) $(1,799,441) $(2,248,772) $(2,820,539)
Stock based compensation (77,821) (257,328) 2,253,011 (47,209) (202,846)
Pro forma $(3,739,165) (2,911,298) (4,052,452) $(2,295,981) $(3,023,335)
===================================================================================================
Basic and diluted loss
per share
As reported $ (0.33) $ (0.26) $ (0.19) $(0.19) $(0.26)
Pro forma (0.34) (0.28) (0.44) $(0.19) $(0.28)
===================================================================================================
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
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 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 11,919,477
and 10,933,588 weighted average shares outstanding for the
nine months ended September 30, 2003 and 2002, respectively.
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 nine months ended
September 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
debt are based on quoted market prices or pricing models
using current market rates, which approximate carrying
values.
RECENT ACCOUNTING PRONOUNCEMENTS
A reporting issue has arisen regarding the application of
certain provisions of SAFS No. 141 and SFAS No. 142 to
companies in the extracting industries including oil and gas
companies. The issue is whether SFAS No. 142 regulates
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
owned and provide specific footnote disclosures.
Historically, the Company had 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 cost of mineral rights held under lease or other
contractual arrangement associated with extracting oil and
gas as a separate intangible asset line item on the balance
sheet, the Company would be required to reclassify
approximately $453,000 at September 30, 2003 and $346,000 at
December 31, 2002, respectively, out of oil and gas
properties and into a separate intangible asset 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 amortized for impairment in accordance with
full cost accounting rules. Further, the Company does not
believe the classification of the cost 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 June 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("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 cost. This statement requires companies to record
the present value of obligations associated with the
retirement of tangible long-lived assets in the periods in
which it is incurred. The liability is capitalized as part
of the related long-lived assets carrying amount. Over time,
accretion of the liability is recognized as an operating
expense and the capitalized cost is depreciated over the
expected useful life of the related asset. The Company's
asset retirement obligations relate primarily to the
plugging, dismantlement, removal site reclamation and
similar activities of its oil and gas properties. Prior to
adoption of this statement, such obligations were accrued
ratably over the productive lives of the assets through its
depreciation, depletion and amortization for oil and gas
properties without recording a separate liability for such
amounts. The impact of applying this statement as of January
1, 2003 and September 30, 2003 is discussed in footnote 10.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
In April 2002, the Financial Accounting Standards Board
issued SFAS No. 145, "Rescission of SFAS No. 4, 44, 64,
Amendment of SFAS No. 13, and Technical Corrections" ("SFAS
145"). SFAS 4, which was amended by SFAS 64, required all
gains and losses from the extinguishment of debt to be
aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result of SFAS
145, the criteria in Accounting Principles Board opinion 30
will now be used to classify those gains and losses. SFAS 13
was amended to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback
transactions. The adoption of SFAS 145 will not have a
current impact on the Company's consolidated financial
statements.
In July 2002, FASB issued SFAS No. 146, Accounting for Cost
Associated with Exit or Disposal Activities. The standard
requires companies to recognize cost associated with exit or
disposal activities when they are incurred rather than at
the date of commitment to an exit or disposal plan. Examples
of cost covered by the standard include lease termination
costs and certain employee severance costs that are
associated with restructuring, discontinued operation, plant
closing, or other exit or disposal activity. Previous
accounting guidance was provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." Statement 146
replaces Issue 94-3. Statement 146 is to be applied
prospectively to exit or disposal activities initiated after
December 31, 2002. The Company does not currently have any
plans for exit or disposal activities, and therefore does
not expect this standard to have a material effect on the
Company's consolidated financial statements upon adoption.
In November 2002, the FASB issued FASB Interpretation
("FIN") No. 45. "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain
guarantees. The disclosure requirements are effective for
financial statements issued after December 15, 2002 and here
cognition/measurement requirements are effective on a
prospective basis for guarantees issued or modified after
December 31, 2002. The application of the requirements of
FIN 45 did not have an impact on the Company's financial
position or results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
In December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based compensation -- Transition and Disclosure --
an amendment of FASB Statement No. 123 ("Statement 148").
This amendment provides two additional methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation.
Additionally, more prominent disclosures in both annual and
interim financial statements are required for stock-based
employee compensation. The transition guidance and annual
disclosure provisions of Statement 148 are effective for
fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports
containing financial statements for interim periods
beginning after December 15, 2002. The adoption of Statement
148 did not have a material impact on the Company's
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No.
(FIN) 46, "Consolidation of Variable Interest Entities."
This interpretation of Accounting Research Bulletin No. 51
"Consolidated Financial Statements" consolidation by
business enterprises of variable interest entities, which
possess certain characteristics. The Interpretation requires
that if a business enterprise has a controlling financial
interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable
interest entity must be included in the consolidated
financial statements with those of the business enterprise.
This Interpretation applies immediately to variable interest
entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest
after that date. The Company does not have any ownership in
any variable interest entities.
In May 2003, the FASB issued Statement No. 150, "Accounting
for Certain Financial Instruments with Characteristics of
both Liabilities and Equity". SFAS No. 150 requires three
types of freestanding financial instruments to be classified
as liabilities in statements of financial position. One type
is mandatory redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets.
A second type, which includes put options and forward
purchase contracts, involves instruments that do or may
require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of
instrument is obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or
predominately to a variable such as a market index, or
varies inversely with the value of the issuer's shares. The
majority of the guidance in SFAS No. 150 is effective for
all financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. In
accordance with SFAS No. 150, the Company adopted this
standard on July 1, 2003. Adoption of SFAS No. 150 did not
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
have a material impact on the Company's consolidated
financial position and results of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
with current year presentation.
3. RELATED PARTY During 2002 the Company received debt financing from a
TRANSACTIONS 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 3. RELATED PARTY
approximately $15,000 for the year ended TRANSACTIONS
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.
On February 3, 2003 and February 28, 2003, Dolphin Offshore
Partners, LP which owns more than 10% of the Company's
outstanding common stock and whose general partner, Peter E.
Salas, is a Director of the Company, loaned the Company the
sum of $250,000 on each such date (cumulatively, $500,000)
which the Company used to pay the principal and interest due
to Bank One for February and March 2003 and for working
capital needs. On May 20, 2003 an additional loan of
$834,000 was loaned by a combination of Dolphin ($750,000)
and Jeffrey R. Bailey who is a Director and President
($84,000) of the Company. On August 6, 2003 an additional
loan of $150,000 was loaned by Dolphin. Each of these loans
is evidenced by a separate promissory note each bearing
interest at the rate of 12% per annum, with payments of
interest only payable quarterly and the principal balance
payable on January 4, 2004. Each of the February and March
2003 promissory notes is secured by an undivided 10%
interest in the Company's pipelines. The May 20, 2003 loans
provides Dolphin with a 30% interest and Bailey with a 3.36%
interest in the Company's pipelines. The August note
provides Dolphin with a 6% interest in the Company's
pipelines.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
4. OIL AND GAS The following table sets forth information concerning the
PROPERTIES 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 In 1996, the Company began construction of a 65-mile gas
FACILITIES 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 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
6. OTHER Other property and equipment consisted of the following:
PROPERTY
AND EQUIPMENT 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:
September
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 $5,701,777
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. 480,000 720,000 300,000
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. - - 297,171
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
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 61,202
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. 412,342 393,311 304,904
------------------------------------------------------------
Total long term debt 9,117,454 10,302,588 7,315,054
Less current maturities (7,861,245) (6,399,831) (6,724,999)
------------------------------------------------------------
Long term debt, less
current maturities 1,256,209 3,902,757 590,055
============================================================
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.
Long-term debt to related parties consisted of the
following:
September
September
30,
DECEMBER 31, 2002 2001 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 TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
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 - 1,734,000
------------------------------------------------------------
Total long term debt
to related Parties 750,000 - 2,234,000
Less current maturities - - (2,234,000)
------------------------------------------------------------
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 follow:
Year Amount
------------------------------------------------------------
2003 $7,861,245
2004 1,720,463
2005 101,468
2006 101,803
Thereafter 82,470
------------------------------------------------------------
$9,867,454
============================================================
8. COMMITMENTS The Company is a party to lawsuits in the ordinary course of
AND its business. While the damages sought in some of these
CONTINGENCIES 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.
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
============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
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 Stock are or will be
CONVERTIBLE immediately convertible into shares of Common Stock. Each
REDEEMABLE $100 liquidation preference share of preferred stock is
PREFERRED convertible at a rate of $7.00 for the Series A per share of
STOCK 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 September 30, 2003, cumulative
accrued and unpaid dividends on the Series A and B Preferred
Stock amounted to $405,334.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
Preferred Stock accrues a 6% cumulative dividend on the
outstanding balance, payable quarterly. As of September 30,
2003, cumulative accrued and unpaid dividends on the Series
C Preferred Stock amounted to $65,209. 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 On August 1, 2001, the Company paid a 5% stock dividend
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 three
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 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 five years 11. STOCK OPTIONS from the date
such stock option is granted.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
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
================================================================================
The share information disclosed above has been adjusted to
reflect the 5% stock dividend declared during 2001. See note
10 above.
The following table summarizes information about stock
options outstanding at December 31, 2002:
------------------------------------------ ------------
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
------------------------------------------ ------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING
AVERAGE CONTRACTUAL
EXERCISE PRICE SHARES LIFE (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
================================================================
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
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 had 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 2003
============================================================
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 2003
============================================================
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 $ - $ - $ -
============================================================
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
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 The Company paid approximately $571,000, $853,500 and
CASH FLOW $544,000 for interest in 2002, 2001 and 2000, respectively.
INFORMATION The Company capitalized approximately $148,000 and $128,000
of this amount in 2001 and 2000, respectively. No interest
was capitalizedduring 2002. The Company paid no income taxes
in 2002, 2001 and 2000.
14. QUARTERLY The following table sets forth, for the fiscal periods
DATA AND indicated, selected consolidated financial data.
SHARE
INFORMATION
(UNAUDITED)
FISCAL YEAR ENDING DECEMBER 31, 2003
--------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------
Revenues $1,971,603 $1,482,390 $1,599,461 -
Net Income (loss) (659,350) (678,592) (508,247) -
Net Income (loss) attributable
to common Stockholders (793,545) (812,786) (642,441) -
Earnings (loss) per common share
Basic and diluted $ (0.07) $ (0.07) $ (0.05) -
--------------------------------------------------------------------------------
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)
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 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 amended the September 30, 2001 SEC
Form 10-Q filing during 2002.
15. SUPPLEMENTAL Information with respect to the Company's oil and gas
OIL AND GAS producing activities is presented in the following tables.
INFORMATION 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 2003
============================================================
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
============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 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 2003
============================================================
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)
------------------------------------------------------------
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
============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
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 2003
============================================================
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
============================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 30, 2003 and 2002 are unaudited)
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 2003
============================================================
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
estimates 6,120 (33,449) (186,289)
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to September 30, 2003 and the nine months ended
September 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.
Effective January 1, 2003, the Company implemented the
requirements of Statement of Financial Accounting Standards
No. 143 (SFAS 143), "Accounting for Asset Retirement
Obligations". Among other things, SFAS 143 requires entities
to record a liability and corresponding increase in
long-lived assets for the present value of material
obligations associated with the retirement oftangible
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 of $351,204 in its statement of loss.
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 nine month period ended September 30, 2003, the
Company recorded accretion and depletion expenses of $77,952
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 nine months ended
September 30, 2003:
Balance, January 1, 2003: $611,395
Accretion expense through September 30, 2003 55,026
--------
Balance, September 30, 2003 $666,421
========
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 American Stock Exchange listing fee. The registrant will pay all
of such expenses.
Securities and Exchange Commission registration fee $ 2,500
AMEX listing fee................................................ $22,500
Accounting fees and expenses.................................... $50,000
Legal fees and expenses......................................... $60,000
Subscription Agent fees and expenses............................ $15,000
--------
Total................................... $150,000
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.
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
Each of the following recent sales of unregistered securities was made
pursuant to an exemption from the provisions of Section 5 of the Securities Act
of 1933 under Section 4(2) of such Act.
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.
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 nine 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.
On August 6, 2003, Dolphin loaned to the registrant $150,000 and was issued a
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 December 3, 2003, Dolphin loaned to the registrant $225,000 and was issued
a 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 December 9, 2003, Dolphin loaned to the registrant $250,000 and was issued
a 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.
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)
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) Loan
10.16 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) Loan
10.28 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
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
10.42 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated December
3, 2003 in the principal amount of $225,000 (Incorporated by
reference to Exhibit 10.42 to the registrant's current
report on Form 8-K dated December 3, 2003 (the "2003 Form
8-K")
10.43 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated December
9, 2003 in the principal amount of $250,000 (Incorporated by
reference to Exhibit 10.43 to the 2003 Form 8-K)
10.44 Continuing Security Agreement dated December 3, 2003 by the
Company and Tengasco Pipeline Corporation as Obligors and
Dolphin Offshore Partners, LP as Secured Party (Incorporated
by reference to Exhibit 10.44 to the 2003 Form 8-K)
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. (contained in Exhibit 5.1
hereto)
23.2* Consent of BDO Seidman
23.3* Consent of Ryder Scott Company, L.P.
24.1* Power of Attorney
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 for Use of Rights Certificates
99.4* Form of Letter to be sent by Company to Holders of Record of
the Rights
99.5* Form of Letter to be Sent to Beneficial Owners
---------------
* Filed herewith
** Previously filed
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 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.
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
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; December 24, 2003
------------------------ Chief Executive Officer
Richard T. Williams (principal executive
officer)
*
------------------------ Director; President December 24, 2003
Jeffrey R. Bailey
* Chief Financial Officer December 24, 2003
------------------------ (principal financial and
Mark A. Ruth accounting officer)
* Director December 24, 2003
------------------------
Stephen W. Akos
* Director December 24, 2003
------------------------
Joseph Earl Armstrong
* Director December 24, 2003
------------------------
John A. Clendening
* Director December 24, 2003
------------------------
Robert L. Devereux
* Director December 24, 2003
------------------------
Bill L. Harbert
* Director December 24, 2003
------------------------
Peter E. Salas
* Director December 24, 2003
------------------------
Charles M. Stivers
*/S/ RICHARD T. WILLIAMS December 24, 2003
------------------------
Richard T. Williams,
as attorney-in-fact
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)
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
10.20 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
10.22 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
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
10.42 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated December
3, 2003 in the principal amount of $225,000 (Incorporated by
reference to Exhibit 10.42 to the registrant's current
report on Form 8-K dated December 3, 2003 (the "2003 Form
8-K")
10.43 Promissory Note made by Tengasco, Inc. and Tengasco Pipeline
Corporation to Dolphin Offshore Partners, LP dated December
9, 2003 in the principal amount of $250,000 (Incorporated by
reference to Exhibit 10.43 to the 2003 Form 8-K)
10.44 Continuing Security Agreement dated December 3, 2003 by the
Company and Tengasco Pipeline Corporation as Obligors and
Dolphin Offshore Partners, LP as Secured Party (Incorporated
by reference to Exhibit 10.44 to the 2003 Form 8-K)
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. (contained in Exhibit 5.1
hereto)
23.2* Consent of BDO Seidman
23.3* Consent of Ryder Scott Company, L.P.
24.1** Power of Attorney
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 for Use of Rights Certificates
99.4* Form of Letter to be Sent by Company to Holders of Records
of the Rights
99.5* Form of Letter to be Sent to Beneficial Owners
---------------
* Filed herewith
** Previously filed