As filed with the Securities and Exchange Commission on October 17, 2016
Registration No. 333-______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 2003
REGISTRATION NO. 333-___________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
TENGASCO, INC.
------------------------------------------------------
(Exact
(Exact Name of registrant as Specified in Our Charter)
TENNESSEE 1311 87-0267438
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
603 MAIN AVENUE, SUITE 500
KNOXVILLE, TN 37902
(865) 523-1124
---------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
RICHARD T. WILLIAMS
TENGASCO, INC.
603 MAIN AVENUE, SUITE 500
KNOXVILLE, TN 37902
(865) 523-1124
---------------------------------------------------------------
(Name,
| Delaware | 1311 | 87-0267438 | ||
| (State or Other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
6021 South Syracuse Way, Suite 117
Greenwood Village, CO 80111
(720) 420-4460
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant’s Principal Executive Offices)
Michael J. Rugen
Chief Executive Officer
6021 South Syracuse Way, Suite 117
Greenwood Village, CO 80111
(720) 420-4460
(Name, Address Including Zip Code, and Telephone Number,
Including Area Code, of Agent Forfor Service)
Copy To:
GARY J. SIMON
HUGHES HUBBARD
with a copy to:
Kristin L. Lentz, Esq.
Davis Graham & REEDStubbs LLP
ONE BATTERY PARK PLAZA
NEW YORK, NY 10004
(212) 837-6000
------------------------
Approximate date of commencement of proposed sale to the public:
1550 Seventeenth Street, Suite 500
Denver, CO 80202
(303) 892-9400
As soon as practicable after the effective date of this registration statement.
(Approximate date of commencement of proposed sale to the public)
If any of the securities being registered on this formForm 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]
box: ☒
If this formForm 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 formForm 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 formForm is a post-effective amendment filed pursuant to Rule 462(d)4629(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☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-----------------------
CALCULATION OF REGISTRATION FEE
Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☒ |
Calculation of Registration Fee
Title of Each Class of Securities to be Registered (1) | Amount to be Registered | Proposed Maximum Offering Price per Share | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee | ||||||||||||
| Common Stock, par value $0.001 per share | 12,195,446 | $ | 0.66 | $ | 8,048,994 | (2) | $ | 932.88 | ||||||||
| Nontransferable subscription rights to purchase common stock | — | — | (3) | — | (3) | — | (3) | |||||||||
| (1) | This registration statement relates to (a) nontransferable subscription rights |
| (2) | Represents the gross proceeds from the rights offering assuming the exercise of all subscription rights to be distributed. |
| (3) | The subscription rights are being issued without consideration. Pursuant to Rule 457(g) under the Securities Act, no separate registration fee is required because the subscription rights are being registered in the same registration statement as the common stock underlying the subscription rights. |
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 offeroffers to buy these securities in any statejurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 17, 2003
2016
PROSPECTUS
TENGASCO, INC.
SUBSCRIPTION RIGHTS TO PURCHASE AN AGGREGATE OF UP TO 12,195,446 SHARES OF COMMON STOCK
UP TO 12,195,446 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE SUBSCRIPTION RIGHTS
We are distributing to holders of our outstanding common stock, at no charge, nontransferable subscription rights to purchase up to an aggregate of _______up to 12,195,446 shares of our common stock at a cash subscription price of $___$0.66 per share.share for maximum gross proceeds of $8,048,994. You will receive for each share of our common stock you own a right to purchase two shares of our common stock at an exercise price of $___$0.66 for each share purchased. If you exercise your rights in full, you may over-subscribeoversubscribe 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.oversubscription privilege and to certain other limitations described below. 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 of this rights offering represent 50% or more 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 approximate amount2016.
Our board of up to $_____ million, with the balance of
the net proceeds, if any, to be used to pay bank indebtedness and/or for working
capital purposes. Our Board of Directorsdirectors has determined that this rights offering is advisable under our present financial, operational and other circumstances. Our Boardboard of Directors hasdirectors formed a three-person special committee comprised
of disinterested directorsits members charged with, among other things, recommending to the full Boardboard of Directorsdirectors the financial and other terms of this rights offering. Subject to the pricingNo special committee member is an employee of Tengasco or its subsidiaries nor has any personal interest in the rights offering Dolphin, of which Peter E.
Salas, a director of Tengasco, is the general partner and which is deemed to
beneficially own approximately 20.1%other than his personal share ownership. Although we expect that members of our outstanding common stock,board of directors and management may agreeparticipate in the rights offering, we have no agreements or understandings with any persons or entities, including members of our board of directors, our management and any brokers or dealers, with respect to their exercise its basic subscription and over-subscription privilegesof any rights offered hereby or their participation as an underwriter, broker or dealer in full. We
reserve the right, in our sole discretion, to accept or reject in whole or in
part subscriptions by Dolphin.
this offering.
The rights will expire if they are not exercised by 5:00 p.m., New York City time, on _____, 2003,[●], 2016, the expected expiration date of the rights offering. We may extend the period for exercising the rights.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. 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.rights. Our board of directors is makingmakes no recommendation regarding your exercise of rights.
Shares of our common stock are traded on the American Stock ExchangeNYSE MKT exchange under the symbol "TGC."“TGC.” On October 13, 2003,14, 2016, the last reported salesclosing price for our common stock was $0.94$1.18 per share. Although application has been made to list the shares of common stock offered hereby on the exchange, we cannot be sure that such listing will be granted. See “Risk Factors.”
AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNINGDESCRIBED ON PAGE 1413 OF THIS PROSPECTUS BEFORE EXERCISING YOUR RIGHTS.
PROCEEDS OF OFFERING
Per Share Total
Subscription Price......................... $ $
Estimated Expenses......................... $ $
Net Proceeds to Tengasco................... $ $
| Per Share | Total (1) | |||||||
| Subscription price | $ | 0.66 | $ | 8,048,994 | ||||
| Estimated offering expenses (2) | 0.01 | 150,933 | ||||||
| Net proceeds to Tengasco | $ | 0.65 | $ | 7,898,061 | ||||
| (1) | Assumes the exercise of subscription rights to purchase all 12,195,446 shares of common stock in this rights offering. |
| (2) | Although we will incur certain offering expenses, no underwriting discounts or commissions will be paid in connection with this offering. |
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 ______________
The date of this prospectus is [●], 2003.
2016.
TABLE OF CONTENTS
Forward Looking Statements..........................2
Questions And Answers About The Rights Offering.....3
Summary.............................................8
Risk Factors.......................................14
Use Of Proceeds....................................19
Price Range Of Common Stock........................20
Capitalization.....................................21
Selected Consolidated Financial Data...............22
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations.............23
Quantitative And Qualitative Disclosure About
Market Risks....................................32
Business...........................................33
Production.........................................45
Legal Proceedings..................................47
Management.........................................48
Certain Relationships And Related Transactions.....53
Principal Stockholders.............................55
The Rights Offering................................57
Description Of Capital Stock.......................67
| 1 | |
| 1 | |
| 2 | |
| 3 | |
| 7 | |
| 13 | |
| 17 | |
| 27 | |
| 27 | |
| 28 | |
| 29 | |
| 29 | |
| 37 | |
| 37 | |
| 37 |
We have not authorized anyone to provide you with additional or different information from that contained or incorporated by reference in this prospectus. We take no responsibility for, and can provide no assurances as to the reliability of, any other information that you may obtain from other sources. You should assume that the information contained in this prospectus is accurate only as of the date on the front cover of this prospectus and any information we have incorporated by reference is accurate only as of the date of the document incorporated by reference, regardless of the time of delivery of this prospectus or any exercise of the subscription rights.
This prospectus does not offer to sell, or ask for offers to buy, any shares of our common stock in any state or jurisdiction (within or outside the United States Federal Income Tax Consequences......70
PlanStates) where it would not be lawful or where the person making the offer is not qualified to do so.
As used in this prospectus, “Tengasco,” the “Company,” “we,” “us,” and “our” refer to Tengasco, Inc. and its subsidiaries.
As permitted under the rules of Distribution...............................71
Tennessee Anti-Takeover Law........................71
Limitation Of Liability Of Directors...............72
Legal Matters......................................73
Experts............................................73
Wherethe Securities and Exchange Commission (the “SEC”), this prospectus incorporates important business information about Tengasco that is contained in documents that we file with the SEC, but that are not included in or delivered with this prospectus. You may obtain copies of these documents, without charge, from the website maintained by the SEC at www.sec.gov, as well as other sources. See “Incorporation by Reference” and “Where You Can Find More Information................73
Index To Financial Statements.....................F-1
FORWARD LOOKING STATEMENTS
Information” in this prospectus.
The statementsfollowing documents are incorporated by reference into this prospectus, together with all exhibits filed therewith or incorporated therein by reference to the extent not otherwise amended or superseded by the contents of this prospectus:
| · | our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 30, 2016; and |
| · | our Quarterly Reports on Form 10-Q for the quarterly periods ended March 30, 2016 and June 30, 2016, as filed with the SEC on May 13, 2016, and August 12, 2016, respectively. |
In addition, we incorporate by reference in this prospectus any future filings we make with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act (excluding any information furnished and not filed with the SEC) after the date on which the registration statement that includes this prospectus was initially filed with the SEC (including all such documents we may file with the SEC after the date of the initial registration statement and prior to the effectiveness of the registration statement) and until all offerings under this prospectus are terminated.
Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in this prospectus or in any other subsequently filed document which is also incorporated or deemed to be incorporated by reference, modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus. You may request a copy of these filings (other than an exhibit to a filing unless that exhibit is specifically incorporated by reference into that filing) at no cost by writing, telephoning or e-mailing us at the following address, telephone number or e-mail address:
Tengasco, Inc.
6021 South Syracuse Way, Suite 117
Greenwood Village, CO 80111
(720) 420-4460
csorensen@tengasco.com
Copies of these filings are not purely historical
arealso available through the “Investor” section of our website at www.tengasco.com. For other ways to obtain a copy of these filings, please refer to “Where You Can Find More Information” below.
The information contained in this prospectus, in certain instances, includes forward-looking statements within the meaning of applicable securities laws. Forward-looking statements include statements regarding our "expectations,"
"anticipations," "intentions," "beliefs,"the Company’s “expectations,” “anticipations,” “intentions,” “beliefs,” or "strategies"“strategies” or any similar word or phrase regarding the future. Forward-looking statements also include statements regarding revenue, margins, expenses, and earnings analysis for 20032016 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; ourthe Company’s products and distribution development strategies; potential acquisitions or strategic alliances; and liquidity and anticipated cash needs and availability.availability; prospects for success of capital raising activities; prospects or the market for or price of the Company’s common stock; 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 the Company. All forward-looking statements included in this
prospectus are based on information available to usthe Company as of the date of this
prospectus,hereof, and we assumethe Company assumes no obligation to update any such forward-looking statements. Ourstatement. The Company’s 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“Risk Factors” below.
Projecting the effects of commodity prices, which in estimating quantities of
proved oil and gas reserves and in projecting future rates ofpast years have been extremely volatile, on production and the timing of development expenditures.expenditures includes many factors beyond the Company’s control. The total amount or timingfuture estimates of net cash flows from the Company’s 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 assumptions could result in the actual future production may vary significantlynet cash flows being materially different from reserves and productionthe estimates. The
drilling
This prospectus is part of a registration statement filed with the SEC. You
should rely only on thesummary highlights information contained elsewhere in this prospectus. We haveThis summary may not authorized anyonecontain all of the information that is important to provide you with different information.you. This prospectus may
onlyincludes 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 we 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 and producing oil and natural gas in Kansas. We lease producing and non-producing properties with a view toward exploration and development. We primarily operate oil wells in the State of Kansas. We also own and operate a facility in Tennessee for production of electricity from landfill methane gas.
The Company was initially organized in Utah in 1916 under a name later changed to Onasco Companies, Inc. In 1995, the Company changed its name from Onasco Companies, Inc. by merging into Tengasco, Inc., a Tennessee corporation, formed by the Company solely for this purpose. In 2011, the stockholders of the Company approved an Agreement and Plan of Merger adopted by the Company’s board of directors which provided for the merger of the Company into a wholly-owned subsidiary formed in Delaware for the purpose of changing the Company’s state of incorporation from Tennessee to Delaware. The merger became effective on June 12, 2011, and the Company is now a Delaware corporation.
The address of our principal executive office is 6021 South Syracuse Way, Suite 117, Greenwood Village, Colorado 80111, and our telephone number at that address is (720) 420-4460. We are a “smaller reporting company” under rules and regulations of the SEC.
The Rights Offering
The following summary describes the principal terms of the rights offering, but is not intended to be used where it is legal for us to sell these securities. You should not
assume that the informationcomplete. See “The Rights Offering” in this prospectus is accurate asfor a more detailed description of any date other
than the date onterms and conditions of the front coverdistribution of those documents.the subscription rights and the offering. For a more detailed description of our common stock which they represent, see “Description of Our business, financial
condition, resultsCommon Stock.”
| Securities Offered | We are distributing, at no charge, to holders of our common stock nontransferable subscription rights to purchase up to an aggregate of 12,195,446 shares of our common stock. You will receive a fixed number of subscription rights for each share of common stock owned at 5:00 p.m., New York City time, as of the record date set forth below. | |
| Record Date | 5:00 p.m., New York City time, on [●], 2016. | |
| Expiration Date | 5:00 p.m., New York City time, on [●], 2016, unless extended by us, in our sole discretion, for up to an additional 30 days. |
| Subscription Price | $0.66 per share, payable in cash. To be effective, any payment related to the exercise of a subscription right must be received by the subscription agent before the expiration of the rights offering. After the date of this prospectus, our common stock may trade at prices below current levels or below the subscription price. In any such event, our board of directors may change the subscription price of this offering or determine to cancel or otherwise alter the terms of this offering. | |
| Basic Subscription Privilege | Each subscription right includes a basic subscription privilege to purchase two shares, both of which must be purchased with each subscription right exercised. | |
| Oversubscription Privilege | If a stockholder exercises all its basic subscription privileges for all shares it owns, the stockholder may exercise an oversubscription privilege to purchase at the same price, a portion of any rights offering shares not purchased by other stockholders exercising their subscription privileges in full, subject to certain limits. | |
| No Fractional Shares | No rights may be exercised as to any fraction of a share owned, and no fractional shares will be issued in the rights offering. However, a stockholder may exercise its rights as to all or any portion of the number of shares it owns if the portion is stated in whole numbers. | |
| Extension or Cancellation | The Company may extend the offering or cancel it. | |
| Shares of Common Stock Outstanding as of the Record Date | [●] shares of our common stock are issued and outstanding as of the record date. | |
| Shares of Common Stock Outstanding After Completion of the Rights Offering | We will issue approximately 12,195,446 shares of common stock in this rights offering if it is fully subscribed. Upon consummation of the rights offering, if fully subscribed, we expect to have approximately [●] shares of outstanding common stock on a fully diluted basis. | |
| Use of Proceeds | We intend to use the net proceeds of this offering to pay bank debt, for working capital for exploration and development growth purposes involving certain prospects being considered by the Company in several states, and for general corporate purposes. See “Use of Proceeds.” |
| Procedure for Exercising Subscription Rights | If you elect to exercise your rights being distributed in the offering, you must send certain documentation and payment to the subscription agent before the offering expires. For instructions on how your subscription documents and payment should be sent to the subscription agent, see “The Rights Offering—Required Forms of Payment of the Subscription Price.” | |
| Nontransferability of the Rights | The rights in the rights offering may not be transferred except in very limited circumstances. See “The Rights Offering—Nontransferability of the Rights.” | |
| No Revocation | Once exercised, the rights in the offering may not be revoked, even if you later learn information about us that you consider to be unfavorable or the market price of our common stock falls below the $0.66 per share subscription price, unless we amend the terms of the offering. | |
| Delivery of Shares | Any shares you elect to purchase in the rights offering will be delivered to you or your broker as soon as practical following the conclusion of the offering period. | |
| No Recommendation | Our board of directors makes no recommendation as to whether any stockholder should or should not exercise its rights in the rights offering. | |
| Market for Common Stock | The Company’s common stock is listed and trades on the NYSE MKT exchange under the ticker symbol “TGC.” | |
| Material U.S. Federal Income Tax Consequences | Subject to the certain conditions, the Company believes that a stockholder will neither recognize taxable income or loss for federal income tax purposes in connection with the receipt of subscription rights in the rights offering nor recognize any gain or loss upon the exercise of the subscription rights received in the rights offering. See “Material U.S. Federal Income Tax Consequences.” | |
| Foreign Holders of Registered Common Stock Certificates | The subscription agent will mail rights certificates to you if your address is outside the United States or if you have an Army Post Office or a Fleet Post Office address. To exercise your rights, you must notify the subscription agent and take all other steps which are necessary to exercise your rights on or prior to expiration of the offering. | |
| Subscription Agent | Continental Stock Transfer & Trust Company |
| Risk Factors | Investors considering making an investment by exercising subscription rights in the rights offering should carefully read the information set forth in “Risk Factors” beginning on page 13 of this prospectus, the documents incorporated by reference herein, and the risks that we have highlighted in other sections of this prospectus. | |
| Questions | Anticipated common questions are set out and answered beginning on page 7 below. |
The following are examples of what we anticipate will be common questions about this rights offering. The following questions and answers do not contain all of the information that may be important to you and may not address all of the questions that you may have about this rights offering. This prospectus and the documents incorporated by reference into this prospectus contain more detailed descriptions of the terms and conditions of this rights offering and provide additional information about us and our business, including potential risks related to this rights offering, the shares of common stock offered hereby and our business.
What is the rights offering?
The rights offering is a distribution to holders of our common stock, at no charge, of nontransferable subscription rights at the rate of one right (toto purchase two shares of our common stock)stock for each share of common stock owned as of _______, 2003,[●], 2016, the record date. Each right will be evidenced by a nontransferable rights certificate.
Q. WHAT IS A SUBSCRIPTION RIGHT?
A.
What is a subscription right?
Each subscription right is a right to purchase two shares of our common stock and carries with it a basic subscription privilege and an over-subscriptionoversubscription privilege.
Q. WHAT IS THE BASIC SUBSCRIPTION PRIVILEGE?
A.
What is the basic subscription privilege?
The basic subscription privilege of each right entitles you to purchase two shares of our common stock at the subscription price of $___ in$0.66 per share (or $1.32 per pair of shares purchased upon exercising each right). You must purchase both of the aggregate, or $__ per each share purchased. You must purchase bothtwo shares relating to each outstanding share if you wish to exercise the subscription privilege relating thereto. FractionalYou may exercise none, some, or all of the subscription rights will be eliminated by rounding upyou receive.
After the date of this prospectus, our common stock may trade at prices below current prices or below the subscription price. In any such event, our board of directors may change the subscription price of this offering or determine to cancel or otherwise alter the next higher whole right.
Q. WHAT IS THE OVER-SUBSCRIPTION PRIVILEGE?
A. terms of this offering.
What is the oversubscription privilege?
We do not expect that all of our stockholders will exercise all of their basic subscription rights. By extending over-subscriptionoversubscription 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-subscriptionoversubscription 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 of $0.66 per share. If an insufficient number of shares is available to fully satisfy all over-subscriptionoversubscription privilege requests, the available shares will be distributed proportionately among rights holders who exercised their over-subscriptionoversubscription privilege based on the number of shares each rights holder subscribed for under the basic subscription privilege. The subscription agent will return any excess payments by mail without interest or deduction promptly after the expiration of the rights offering.
Q. HOW LONG WILL THE RIGHTS OFFERING LAST?
A.
How long will the rights offering last?
You will be able to exercise your subscription rights only during a limited period. If you do not exercise your subscription rights before 5:00 p.m., New York City time, on _____________, 2003,[●], 2016, your subscription rights will expire. We may, in our discretion, extend the rights offering until some later
time not laterfor up to an additional 30 days.
Are there any limitations on the number of my rights that I may exercise?
Yes. 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 of this rights offering represent 50% or more of our issued and outstanding shares. There are other limitations bearing upon persons owning or that may become owners by the rights offering of 5% of the Company’s outstanding shares in order to preserve the Company’s net operating losses under federal income tax laws. The limitations as to 5% ownership may be waived by the board of directors as to all affected persons in the event the board determines in its discretion that such limitations have little or no practical effect to prevent loss of any of the Company’s net operating loss (“NOL”) carryforwards or that the Company’s need to maximize proceeds from the rights offering is greater than _______, 2003.
Q. WHY IS TENGASCO ENGAGING IN A RIGHTS OFFERING?
A. the need to attempt to prevent the loss of NOLs by enforcement of the limitations.
Why is Tengasco engaging in a rights offering?
The net proceeds of the rights offering will be used initially to pay non-bankbank indebtedness including to Dolphin, in the approximateaggregate amount of up to
$_____approximately $2.4 million, with the balance of the net proceeds if any, to be used to repay
bank indebtedness and/or for working capital purposes, including the drillingexploration of additional wells.the Company’s leased acreage in Saline County, Kansas, and other projects currently identified by the Company for acquisition, joint development, or joint exploration in Kansas and Texas. The rights offering gives you the opportunity to participate in this fund-raisingcapital raising effort and to purchase additional shares of our common stock.
Q. WHAT HAPPENS IF
What happens if I CHOOSE NOT TO EXERCISE MY SUBSCRIPTION RIGHTS?
A. choose not to exercise my subscription rights?
You will retain your current number of shares of common stock even if you do not exercise your subscription rights. If you choose not to exercise your subscription rights, then the percentage of our common stock that you own will decrease. Rights not exercised prior to the expiration of the rights offering will expire.
3
Q. HOW DO
How do I EXERCISE MY SUBSCRIPTION RIGHTS?
A. exercise my subscription rights if I hold my shares in certificate form?
You may exercise your rights by properly completing and signing your rights certificate. You must deliver your rights certificate with full payment of the subscription price (including any amounts in respect of the over-subscriptionoversubscription 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
What should I do if I want to participate in the rights certificate tooffering but my shares are held in the subscription agent on time, you may follow the guaranteed
delivery procedures described under "The Rights Offering--Guaranteed Delivery
Procedures" beginning on page 56.
Q. WHAT SHOULD I DO IF I WANT TO PARTICIPATE IN THE RIGHTS OFFERING BUT MY
SHARES ARE HELD IN THE NAME OF MY BROKER, CUSTODIAN BANK OR OTHER NOMINEE?
A. name my broker, custodian bank or other nominee?
If you hold shares of our common stock through a broker, custodian bank or other nominee, we will ask your broker, custodian bank or other nominee to notify you of the rights offering. If you wish to exercise your rights, you will need to have your broker, custodian bank or other nominee act for you.
To indicate your decision, you should complete and return to your broker, custodian bank or other nominee the form entitled "Beneficial“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 that you are entitled to participate in the rights offering, but you have not received this form.
Q. WHAT SHOULD
What should I DO IFdo if I WANT TO PARTICIPATE IN THE RIGHTS OFFERING ANDwant to participate in the rights offering and I AM A STOCKHOLDER IN A FOREIGN COUNTRY OR IN THE ARMED SERVICES?
A. am a stockholder residing in a foreign country or participating in the armed services?
The subscription agent will mail rights certificates to you if you are a rights holder whose address is outside the United States or if you have an Army Post Office or a Fleet Post Office address. To exercise your rights, you must notify the subscription agent on or prior to 5:00 p.m., New York City time, on _________ 2003,[●], 2016, and take all other steps which are necessary to exercise your rights, on or prior to that time. If you do not follow these procedures prior to the expiration of the rights offering, your rights will expire.
Q. WHAT IF THE MARKET PRICE PER SHARE OF OUR COMMON STOCK IS LESS THAN THE
SUBSCRIPTION PRICE PER SHARE WHEN
What if the market price per share of our common stock is less than the subscription price per share when I AM DECIDING TO EXERCISE MY SUBSCRIPTION
RIGHTS?
A. am deciding to exercise my subscription rights?
Consult your broker. Depending on the market price of our common stock, it most likely will be more cost effective for you to purchase shares of our common stock on the American Stock ExchangeNYSE MKT exchange rather than exercise your subscription rights. Q. WILLHowever, the proceeds for shares purchased on the exchange go to the person or entity who sold the stock to you. The proceeds for shares purchased in the rights offering go to the Company for the purposes of repayment of bank debt, exploration and other growth objectives of the Company.
Will I BE CHARGED A SALES COMMISSION OR A FEE BY TENGASCO IFbe charged a sales commission or a fee by Tengasco if I EXERCISE
MY SUBSCRIPTION RIGHTS?
A. exercise my subscription rights?
No. We will not charge a brokerage commission or a fee to rights holders for exercising their rights. However, if you exercise your rights through a broker or nominee, you will be responsible for any fees charged by your broker or nominee.
Q. WHAT IS THE BOARD OF DIRECTORS' RECOMMENDATION REGARDING THE RIGHTS
OFFERING?
A.
What is the board of directors’ recommendation regarding the rights offering?
Our board of directors is not making any recommendation as to whether you should exercise your subscription rights. You are urged to make your decision based on your own assessment of the rights offering and Tengasco.
4
Q. HOW MANY SHARES MAY
How many shares may I PURCHASE?
A. purchase?
You will receive one nontransferable subscription right for each share of common stock that you owned on ________, 2003,[●], 2016, the record date. Each subscription right contains the basic subscription privilege and the over-subscriptionoversubscription privilege. Each basic subscription privilege entitles you to purchase two shares of common stock for $___$0.66 per each share purchased. Fractional rights will be eliminated by rounding upIf and when you decide to exercise the next higher whole
right.basic subscription privilege, you must purchase both of the two shares to exercise the basic subscription privilege associated with each share you currently own. However, you are not required to exercise the basic subscription privilege for every share you own unless you desire to participate in the oversubscription privilege as well as the basic privilege. See "The“The Rights Offering - Offering—Subscription Privileges - Basic Subscription
Privilege."
The over-subscriptionPrivileges.”
If you fully exercise your basic subscription privilege, the oversubscription privilege entitles you to subscribe for any number of additional shares (subject to some limitations) of our common stock not purchased by other shareholders under their basic subscription privilege, at the same subscription price per shareprice. If total oversubscription requests exceed the number of available shares, you may receive a smaller number of shares than you request, on a pro-ratapro rata basis to the number of shares you purchased under your basic subscription privilege, provided you fully exercise your basic subscription
privilege. "Pro-rata"“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-subscriptionoversubscription privileges have purchased by exercising the basic subscription privileges on their holdings of common stock. See "The“The Rights Offering--Subscription Privileges--Over-Subscription Privilege."
Q. HOW WAS THE SUBSCRIPTION PRICE ESTABLISHED?
A. Offering—Subscription Privileges.”
How was the subscription price established?
The subscription price per share will be approved bywas recommended to our board of directors (with Mr. Salas not voting with respect to these matters) upon the
recommendation ofby a special committee of independent directors formed for that
purpose, among others.our board charged with recommending financial and other terms of this offering. The special committee will considerconsidered a number of factors, including the historic and then currentthen-current market price of the common stock, our business prospects, our recent and anticipated operating results, general conditions in the securities markets and the energy markets, our need for capital, alternatives available to us for raising capital, the amount of proceeds desired, the pricing of similar transactions, the liquidity of our common stock and the level of risk to our investors. See "Background
The matters considered by the special committee in its determination also included discussions with Dolphin Offshore Partners, L.P. (“Dolphin”), the Company’s largest stockholder, of which Mr. Peter E. Salas is the Rights Offering."
Q. IS EXERCISING MY SUBSCRIPTION RIGHTS RISKY?
A. 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. In its deliberations, the special committee was advised by an advisor engaged for this purpose and by legal counsel.
Is exercising my subscription rights risky?
Yes. The exercise of your rights involves risks. Exercising your rights means buying additional shares of our common stock and should be considered as carefully as you would consider any other equity investment. Among other things, you should carefully consider the risks described under the heading "Risk
Factors,"“Risk Factors” beginning on page 14.
Q. MAY13.
May I TRANSFER MY RIGHTS IFtransfer my rights if I DO NOT WANT TO PURCHASE ANY SHARES?
A. do not want to purchase any shares?
No. Should you choose not to exercise your rights, you may not sell, give away or otherwise transfer your rights. However, rights will be transferable to certain affiliates of the recipient and by operation of law -
for(for example, upon death of the recipient.
Q. AMrecipient).
Am I REQUIRED TO SUBSCRIBE IN THE RIGHTS OFFERING?
A. required to subscribe in the rights offering?
No.
Q. HOW MANY SHARES WILL BE OUTSTANDING AFTER THE RIGHTS OFFERING?
A.
How many shares will be outstanding after the rights offering?
Assuming the rights offering is fully subscribed, the number of shares of common stock that will be outstanding immediately after the rights offering will be approximately 36 million shares, subject[●] shares.
What happens if the rights offering is not fully subscribed after giving effect to any increase(s) that may
occurthe oversubscription privilege?
If the rights offering is not fully subscribed after giving effect to the dateoversubscription privilege, Tengasco will raise less than the maximum potential offering of this prospectus as a result of the exercise, conversion
or exchange of outstanding stock options, convertible securities or exchangeable
securities.
Q. WHAT HAPPENS IF THE RIGHTS OFFERING IS NOT FULLY SUBSCRIBED AFTER
GIVING EFFECT TO THE OVER-SUBSCRIPTION PRIVILEGE?
A.approximately $8 million. Any rights not exercised after giving effect to the over-subscriptionoversubscription privilege will expire.
5
Q. HOW WILL THE RIGHTS OFFERING AFFECT OUR BOARD'SOWNERSHIP OF OUR COMMON
STOCK?
A. The
How will the rights offering affect our board’s ownership of our common stock?
As of October 14, 2016, the members of our board of directors and their affiliates are deemed to beneficially own 4,574,2652,125,280 shares of our common stock, representing approximately 38%34.9% of our outstanding common stock. As of October 14, 2016, Dolphin is deemed to beneficially own 2,441,0192,063,916 shares of our common stock, representing approximately 20.1%33.9% of our outstanding common stock. See "Principal Stockholders."
The Company anticipates that all directors of the Company and the Chief Executive Officer will fully exercise their basic subscription rights.
If no rights holders other than Dolphin and its affiliates exercise their rights in the rights offering, Dolphin would, if it subscribes for and purchases the maximum number of unsubscribed shares, be limited by the terms of this offering to ownership of less than 50% of our issued and outstanding shares, when such ownership is aggregated with the ownership of its affiliates. Although no agreement or understanding has been reached between Dolphin and the Company, the Company expects that Dolphin will fully exercise its basic subscription rights and its oversubscription privilege to the fullest extent possible subject to the limitations set out in the offering.
If no rights holders other than all of the members of our board of directors collectively, onexercise their respective rights in the one hand,rights offering, and Dolphin on the other hand, will,is limited as set out above, our board of directors collectively could as a result of Dolphin'sits subscription for and purchase of allthe maximum number unsubscribed shares, be deemed to beneficially own approximately 28,505,655 and 26,541,013 shares,
respectively, representing the beneficial ownership of 77.4% and 72.8%,
respectively,more than 50% of our issued and outstanding common stock. If allshares.
After I exercise my rights, holders exercise
their basic subscription privileges in full, then the members of our board of
directors collectively, on the one hand,can I change my mind and Dolphin, on the other hand, will
continue to beneficially own 37.6% and 20.1%, respectively, of our common stock.
See "Principal Stockholders."
Q. AFTER I EXERCISE MY RIGHTS, CAN I CHANGE MY MIND AND CANCEL MY
PURCHASE?
A. cancel my purchase?
No. Once you send in your subscription certificate and payment you cannot revoke the exercise of your rights, even if you later learn information about us that you consider to be unfavorable and even ifor the market price of our common stock isfalls below the $____$0.66 per share subscription price. You should not
exercise yourprice, unless we amend the terms of the offering.
What are the federal income tax consequences of exercising my subscription rights unless you are certain that you wish to
purchase additional shares of our common stock atas a price of $_____ per share.
See "The Rights Offering - No Revocation."
Q. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF EXERCISING MY
SUBSCRIPTION RIGHTS AS A HOLDER OF COMMON STOCK?
A. A holder of common stockstock?
Subject to the certain conditions, the Company believes that a stockholder will notneither recognize taxable income or loss for federal income tax purposes in connection with the receipt or exercise of subscription rights in the rights offering nor recognize any gain or loss upon the exercise of the subscription rights received in the rights offering. See "United States“Material U.S. Federal Income Tax Consequences"Consequences” on page 70.
Q. WHEN WILL29.
When will I RECEIVE MY NEW SHARES?
A. receive my new shares?
If you purchase shares of common stock through this rights offering, you will receive certificates representing those shares as soon as practicable after the expiration of the rights offering. Subject to state securities laws and regulations, we have the discretion to delay allocation and distribution of any shares you may elect to purchase by exercise of your basic or over-subscriptionoversubscription privilege in order to comply with state securities laws.
Q. WILL THE NEW SHARES BE INITIALLY LISTED ON THE AMERICAN STOCK EXCHANGE
AND TREATED LIKE OTHER SHARES?
A.
Will the new shares be listed on the NYSE MKT exchange and treated like our other shares?
Yes. Our common stock is traded on the American Stock ExchangeNYSE MKT exchange under the symbol "TGC." On October 13, 2003,“TGC.”
If the last reported sales price of our common
stock on the AMEX was $0.94 per share.
Q. IF THE RIGHTS OFFERING IS NOT COMPLETED, WILL MY SUBSCRIPTION PAYMENT
BE REFUNDED TO ME?
A. rights offering is not completed, or my oversubscription request is limited, will my subscription payment be refunded to me?
Yes. The subscription agent will hold all funds it receives in escrow until completion of the rights offering. If the rightrights offering is not completed, the subscription agent will return promptly, without interest, all subscription payments. 6
Q. WHAT SHOULD I DO IF I HAVE OTHER QUESTIONS?
A. If you have questions or need assistance, please contact ___________,
the subscription agent, at: ( )_____-_____. Banks and brokerage firms please
call ( )_____-_____. For a more complete descriptionamount of the rights offering,
see "The Rights Offering" beginning on page 57.
7
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information that is important to you.
This prospectus includes information about our business and our financial and
operating data. Before making an investment decision, we encourage you to read
the entire prospectus carefully, including the risks discussed in the "Risk
Factors" section. We also encourage you to review our financial statements and
the other information us provide in the reports and other documents that we file
with the SEC, as described under "Where You Can Find More Information."
Our Company
We are in the business of exploring for, producing and transporting oil and
natural gas in Tennessee and Kansas. We lease producing and non-producing
properties with a view toward exploration and development. Emphasis is also
placed on pipeline and other infrastructure facilities to provide transportation
services. We utilize seismic technology to improve the discovery and recovery of
reserves.
To date, we have drilled primarily on a portion of our Tennessee leases
known as the Swan Creek Field in Hancock County focused within what is known as
the Knox formation, one of the geologic formations in that field. During the
first six months of 2003, we produced an average of approximately 1.2 MMcf of
natural gas per day and approximately 2,345 barrels of oil per month from 23
producing gas wells and six producing oil wells in the Swan Creek Field. We also
operate wells in the State of Kansas. During the first six months of 2003, we
produced an average of approximately .13 MMcf of natural gas per day and 10,900
barrels of oil per month from 59 producing gas wells and 129 producing oil wells
in Kansas.
We were initially organized under the laws of the State of Utah on April
18, 1916, under the name "Gold Deposit Mining & Milling Company." We
subsequently changed our name to Onasco Companies, Inc. We were formed
originally for the purpose of mining, reducing and smelting mineral ores. On
November 10, 1972, we conveyed to an unaffiliated entity substantially all of
our assets and we ceased all business operations. From approximately 1983 to
1991, our operations were limited to seeking out the acquisition of assets,
property or businesses. In 1995 we began acquiring oil and gas assets and have
since focused our efforts on the operation of these assets as well as the
acquisition of additional oil and gas assets.
We are a Tennessee corporation, the address of our principal executive
office is 603 Main Avenue, Suite 500, Knoxville, TN 37902, and our telephone
number at that address is (865)523-1124.
THE RIGHTS OFFERING
You should read "Risk Factors" before you exercise your rights.
WHAT IS THE RIGHTS OFFERING? The rights offering is a distributionlimited, any amount not used for purchases shall also be refunded. See “Questions and Answers Related to holders of our common stock, at no charge, of
nontransferable subscription rights at the
rate of one right (to purchase two shares of
our common stock) for each share of common
stock owned as of ________, 2003, the record
date. Each right will be evidenced by a
nontransferable rights certificate.
WHAT IS A SUBSCRIPTION RIGHT? Each subscription right is a right to
purchase two shares of our common stock and
carries with it a basic subscription
privilege and an over-subscription privilege.
WHAT IS THE BASIC SUBSCRIPTION The basic subscription privilege of each
PRIVILEGE? right entitles you to purchase two shares of
our common stock at the subscription price of
$___ in the aggregate, or $___ per each share
purchased. You must purchase both shares
relating to each outstanding share if you
wish to exercise the subscription privilege
relating thereto. Fractional rights will be
eliminated by rounding up to the next higher
whole right.
8
WHAT IS THE OVER-SUBSCRIPTION We do not expect that all of our stockholders
PRIVILEGE? will exercise all of their basic subscription
rights. By extending over-subscription
privileges to our stockholders, we are
providing stockholders that exercise all of
their basic subscription privileges with the
opportunity to purchase those shares that are
not purchased by other stockholders through
the exercise of their basic subscription
privileges. The over-subscription privilege
of each right entitles you, if you fully
exercise your basic subscription privilege,
to subscribe for additional shares of our
common stock unclaimed by other holders of
rights in the rights offering, at the same
subscription price per share. If an
insufficient number of shares is available to
fully satisfy all over-subscription privilege
requests, the available shares will be
distributed proportionately among rights
holders who exercised their over-subscription
privilege basedthis Rights Offering—Are there any limitations on the number of shares eachmy rights holder subscribed for under the basic
subscription privilege. The subscription
agent will return any excess payments by mail
without interest or deduction promptly after
the expiration of the rights offering.
HOW LONG WILL THE RIGHTS You will be able to exercise your
OFFERING LAST? subscription rights only during a limited
period. that I may exercise?”
To whom should I send forms and payments?
If you do not exercise your
subscription rights before 5:00 p.m., hold certificates in paper form, the address for the appropriate forms and payment by U.S. postal service mail, overnight delivery courier, or messenger is as follows:
Continental Stock Transfer & Trust Company
Attention: Corporate Actions Department
17 Battery Place, 8th Floor
New York, City time,NY 10004
If your shares are held by a broker or other nominee, you should refer to the instructions on _____________, 2003,how your subscription rightsbroker or nominee will expire. We may, in
our discretion, extend the rights offering
until some later time not later than _______,
2003.
WHY IS TENGASCO ENGAGING IN A The net proceeds of the rights offering will
RIGHTS OFFERING? be used initially to pay non-bank
indebtedness, including to Dolphin, in the
aggregate amount of up to $4.5 million, with
the balance of the net proceeds, if any,need to be usedinstructed by you for the broker or nominee to repay bank indebtedness and/or for
working capital purposes, including the
drilling of additional wells. The rights
offering gives you the opportunitysend subscription payment to participate in this fund-raising effort and
to purchase additional shares of our common
stock.
WHAT HAPPENS IF I CHOOSE NOT You will retain your current number of shares
TO EXERCISE MY SUBSCRIPTION of common stock even if you do not exercise
RIGHTS? your subscription rights. If you choose not
to exercise your subscription rights, then
the percentage of our common stock that you
own will decrease. Rights not exercised prior
to the expiration of the rights offering will
expire.
HOW DO I EXERCISE MY You may exercise your rights by properly
SUBSCRIPTION RIGHTS? completing and signing your rights
certificate. You must deliver your rights
certificate with full payment of the
subscription price (including any amounts in
respect of the over-subscription privilege)
toContinental Stock Transfer & Trust Company, the subscription agent, on or prior tosee “The Rights Offering—Required Forms of Payment of 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" beginningSubscription Price” on page 56.
9
WHAT SHOULD I DO IF I WANT TO If you hold shares23.
This offering and an investment in the shares of our common stock involve a high degree of risk. You should carefully consider the following factors and other information presented or incorporated by reference in this prospectus before deciding to invest in our common stock. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us may also impair our operations and
business. If we do not successfully address any one or more of the risks described below, there could be a material adverse effect on our financial condition, operating results and business. We cannot assure you that we will
successfully address these risks.
RISKS RELATED TO OUR BUSINESS
GOING CONCERN QUALIFICATION; SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR
ADDITIONAL FINANCING.
We must make substantial capital expenditures for
Risks Relating to our Business
The risks relating to our business are set out in full under 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
completeheading “Risk Factors” in our drilling program in the Swan Creek Field is dependent upon our
ability to fund these expenditures. Although we anticipated that by this time we
would be able to fund the completion of our drilling program in the Swan Creek
Field from revenues from the sales of gas, we are unable to do so. Further, the
availability under our credit facility with Bank One has been revoked by Bank
One. As a result of Bank One's revocation of the credit facility and the
corresponding demand for repayment, combined with the fact that we are still in
the early stages of our oil and gas operating history, during which time we have
a history of losses from operations and have an accumulated deficit of
$(29,491,533) and a working capital deficit of $(9,194,357) as of June 30, 2003,
our independent certified public accountants have indicated in their reportAnnual Report on our Consolidated Financial StatementsForm 10-K for the year ended December 31, 2002, that
these circumstances raise substantial doubt about our ability2015 filed with the SEC on March 30, 2016 and are incorporated herein by this reference.
Risks Relating to continue as a
going concern, which depends upon our ability to obtain long-term debt or raise
capital to satisfy our cash flow requirements. At the present time and until we
are able to increase our production and sales of gas, we must obtain the
necessary funds to complete our drilling program from other sources such asthis Rights Offering
The subscription price determined for this offering as well as other equity investments, bank loans or joint ventures with
other companies, as to which there can be no assurances. In addition, our
revenues or cash flows could decline in the future because of lower oil and gas
prices or for other reasons. If our revenues or cash flows decrease and we are
unable to procure additional financing, this would require us to reduce
production over time, which would adversely impact our ability to continue in
business. Where we areis not the majority owner or operator of an oil and gas
project, we may have no control over the timing or amount of capital
expenditures required with the particular project. If we cannot fund our capital
expenditures in such projects, our interests in such projects may be reduced or
forfeited. In addition to the foregoing operational cash requirements, we have a
significant amount of loans and other obligations either currently due or
maturing by January 4, 2004. These loans, excluding our obligations to Bank One,
and other obligations include interest-bearing loans in excess of $4 million, of
which approximately $2 million is owed to Dolphin, past due accounts payable in
excess of $800,000, interest payments in excess of $300,000, and preferred
dividends in arrears in excess of $600,000. If we are unable to procure
additional funding in addition to the net proceeds of this offering, then we may
not be able to continue as a going concern. There can be no assurance that the
proceeds of this offering will be sufficient to pay allindication of our loans and
obligations currently duevalue or maturing as described above or that we will be able
to obtain any additional funding required as described above.
VOLATILE OIL AND GAS PRICES CAN MATERIALLY AFFECT US.
Our future financial condition and results of operations will depend upon
the prices obtainable for our oil and natural gas production and the costs of
finding, acquiring. developing and producing reserves. Prices for oil and
natural gas are subject to fluctuations in response to relatively minor changes
in supply, market uncertainty and a variety of additional factors that are
beyond our control. These factors include worldwide political instability
(especially in the Middle East and other oil-producing regions), the foreign
supply of oil and gas, the price of foreign imports, the level of drilling
activity, the level of consumer product demand, government regulations and
taxes, the price and availability of alternative fuels and the overall economic
environment. A substantial or extended decline in oil and gas prices would have
a material adverse effect on our financial position, results of operations,
quantities of oil and gas that may be economically produced, and access to
capital. Oil and natural gas prices have historically
14
been and are likely to continue to be volatile. This volatility makes it
difficult to estimate with precision the value of producing properties in
acquisitions and to budget and project the return on exploration and development
projects involving our oil and gas properties. In addition, unusually volatile
prices often disrupt the market for oil and gas properties, as buyers and
sellers have more difficulty agreeing on the purchase price of properties.
UNCERTAINTY IN CALCULATING RESERVES; RATES OF PRODUCTION; DEVELOPMENT
EXPENDITURES; CASH FLOWS.
There are numerous uncertainties inherent in estimating quantities of oil
and natural gas reserves of any category and in projecting future rates of
production and timing of development expenditures, which underlie the reserve
estimates, including many factors beyond our control. Reserve data represent
only estimates. In addition, the estimates of future net cash flows from our
proved reserves and their present value are based upon various assumptions about
future production levels, prices and costs that may prove to be incorrect over
time. Any significant variance from the assumptions could result in the actual
quantity of our reserves and future net cash flows from being materially
different from the estimates. In addition, our estimated reserves may be subject
to downward or upward revision based upon production history, results of future
exploration and development, prevailing oil and gas prices, operating and
development costs and other factors.
OIL AND GAS OPERATIONS INVOLVE SUBSTANTIAL COSTS AND ARE SUBJECT TO VARIOUS
ECONOMIC RISKS.
Our oil and gas operations are subject to the economic risks typically
associated with exploration, development and production activities, including
the necessity of significant expenditures to locate and acquire producing
properties and to drill exploratory wells. In conducting exploration and
development activities, the presence of unanticipated pressure or irregularities
in formations, miscalculations or accidents may cause our exploration,
development and production activities to be unsuccessful. This could result in a
total loss of our investment. In addition, the cost and timing of drilling,
completing and operating wells is often uncertain.
COSTS INCURRED TO CONFORM TO GOVERNMENT REGULATION OF THE OIL AND GAS
INDUSTRY.
Our exploration, production and marketing operations are regulated
extensively at the federal, state and local levels. We have made and will
continue to make large expenditures in our efforts to comply with the
requirements of environmental and other regulations. Further, the oil and gas
regulatory environment could change in ways that might substantially increase
these costs. Hydrocarbon-producing states regulate conservation practices and
the protection of correlative rights. These regulations affect our operations
and limit the quantity of hydrocarbons we may produce and sell. In addition, at
the federal level, the Federal Energy Regulatory Commission regulates interstate
transportation of natural gas under the Natural Gas Act. Other regulated matters
include marketing, pricing, transportation and valuation of royalty payments.
COSTS INCURRED RELATED TO ENVIRONMENTAL MATTERS.
Our operations are subject to numerous and frequently changing laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. We own or lease, and have in the
past owned or leased, properties that have been used for the exploration and
production of oil and gas and these properties and the wastes disposed on these
properties may be subject to the Comprehensive Environmental Response,
Compensation and Liability Act, the Oil Pollution Act of 1990, the resource
Conservation and Recovery Act, the Federal Water Pollution Control Act and
analogous state laws. Under such laws, we could be required to remove or
remediate previously released wastes or property contamination.
Laws and regulations protecting the environment have generally become more
stringent and, may in some cases, impose "strict liability" for environmental
damage. Strict liability means that we may be held liable for damage without
regard to whether we were negligent or otherwise at fault. Environmental laws
and regulations may expose us to liability for the conduct of or conditions
caused by others or for acts that were in compliance with all applicable laws at
the time they were performed. Failure to comply with these laws and regulations
may result in the imposition of administrative, civil and criminal penalties.
While we believe that our operations are in substantial compliance with
existing requirements of governmental bodies, our ability to conduct continued
operations is subject to satisfying applicable regulatory and permitting
controls. Our current permits and authorizations and ability to get future
permits and authorizations may be
15
susceptible, on a going forward basis, to increased scrutiny, greater complexity
resulting in increased costs or delays in receiving appropriate authorizations.
INSURANCE DOES NOT COVER ALL RISKS.
Exploration for and production of oil and natural gas can be hazardous,
involving unforeseen occurrences such as blowouts, cratering, fires and loss of
well control, which can result in damage to or destruction of wells or
production facilities, injury to persons, loss of life, or damage to property or
the environment. We maintain insurance against certain losses or liabilities
arising from our operations in accordance with customary industry practices and
in amounts that management believes to be prudent; however, insurance is not
available to us against all operational risks.
HEDGING MAY PREVENT US FROM FULLY BENEFITING FROM PRICE INCREASES.
We do not presently have any hedging agreements or plans to enter into any
hedging activities. However, to the extent that we do enter into such agreements
or undertake such activities, we may be prevented from realizing the benefit of
price increases above the levels of the hedges. In addition, we are subject to
basis risk when we engage in hedging transactions, particularly where
transportation constraints restrict our ability to deliver oil and gas volumes
at the delivery point to which the hedging transaction is indexed.
GENERAL ECONOMIC CONDITIONS.
Virtually all of our operations are subject to the risks and uncertainties
of adverse changes in general economic conditions, the outcome of pending and/or
potential legal or regulatory proceedings, changes in environmental, tax, labor
and other laws and regulations to which we are subject, and the condition of the
capital markets utilized
COMPETITION.
Our business is highly competitive. In seeking any other suitable oil and
gas properties for acquisition, or drilling rig operators and related personnel
and equipment, we will be competing with a number of other companies, including
large oil and gas companies and other independent operators with substantially
greater financial and technical resources and longer history and experience in
property acquisition and operation.
DEPENDENCE ON KEY PERSONNEL.
Members of present management and certain company employees have
substantial expertise in the areas of endeavor presently conducted and to be
engaged in by us. To the extent that their services become unavailable, we will
be required to retain other qualified personnel. There can be no assurance that
we will be able to recruit and hire qualified persons upon acceptable terms.
RISKS RELATING TO THIS RIGHTS OFFERING
THE SUBSCRIPTION PRICE DETERMINED FOR THIS OFFERING IS NOT AN INDICATION OF
OUR VALUE OR THE VALUE OF OUR COMMON STOCK.
common stock.
The subscription price for this rights offering is $___has been determined to be $0.66 for each share purchased. The subscription price was determined by a special committee of our Boardboard of Directorsdirectors formed for that purpose, among others, and recommended to our full Boardboard of Directorsdirectors 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 discussions with a representative of Dolphin Offshore Partners, L.P., the Company’s largest stockholder, 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 abovebelow current levels or below the subscription price. 16
IF YOU EXERCISE YOUR RIGHTS, YOU MAY LOSE MONEY IF THERE IS A DECLINE IN
THE TRADING PRICE OF OUR SHARES OF COMMON STOCK.
In any such event, our board of directors may change the subscription price of this offering or determine to cancel or otherwise alter the terms of this offering.
As a result of this offering, certain persons may obtain effective voting control of us and be able to direct our actions.
As a result of this offering, Dolphin would, in the event that it were to subscribe for and purchase the maximum number of unsubscribed shares and no other rights holders exercised their rights, be able to acquire the ownership of just under 50% of our issued and outstanding shares. Similarly, if no rights holders other than all of the members of our board of directors exercise their respective rights in this offering, our board of directors (including Peter E. Salas) collectively would, as a result of its subscription for and purchase of all unsubscribed shares, own or be deemed to own up to or slightly more than 50% of our issued and outstanding shares of common stock. Consequently, such control, if it occurs, would allow such persons to be able to elect all of our directors and otherwise control our operations, including being able to direct our actions. Further, such control might discourage potential acquirers from seeking to acquire control of us through the purchase of our common stock, which could have a limiting effect on the price of our common stock.
If you exercise your rights, you may lose money if there is a decline in the trading price of our shares of common stock.
The trading price of our common stock in the future may decline below the subscription price. We cannot assure you that the subscription price will remain below any future trading price for the shares of our common stock. Future prices of the shares of our common stock may adjust positively or negatively depending on various factors, including our future revenues and earnings, changes in earnings estimates by analysts, our ability to meet analysts'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.
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 declinesfalls 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.
payment, unless we amend the terms of the offering.
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 a date no later than ________, 2003.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.
rights, unless we amend the terms of the offering.
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.
We may not receive sufficient participation to generate sufficient proceeds for all intended purposes.
We have no agreements or understandings with any persons or entities, including Dolphin, members of our board of directors, our management and any broker or dealers, with respect to their exercise of any rights offered hereby or their participation as an underwriter, broker or dealer in this offering. As such, we do not know to what extent any stockholders will participate in the offering and therefore what amount of proceeds will be raised in the offering. Assuming that stockholders exercise all of the rights we are offering, we will receive gross proceeds of approximately $8,049,000. We intend to use the net proceeds initially to pay bank indebtedness of up to approximately $2.4 million, with the balance, if any, for working capital and general corporate purposes in our discretion. The net proceeds of this offering, even at a maximum participation level, may not provide sufficient working capital to sustain the Company for any minimum period of time.
Because we may terminate the offering, your participation in the offering is not assured.
Once you exercise your subscription rights, you may not revoke the exercise for any reason unless we amend the offering. If we decide to terminate the offering, we will not have any obligation with respect to the subscription rights except to return any subscription payments, without interest.
YOU NEED TO ACT PROMPTLY AND FOLLOW SUBSCRIPTION INSTRUCTIONS.
Stockholders who desire
Our ability to purchase shares inuse our net operating loss carryforwards may be substantially reduced as a result of this rights offering must act
promptly to ensure that all required forms and payments are actually received by
the subscription agent prior to 5:00 p.m., New York City time, on______, 2003,
the expiration date. If you fail to complete and sign the required subscription
forms, send an incorrect payment amount, or otherwise fail to follow the
subscription procedures that apply to your desired transaction the subscription
agent may, depending on the circumstances, reject your subscription or accept it
to the extent of the payment received. Neither we nor our subscription agent
undertakes to you concerning, or attempt to correct, an incomplete or incorrect
subscription form or payment. We have the sole discretion to determine whether a
subscription exercise properly follows the subscription procedures.
OUR ABILITY TO USE OUR NET OPERATING LOSS CARRYFORWARDS MAY BE
SUBSTANTIALLY REDUCED AS A RESULT OF THIS OFFERING.
offering.
Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes a limitation on a corporation'scorporation’s use of net operating loss ("NOL")NOL carryforwards if the corporation has undergone an "ownership“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,Because we had federal tax NOL carryforwards
of $7,139,000. However, because
17
we previously have taken a full valuation reserve for our deferred tax assets on our financial statements, an ownership change would not have an immediate impact on our reported earnings for financial accounting purposes.
18
USE OF PROCEEDS
Assuming that stockholderspurposes but may cause significant reduction or elimination of the NOL carryforwards in the future.
Your interest in the Company may be diluted as a result of this rights offering and due to other future transactions.
Stockholders who do not fully exercise their subscription rights for all of the
common stock that we are offering, we will receive gross proceeds of
approximately $___ million. Dolphin and its affiliates, subjectin proportion to the pricingoverall exercise of rights may own a smaller proportional interest in the Company at the completion of this offering than they had owned before the offering was completed. If we raise additional capital by issuing equity in the future, any such additional capital raise may result in further dilution to our stockholders.
Completion of the rights offering is not subject to us raising a minimum offering amount, and we may agree that it will exercise its basic subscription
and over-subscription privileges in full. In that event, we would expectneed additional funding to receivecarry out our proposed operating activities after the rights offering.
Completion of the rights offering is not subject to us raising a minimum offering amount; therefore, the net proceeds of at least $___ million from the rights offering before any
purchases by any other rights holders. See "The Rights Offering - Proposed
Commitment Agreement." We will pay estimated expenses of approximately $150,000may be insufficient to meet our objectives, thereby increasing the risk to investors in connection with the rights offering. We intend to use the net proceeds from this offering, initiallyincluding investing in a company that may continue to pay non-bank indebtedness, including to Dolphin inrequire additional capital.
This rights offering may cause the aggregate amount of up to $_____ million, and to apply the balance of such
proceeds, if any, to repay bank indebtedness to some extent and/or for working
capital purposes, including the drilling of additional wells. There can be no
assurance that the net proceeds of this offering will provide sufficient working
capital to us for any minimum period of time. See "Risk Factors - Going Concern
Qualification; Significant Capital Requirements; Need for Additional Financing."
19
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the American Stock Exchange under the symbol
"TGC." The following table sets forth the high and low closing sales prices per
sharetrading price of our common stock forto decrease.
The rights offering may result in an immediate decrease in the periods indicated. The prices for the first
three quarters of 2001 have been retroactively adjusted by a 5% reduction to
take into account the 5% stock dividend declared by us payable on October 1,
2001 to all stockholders of record as of September 4, 2001.
HIGH LOW
---- ---
Year Ending December 31, 2003
First Quarter........................................ $2.00 $1.00
Second Quarter....................................... 1.23 0.36
Third Quarter........................................ 1.28 0.65
Fourth Quarter (through October 13, 2003)............ 0.94 0.77
Year Ended December 31, 2002
First Quarter........................................ 8.19 5.80
Second Quarter....................................... 6.49 2.71
Third Quarter........................................ 3.45 2.20
Fourth Quarter....................................... 2.90 1.05
Year Ended December 31, 2001
First Quarter........................................ 14.20 9.69
Second Quarter....................................... 15.01 11.16
Third Quarter........................................ 13.69 7.60
Fourth Quarter....................................... 10.54 7.39
20
CAPITALIZATION
The following table sets forth our summary capitalization as of June 30,
2003, and our summary capitalization as of June 30, 2003 as adjusted to reflect
the sale of__ sharesmarket price of our common stock. Any such stock (the maximum numberprice decline may continue after the completion of this rights offering. If that occurs, you may have committed to buy shares offered)of common stock in thisthe rights offering at an offeringa price greater than the then-prevailing market price. Following the exercise of $___ per share and the
application of the estimated net proceeds therefrom, after deducting estimated
offering expenses of $150,000.
21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and notes thereto, and other
financial information included elsewhere in this prospectus. Our consolidated
statement of loss data set forth below for the years ended December 31, 2002,
2001 and 2000 and the consolidated balance sheet data as of December 31, 2002
and 2001 have been derived from our audited consolidated financial statements
which are included elsewhere in this prospectus. The consolidated statement of
loss data set forth below for the years ended December 31, 1999 and 1998 and the
consolidated balance sheet data as of December 31, 2000, 1999, and 1998 have
been derived from our audited consolidated financial statements that are not
included in this prospectus. The balance sheet data and the statement of loss
data as of and for the six months ended June 30, 2003 and 2002 have been derived
from our unaudited financial statements included elsewhere in this prospectus,
which we believe have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, which we consider necessary for a fair presentation of the selected
financial data shown.
(1) All references in this table to common stock and per share data have been
retroactively adjusted to reflect the 5% stock dividend declared by the
Company effective as of September 4, 2001.
(2) With respect to the pipeline facilities, during the years ended December
31, 2000, 1999, and 1998, this included portions which were under
construction.
(3) No cash dividends have been declared or paid by the Company for the periods
presented.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section should be read in conjunction with our consolidated financial
statements included elsewhere in this prospectus. Comments on the results of
operations and financial condition below refer to our continuing operations.
OVERVIEW
We are in the business of exploring for, producing and transporting oil and
natural gas in Tennessee and Kansas. We lease producing and non-producing
properties with a view toward exploration and development. Emphasis is also
placed on pipeline and other infrastructure facilities to provide transportation
services. We utilize seismic technology to maximize the recovery of reserves.
Our activities in the oil and gas business commenced in May 1995 with the
acquisition of oil and gas leases in Hancock, Claiborne, Knox, Jefferson and
Union counties in Tennessee. Our current lease position in these areas in
Tennessee is approximately 41,088 acres. In addition, in 1997, we acquired
approximately 32,000 acres of leases in the vicinity of Hays, Kansas.
To date, we have drilled primarily on a portion of our Tennessee leases
known as the Swan Creek Field in Hancock County focused within what is known as
the Knox formation, one of the geologic formations in that field. During the
first six months of 2003, we produced an average of approximately 1.2 MMcf of
natural gas per day and approximately 2,345 barrels of oil per month from 23
producing gas wells and six producing oil wells in the Swan Creek Field. We also
operate wells in the State of Kansas. During the first six months of 2003, we
produced an average of approximately .13 MMcf of natural gas per day and 10,900
barrels of oil per month from 59 producing gas wells and 129 producing oil wells
in Kansas.
We must make substantial capital expenditures for the acquisition,
exploration and development of oil and gas reserves. Historically, we have paid
for these expenditures with cash from operating activities, proceeds from debt
and equity financings and asset sales. Our ability to re-work existing wells and
complete our drilling program in the Swan Creek Field is dependent upon our
ability to fund these expenditures. Although we anticipated that by this time we
would be able to fund the completion of our drilling program in the Swan Creek
Field from revenues from the sales of gas, we are unable to do so. Further, our
credit facility with Bank One has been revoked by Bank One. As a result of Bank
One's revocation of the credit facility and the corresponding demand for
payment, combined with the fact that we are still in the early stages of our oil
and gas operating history, during which time we have a history of losses from
operations and have an accumulated deficit of $(29,491,533) and a working
capital deficit of $(9,194,357) as of June 30, 2003, our independent certified
public accountants have indicated in their report on our Consolidated Financial
Statements for the year ended December 31, 2002, that these circumstances raise
substantial doubt about our ability to continue as a going concern, which
depends upon our ability to obtain long-term debt or raise capital to satisfy
our cash flow requirements. At the present time and until we are able to
increase our production and sales of gas and to resolve our dispute with Bank
One, we must obtain the necessary funds to proceed with our drilling program
from other sources such as equity investment, bank loan or a joint venture with
other companies, as to which there can be no assurances. Although we intend to
apply the net proceeds from this offering initially to repay non-bank
indebtedness and to apply the balance of such proceeds, if any, to repay in part
bank indebtedness and/or other working capital purposes, including the drilling
of additional wells, there can be no assurances that such net proceeds will be
sufficient for such purposes or that we will be able to resolve the financial
difficulties currently preventing us from drilling additional wells and
increasing production volumes of natural gas from the Swan Creek Field. In
addition, our revenues or cash flows could be reduced because of lower oil and
gas prices or for some other reason. There can be no assurances that we will be
able to obtain additional funding. Further, in certain projects where we are not
the majority owner or operator and we may have no control over the timing or
amount of capital expenditures associated with those projects. If we cannot fund
such capital expenditures, our interests in those projects would likely be
reduced or forfeited. In addition to the foregoing operational cash
requirements, we have a significant amount of loans and other obligations either
currently due or maturing by January 4, 2004. These loans, excluding our
obligations to Bank One, and other obligations include interest-bearing loans in
excess of $4 million principal amount, approximately $2 million of which is owed
to Dolphin, past due accounts payable in excess of $800,000, interest payments
in excess of $300,000, and preferred
23
dividends in arrears in excess of $600,000, as well as the negative operating
cash flow referred to above in excess of $500,000. If we are unable to procure
additional funding in addition to the act proceeds of this offering, then weyour subscription rights, you may not be able to continue assell your common stock at a going concern. There can be no assurance thatprice equal to or greater than the proceeds of this offering will be sufficient to pay all of our loans and
obligations currently due or maturing as described above or that we will be able
to obtain any additional funding required as described above.
A reporting issue has arisen regarding the application of certain
provisions of SFAS No. 141 and SFAS No. 142 to companies in the extractive
industries, including oil and gas companies. The issue is whether SFAS No. 142
requires registrants to classify the costs of mineral rights held under lease or
other contractual arrangement associated with extracting oil and gas as
intangible assets in the balance sheet, apart from other capitalized oil and gas
property costs, and provide specific footnote disclosures. Historically, we have
included the costs of such mineral rights associated with extracting oil and gas
as a component of oil and gas properties. subscription price.
If it is ultimately determined that
SFAS No. 142 requires oil and gas companies to classify costs of mineral rights
held under lease or other contractual arrangement associated with extracting oil
and gas as a separate intangible assets line item on the balance sheet, we would
be required to reclassify approximately $421,000 at June 30, 2003 and $346,000
at December 31, 2002, respectively, out of oil and gas properties and into a
separate intangible assets line item. Our cash flows and results of operations
would not be affected since such intangible assets would continue to be depleted
and assessed for impairment in accordance with full cost accounting rules.
Further, weyou do not believe the classification of the costs of mineral rights
associated with extracting oil and gas as intangible assets would have any
impact on compliance with covenants under our debt agreements.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Kansas During the first six months of 2003, we produced and sold 65,457
barrels of oil and 129,995 Mcf of natural gas from our Kansas Properties, which
are comprised of 149 producing oil wells and 59 producing gas wells. The first
six months production of 65,457 barrels of oil compares to 72,124 barrels
produced in the first six months of 2002. The first six months production of
129,995 Mcf of gas compares to 146,783 Mcf produced in the first six months of
2002. In summary, the first six months production reflected expected continued
relatively stable production levels from the Kansas Properties, which have been
in production for many years. The decrease in production reflects a normal
decline curve for the Kansas properties. The revenues from the Kansas properties
were $2,049,781 in the first six months of 2003 as compared to $1,559,361 for
the first six months of 2002. The increase in revenues is due to a significant
increase in the price of oil and gas during the period.
Tennessee During the first six months of 2003, we produced gas from 23
wells in the Swan Creek Field, which gas was sold to our two industrial
customers in Kingsport, Tennessee, BAE SYSTEMS Ordnance Systems Inc. as operator
of the Holston Army Ammunition Plant, or BAE, and Eastman Chemical Company.
Natural gas production from the Swan Creek Field for the first six months of
2003 was an average of 1.150 million cubic feet per day during that period as
compared to 2.270 million cubic feet per day during the first six months of
2002. The first six months production reflected expected natural decline in
production from the existing Swan Creek gas wells, which were first brought into
production in mid-2001 upon completion of our pipeline. Although this decline is
normal, the reduced production volume was not replaced as we had expected by
additional drilling. In order for overall field production to remain steady or
grow, new wells must be brought online. We expect that any of the new wells we
drill would also experience the same harmonic (i.e. a relatively steep initial
decline curve followed by longer periods of relatively flat or stable
production) decline like other natural wells in formations similar to the Knox
formation, so continuous drilling is vital to maintaining or increasing initial
levels of production. We have not drilled any new wells to date in 2003. We
anticipate, although there can be no assurance, that the natural decline of
production from existing wells is now predictable in Swan Creek, that the total
volume of our reserves remain largely intact, and that these reserves could be
extracted through existing wells and also by steady additional drilling brought
on by reliable financial arrangements to fund drilling. The decrease in our
pipeline transportation revenues is directly related to the decrease in our gas
production volumes.
We recognized $3,360,763 in oil and gas revenues from our Kansas Properties
and the Swan Creek Field during the first six months of 2003 compared to
$2,408,917 in the first six months of 2002. The increase in revenues was due to
a significant increase in price from oil and gas sales. Oil prices averaged
$28.90 per barrel in 2003 as
24
compared to $21.54 during the comparable period in 2002. Gas prices averaged
$5.71 per Mcf in 2003 as compared to $2.80 during the comparable period in 2002.
The Swan Creek Field produced 207,056 Mcf and 408,593 Mcf in the first six
months of 2003 and 2002, respectively. This decrease was due to the declines in
production, which could not be offset due to the lack of funds to continue
drilling new wells.
We realized a net loss attributable to common stockholders of $1,606,331
(($0.14) per share of common stock) during the first six months of 2003 compared
to a net loss in the first six months of 2002 attributable to common
stockholders of $1,964,465 (($0.18) per share of common stock). A non-cash
charge of $351,204 was recognized as a cumulative effect of a change in
accounting principle during the first quarter of 2003 relating to the
implementation of SFAS 143. See "--Recent Accounting Pronouncements" and the
Notes to the Consolidated Financial Statements contained elsewhere in this
Prospectus.
Production costs and taxes in the first six months of 2003 of $1,627,079
were consistent with production costs and taxes of $1,269,304 in the first six
months of 2002. The difference of $358,575 was due to a reclassification of
insurance cost relating to field activities of $176,258 from general and
administrative to production costs. Part of the increase in production costs in
2003 was due to the fact that our field personnel cost was capitalized as we
were drilling new wells in 2002, as compared to 2003 when all employees were
working to maintain production. Field salaries in Swan Creek was $152,217 in the
first six months of 2003.
Depreciation, Depletion, and Amortization expense for the first six months
of 2003 was $1,259,138 compared to $974,696 in the first six months of 2002. The
December 31, 2002, Ryder Scott Company, L.P. reserve reports were used as a
basis for the 2003 estimate. We review our depletion analysis and industry oil
and gas pricesact on a quarterlytimely basis to ensure that the depletion estimate is
reasonable. The depletion taken in the first six months of 2003 was $700,000 as
compared to $500,000 in the first six months of 2002. We also amortized $104,422
of loan fees relating to the Bank One loan and convertible notes in the first
six months of 2003 as compared to $86,360 in the same period of 2002.
During the first six months of 2003, we reduced our general and
administrative costs significantly by $315,614 from those of the first six
months of 2002. Management has made an effort to control costs in every aspect
of its operations. Some of these cost reductions included the closing of our New
York office and a reduction in personnel from 2002 levels. Professional fees
have remained at a high level, primarily due to costs incurred for legal and
accounting services as a result of the Bank One lawsuit. Dividends on preferred
stock have increased from $238,400 in 2002 to $268,389 in 2003 as a result of
the increase in the amount of preferred stock outstanding from new private
placements occurring during the second six months of 2002. Our 2003 public
relations costs were reduced by $132,112 from those of 2002 as part of our
efforts to cut costs.
Dividends on preferred stock increased from $238,400 in the first six
months of 2002 to $268,389 in the first six months of 2003 as a result of the
increase over the periods in the amount of outstanding preferred stock.
FISCAL YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
We realized oil and gas revenues of $5,437,723 in 2002 as compared to
$6,656,758 in 2001 and $5,241,076 in 2000. The decrease in revenues in 2002 from
2001 was due to a decrease in volumes produced in 2002 from the volumes produced
in 2001. Gas produced from the Swan Creek Field was 717,701 MCF in 2002 as
compared to 966,967 MCF in 2001, resulting in approximately $800,000 in reduced
revenues. Oil production from the Swan Creek Field was 20,122 barrels in 2002,
down from 30,323 barrels in 2001, resulting in approximately $200,000 in reduced
revenues. Gas production from the Kansas Properties was 287,198 MCF in 2002
compared to 324,915 MCF in 2001, resulting in approximately $100,000 in reduced
revenues. Oil production from the Kansas Properties was 137,851 barrels in 2002
compared to 147,029 barrels in 2001, resulting in approximately $200,000 in
reduced revenues. The reason for the decrease in volumes produced in 2002 was
our disputed credit reduction by Bank One, which significantly limited our
ability to drill new wells to maintain or increase production volumes. The
increased revenues in 2001 of $6,656,758 compared to $5,241,076 in 2000 was
primarily due to gas sales from the Swan Creek field of $2,563,935 being made
for the first time during 2001. However, oil sales decreased by approximately
$951,000 in 2001 from 2000 levels due to price decreases, as the number of
barrels produced remained constant.
25
Our subsidiary, TPC, had pipeline transportation revenues of $259,677 in
2002, a decrease compared to $296,331 in 2001, the first year of transportation
revenues.
Our production costs and taxes have increased each year from 2000 to 2002
as additional costs have been incurred to maintain the Kansas Properties and to
begin production from the Swan Creek Field in 2001 and to maintain it in 2002.
The production costs and taxes increased from $2,951,746 in 2001 to $3,094,731
in 2002. An increase in 2001 of $337,332 in production costs and taxes as
compared to 2000 was due primarily to the commencement of production from the
Swan Creek Field.
Depletion, depreciation, and amortization increased significantly in 2002
to $2,413,597 over 2001 and 2000 levels of $1,849,963 and $371,249,
respectively. The primary reason for the increase from 2002 over 2001 was due to
depreciation being taken for the first time for a full year on our pipeline
facilities in 2002, whereas only a half year of depreciation was taken in 2001
after the pipeline was placed in service in mid-year. Also, approximately
$186,000 of loan fees were amortized in 2002. The primary increase in 2001 from
2000 was due to significant increases in depletion expense during 2001
($1,142,000) as a result of the following: decreases in reserve estimates on oil
and gas properties arising from declining commodity prices; certain of our gas
wells had decreased production levels at year-end due to problems encountered
with liquids in the wells. This decreased production level at year-end was
factored into the estimated future proved reserves calculation performed as of
December 31, 2001, resulting in a lower future proved reserves estimate.
Additionally, in 2001 we depreciated the pipeline for the first time ($220,371).
We significantly reduced our general administrative costs to $1,868,141 in
2002 from $2,957,871 in 2001. Management has made a significant effort to
control costs in every aspect of its operations. Some of these cost reductions
include the closing of the New York office and a reduction in personnel from
2001 levels. General and administrative expenses had increased to $2,957,871 in
2001 from $2,602,311 in 2000. The increases in 2001 from 2000 were attributable
to an increase in insurance of approximately $400,000 in 2001 to expand coverage
including blowout insurance and the addition of company provided medical
insurance for employees.
Interest expense for 2002 decreased significantly over 2001 levels due to
the reduced interest rate on the Bank One loan over the rate applicable under
previous financing arrangements. Interest expense in 2002 was $578,039 compared
to $850,965 in 2001. Interest expense for 2001 had in turn increased
significantly from $415,376 in 2000. This increase was due to additional
interest cost associated with financing for the completion of Phase II of our
65-mile pipeline. The increase in 2001 was reduced by interest cost of
approximately $148,000 which was capitalized in the first three months of 2001
during construction of the pipeline. Interest of $128,000 was capitalized in
2000.
Public relations costs were significantly reduced in 2002 to $193,229 from
$293,448 in 2001 as we applied cost saving methods in the preparation of our
annual report to stockholders and in publishing of press releases. Public
relations costs increased to $293,448 in 2001 as compared to 2000 costs of
$106,195 due to costs associated with producing the annual report, the proxy
statement and press releases.
Professional fees increased to $707,296 in 2002 from $355,480 in 2001 due
to legal and accounting services primarily related to the Bank One litigation
and new accounting regulations. Professional fees had decreased substantially in
2001 from 2000 fees of $719,320 which included a charge in 2000 of $242,000 for
stock options issued in 2000 to non-employees.
Dividends on preferred stock increased to $506,789 in 2002 from $391,183 in
2001 and from $257,557, in 2000 as a result in the increase in the amount of
preferred stock outstanding.
LIQUIDITY AND CAPITAL RESOURCES
In November 2001, Bank One extended to us a line of credit of up to $35
million. The initial borrowing base under such credit agreement was $10 million.
On November 9, 2001, following drawdowns on the facility to pay certain
obligations, outstanding borrowings under the credit facility were $7,901,776.
In April 2002, we received a notice from Bank One stating that it had
redetermined and reduced the borrowing base under the credit agreement to
approximately $3.1 million and requiring a $6 million reduction of the
outstanding loan. The schedule of reserve
26
reports required by the Credit Agreement upon which such redeterminations were
to be based specifically established a procedure involving an automatic monthly
principal payment of $200,000 commencing February 1, 2002. As of June 30, 2003,
the outstanding principal balance under the credit agreement was approximately
$6.9 million.
As a result of Bank One's unexpected reduction of the borrowing base and
the corresponding demand for payment of $6 million, combined with the fact that
we are still in the early stages of our oil and gas operating history during
which time we have had a history of losses from operations and have an
accumulated deficit of $(29,491,533) and a working capital deficit of
$(9,194,357) as of June 30, 2003, our independent auditors indicated in their
report on the audit of our consolidated financial statements for the year ended
December 31, 2002 that our ability to continue as a going concern is uncertain.
Our ability to continue as a going concern depends upon our ability to obtain
long-term debt or raise capital and satisfy cash flow requirements.
In May 2002, we filed suit against Bank One in federal court in the Eastern
District of Tennessee, Northeastern Division at Greeneville, Tennessee to
restrain Bank One from taking any steps pursuant to the credit agreement to
enforce its demand that we reduce our loan obligation or else be deemed in
default and for actual and punitive damages resulting from the demand. See
"Legal Proceedings" for a discussion of this action. Although the parties
continue to discuss settlement of all outstanding issues, no settlement has been
reached. At a scheduling conference held by the Court in February 2003, a
procedural schedule was set as requested by us leading toward a trial date of
November 18, 2003 in the event settlement is not concluded. Even if we conclude
a settlement with Bank One, we do not anticipate that we will be able to either
increase the borrowing base under the Bank One credit agreement or borrow any
additional sums from Bank One. To fund additional drilling and to provide
additional working capital, we are required to pursue other options. Although we
intend to apply the net proceeds from this offering initially to repay
outstanding non-bank indebtedness and to apply the balance of such proceeds, if
any, to repay bank indebtedness to some extent and/or to fund the drilling of
additional wells, there can be no assurances that such net proceeds will be
sufficient for such purposes or that we will be able to resolve the difficulties
currently preventing us from drilling additional wells and increasing production
volumes of natural gas from the Swan Creek Field. See "Use of Proceeds."
We believe that the total volume of our reserves in the Swan Creek Field
remains largely intact and that these reserves can be extracted through existing
wells and by steady additional drilling brought on by reliable financial
arrangements. We plan to drill up to 20 additional wells in this field and have
obtained approval from the Tennessee regulatory authorities with jurisdiction
over spacing of wells to drill on smaller spacing units in the field,
effectively allowing more wells to be drilled and the reservoir to produce more
quickly but with no decrease in the long term efficiency of production of the
maximum amount of reserves from the reservoir. We are hopeful that production
from these new wells will be in line with the production from its more
productive existing wells in the Swan Creek Field and will have a noticeable
effect on increasing the total production from the field.
Similarly, if funding for additional drilling becomes sufficiently
available, as to which there can be no assurance, we plan to drill wells in five
new locations in Ellis and Rush Counties, Kansas on existing leases in response
to drilling activity in the area establishing new areas of oil production.
Although we drilled a well in Kansas in 2001 and completed the well as an oil
well, we were not able to drill any new wells in Kansas in or since 2002 due to
lack of funds.
As of June 30, 2003, we had total stockholders' equity of $13,090,438 on
total assets of $32,178,382. We had a net working capital deficiency at June 30,
2003 of $(9,194,357) as compared to a net deficiency of $(7,998,835) at December
31, 2002.
Net cash used in operating activities increased from $221,176 in 2001 to
$566,017 in 2002 and decreased from $779,327 during the first six months of 2002
to net cash provided by operating activities during the first six months of 2003
of $6,016. Our net loss in 2002 increased to $(3,154,555) in 2002 from
$(2,262,787) in 2001 and decreased from $(1,726,065) during the first six months
of 2002 to $(986,738) during the first six months of 2003.
Net cash used in investing activities amounted to $2,889,937 for 2002
compared to net cash used in the amount of $9,408,684 for 2001 and $348,443 for
the first six months of 2003 compared to $1,464,553 for the first six months of
2002. The decrease in net cash used for investing activities during 2002 is
primarily attributable to the
27
construction of Phase II of the pipeline of $4,213,095 in 2001 as compared to
$841,750 in 2002 and additions to oil and gas properties of $4,821,883 in 2001
as compared to $1,982,529 in 2002.
Net cash provided by financing activities decreased to $3,246,633 in 2002
from $8,419,336 in 2001 and to $541,355 during the first six months of 2003 from
$1,951,514 during the first six months of 2002. The decrease over the full years
was due, in part, to our inability to enter into new financing arrangements in
2002 as a result of our dispute with Bank One as discussed above. The decrease
over the six-month periods was a result, in part, of the private placements of
common stock and preferred stock during the earlier period in the amount of
$2,440,166 as compared to only $250,000 during the recent period. In 2001 the
primary sources of financing included proceeds from borrowings of $10,442,068 as
compared to $2,063,139 in 2002 and net proceeds of issuances of common stock of
$3,900,000 in 2001 as compared to $2,677,000 in 2002. In addition, proceeds fromfollow subscription instructions, your exercise of options were $2,341,000 in 2001 as compared to zero in 2002 as the
market price of our stock fell below the exercise price of the earlier granted
options. The primary use of cash in financing activities in 2001 was the use of
the funds received from Bank One to repay our prior borrowings of $8,833,325 as
compared to 2002 when $2,378,273 was used primarily to make payments to Bank
One.
CRITICAL ACCOUNTING POLICIES
Our Company's accounting policies are described in the Notes to
Consolidated Financial Statements contained in this Prospectus. We prepare our
Consolidated Financial Statements in conformity with accounting principles
generally accepted in the United States of America, which requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ fro those estimates. We consider
the following policies to be the most critical in understanding the judgments
that are involved in preparing our financial statements and the uncertainties
that could impact our results of operations, financial condition and cash flows.
FULL COST METHOD OF ACCOUNTING
We follow the full cost method of accounting for oil and gas property
acquisition, exploration and development activities. Under this method, all
productive and non-productive costs incurred in connection with the acquisition
of, exploration for and development of oil and gas reserves for each cost center
are capitalized. Capitalized costs include lease acquisitions, geological and
geophysical work, daily rentals and the costs of drilling, completing and
equipping oil and gas wells. We capitalized $13,475, $1,982,529, $4,821,883 and
$1,456,996 of these costs for the first six months of 2003 and for the year
ended December 31, 2002, 2001 and 2000, respectively. Costs, however, associated
with production and general corporate activities are expensed in the period
incurred. Interest costs related to unproved properties and properties under
development are also capitalized to oil and gas properties. Gains or losses are
recognized only upon sales or dispositions of significant amounts of oil and gas
reserves representing an entire cost center. Proceeds from all other sales or
dispositions are treated as reductions to capitalized costs.
OIL AND GAS RESERVES/DEPLETION DEPRECIATION AND AMORTIZATION OF OIL AND GAS
PROPERTIES
The capitalized costs of oil and gas properties, plus estimated future
development costs relating to proved reserves and estimated costs of plugging
and abandonment, net of estimated salvage value, are amortized on the
unit-of-production method based on total proved reserves. The costs of unproved
properties are excluded from amortization until the properties are evaluated,
subject to an annual assessment of whether impairment has occurred.
Our proved oil and gas reserves as at December 31, 2002 were estimated by
Ryder Scott Company, L.P., oil and gas consultants. The Company's discounted
present value of its proved oil and gas reserves requires subjective judgments.
Estimates of our reserves are in part forecasts based on engineering data,
projected future rates of production and timing of future expenditures. The
process of estimating oil and gas reserves requires substantial judgment,
resulting in imprecise determinations, particularly for new discoveries.
Different reserve engineers may make different estimates of reserve quantities
based on the same data. The passage of time provides more qualitative
information regarding estimates of reserves and revisions are made to prior
estimates to reflect updated information. Given the volatility of oil and gas
prices, it is also reasonably possible that our estimate of discounted net cash
flows from proved oil and gas reserves could change in the near term. If oil and
gas prices decline
28
significantly this will result in a reduction of the valuation of our reserves.
For 2002, Ryder Scott Company, L.P., based on production results and the
increase of oil and gas prices, increased our estimated value of reserves of gas
in the Swan Creek Field from its reserve report for the year ended December 31,
2001. See "Business--Reserve Analyses."
CONTINGENCIES
We account for contingencies in accordance with Financial Accounting
Standards Board Statement of Financial Accounting Standards ("SFAS") No. 5,
"Accounting Contingencies." SFAS No. 5 requires that we record an estimated loss
from a loss contingency when information available prior to the issuance of our
financial statements indicate that it is probable an asset has been impaired or
a liability has been incurred at the date of the financial statements and the
amount of the loss can be reasonably estimated. Accounting for contingencies
such as environmental, legal and income tax matters requires our management to
use its judgment. While our management believes that our accrual for these
matters are adequate, if the actual loss from a loss contingency is
significantly different from the estimated loss, our results of operationssubscription rights may be over or understated. The primary area in which we have to estimate contingent
liabilities is with respect to legal actions brought against us. See "Legal
Proceedings."
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statementrejected.
Holders of Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and SFAS
No.142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination and SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other assets. These
standards require all future business combinations to be accounted for using the
purchase method of accounting. Goodwill will no longer be amortized but instead
will be subject to impairment tests at least annually. We were required to adopt
SFAS No. 141 on July 1, 2001, and to adopt SFAS 142 on a prospective basis as of
January 1, 2002. We have not effected a business combination and carry no
goodwill on our balance sheet; accordingly, the adoption of these standards did
not have an effect on our financial position or results of operations.
A reporting issue has arisen regarding the application of certain
provisions of SFAS No. 141 and SFAS No. 142 to companies in the extractive
industries, including oil and gas companies. The issue is whether SFAS No. 142
requires registrants to classify the costs of mineralsubscription rights held under lease or
other contractual arrangement associated with extracting oil and gas as
intangible assets in the balance sheet, apart from other capitalized oil and gas
property costs, and provide specific footnote disclosures. Historically, we have
included the costs of such mineral rights associated with extracting oil and gas
as a component of oil and gas properties. If it is ultimately determined that
SFAS No. 142 requires oil and gas companies to classify costs of mineral rights
held under lease or other contractual arrangement associated with extracting oil
and gas as a separate intangible assets line item on the balance sheet, we would
be required to reclassify approximately $421,000 at June 30, 2003 and $346,000
at December 31, 2002, respectively, out of oil and gas properties and into a
separate intangible assets line item. Our cash flows and results of operations
would not be affected since such intangible assets would continue to be depleted
and assessed for impairment in accordance with full cost accounting rules.
Further, we do not believe the classification of the costs of mineral rights
associated with extracting oil and gas as intangible assets would have any
impact on compliance with covenants under our debt agreements.
In 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement requires companies to record the present value of
obligations associated with the retirement of tangible long-lived assets in the
period in which it is incurred. The liability is capitalized as part of the
related long-lived asset's carrying amount. Over time, accretion of the
liability is recognized as an operating expense and the capitalized cost is
depreciated over the expected useful life of the related asset. Our asset
retirement obligations relate primarily to the plugging dismantlement, removal,
site reclamation and similar activities of its oil and gas properties. Prior to
adoption of this statement, such obligations were accrued ratably over the
productive lives of the assets through its depreciation, depletion and
amortization for oil and gas properties without recording a separate liability
for such amounts. The
29
impact of implying SFAS No. 143 as of January 1, 2003 and June 30, 2003 is
discussed in the Notes to the Consolidated Financial Statements contained
elsewhere in this Prospectus.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, addresses accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and expands on the guidance provided by SFAS No. 121 with
respect to cash flow estimations. SFAS No. 144 becomes effective for our fiscal
year beginning January 1, 2003. Management does not expect that adoption of this
standard will have a material impact on our financial position or results of
operations.
The FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections, on April
30, 2002. SFAS No. 145 will be effective for fiscal years beginning after May
15, 2002. This statement rescinds SFAS No. 4, Reporting Gains and Losses From
Extinguishment of Debt, and requires that all gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB No. 30. Applying APB No. 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual or infrequent or that meet the criteria for classification as an
extraordinary item. Any gain or loss on extinguishment of debt that was
classified, as an extraordinary item in prior periods presented that does not
meet the criteria in APB No. 30 for classification as an extraordinary item must
be reclassified. There is no current impact of adoption on our financial
position or results of operations.
The FASB issued Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, in June 2002. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs incurred in a Restructuring). SFAS No. 146 applies to
costs incurred in an "exit activity", which includes, but is not limited to, a
restructuring, or a "disposal activity" covered by SFAS No. 144.
SFAS No. 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. Previously,
under Issue 94-3, a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. Statement No. 146 also establishes that
fair value is the objective for initial measurement of the liability. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. Management does not expect that adoption
of this standard will have a material effect on our financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002. We have not guaranteed the debts of others, therefore, this
interpretation is not expected to have a material effect on our financial
statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Management has adopted certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002 and
are included in the Notes to Consolidated Financial Statements contained
elsewhere in this Prospectus.
30
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51. Interpretation No. 46 requires a company to consolidate a variable
interest entity if the company has a variable interest (or combination of
variable interests) that will absorb a majority of the entity's expected losses
if they occur, receive a majority of the entity's expected residual returns if
they occur, or both. A direct or indirect ability to make decisions that
significantly affect the results of the activities of a variable interest entity
is a strong indication that a company has one or both of the characteristics
that would require consolidation of the variable interest entity. Interpretation
No. 46 also requires additional disclosures regarding variable interest
entities. The new interpretation is effective immediately for variable interest
entities created after January 31, 2003, and is effective in the first interim
or annual period beginning after December 15, 2003, for variable interest
entities in which a company holds a variable interest that it acquired before
February 1, 2003. Management does not expect that adoption of this
interpretation will have a material effect on our financial position or results
of operations.
31
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISKS
COMMODITY RISK
Our major market risk exposure is in the pricing applicable to our oil and
gas production. Realized pricing is primarily driven by the prevailing worldwide
price for crude oil and spot prices applicable to natural gas production.
Historically, prices received for oil and gas production have been volatile and
unpredictable and price volatility is expected to continue. Monthly oil price
realizations ranged from a low of $18.56 per barrel to a high of $27.49 per
barrel during 2002 and from a low of $23.44 per barrel to a high of $33.60 per
barrel during the first six months of 2003. Gas price realizations ranged from a
monthly low of $1.91 per Mcf to a monthly high of $4.01 per Mcf during 2002 and
from a monthly low of $4.16 per Mcf to a monthly high of $9.11 per Mcf during
the first six months of 2003.
As required by our credit agreement with Bank One, we entered into hedge
agreements on December 28, 2001 on notional volumes of oil and natural gas
production for the first six months of 2002 in order to manage some exposure to
oil and gas price fluctuations. Realized gains or losses from our price risk
management activities were recognized in oil and gas production revenues when
the associated production occurred. Notional volumes associated with our
derivative contracts were 27,000 barrels and 630,000 MMBTU's for oil and natural
gas, respectively. We do not generally hold or issue derivative instruments for
trading purposes. These hedge agreements expired in June 2002 and have not been
renewed. Hedging activities resulted in a loss to the Company of approximately
$118,000 for the year ended December 31, 2002 and had no impact on operations
for the first six months of 2003. We currently have no hedging arrangements.
INTEREST RATE RISK
At December 31, 2002, we had debt outstanding of approximately $9.9
million. The interest rate on the revolving credit facility of $7.5 million is
variable based on the financial institution's prime rate plus 0.25%. The
remaining debt of $2.4 million has fixed interest rates ranging from 6% to
11.95%. As a result, our annual interest costs in 2002 fluctuated based on
short-term interest rates. The impact of interest expense and our cash flows of
a ten percent increase in the financial institution's prime rate (approximately
0.5 basis points) would be approximately $32,000, assuming borrowed amounts
under the credit facility remain at $7.5 million. We did not have any open
derivative contracts relating to interest rates at June 30, 2003.
32
BUSINESS
OVERVIEW
We are in the business of exploring for, producing and transporting oil and
natural gas in Tennessee and Kansas. We lease producing and non-producing
properties with a view toward exploration and development. Emphasis is also
placed on pipeline and other infrastructure facilities to provide transportation
services. We utilize seismic technology to improve the recovery of reserves.
Our activities in the oil and gas business commenced in May 1995 with the
acquisition of oil and gas leases in Hancock, Claiborne, Knox, Jefferson and
Union counties in Tennessee. Our current lease position in these areas in
Tennessee is approximately 41,088 acres.
To date, we have drilled primarily on a portion of our Tennessee leases
known as the Swan Creek Field in Hancock County focused within what is known as
the Knox formation, one of the geologic formations in that field. During the
first six months of 2003, we produced an average of approximately 1.2 MMcf of
natural gas per day and 2,345 barrels of oil per month from 22 producing gas
wells and six producing oil wells in the Swan Creek Field. Revenues from the
Swan Creek Field were an average of approximately $218,000 per month during the
first six months of 2003.
In 2001, our wholly-owned subsidiary, Tengasco Pipeline Corporation, or
TPC, completed a 65-mile intrastate pipeline from the Swan Creek Field to
Kingsport, Tennessee. Until our pipeline was completed, the gas wells that had
been drilled in the Swan Creek Field could not be placed into actual production
and the gas transported and sold to our industrial customers in Kingsport. We
initially believed that the production of natural gas from the Swan Creek Field
would be significantly higher than the actually experienced production. The
reasons for the lower production volumes include initial production problems
caused by naturally occurring fluids entering the well bore, slower than
anticipated production of the wells due to underground reservoir characteristics
that became apparent only when the wells were placed into actual production, and
our inability to drill additional wells due to shortage of available capital. We
have taken steps to minimize fluid problems in existing wells by mechanical
means and to avoid them in future wells by drilling and completion techniques.
Management believes, however, that the only way to increase production volumes
of gas from this field is to drill additional wells to drain the underground
reservoirs of the full reserves of gas, and our ability to do so is dependent
upon raising additional capital for drilling. Although we intend to apply the
net proceeds from this offering initially to repay outstanding non-bank
indebtedness and to apply the balance of such proceeds, if any, to repay in part
bank indebtedness and/or to fund in part the drilling of additional wells, there
can be no assurances that such net proceeds will be sufficient for such purposes
or that we will be able to resolve the difficulties currently preventing us from
drilling additional wells and increasing production volumes of natural gas from
the Swan Creek Field.
In 1998, we acquired from AFG Energy, Inc., or AFG, a private company,
approximately 32,000 acres of leases in the vicinity of Hays, Kansas. Included
in that acquisition were 273 wells, including 208 working wells, of which 149
were producing oil wells and 59 were producing gas wells, a related 50-mile
pipeline and gathering system, three compressors and 11 vehicles. The total
purchase price of these assets was approximately $5.5 million. During the first
six months of 2003, our Kansas properties produced an average of approximately
..13 MMcf of natural gas per day and 10,800 barrels of oil per month. Net
revenues from our Kansas properties were an average of approximately $342,000
per month during the first six months of 2003.
HISTORY OF THE COMPANY
We were initially organized under the laws of the State of Utah in 1916,
under the name "Gold Deposit Mining & Milling Company." We were formed for the
purpose of mining, reducing and smelting mineral ores. In 1972, we conveyed to
an unaffiliated entity substantially all of our assets and we ceased all
business operations. From approximately 1983 to 1991, our operations were
limited to seeking out the acquisition of assets, property or businesses.
33
In 1995, we acquired certain oil and gas leases, equipment, securities and
vehicles owned by Industrial Resources Corporation, a Kentucky corporation,
changed our name from "Onasco Companies, Inc." to "Tengasco, Inc.", and changed
our domicile from the State of Utah to the State of Tennessee by merging into
Tengasco, Inc., a Tennessee corporation, formed by us solely for this purpose.
During 1996, we formed TPC to manage the construction and operation of our
pipeline, as well as other pipelines planned for the future.
GENERAL
THE SWAN CREEK FIELD
Amoco Production Company, during the late 1970's and early 1980's acquired
approximately 50,500 acres of oil and gas leases in the Eastern Overthrust in
the Appalachian Basin, including the area now referred to as the Swan Creek
Field. In 1982, Amoco successfully drilled two natural gas discovery wells in
the Swan Creek Field to the Knox Formation at approximately 5,000 feet of total
depth. These wells, once completed, had a high pressure and apparent volume of
deliverability of natural gas. In the mid-1980's, however, a substantial decline
in worldwide oil and gas prices occurred and further exacerbated the high cost
of constructing a necessary 23-mile pipeline across three rugged mountain ranges
and crossing the environmentally protected Clinch River from Sneedville to the
closest market in Rogersville, Tennessee. In 1987, Amoco farmed out our leases
to Eastern American Energy Company which held the leases until July 1995. In
July 1995 we commenced a legal action, under laws passed by the Tennessee
legislature, as to our right to lease Amoco's prior acreage. In July 1995
pursuant to such action, we acquired the Swan Creek leases. These leases provide
for a landowner royalty of 12.5%.
Swan Creek Pipeline Facilities. In July 1998, we completed Phase I of our
pipeline from the Swan Creek Field, a 30-mile pipeline made of six- and
eight-inch steel pipe running from the Swan Creek Field into the main city gate
of Rogersville, Tennessee. With the assistance of the Tennessee Valley
Authority, or TVA, we were successful in utilizing TVA's right-of-way along its
main power line grid from the Swan Creek Field to the Hawkins County Gas Utility
District located in Rogersville. The cost of constructing Phase I of the
pipeline was approximately $4,200,000.
In April 2000, construction commenced on Phase II of our pipeline. This was
an additional 35 miles of eight- and 12-inch pipe laid at a cost of
approximately $11.1 million extending our pipeline from a point near the
terminus of Phase I and connecting to an existing pipeline and meter station at
Eastman Chemical Company's chemical plant. The pipeline system was completed in
March 2001 at an overall cost of approximately $15.3 million and extends 65
miles from our Swan Creek Field to Kingsport, Tennessee.
Swan Creek Contractual Arrangements. In November 1999, we entered into an
agreement with Eastman Chemical Company that provides that we will deliver daily
from the Swan Creek Field to Eastman's plant in Kingsport a minimum of the
lesser of (i) 5,000 MMBtu's (MMBtu means one million British thermal units,
which is the equivalent of approximately one thousand cubic feet of gas) or (ii)
forty percent (40%) of the natural gas requirements of Eastman's plant and a
maximum of 15,000 MMBtu's per day. Under the terms of the agreement, we had the
option to install facilities to treat the delivered gas so that the total
non-hydrocarbon content of the delivered gas is not greater than two percent
(2%). This would have allowed the gas to be used in certain processes in the
Eastman plant requiring low levels of non-hydrocarbons. If we elected to perform
this option by installing additional facilities, the minimum daily amount of gas
to be purchased by Eastman from us would increase to the lesser of (i)10,000
MMBtu's or (ii) eighty percent (80%) of the natural gas requirements of
Eastman's chemical plant.
In March 2000, we signed an amendment to the agreement with Eastman
permitting us a further option with respect to the allowable level of
non-hydrocarbons in the delivered gas from the Swan Creek Field. This amendment
gives us the further option to tender gas without treatment, at a minimum volume
of 10,000 MMBtu's per day, in consideration of which we agreed to accept a price
reduction of five cents per MMBtu for the volumes per day between 5,000 and
10,000 MMBtu's per day under the pricing structure in place under the original
agreement. To date, to our knowledge, none of the gas sold by us to Eastman
exceeds the allowable level of non-hydrocarbons permitted under the agreement
and no such gas requires treatment.
34
Under the agreement as amended in March 2000, Eastman agreed to pay us the
index price plus $0.10 for all natural gas quantities up to 5,000 MMBtu's
delivered per day, the index price plus $0.05 for all quantities in excess of
5,000 MMBtu's per day and the index price for all quantities in excess of 15,000
MMBtu's per day. The index price means the price per MMBtu published in
McGraw-Hill's INSIDE F.E.R.C Gas Market Report equal to the Henry Hub price
index as shown in the table labeled Market Center Spot Gas Prices. The agreement
with Eastman is for an initial term of twenty years and will be automatically
extended, if the parties agree, for successive terms of one year. The initial
term of the agreement commenced in March 2001.
In January 2000, TPC, signed a franchise agreement to install and operate
new natural gas utility services for residential, commercial and industrial
users in Hancock County, Tennessee for the Powell Valley Utility District, which
we refer to as the District. The District had no existing natural gas facilities
and the system to be installed by TPC was initially intended to extend to
schools and small customers and gradually be expanded over time to serve as many
of the 6,900 residents of the County as is economically feasible. TPC purchases
gas from us on behalf of the District, which gas is to be resold at an average
retail price of about $8.00 Mcf. Under the franchise agreement, which has an
initial term of ten years and may be renewed by us for an additional ten years,
TPC will receive 95% of the gross proceeds of the sale of gas for our services
under the agreement. In June 2000, TPC began installation of the necessary
facilities to begin to serve up to 1,500 residential and industrial consumers in
the City of Sneedville, county seat of Hancock County. Our existing eight-inch
main line from our Swan Creek Field passes through the city limit of Sneedville.
A one-half mile of interconnecting pipeline from our existing pipeline was
installed, as well as an additional four miles of pipeline as the initial phase
of the distribution system. The construction was completed and delivery of
initial volumes of gas into the system from the Swan Creek field occurred in
December 2000. The cost of construction of these facilities was approximately
$133,000. Upon enactment of initial rate schedules by the District, initial
sales began in January 2001 to a small number of residential and small
commercial customers.
In March 2002, we began delivering gas to our first commercial customer,
Kiefer Built, Inc, an Iowa-based manufacturer of livestock and industrial
trailers, in a new industrial park in Sneedville. Although there can be no
assurance, we hope to be able to supply gas to other District customers who may
move into that industrial park. At this time, however, no gas sales agreements
for large volume or base load sales have been signed and there can be no
assurances that such agreements will be signed and if signed, we are not able to
predict when such sales may begin, if at all, or what the overall volumes of gas
sold may be. Due to the small number of existing customers and relatively high
operating costs, we experienced a loss of approximately $35,000 attributable to
the operation of this system in 2002. Although there can be no assurance, we
intend to either expand the operation of this system so as to increase revenues
or to sell these assets to neighboring utilities or the City of Sneedville. In
the event of such a sale, we could still sell gas to the District.
In March 2001, we signed a contract to supply natural gas to BAE Systems
Ordnance Systems Inc., or BAE, operator of the Holston Army Ammunition Plant in
Kingsport, Tennessee for a period of twenty years. Natural gas is used at the
Holston Army ammunition facility to fire boilers and furnaces for steam
production and process operations utilized in the manufacture of explosives by
BAE for the United States military. Under the agreement, BAE's daily purchases
of natural gas may be between 1.8 million and five million cubic feet, and
volume could, although there can be no assurance, increase over the life of the
agreement as BAE conducts additional operations at the Holston facility. The
contract calls for a price based on the monthly published index price for spot
sales of gas at the Henry Hub plus five cents per MMBtu in the same manner as
the price is calculated in the contract between us and Eastman.
We have the only gas pipeline located on the grounds of the 6,000-acre
Holston facility. A portion of the Holston facility is being developed by BAE as
the new Holston Business and Technology Park, which is expected to serve as a
location for additional commercial and industrial customers. Although there can
be no assurance, our presence at the Holston Business and Technology Park is
expected to position us to provide gas service to those customers and we
understand that our presence is considered by BAE to be a favorable factor in
the development of the Park.
Swan Creek Production And Development. We began delivering gas through our
pipeline to BAE in April 2001 and to Eastman in May 2001. Daily production in
June 2001 averaged 4,936.2 Mcf and in July 2001 daily production averages
increased to 5,497 Mcf per day. Although our gas production in mid-2001 was at
anticipated
35
levels, we were unable to maintain those production levels for the remainder of
2001 and since then. This was due primarily to three problems:
o initial fluid problems in some wells;
o natural and expected production declines from the type of reservoir
that exists in the Swan Creek field; and
o our inability to offset expected natural declines in production by
drilling new wells because of inadequate capital.
As to the first of these problems, we experienced the in-flow of
substantially more fluids in the existing wells than had been expected when they
were first brought into continuous production in 2001. These fluids entered the
wells from the boreholes. The fluids obstructed and significantly reduced the
flow of gas from the existing wells in the Swan Creek Field and required
substantial additional work and repairs to increase the production from existing
wells. First, we installed a drip tank system to eliminate the fluids in the
pipeline. Next, we installed mechanical devices in many of the existing wells to
reduce the fluid problems. Many of the existing wells had to be shut down while
the repairs were made. Gas lifts have been installed in 15 of our existing wells
and act as mechanisms to remove the fluids and stabilize erratic behavior, such
as large swings in individual well production. These measures have had only
limited success in increasing production from existing wells. We expect that
techniques used in addressing these fluid problems will be applied in our future
wells in the Swan Creek Field and we anticipate, although there can be no
assurance, that this will minimize or prevent these problems.
As to the second problem, we experienced an expected and we believe normal
decline in initial production from existing wells in the newly-producing Swan
Creek Field. We believe that all types of gas wells experience some type of
decline as in the course of initial production. These declines were expected and
do not diminish either the shut-in pressure or our actual reserves in the Swan
Creek Field. The declines, however, suggest the production rates from some of
our smaller wells will continue to be slower, which may result in such wells
lasting longer than we originally expected.
As to the third problem, the declines in production have not been addressed
and replaced by additional drilling as we had planned. We believe that in order
for overall field production to remain steady or grow in a field such as the
Swan Creek Field, new wells must be brought online to offset the normal
production declines in wells as described above. We anticipate, although there
can be no assurances, that any new wells drilled by us would experience a
similar harmonic (i.e. a relatively steep initial decline curve followed by
longer periods of relatively flat or stable production) decline as a normal
function. Consequently, continuous drilling is important to maintaining or
increasing initial levels of production. Only two gas wells were added by us in
2002. We anticipate that the natural decline of production from existing wells
is now predictable in the Swan Creek Field, that the total volume of our
reserves remains largely intact, and that these reserves can be extracted
through both existing wells and by additional well drilled by us, subject to the
availability of requisite funding. Although we intend to apply the net proceeds
from this offering initially to repay outstanding non-bank indebtedness and to
apply the balance of such proceeds, if any, to repay in part bank indebtedness
and/or to fund such net proceeds will be sufficient for such purposes or that
the drilling of additional wells, there can be no assurance that such net
proceeds will be sufficient for such purposes or that we will have or be able to
further raise sufficient capital to fund our proposed drilling program to
successfully increase production from the Swan Creek Field.
Due to natural and expected declines that continue to occur in ongoing
production from any oil and gas well, some additional declines are expected to
occur in production from our existing wells in the Swan Creek Field. Although
there can be no assurance, we expect these natural declines to be less than the
decline experienced to date, and that ongoing production from existing wells
will tend to level off. This expectation is based on two factors:
o first, repairs have been performed on many of the existing wells, and
o second, the natural production decline from any well is normally
greatest during the initial producing periods, which initial periods
have largely elapsed.
36
Natural gas production from the Swan Creek Field during 2002 averaged 2.567
million cubic feet per day in the first quarter; 2.553 million cubic feet per
day in the second quarter; 2.224 million cubic feet per day in the third
quarter; and, 1.467 million cubic feet per day in the fourth quarter. Natural
gas production from the Swan Creek Field for the first six months of 2003
averaged 1.150 million cubic feet per day. This production history reflects a
combination of natural and expected decline from initial production from
existing wells, partially offset in the second and third quarters by the
addition of production from two new gas wells. During the fourth quarter of 2002
and the first six months of 2003, no wells were added to offset the natural and
expected declines in production from existing wells.
We also experienced reductions or declines in our sales volumes during
certain times in 2002 for reasons unrelated to the production capability of our
wells or fields. These declines were caused by reductions in our customers'
usage requirements and/or by delivery restrictions. During a period in 2002,
Eastman temporarily ceased purchases from us because we were delivering most of
our then available volumes to supply BAE's newly-increased requirements. During
that period, we were unable to sell to Eastman all volumes of gas exceeding
BAE's increased requirements, although we were able to produce these volumes,
because Eastman requires a minimum volume for its meters that available volumes
did not meet and a uniform rate of delivery that taking short-term volumes would
interrupt. During the time Eastman was not purchasing gas from us, BAE purchased
additional volumes until BAE experienced a partial equipment outage in July 2002
and reduced our purchased volumes. As a result of these occurrences, which were
not within our control, our sales volume to BAE and Eastman in July 2002
declined to 42,382 Mcf or an average of 1,367 Mcf per day. In order to increase
the volumes of gas for delivery from the Swan Creek Field, we must drill
additional wells. However, even if additional wells are drilled, we anticipate
based on all information acquired to date, although there can be no assurance,
that deliverability from the Swan Creek Field, once stabilized, may not exceed
approximately three million cubic feet per day, and there can be no assurances
as to any minimum productivity.
During 2002, we had 30 producing gas wells and seven producing oil wells in
the Swan Creek Field. Miller Petroleum, Inc. and others had a participating
interest in twelve of these wells. In total, we have completed 45 wells in the
Swan Creek Field. The majority of these gas wells were drilled prior to the
completion of the pipeline system so only test data was available prior to full
production. Of the completed wells, twelve are shut-in or currently not
producing because these wells are either not presently producing commercial
quantities of hydrocarbons, or are awaiting workover or tie-in to our pipeline.
However, certain of these wells may not be tied in to our pipeline since the
expense of connection over rough terrain may not be justified in view of the
expected volumes to be produced. During the first six months of 2003, we
produced gas from 23 gas wells in the Swan Creek Field.
We were not able to drill a substantial number of additional gas or oil
wells at Swan Creek in 2002 because we did not have sufficient funds to do so.
Although we had expected to commence and continue our drilling program in 2002,
we were forced to postpone any further drilling until additional funds are
available and our dispute with Bank One is resolved, as to which there can be no
assurance. Because the Knox formation has been defined by the accumulation of
data from previously drilled wells and seismic data, new locations and new wells
when drilled are expected, although there can be no assurances, to contribute to
achieving increases in production totals. We believe, although there can be no
assurance, that new wells can be strategically based on information we have
developed from our existing wells as to the shape and key producing horizons of
the Knox formation. We have obtained approval from the Tennessee regulatory
authorities with jurisdiction over spacing of wells to drill additional wells on
smaller spacing in the field, effectively allowing more wells to be drilled and
the reservoir to produce more quickly but with no decrease in the long term
efficiency of production of the maximum amount of reserves from the reservoir.
We are hopeful that production from these new wells will be in line with our
more productive existing wells in the Swan Creek Field and will have a
noticeable effect on increasing the total production from the Field. Although
there can be no assurance, our strategy is that once this work is completed and
the new wells are drilled production from the Swan Creek Field will increase.
Even if such production increases, however, the deliverability from the Swan
Creek Field will not be sufficient to meet our entire daily requirements under
the contracts with BAE and Eastman.
Our strategy also includes commencing drilling in other formations in our
Swan Creek Field. To date, drilling in the Swan Creek Field has focused on
production of gas primarily from the Knox formation. Immediately adjacent to
this formation, however, and shallower over these formations, are other
formations that we believe, although there can be no assurance, have a potential
for gas production. These other formations hold the possibility for yielding
37
both oil and gas and have produced some gas to date and have not been a primary
target for gas production. The shallower depths needed for drilling in these
other formations and the moderate gas production from them may make the
production of additional gas feasible. As noted above, we can not proceed with
such drilling until such time as funding is available, as to which there can be
no assurance.
THE KANSAS PROPERTIES
In 1997, we acquired the Kansas Properties, which presently include 134
producing oil wells and 51 producing gas wells in the vicinity of Hays, Kansas
and a gathering system including 50 miles of pipeline. We also acquired 37 other
wells, which now serve as saltwater disposal wells in the vicinity of Hays,
Kansas. Saltwater wells are used to store saltwater encountered in the drilling
process that would otherwise have to be transported out of the area. These
saltwater disposal wells reduce operating costs by eliminating the need for
transport. The aggregate production for the Kansas Properties at present is
approximately 800 Mcf and 336 barrels of oil per day. Revenue for the Kansas
Properties was approximately $275,000 per month in 2002.
We employ a full time geologist in Kansas to oversee operations of the
Kansas Properties. We have identified five new locations for drilling wells in
Ellis and Rush Counties, Kansas on our existing leases in response to drilling
activity in the area indicating new areas of production. In 2001 we successfully
drilled the Dick No. 7 well in Kansas and completed the well as an oil well. We
did not drill any new wells in Kansas in 2002 or the first six months of 2003
due to lack of funds available for such drilling. We are also engaged in
gathering for a fee the gas produced from wells owned by others located in
Kansas adjacent to our wells and near our gathering lines. Our plans for our
Kansas properties include maintaining the current productive capacity of our
existing wells through normal workovers and maintenance of the wells, performing
gathering or sales services for adjacent producers, and expanding our own
production through drilling these additional wells. Such plans are subject to
the availability of funds, in addition to the funds raised by this offering, to
finance the work.
In addition, there are several capital development projects that we have
considered with respect to the Kansas Properties, including recompletion of
wells and major workovers to increase current production. Although there can be
no assurances, these projects when completed might increase production in
Kansas. Management, however, has made the decision not to undertake any of these
projects, as we do not presently have the necessary funds. We will, however,
reconsider our decision if such funds become available.
OTHER AREAS OF DEVELOPMENT
We are presently exploring other geological structures in the East
Tennessee area that are similar to the Swan Creek Field and which we believe,
although there can be no assurance, have a high probability of producing
hydrocarbons. We have either acquired seismic data on these structures from
third-party sources or are conducting our own seismic studies with our own
trucks and equipment. The seismic analysis is continuing and related leasing
activities have begun based on initial analysis of seismic results. We plan to
conduct exploration activities in these areas. The first of these locations was
in Cocke County, Tennessee which is approximately 40 miles southeast of the Swan
Creek Field. In 2002, we, in conjunction with Southeast Gas & Oil Corp. of
Newport, Tennessee, drilled an approximately 6,000-foot exploratory well to the
Knox formation. This well did not result in any commercial quantities of
hydrocarbons. Although these and other exploratory efforts have commenced or are
under consideration, there can be no assurances that any such efforts will be
completed or will be commercially successful.
GOVERNMENTAL REGULATIONS
We are subject to numerous state and federal regulations, environmental and
otherwise, that may have a substantial negative effect on our ability to operate
at a profit. For a discussion of the risks involved as a result of such
regulations, see, "Effect of Existing or Probable Governmental Regulations on
Business" below.
38
PRINCIPAL PRODUCTS OR SERVICES AND MARKETS
The principal markets for our crude oil are local refining companies, local
utilities and private industry end- users. The principal markets for our natural
gas are local utilities, private industry end-users and natural gas marketing
companies.
Gas production from the Swan Creek Field can presently be delivered through
our completed pipeline to the Powell Valley Utility District in Hancock County,
Eastman and BAE in Sullivan County, as well as other industrial customers in the
Kingsport area. We believe, although there can be no assurance, that we have
acquired all necessary regulatory approvals and necessary property rights for
the pipeline system. Our pipeline would not only provide transportation service
for gas produced from our wells, but would provide transportation of gas for
small independent producers in the local area as well. We also could, although
there can be no assurance, sell our products to certain local towns, industries
and utility districts.
Natural gas from the Kansas Properties is delivered to Kansas-Nebraska
Energy, Inc. in Bushton, Kansas. At present, crude oil is sold to the National
Cooperative Refining Association in McPherson, Kansas, 120 miles from Hays.
National Cooperative is solely responsible for transportation of the oil it
purchases whether by truck or pipeline.
DRILLING EQUIPMENT
We purchased an Ingersoll Rand RD20 drilling rig and related equipment from
Ratliff Farms, Inc., an affiliate of Malcolm E. Ratliff, who at that time was
our Chief Executive Officer and Chairman of the Board of Directors. We also
receive contract drilling services from Miller Petroleum, Inc. and Union
Drilling in the Swan Creek Field.
DISTRIBUTION METHODS OF PRODUCTS OR SERVICES
Crude oil is normally delivered to refineries in Tennessee and Kansas by
tank truck and natural gas is distributed and transported via pipeline.
COMPETITIVE BUSINESS CONDITIONS, COMPETITIVE POSITION IN THE INDUSTRY AND
METHODS OF COMPETITION
Our contemplated oil and gas exploration activities in the States of
Tennessee and Kansas will be undertaken in a highly competitive and speculative
business atmosphere. In seeking any other suitable oil and gas properties for
acquisition, we will be competing with a number of other companies, including
large oil and gas companies and other independent operators with greater
financial resources. Management does not believe that our initial competitive
position in the oil and gas industry will be significant.
Our principal competitors in the State of Tennessee are Nami Resources,
LLC, Miller Petroleum, Inc., Knox Energy Development and Penn Virginia
Corporation. We believe that we are in a favorable position in the area in which
our pipeline is located. Within that area, we own leases on approximately 41,088
acres.
There are numerous producers in the area of the Kansas Properties. Some are
larger with greater technological and financial resources.
Although we do not now foresee any difficulties in procuring drilling rigs
or the manpower to run them in the area of our operation, several factors,
including increased competition in the area, may limit the availability of
drilling rigs, rig operators and related personnel and/or equipment in the
future. Such limitations would have a natural adverse effect on our operations.
The prices of our products are controlled by the world oil market and the
United States natural gas market. Thus, competitive pricing behaviors are
considered unlikely; however, competition in the oil and gas exploration
industry exists in the form of competition to acquire the most promising acreage
blocks and obtaining the most favorable prices for transporting the product. We
believe that we are well-positioned in these areas because of the
39
transmission lines that run through and adjacent to the properties leased by us
and because we hold relatively large acreage blocks in our areas of current
operation.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND NAMES OF PRINCIPAL SUPPLIERS
Excluding the development of oil and gas reserves and the production of oil
and gas, our operations are not dependent on the acquisition of any raw
materials.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
We presently are dependent upon a small number of customers for the sale of
gas from the Swan Creek Field, principally Eastman and BAE, and other industrial
customers in the Kingsport area with which we may enter into gas sales
contracts.
Natural gas from the Kansas Properties is delivered to Kansas-Nebraska
Energy, Inc. in Bushton, Kansas. At present, crude oil from the Kansas
Properties is being trucked and transported through pipelines to the National
Cooperative Refining Association in McPherson, Kansas, 120 miles from Hays,
Kansas. National Cooperative is solely responsible for transportation of
products whether by truck or pipeline.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR
LABOR CONTRACTS, INCLUDING DURATION
Royalty agreements relating to oil and gas production are standard in the
industry. The amounts of our royalty payments vary from lease to lease.
NEED FOR GOVERNMENTAL APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES
Although none of the principal products offered by us require governmental
approval, permits are required for drilling oil or gas wells.
The transportation service offered by TPC is subject to regulation by the
Tennessee Regulatory Authority to the extent of certain construction, safety,
tariff rates and charges, and nondiscrimination requirements under state law.
These requirements are typical of those imposed on regulated utilities. TPC has
been granted a certificate of public convenience and necessity to operate as a
pipeline utility in Hancock, Hawkins, and Claiborne counties, Tennessee. In
addition, TPC was authorized to construct and operate the portion of Phase II of
the pipeline to Eastman by resolution of the City of Kingsport in May, 2000.
This resolution was approved by the Tennessee Regulatory Authority as required
by state law. All approvals for our pipeline have been granted.
The City of Kingsport, Tennessee has also enacted an ordinance granting to
TPC a franchise for twenty years to construct, maintain and operate a gas system
to import, transport, and sell natural gas to the City of Kingsport and
inhabitants, institutions and businesses for domestic, commercial, industrial
and institutional uses. This ordinance and the franchise agreement it authorizes
also require approval of the Tennessee Regulatory Authority under state law. We
will not initiate the required approval process for the ordinance and franchise
agreement until such time that we can supply gas to the City of Kingsport.
Although we anticipate that regulatory approval will be granted, there can be no
assurance that it will be granted, or that such approval may be granted in a
timely manner, or that such approval may not be limited in some manner by the
Tennessee Regulatory Authority.
EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON BUSINESS
Exploration and production activities relating to oil and gas leases are
subject to numerous environmental laws, rules and regulations. The Federal Clean
Water Act requires us to construct a fresh water containment barrier between the
surface of each drilling site and the underlying water table. This involves the
insertion of a seven-inch diameter steel casing into each well, with cement on
the outside of the casing. We have complied with this environmental regulation,
the cost of which is approximately $10,000 per well.
40
The State of Tennessee also requires the posting of a bond to ensure that
our wells are properly plugged when abandoned. A separate $2,000 bond is
required for each well drilled. We currently have the requisite amount of bonds
on deposit with the State of Tennessee.
As part of our purchase of the Kansas Properties we acquired a statewide
permit to drill in Kansas. Applications under such permit are applied for and
issued within one to two weeks prior to drilling. At the present time, the State
of Kansas does not require the posting of a bond either for permitting or to
insure that our wells are properly plugged when abandoned. All of the wells in
the Kansas Properties have all permits required and we believe that we are in
substantial compliance with the laws of the State of Kansas.
Our exploration, production and marketing operations are regulated
extensively at the federal, state and local levels. We have made and will
continue to make expenditures in our efforts to comply with the requirements of
environmental and other regulations. Further, the oil and gas regulatory
environment could change in ways that might substantially increase these costs.
Hydrocarbon-producing states regulate conservation practices and the protection
of correlative rights. These regulations affect our operations and limit the
quantity of hydrocarbons we may produce and sell. In addition, at the federal
level, the Federal Energy Regulatory Commission regulates interstate
transportation of natural gas under the Natural Gas Act. Other regulated matters
include marketing, pricing, transportation and valuation of royalty payments.
Our operations are subject to numerous and frequently changing laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. We own or lease, and have in the
past owned or leased, properties that have been used for the exploration and
production of oil and gas and these properties and the wastes disposed on these
properties may be subject to the Comprehensive Environmental Response,
Compensation and Liability Act, the Oil Pollution Act of 1990, the Resource
Conservation and Recovery Act, the Federal Water Pollution Control Act and
analogous state laws. Under such laws, we could be required to remove or
remediate previously released wastes or property contamination.
Laws and regulations protecting the environment have generally become more
stringent and, may in some cases, impose "strict liability" for environmental
damage. Strict liability means that we may be held liable for damage without
regard to whether we were negligent or otherwise at fault. Environmental laws
and regulations may expose us to liability for the conduct of or conditions
caused by others or for acts that were in compliance with all applicable laws at
the time they were performed. Failure to comply with these laws and regulations
may result in the imposition of administrative, civil and criminal penalties.
While we believe that our operations are in substantial compliance with
existing requirements of governmental bodies, our ability to conduct continued
operations is subject to satisfying applicable regulatory and permitting
controls. Our current permits and authorizations and ability to get future
permits and authorizations may be susceptible, on a going forward basis, to
increased scrutiny, greater complexity resulting in increased costs or delays in
receiving appropriate authorizations.
The foregoing is only a brief summary of some of the existing environmental
laws, rules and regulations to which our business operations are subject, and
there are many others, the effects of which could have an adverse impact on us.
Future legislation in this area will no doubt be enacted and revisions will be
made in current laws. No assurance can be given as to what effect these present
and future laws, rules and regulations will have on our current and future
operations.
RESEARCH AND DEVELOPMENT
We have not expended any material amount in research and development
activities during the last two fiscal years. Research done in conjunction with
our exploration activities would consist primarily of conducting seismic surveys
on the lease blocks. This work would be performed by our geology and engineering
personnel and other employees and would not be expected to have a material cost
of above their standard salaries.
41
NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES
We presently have 25 full time employees and no part-time employees.
PROPERTY LOCATION, FACILITIES, SIZE AND NATURE OF OWNERSHIP
Swan Creek Field. Our Swan Creek leases are on approximately 41,088 acres
in Hancock, Claiborne, Knox, Jefferson, Morgan and Union Counties in Tennessee.
The initial terms of these leases vary from one to five years. Some of them will
terminate unless we have commenced drilling. In 2002, we reduced the acreage
comprising the Swan Creek Field from approximately 50,500 acres to the present
41,088 acres. This reduction in acreage was a result of our improved
understanding of the geological and geophysical makeup of the Swan Creek Field.
We believe that the acreage eliminated from the field does not have the
potential to produce commercial quantities of oil or gas and that the reduction
of this acreage does not affect the reserves of the Swan Creek Field. Further,
the elimination of the leases for this acreage is expected to result in cost
savings to us.
Morita Properties, Inc., an affiliate of Shigemi Morita, a former Director,
currently has a 25% working interest in nine of our existing wells, and a 50%
working interest and 6% working interest, respectively, in two of our other
existing wells. All of these wells are located in the Swan Creek Field and all
but two are presently producing wells. In addition, to those interests, Morita
Properties, Inc. previously owned a 25% working interest in three of our other
existing wells and 12.5% working interest in another of our wells all of which
subsequently have been sold.
An individual who is not an affiliate of us purchased 25% working interests
in two other wells located in the Swan Creek Field that are presently producing
wells.
Another individual has a 29% revenue interest in a producing well located
in the Swan Creek Field by virtue of having contributed her unleased acreage to
the drilling unit and paying her proportionate share of the drilling costs of
the well. We were obligated to allow that individual to participate on that
basis in accordance with both customary industry practice and the requirements
of the procedures of the Tennessee Oil and Gas Board in a forced pooling action
brought by us to require the acreage to be included in the unit so that the well
could be drilled. The forced pooling procedure was concluded by her contribution
of acreage and agreement to pay proportionate share of drilling costs.
We also entered into a farmout agreement with Miller Petroleum, Inc. for
ten wells to be drilled in the Swan Creek Field and we have an option to award
up to an additional ten future wells. All locations were to be mutually agreed
upon. Net revenues, as defined, are to be 81.25% to Miller. Our subsidiary TPC
will transport Miller's gas. We reserved all offset locations to wells drilled
under the farmout agreement. All ten wells have been drilled under the farmout
agreement. We acquired back from Miller a 50% working interest in nine of those
ten wells in addition to our rights under the farmout agreement. In addition, we
along with Miller have drilled two additional wells on a 50-50 basis, although
we declined to exercise our option for a ten-well extension of the farmout
agreement. Of the wells in which Miller owns an interest, six are presently
producing.
Other than the working interests described or referred to above, we retain
all other working interests in wells drilled or to be drilled in the Swan Creek
Field.
Other working interest owners in oil and gas wells in which we have working
interests are entitled to market their respective shares of production to
purchasers other than purchasers with whom we have contracted. Absent such
contractual arrangements being made by the working interest owners, we are
authorized but are not required to provide a market for oil or gas attributable
to working interest owners' production. At this time, we have not agreed to
market gas for any working interest owner to customers other than our customers.
If we agree to market gas for working interest owners to our customers, we will
have to agree, at that time, to the terms of such marketing arrangements and it
is possible that as a result of such arrangements, our revenues from such
customers may be correspondingly reduced. If the working interest owners make
their own arrangements to market their natural gas to other end users along the
pipeline which have been served by East Tennessee Natural Gas, an interstate
pipeline, such gas would be transported by TPC at published tariff rates. The
current published tariff rate is for firm transportation at a demand charge of
five cents per MMBtu per day plus a commodity charge of $0.80 per MMBtu.
42
If the working interest owners do not market their production, either
independently or through us, then their interest will be treated as not yet
produced and will be balanced either when marketing arrangements are made by
such working interest owners or when the well ceases to produce in accordance
with customary industry practice.
Kansas Properties. The Kansas Properties contain 138 leases totaling 32,158
acres in the vicinity of Hays, Kansas. The original terms on these leases were
from one to ten years and in most cases have expired. Most of these leases,
however, are still in effect because they are being held by production. We
maintain a 100% working interest in most wells. The leases provide for a
landowner royalty of 12.5%. Some wells are subject to an overriding royalty
interest from 0.5% to 9%.
Although we do not pay any taxes on our Swan Creek Leases, we pay ad
valorem taxes on our Kansas Properties. We have general liability insurance for
the Kansas Properties and the Swan Creek Field.
We lease our principal executive offices, consisting of approximately 5,647
square feet located at 603 Main Avenue, Suite 500, Knoxville, Tennessee at a
rental of $4,705.83 per month and an office in Hays, Kansas at a rental of $500
per month. During 2002 and the first six months of 2003, we closed a field
office in Sneedville, Tennessee and an office in New York City we had previously
leased at an aggregate rental of $3,100 per month.
RESERVE ANALYSES
Ryder Scott Company, L.P. of Houston, Texas has performed reserve analyses
of all our productive leases. Ryder Scott Company, L.P. and its employees and
its registered petroleum engineers have no interest in the Company, and
performed these services at their standard rates. The net reserve values used
hereafter were obtained from a reserve report dated February 10, 2003, which we
refer to as the Report, prepared by Ryder Scott Company, L.P. as of December 31,
2002. In substance, the Report used estimates of oil and gas reserves based upon
standard petroleum engineering methods which include production data, decline
curve analysis, volumetric calculations, pressure history, analogy, various
correlations and technical judgment. Information for this purpose was obtained
from owners of interests in the areas involved, state regulatory agencies,
commercial services, outside operators and files of Ryder Scott Company, L.P.
The net reserve values in the Report were adjusted to take into account the
working interests that have been sold by us in various wells in the Swan Creek
Field. The Report provides that proved reserves in the Swan Creek Field are
30,360 MMcf of natural gas and 226,456 barrels of oil. According to the Report,
the value of the future gross revenues of our interest in the Swan Creek Field
as of December 31, 2002 is $103,667,886 before production taxes and $100,557,852
after production taxes. The Report further provides that as of December 31, 2002
the value of the future net income before income taxes of our interest in the
Swan Creek Field is $80,798,842 and discounting the future net income by 10%
results in a present value of $36,230,728.
The Report reflects that the amount of proved natural gas net reserves in
the Swan Creek Field of 23,499 MMcf remained essentially unchanged from net
reserves of 23,006 MMcf reported in the Ryder Scott Company, L.P. report dated
March 28, 2002 reporting values as of December 31, 2001. The Report also
reflects a decrease in the amount of proved oil reserves to 167,432 barrels in
2002 from 224,745 barrels reported in the earlier Ryder Scott Company, L.P.
report for values as of December 31, 2001. This decrease was primarily due to
estimates for the Colson #1 well which was included in the earlier Ryder Scott
Company, L.P. report as of December 31, 2001, but was not included in the
current Report as that well was subsequently taken off-line and reclassified as
unproved. The Report reflects an increase from the Ryder Scott Company, L.P.
Report for the year ended December 31, 2001 in the value of the future gross
revenues of our interest in the Swan Creek Field from $57,832,005 to
$103,667,886 before production taxes and $56,097,044 after production taxes to
$100,557,852. The Report also indicates an increase in the discounted (at 10%
per annum compounded monthly) present value of the reserves of the Swan Creek
Field from $19,302,590 as of December 31, 2001 to $36,230,728 as of December 31,
2002. These increases in values reported by Ryder Scott Company, L.P. in the
Report are due to an increase in oil and gas prices for 2002 making a larger
portion of the Field's undeveloped reserves more economical for future
development. Gas prices for the year-end 2001 Ryder Scott Company, L.P. report
utilized gas prices of $2.35 per Mcf and oil prices of $16.25 per barrel as
opposed to the $4.22 per Mcf price and $26.90 per barrel price utilized in the
current Report for the year ended December 31, 2002. In addition, we drilled two
wells in 2002, the Colson #2 and the Paul Reed #9, which added 936 MMcf to our
gas reserves in the Swan Creek Field.
43
Ryder Scott Company, L.P. also performed a reserve analysis of the Kansas
Properties. The Report provides that as of December 31, 2002 the net proved
reserves for the Kansas Properties are 3,100 MMcf of natural gas and 1,308,467
barrels of oil. According to the Report, the value of the future gross revenues
of our interest in the Kansas Properties as of December 31, 2002 is $48,511,771
before production taxes and 48,066,045 after production taxes. The Report
further provides that as of December 31, 2002 the value of the future net income
before income taxes of our interest in the Kansas Properties is $18,163,162 and,
discounting the future net income by 10% results in a present value of
$10,417,292.
The current Report reflects a substantial increase from the Ryder Scott
Company, L.P. report analyzing the reserves of the Kansas Properties as of
December 31, 2001 in (i) the number of barrels of oil attributed to our net
interest in the Kansas Properties from 831,930 barrels to 1,308,467 barrels and
(ii) the value of the future gross revenues of our interest in the Kansas
Properties from $20,463,797 to $48,511,771 before production taxes and
$19,586,607 after production taxes to $48,066,045. The current Report also
indicates an increase in the discounted (at 10% per annum compounded monthly)
net present value of our oil and gas reserves in the Kansas Properties from
$2,431,317 as of December 31, 2001 to $10,417,292 as of December 31, 2002. These
increases are due primarily to two factors. First, the increased price and
future speculative market for energy prices have driven both oil and gas prices
higher. The 2001 Ryder Scott Company, L.P. report used a gas price of $2.13 per
Mcf in determining the value of reserves in contrast to the $4.13 per Mcf price
used in the current Report and an oil price of $17.24 per barrel in 2001
contrasted to the $27.29 per barrel price used in 2002. Second, an increase in
the number of barrels occurred because the current Report for December 31, 2002
included the production and reserves from approximately thirty producing oil
wells that had not been included in the prior Ryder Scott Company, L.P. report
for December 31, 2001. At the time of the earlier report, the calculated
operating expenses for those producing wells matched or exceeded the oil price
utilized in that report and therefore, those wells were not considered
commercially viable for purposes of that earlier report. As a result of the
increase in the price of oil, those wells and associated reserves are included
in the current Report. We anticipate that future reports of the net present
value of the Kansas Properties should remain stable, and may even increase and
will continue to include the consideration of reserves attributable to all of
our wells in Kansas, which are still producing in accordance with their extended
production history, provided that the market price of oil and gas remains
constant or increases.
We believe that the reserve analysis reports prepared by Ryder Scott
Company, L.P. for us for the Swan Creek Field and Kansas Properties provide an
essential basis for review and consideration of our producing properties by all
potential industry partners and all financial institutions across the country.
It is standard in the industry for reserve analyses such as these to be used as
a basis for financing of drilling costs. Reserve analyses, however, are at best
speculative, especially when based upon limited production; no assurance can be
given that the reserves attributed to these leases exist or will be economically
recoverable. The result of any reserve analysis is dependent upon the forecast
of product prices utilized in the analysis which may be more or less than the
actual price received during the period in which production occurs.
We have not filed the reserve analysis reports prepared by Ryder Scott
Company, L.P. or any other reserve reports with any Federal authority or agency
other than the Securities and Exchange Commission. We, however, have filed the
information in the Report of our reserves with the Energy Information Service of
the Department of Energy in compliance with that agency's statutory function of
surveying oil and gas reserves nationwide.
44
PRODUCTION
The following tables summarize for the past three fiscal years the volumes
of oil and gas produced to our interests, our operating costs and our average
sales prices for our oil and gas. The information does not include volumes
produced to royalty interests or other working interests.
TENNESSEE
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
OIL AND GAS DRILLING ACTIVITIES
Our oil and gas developmental drilling for the past three fiscal years are
as set forth in the following tables. During the fiscal years ending December
31, 2000 and 2001 we did not drill any exploratory wells. In 2002, we drilled
one exploratory well in Cocke County, Tennessee which did not result in finding
commercial quantities of hydrocarbons. The information should not be considered
indicative of future performance, nor should it be assumed that there is
necessarily any correlation between the number of wells drilled, quantities of
reserves found or economic value.
45
GROSS AND NET WELLS
The following tables set forth for the fiscal years ending December 31,
2000, 2001, and 2002 the number of gross and net development wells drilled by
us. The dry hole set forth in the table below is the Cocke County well referred
to above. The term gross wells means the total number of wells in which we own
an interest, while the term net wells means the sum of the fractional working
interests we own in gross wells.
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.
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.
46
LEGAL PROCEEDINGS
Except as described hereafter, we are not a party to any pending material
legal proceeding. To the knowledge of management, no federal, state or local
governmental agency is presently contemplating any proceeding against us which
would have a result materially adverse on us. To the knowledge of management, no
director, executive officer or affiliate of the company or owner of record or
beneficially of more than 5% of our common stock is a party adverse to us or has
a material interest adverse to us in any proceeding.
In November 2001, we signed a credit facility with Bank One, N.A. in
Houston, Texas whereby Bank One extended to us a revolving line of credit of up
to $35 million. The initial borrowing base under the facility was $10 million.
In April 2002, we received a notice from Bank One stating that it had
redetermined and reduced the then-existing borrowing base under the credit
agreement by $6 million to approximately $3.1 million. Bank One demanded that we
pay the $6 million within thirty days. In May 2002, we filed suit in federal
court in the Eastern District of Tennessee, Northeastern Division at Greeneville
to restrain Bank One from taking any steps to enforce its demand that we reduce
our loan obligation or else be deemed in default and for damages resulting from
the demand. We sought a jury trial and actual damages sustained by it as a
result of the wrongful demand in the amount of $51 million plus punitive damages
in the amount of $100 million.
In July 2002, Bank One filed its answer and counterclaim, alleging that its
actions were proper under the terms of the credit agreement and seeking to
recover all amounts it alleges to be owed under the credit agreement, including
principal, accrued interest, expenses and attorney's fees in the approximate
amount of $9 million. No hearings have occurred or been scheduled in the court
proceeding. We have filed initial written discovery requests upon Bank One. We
have continued to pay $200,000 per month of principal due under the original
terms of the credit agreement, plus interest, and have reduced the principal now
outstanding to approximately $7.1 million. Although the parties continue to
discuss settlement of all outstanding issues, no settlement has been concluded.
At a scheduling conference held by the Court in February 2003, a procedural
schedule was set as requested by us leading toward a trial date of November 18,
2003 in the event settlement is not concluded.
In November 2002, we and our then Chief Executive Officer, Malcolm E.
Ratliff, were served with a complaint filed in the United States District Court
for the Eastern District of Tennessee, Knoxville, entitled PAUL MILLER V. M. E.
RATLIFF AND TENGASCO, INC., DOCKET NUMBER 3:02-CV-644. The complaint seeks
certification of a class action to recover on behalf of the class of all persons
who purchased shares of our common stock between August 1, 2001 and April 23,
2002, damages in an amount not specified that were allegedly caused by
violations of the federal securities laws, specifically Rule 10b-5 under the
Securities Exchange Act of 1934 as to us and Mr. Ratliff, and Section 20(a) of
that Act as to Mr. Ratliff. The complaint alleges that documents and statements
made to the investing public by us and Mr. Ratliff misrepresented material facts
regarding our business and finances. We believe that the allegations in the
complaint are without merit. We intend to vigorously defend against all of the
allegations. We have filed a motion to dismiss the action based on the failure
of the complaint to meet the requirements of the Securities Litigation Reform
Act of 1995.
We, our former Chief Executive Officer, Malcolm E. Ratliff, and one of our
attorneys, Morton S. Robson, were named as defendants in an action commenced in
the Supreme Court of the State of New York, New York County entitled MAUREEN
COLEMAN, JOHN O. KOHLER, CHARLES MASSOUD, JONATHAN SARLIN, VON GRAFFENRIED A.G.
AND VPM VERWATUNGS A.G., PLAINTIFFS V. TENGASCO, INC., MORTON S. ROBSON AND
MALCOLM E. RATLIFF, DEFENDANTS, INDEX NO. 603009/98. In that action, the
plaintiffs, stockholders of the Company, allege that they were entitled to sell
their shares of our common stock in the open market pursuant to Rule 144
promulgated under the Securities Act of 1933, but they were precluded from doing
so by the defendants' purported wrongful refusal to remove the restrictive
legends from their shares. The plaintiffs own in the aggregate 35,000 shares of
our common stock. The plaintiffs are seeking damages in an amount equal to the
difference between the amount for which they would have been able to sell their
shares if the defendants had acted to remove the restrictive legends when
requested and the amount they will receive on the sale of their shares. The
plaintiffs are also seeking punitive damages in an amount they claim to be in
excess of $500,000, together with interest, costs and disbursements of bringing
the action, including reasonable attorneys fees. We do not believe that we
wrongfully withheld our approval of the removal of the restrictive legends at
the times such removal was requested by the stockholders. The plaintiffs have
not taken any action in this matter for several years.
47
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors.
Name Age Position
- ---- --- --------
Richard T. Williams(3)(4) 52 Chairman of the Board and Chief
Executive Officer
Jeffrey R. Bailey(3)(4) 46 President and Director
Mark A. Ruth 44 Chief Financial Officer
Robert M. Carter 66 President - Tengasco Pipeline
Corporation
Cary V. Sorensen 54 General Counsel, Vice President and
Secretary
Stephen W. Akos(1)(2) 49 Director
Joseph Earl Armstrong(3) 46 Director
John A. Clendening(1)(2)(4) 70 Director
Robert L. Devereux(1) (2) 43 Director
Bill W. Harbert 80 Director
Peter E. Salas 49 Director
Charles M. Stivers(1) 40 Director
- -----------------
(1) Audit Committee, Compensation Committee and Special Committee Member
(2) Stock Option Committee Member
(3) Field Safety Committee Member
(4) Frontier Exploration Committee Member
DR. RICHARD T. WILLIAMS has been a member of the faculty of the Department
of Geological Sciences at The University of Tennessee in Knoxville, Tennessee,
since 1987, after holding faculty positions at West Virginia University and the
University of South Carolina since 1979. He has been engaged in reflection
seismology and geophysical studies in the Appalachian Overthrust since 1980. He
earned his Ph.D. in Geophysics from Virginia Tech in 1979. Dr. Williams was
elected as a director effective June 28, 2002. He was appointed Chief Operating
Officer on January 10, 2003, and on February 3, 2003, he was elected our Chief
Executive Officer.
JEFFREY R. BAILEY graduated in 1980 from New Mexico Institute of Mining and
Technology with a B.S. degree in Geological Engineering. Upon graduation he
joined Gearhart Industries as a field engineer working in Texas, New Mexico,
Kansas, Oklahoma and Arkansas. Gearhart Industries later merged with Halliburton
Company. In 1993 after 13 years working in various field operations and
management roles primarily focused on reservoir evaluation, log analysis and log
data acquisition he assumed a global role with Halliburton as a Petrophysics
instructor in Fort Worth, Texas. His duties were to teach Halliburton personnel
and customers around the world log analysis and competition technology and to
review analytical reservoir problems. In this role Mr. Bailey had the
opportunity to review reservoirs in Europe, Latin America, Asia Pacific and the
Middle East developing a special expertise in carbonate reservoirs. In 1997 he
became technical manager for Halliburton in Mexico focusing on finding
engineering solutions to the production challenges of large carbonate reservoirs
in Mexico. He joined us as our Chief Geological Engineer on March 1, 2002. He
was elected our President on July 17, 2002 and as a director on February 28,
2003.
MARK A. RUTH is a certified public accountant with 21 years accounting
experience. He received a B.S. degree in accounting with honors from the
University of Tennessee at Knoxville. He has served as a project controls
engineer for Bechtel Jacobs Company, LLC; business manager and finance officer
for Lockheed Martin Energy Systems; settlement department head and senior
accountant for the Federal Deposit Insurance Corporation; senior financial
analyst/internal auditor for Phillips Consumer Electronics Corporation; and, as
an auditor for Arthur Andersen and Company. From December 14, 1998 to August 31,
1999 he served as the Company's Chief Financial Officer. On August 31, 1999 he
was elected as a Vice-President of the Company and on November 8, 1999 he was
again appointed as the Company's Chief Financial Office, which office he has
occupied since then.
48
ROBERT M. CARTER attended Tennessee Wesleyan College and Middle Tennessee
State College between 1954 and 1957. For 35 years he was an owner of Carter
Lumber & Building Supply Company and Carter Warehouse in Loudon County,
Tennessee. He has been with us since 1995 and during that time has been involved
in many phases of our business, including pipeline construction, leasing,
financing and the negotiation of acquisitions. Mr. Carter was elected
Vice-President in March, 1996, Executive Vice-President in April 1997 and
President on March 13, 1998 until he resigned from that position on October 19,
1999. On August 8, 2000 he again was elected as President and served in that
capacity until July 31, 2001. He has served as President of Tengasco Pipeline
Corporation, our wholly-owned subsidiary, from June 1, 1998 to the present.
CARY V. SORENSEN is a 1976 graduate of the University of Texas School of
Law and has undergraduate and graduate degrees from North Texas State University
and Catholic University in Washington, D.C. Prior to joining us in July 1999, he
had been continuously engaged in the practice of law in Houston, Texas relating
to the energy industry since 1977, both in private law firms and a corporate law
department, most recently serving for seven years as senior counsel with the
litigation department of a major Houston energy corporation before entering
private practice in June 1996. He has represented many of the major oil
companies headquartered in Houston, as well as local distribution companies and
electric utilities in a variety of litigation and administrative cases before
state and federal courts and agencies in numerous states. These matters involved
gas contracts, gas marketing, exploration and production disputes involving
royalties or operating interests, land titles, oil pipelines and gas pipeline
tariff matters at the state and federal levels, and general operation and
regulation of interstate and intrastate gas pipelines. He has served as General
Counsel of the Company since July 9, 1999.
STEPHEN W. AKOS has over twenty years experience in the financial services
industry with an expertise in fixed income securities. Since August of 2000, he
has been First Vice President, Institutional Fixed Income Sales, Robert W. Baird
& Co., St. Louis, Missouri. Prior to 2000, he held executive positions with
Mercantile Bank and Mark Twain Bank since 1993. Before 1993 he was a broker and
held a series of executive positions at brokerage firms Dean Witter, Shearson
Lehman Hutton, Drexel Burnham Lambert, and Kidder Peabody in St. Louis. He
received an MBA in Finance from Washington University in 1979, and a B.S. in
Business Administration, Accounting, from Washington University in 1976. He was
elected as a director on February 28, 2003.
JOSEPH EARL ARMSTRONG is a resident of Knoxville, Tennessee. He is a
graduate of the University of Tennessee and Morristown College where he received
a Bachelor of Science Degree in Business Administration. From 1988 to the
present, he has been an elected State Representation for Legislative District 15
in Tennessee. He has served as director since 1997.
DR. JOHN A. CLENDENING received B.S (1958), M.S. (1960) and Ph. D. (1970)
degrees in geology from West Virginia University. He was employed as a
Palynologist-Coal Geologist at the West Virginia Geological Survey from 1960
until 1968. He joined Amoco in 1968 and remained with Amoco as a senior
geological associate until 1972. Dr. Clendening has served as President and
other offices of the American Association of Stratigraphic Palynologists and the
Society of Organic Petrologists. From 1992 - 1998 he was engaged in association
with Laird Exploration Co., Inc. of Houston, Texas, directing exploration and
production in south central Kentucky. In 1999 he purchased all the assets of
Laird Exploration in south central Kentucky and operates independently. While
with Amoco Dr. Clendening was instrumental in Amoco's acquisition in the early
1970's of large land acreage holdings in Northeast Tennessee, based upon his
geological studies and recommendations. His work led directly to the discovery
of what is now our Paul Reed # 1 well. He further recognized the area to have
significant oil and gas potential and is credited with discovery of the field
which is now known as our Swan Creek Field. Dr. Clendening previously served as
a director from September 1998 to August 2000. He was again elected as a
director on February 28, 2003.
ROBERT L. DEVEREUX graduated in 1982 from St. Louis University with a
Bachelor's Degree in Business Administration with a major in finance. He
received his law degree from St. Louis University in 1985. For the past eighteen
years, Mr. Devereux has been actively engaged in the practice of law,
specializing in commercial litigation. Since 1994, he has been a principal in
the law firm of Devereux Murphy LLC located in St. Louis, Missouri. For the past
eight years Mr. Devereux has also been a principal of and has served as the
Chief Executive Officer of Gateway Title Company, Inc. He was elected as a
director on February 28, 2003.
49
BILL L. HARBERT earned a B.S. degree in civil engineering from Auburn
University in 1948. In 1949 he was one of the founders of Harbert Construction
Company. He managed that company's construction operations, both domestic and
foreign, and served as our Executive Vice-President until 1979. From 1979 until
July, 1990 he served as President and Chief Operating Officer and from July 1990
through December 1991 he served as Vice Chairman of the Board of Harbert
International, Inc. He then purchased a majority of the international operations
of Harbert International, Inc. and formed Bill Harbert International
Construction, Inc. He served as Chairman and Chief Executive Officer of that
corporation until retiring from us in 2000. Mr. Harbert's companies built
pipeline projects in the United States and throughout the world. They also built
many other projects including bridges, commercial buildings, waste water
treatment plants, airports, including an air base in Negev, Israel and embassies
for the United States government in, among other places, Tel Aviv, Hong Kong,
and Baku. Mr. Harbert has also served as president (1979) and Director (1980) of
the Pipe Line Contractors Association, USA and for seven years as Director,
Second Vice-President and First Vice-President (2001-2002) of the International
Pipe Line Contractors Association. Mr. Harbert has been active in service to a
variety of business associations, charities and the arts in the Birmingham area
for many years. He was elected as a director on April 2, 2002.
PETER E. SALAS has been President of Dolphin Asset Management Corp. and
associated companies since 1988. Prior to establishing Dolphin, he was with J.P.
Morgan Investment Management, Inc. for ten years, becoming Co-manager, Small
Company Fund and Director-Small Cap Research. He received an A.B. degree in
Economics from Harvard in 1978. Mr. Salas was elected as a director on October
8, 2002.
CHARLES M. STIVERS is a Certified Public Accountant with 18 years
accounting experience. In 1984 he received a B.S. degree in accounting from
Eastern Kentucky University. From 1983 through July 1986 he served as Treasurer
and CEO for Clay Resource Company. From August 1986 through August 1989 he
served as a senior tax and audit specialist for Gallaher and Company. From
September 1989 to date he has owned and operated Charles M. Stivers, C.P.A., a
regional accounting firm. Mr. Stiver's firm specializes in the oil and gas
industry and has clients in eight states. The oil and gas work performed by his
firm includes all forms of SEC audit work, SEC quarterly financial statement
filings, oil and gas consulting work and income tax services. Mr. Stiver's firm
has also represented oil and gas companies with respect to Federal and State
income tax disputes in 15 states over the past 12 years. In September 2001, he
was elected as a director and is the chairman of our audit committee.
EXECUTIVE COMPENSATION
The following sets forth certain information regarding compensation awarded
to, earned by or paid to, and options granted to, repriced or exercised by, the
Company's Chief Executive Officers during fiscal years ended December 31, 2002,
December 31, 2001 and December 31, 2000. During that period, none of the
Company's other executive officers earned compensation in excess of $100,000 per
annum for services rendered to us in any capacity.
Summary Compensation Table
- --------------
(1) Malcolm E. Ratliff served as our Chief Executive Officer throughout 2002.
Richard T. Williams, our current Chief Executive Officer replaced Mr.
Ratliff on February 3, 2003.
REPRICING OF OPTIONS IN FISCAL 2002
We did not adjust or amend the exercise price of any options previously
granted to any of our directors or executive officers during Fiscal 2002.
50
OPTION GRANTS FOR FISCAL 2002
The following table sets forth information concerning optionsdesire to purchase shares of our common stock grantedin this offering must act on a timely basis 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 the expiration date, unless extended. If you are a beneficial owner of shares of common stock and you wish to exercise your subscription rights, you must act promptly to ensure that your broker, dealer, custodian bank, trustee or other nominee acts for you and that all required forms and payments are actually received by your broker, dealer, custodian bank, trustee or other nominee in sufficient time to deliver such forms and payments to the named executive officersubscription agent to exercise the subscription rights granted in 2002.
- ------------
(1) These options expiredthis offering that you beneficially own prior to 5:00 p.m., New York City time, on the expiration date, as may be extended. We will not be responsible if your broker, dealer, custodian bank, trustee or other nominee fails 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 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 exercise in this rights offering, the subscription agent may, depending on the circumstances, reject your subscription or accept it only to the extent of the payment received. Neither we nor the subscription agent undertakes to contact you concerning an incomplete or incorrect subscription form or payment, nor are we under any obligation to correct such forms or payment. We have the sole discretion to determine whether a subscription exercise properly follows the subscription procedures.
You may not receive all of the shares for which you oversubscribe.
Holders who fully exercise their terms 90 days following the resignationbasic subscription rights will be entitled to subscribe for an additional number of shares of common stock by exercising an oversubscription privilege. Oversubscription privileges will generally be allocated pro rata among rights holders who oversubscribe, based 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 basic subscription shares received upon exerciseto which they have subscribed, although the allocation of stock options byoversubscription privileges among investors who may become 5% holders, who are 5% holders that have not properly filed any required forms with the names executive officer duringSEC, or who would own in excess of 50% of the last completed fiscal
year andCompany’s shares may be reduced. We cannot guarantee that you will receive any or the aggregate optionsentire number of shares for which you oversubscribed. If the prorated number of shares allocated to purchase shares of our common stockyou in connection with your oversubscription privilege is less than your request, then the excess funds held by the named executive officer at December 31, 2002.
- ------------
(1) Numbersubscription agent on your behalf will be returned to you, without interest, as soon as practicable after the rights offering has expired and all prorating calculations and reductions contemplated by the terms of the rights offering have been effected, and we will have no further obligation to you.
The receipt of subscription rights may be treated as a taxable distribution to you.
We believe the distribution of the subscription rights in this rights offering should be a non-taxable distribution to holders of shares underlyingof common stock under Section 305 of the unexercised options has been retroactively
adjusted forCode. Please see the discussion on the “Material U.S. Federal Income Tax Consequences” on page 29. This position is not binding on the Internal Revenue Service (the “IRS”), or the courts, however. If this rights offering is deemed to be part of a 5% stock dividend declared by us“disproportionate distribution” under Section 305 of the Code, your receipt of subscription rights in this offering may be treated as the receipt of September 4, 2001.
(2) Unexercised options are in-the-money ifa taxable distribution to you equal to the fair market value of the underlying securities exceedssubscription rights. Any such distribution would be treated as dividend income to the exercise price of the option. The fair market
value of the Common Stock was $1.10 per share on December 31, 2002, as reported
by The American Stock Exchange. The exercise price of the unexercised options
granted to Malcolm E. Ratliff, the Chief Executive Officer of the Company, were
$8.69 and $2.86 per share. As a result, the unexercised options are for purposes
of this table deemed to have no value.
(3) Value realized in dollars is based upon the difference between the fair
market value of the underlying securities on the date of exercise, and the
exercise price of the option.
(4) These options expired by their terms 90 days following the resignation on
March 10, 2003 of Mr. Ratliff from our Board of Directors.
LONG TERM INCENTIVE PLANS
We do not have any long-term incentive programs or plans. We adopted an
employee health insurance plan in August 2001. We do not presently have a
pension or similar plan for our directors, executive officers or employees.
Management is considering adopting a 401(k) plan and full liability insurance
for directors and executive officers. However, there are no immediate plans to
do so at this time.
51
COMPENSATION OF DIRECTORS
The Board of Directors has resolved to compensate members of the Board of
Directors for attendance at meetings at the rate of $250 per day, together with
direct out-of-pocket expenses incurred in attendance at the meetings, including
travel. The Directors, however, have waived such fees due to them as of this
date for prior meetings.
Members of the Board of Directors may also be requested to perform
consulting or other professional services for us from time to time. The Board of
Directors has reserved to itself the right to review all directors' entitlement
to compensation on an ad hoc basis.
Directors who are on our Audit, Compensation and Stock Option Committees
are independent and therefore, do not receive any consulting, advisory or
compensatory fees from us. However, such board members may receive fees from us
for their services on those committees. The Company intends to implement a plan
for the payment of those committee members for their services on an annual
basis.
EMPLOYMENT CONTRACTS
We have entered into an employment contract with our Chief Executive
Officer, Richard T. Williams, for a period of two years through December 31,
2004 at an annual salary of $80,000. There are presently no other employment
contracts relating to any member of management. However, depending upon our
operations and requirements, we may offer long term contracts to directors,
executive officers or key employees in the future.
52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On each of January 21, 2002 and April 9, 2002, Bill L. Harbert, who owns
more than ten percentextent of our outstanding common stockcurrent and is now, but was not at
those dates,accumulated earnings and profits, if any, with any excess being treated as a director, purchased from us in a private placement, 100,000
sharesreturn of our common stock, at prices of $6.32 and $4.80 per share,
respectively. The proceeds from those private placements were used as working
capital.
On July 5, 2002 and July 23, 2002, Dolphin Offshore Partners, L.P., which
we refer to as Dolphin and which owns more than ten percent of our outstanding
common stock, and whose general partner, Peter E. Salas, is a director,
purchased from us in a private placement, 400,000 and 250,000 shares of our
common stock, respectively, at a price of $2.50 per share. The proceeds from
those private placements were used as working capital.
On August 8, 2002, Dolphin purchased 718,820 shares of our common stock in
an open market transaction. In connection with that purchase, Dolphin entered
into an agreement, which was later amended in October 2002, with Industrial
Resources Corporation, which we refer to as IRC, which owns more than ten
percent of our outstanding common stock and whose sole stockholder and
president, Malcolm E. Ratliff, was at the time of this transaction our Chief
Executive Officer and a director. Pursuant to that agreement, Dolphin granted
IRC an option commencing on April 11, 2003 and expiring on May 12, 2003 to
purchase up to 373,900 shares of our common stock that had been purchased by
Dolphin at a price of $2.386 per share. The agreement further provided that if
the option were not exercised during the option period, then IRC could then be
required by Dolphin to purchase from Dolphin at price of $2.495 per share the
same number of shares that had been the subject of the option. We were not a
party to this agreement. As a result of IRC's default on this obligation, in
June 2003, Dolphin received 400,000 shares of our common stock from an escrow
account established by IRC.
In October 2002, Dolphin in consideration of a loan to us was issued an
unsecured convertible promissory note from us in the principal amount of
$500,000 bearing 8% interest, with interest only payable quarterly and principal
payable January 4, 2004. The principal amount of the note is convertible into
our common stock at the rate of $2.88 per share. The proceeds from this loan
were used to provide working capital for our operations.
In December 2002, Dolphin loaned us the sum of $250,000, which funds were
used to pay the principal and interest due that month from us to Bank One and to
provide working capital. We issued a promissory note to Dolphin bearing interest
at the rate of 12% per annum, with interest only payable quarterly and the
principal balance payable on January 4, 2004. The obligations under the loan are
secured by an undivided 10% interest in our Tennessee and Kansas pipelines.
In January 2003, Bill L. Harbert, a director, purchased 227,275 shares of
our common stock from us in a private placement at a price of $1.10 per share.
The proceeds from this sale were used by us to pay the principal and interest
due that month from us to Bank One and to provide working capital.
On each of February 3, 2003 and February 28, 2003, Dolphin loaned us the
sum of $250,000, which we used to pay the principal and interest due from us to
Bank One for February and March 2003, respectively, and for working capital.
Each of these loans is evidenced by a separate promissory note bearing interest
at the rate of 12% per annum, with payments of interest only payable quarterly
and the principal balance payable on January 4, 2004. The obligations under the
loans are secured by an undivided 10% interest in our Tennessee and Kansas
pipelines.
On May 20, 2003, Dolphin loaned us the sum of $750,000 and Jeffrey R.
Bailey, our President and a director, loaned us $84,000, which aggregate amount
of $834,000 we used to pay the principal and interest due from us to Bank One
for June 2003 and for working capital. These loans are evidenced by separate
promissory notes bearing interest at the rate of 12% per annum, with payments of
interest only payable quarterly and the principal balance payable on January 4,
2004. The obligations under the loans are secured by an undivided 30% and 3.36%
interest, respectively, in our Tennessee and Kansas pipelines.
On August 6, 2003, Dolphin loaned us the sum of $150,000, which we used for
working capital. This loan is evidenced by a separate promissory note bearing
interest at the rate of 12% per annum, with payments of interest
53
only payable quarterly and the principal balance payable on January 4, 2004. The
obligations under the loan are secured by an undivided 6% interest in our
Tennessee and Kansas pipelines
From April 1 through June 30, 2003, we issued 10,363 shares of our common
stock to holders of our Series A 8% Cumulative Convertible Preferred Stock in
lieu of cash quarterly interest payments due to those holders. Also during that
period, certain members of our board of directors exercised options granted to
them pursuant to the Tengasco, Inc. Stock Incentive Planextent thereof and purchased the
following numberthen as capital gain. Each holder of shares of our common stock at the exercise price of $0.50
per share. Richard T. Williams - 10,000 shares, Bill L. Harbert - 24,000 shares
and John A. Clendening - 24,000 shares.
In this offering Dolphin, as well as our directors (certain of whom are
also officers), will have the right to purchase additional shares of common stock at the offering price in an amount proportionalis urged to their existing
interests. These officers, directors, and affiliated companies would receive the
same terms as the other stockholders in this rights offering; except that
Dolphin may also enter into the proposed commitment agreement. See "The Rights
Offering - Effects of Rights Offering on Dolphin's Securities and Ownership and
- - Proposed Commitment Agreement."
54
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of October 13, 2003,
concerning the beneficial ownership of our common stock by (a) each director,
(b) each executive officer named in our summary compensation table above, (c)
all directors and executive officers as a group, and (d) each person known by us
to beneficiallyconsult his, her or its 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 powertax advisor 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.
- ------------
* Indicates holdingsparticular tax consequences 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. this rights offering.
The shares underlying the note held by the limited partnership
have been adjusted to reflect Mr. Akos' ownership interest in the limited
partnership.
(2) Consists of 4,950 shares held directly and options to purchase 76,500
shares.
(3) Consists of 10,000 shares held directly and options to purchase 73,125
shares.
(4) Consists of 34,562 shares held directly and jointly with his spouse;
options to purchase 24,000 shares; 12,448 shares underlying a convertible
note held jointly with his spouse; 6,753 shares owned by a limited
liability company; and 3,119 shares underlying a convertible promissory
note held by a limited liability company. The shares owned by the limited
liability company and underlying the note held by the limited liability
company have been adjusted to reflect Mr. Devereux's ownership interest in
the limited liability company.
(5) Mr. Salas, a director, is the general partner and controlling person of
Dolphin. The share amount indicated consists of 2,139,720 shares held by
Dolphin; 10,500 shares underlying a warrant held by Dolphin; 173,611 shares
underlying a convertible promissory note held by Dolphin; and 117,188
shares underlying 9,000 shares of our series B 8% cumulative convertible
preferred stock held directly by Dolphin that are convertible into our
common stock. The indicated amount includes 400,000 shares transferred in
May 2003 to Dolphin from
55
Industrial Resources Corporation, a corporation that we believe is
affiliated with M.E. Ratliff, pursuant to the terms of an agreement between
that corporation and Dolphin. The Company was not a party to that
agreement.
(6) Consists of 1,428,942 shares held directly, 71,429 shares underlying 5,000
shares of our series A 8% cumulative convertible preferred stock held
directly, which shares are convertible into our common stock, and an option
to purchase 13,125 shares.
(7) Includes 80,171 shares owned directly and an option to purchase 59,062
shares held by Mr. Ratliff, 1,249,744 shares owned by Industrial Resources
Corporation, which is controlled by Mr. Ratliff, 1,289,072 shares owned by
Ratliff Farms, Inc., which is controlled by Mr. Ratliff, and 31,500 shares
owned directly by a trust of which Mr. Ratliff's wife is a trustee and the
children of Mr. Ratliff are the beneficiaries. The information regarding
these shares was previously provided to us by Mr. Ratliff when he was our
Chairman of the Board and Chief Executive Officer. Wesubscription rights are not aware of any
changes in the information, excepttransferable, and there is no market for the subscription rights.
You may not sell, transfer, assign or give away your subscription rights. Because the subscription rights are nontransferable, there is no market or other means for you to directly realize any value associated with the subscription rights. You must exercise the subscription rights to realize any potential value from your subscription rights.
THE RIGHTS OFFERING
BACKGROUND OF THE RIGHTS OFFERING
Our Board of Directors has proposed that we attempt to raise equity capital
through a rights offering to all of our stockholders and to use the proceeds
from the equity financing to repay certain long term indebtedness to Dolphin and
others and, if proceeds are sufficient, to repay a portion of under our senior
secured credit facility and/or to finance the drilling of additional wells.
The primary reason for authorizing the rights offering is to pay non-bank
indebtedness, including to Dolphin in the approximate amount of up to $_____
million, with the balance of the net proceeds, if any, to be used to pay bank
indebtedness to some extent and/or for working capital purposes, including the
drilling of additional wells. The board determined that the rights offering with
Dolphin possibly having certain rights to purchase unsubscribed shares is
advisable for these purposes under our present financial, operating and other
circumstances.
In preliminarily approving the rights offering as proposed, our Board of
Directors considered a number of factors, including the following:
o the need to pay our outstanding indebtedness, including to Dolphin, and
repaying certain other outstanding indebtedness, including perhaps a
portion of our credit facility with Bank One and/or providing certain,
albeit not necessarily sufficient, capital usable toward resuming our
drilling program;
o the difficulty of refinancing our outstanding indebtedness;
o the possible need to refinance all or a portion of the credit facility
in light of the impediment to other capital-raising created by the
dispute with Bank One;
o the commercial and other risks and uncertainties associated with a
restructuring or recapitalization and the impact of those alternatives
on our shareholders and our creditors;
o the possible willingness of Dolphin, subject to the pricing of the
rights offering, to agree to purchase shares in the rights offering;
and
o the belief that the transaction was the best alternative reasonably
available to us from the perspective of our public shareholders.
The preceding discussion of the information and factors considered and
given weight by our Board of Directors is not intended to be exhaustive.
However, our board of directors believe that the discussion includes all of the
material factors that they considered. In reaching their decisions to approve
and to recommend approval of the rights offering and Dolphin's possible purchase
of shares in the rights offering, our Board of Directors did not assign any
relative or specific weights to the factors they considered. Individual
directors may have given different weights to different factors.
An investment in our common stock must be made according to your own
evaluation of your best interests. Accordingly, our Board of Directors does not
make any recommendation to you about whether you should exercise your rights.
Neither have we retained a financial advisor to make any recommendation to you
about whether you should exercise your rights.
Our Board of Directors has formed a special committee consisting of Stephen
W. Akos, John A. Clendening and Robert L. Devereux, none of whom has any
personal interest in the rights offering, except by virtue of their beneficial
membership of shares of our common stock. The special committee has been charged
with determining the terms, including the financial terms, of the rights
offering and making recommendations regarding such terms to the Board of
Directors. It is anticipated that Mr. Salas, in light of his discussions with us
regarding his possible
57
commitment to participate in the rights offering and his significant ownership
of our common stock, will not vote with respect to the Board of Directors'
approval of such terms.
THE RIGHTS
Rights
We will distribute to each holder of record of our common stock on _____,
2003,[●], 2016, at no charge, one nontransferable subscription right for each share of our common stock they own. The rights will be evidenced by rights certificates.
Subscription Privileges
Each subscription right carries with it the following two privileges:
| · | Basic subscription privilege. With your basic subscription privilege, you may purchase two shares of our common stock per right, upon delivery of the required documents and payment of the subscription price of $0.66 per share (or $1.32 per pair of shares purchased upon exercising each right). You must purchase both shares underlying a right if you want to exercise that right. You are not required to exercise all of your rights or any of them. 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. |
| · | Oversubscription privilege. If you exercise your basic subscription privilege in full (i.e., as to all shares you own) you may also subscribe for additional shares that other stockholders have not purchased under their basic subscription privilege pursuant to an oversubscription privilege. Any shares that were eligible to be purchased in the rights offering but were not purchased under the basic subscription privilege will be allocated among the holders of rights who exercise the oversubscription privilege, in accordance with the following procedure: |
| 1. | Each holder who exercises the oversubscription privilege will be allocated a percentage of the remaining shares equal to the percentage that results from dividing (i) the number of basic subscription rights which that holder exercised by (ii) the number of basic subscription rights which all holders who wish to participate in the oversubscription privilege exercised. Such percentage could result in the allocation of more or fewer oversubscription shares than the holder requested to purchase through the exercise of the oversubscription privilege. For example, if Stockholder A exercised 200 basic subscription privileges and Stockholder B exercised 300 basic subscription privileges and they are the only two stockholders who exercise the oversubscription privilege, Stockholder A will be allocated 40% and Stockholder B will be allocated 60% of all remaining shares. (Example A) |
| 2. | If the allocation of remaining shares pursuant to the formula described in paragraph 1 above would result in any holder receiving a greater number of shares than that holder subscribed for pursuant to the oversubscription privilege, then such holder will be allocated only that number of shares for which the holder oversubscribed. For example, if Stockholder A in Example A above is allocated 100 shares pursuant to the formula described in paragraph 1 but subscribed for only 40 additional shares pursuant to the oversubscription privilege, Stockholder A’s allocation would be reduced to 40 shares. (Example B) |
| 3. | Any shares that remain available as a result of the allocation described above being greater than a holder’s oversubscription request (i.e., the 60 additional shares in Example B above) will be allocated among all remaining holders who exercised the oversubscription privilege and whose initial allocations were less than the number of shares they requested. This second allocation will be made pursuant to the same formula described above and repeated, if necessary, until all available shares have been allocated or all oversubscription requests have been satisfied in full. |
We will allownot allocate to you more than the number of shares you have actually subscribed and paid for. As soon as practicable after the expiration date, Continental Stock Transfer & Trust Company, acting as our subscription agent, together with our board in the event of any other limitations, will determine the number of shares that you may purchase pursuant to the oversubscription privilege. The allocation of oversubscription privileges among investors who may become 5% holders, who are 5% holders that have not properly filed any required forms with the SEC, or who would own in excess of 50% of the Company’s shares may be reduced.
You are not entitled to exercise the oversubscription privilege unless you have fully exercised your basic subscription privilege for all shares you own. 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, Continental Stock Transfer & Trust Company, and report certain other information received from each beneficial owner exercising shares. Generally, banks, brokers and other nominees must report:
| · | the number of shares held on the record date on behalf of each beneficial owner; |
| · | the number of shares as to which the basic subscription privilege has been exercised on behalf of each beneficial owner; |
| · | that each beneficial owner’s basic subscription privilege, held in the same capacity, has been exercised in full; and |
| · | 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.
Reasons for the Rights Offering
We are conducting the rights offering to raise additional capital to pay certain bank indebtedness and for working capital and general corporate purposes. We intend to use the proceeds from this offering (i) to pay bank indebtedness in the aggregate amount of approximately $2.4 million, and (ii) to apply the balance of such holderproceeds, if any, for working capital and general corporate purposes, including participation in exploration and development projects in several states in projects and joint ventures currently being reviewed by the Company. A more detailed description of the intended use of proceeds is set forth under the heading “Use of Proceeds” on page 27 below.
Determination of the Subscription Price
In originally proposing a rights offering of common stock and subsequently approving the terms of the rights offering, our board of directors and its special committee, together with its advisors and legal counsel, considered a number of factors, including the following:
| · | the amount of our existing borrowings under the revolving credit facility with our principal creditor, Prosperity Bank, totaling approximately $2.4 million, the need for covenant waivers in the recent past and the potential for further requests in the future, and the indication from Prosperity Bank that such borrowings would need to be repaid from the proceeds of any capital raise; |
| · | the difficulty of refinancing our outstanding indebtedness in the current commodity markets with long periods of depressed pricing received by the Company in its sales of crude oil production; |
| · | our recent and anticipated operating results, including the amount of proceeds desired to not only maintain current production levels but to grow the Company and take advantage of exploration and development growth opportunities involving certain prospects being considered by the Company in several states (see “Use of Proceeds”); |
| · | the historic and current price of our common stock; |
| · | our debt levels and expected cash flow, taking into account different oil and gas price scenarios; |
| · | general conditions in the securities markets; |
| · | the lack of practical alternatives available to us for raising capital in the equity markets, considering current industry prices and future prospects; |
| · | the pricing of similar, comparable, or analogous offerings; |
| · | the liquidity of our stock; |
| · | our business prospects; |
| · | the commercial and other risks and uncertainties associated with a potential restructuring or recapitalization and the impact of those alternatives on our stockholders and our creditors; |
| · | the need to preserve, if possible, existing net operating losses for federal income tax benefits in the future; and |
| · | the belief that the rights offering was the best alternative reasonably available considering the factors above. |
The preceding discussion of the information and factors considered and given weight by our board of directors and its special committee includes all the material factors considered by the board of directors in its determination to propose, and then in its determination to approve the recommendations of the special committee as to the terms of the rights offering. In the decisions to propose and approve the rights offering, our board of directors and its special committee 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 Matthew Behrent, Hugh Brooks, and Richard Thon. None of these directors is an employee nor has any personal interest in the rights offering other than his individual share holdings. The special committee was charged by the board with determining the 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 the proposed rights offering, he did not participate in any discussions in connection with the special committee’s determinations and recommendations regarding the terms of the offering. Mr. Salas did not participate in any board discussions upon the receipt on September 13, 2016 of the special committee’s recommendations regarding the terms hereof.
The subscription price per share was recommended to our board by the special committee. The special committee considered all of the factors enumerated above in making its determination. In addition, the special committee also considered its discussions with Dolphin, of which Mr. Salas is the controlling person, regarding subscription terms at which Dolphin might participate in the offering, although Dolphin has not proposed or entered into any agreement or understanding with the special committee or us with respect to such participation. The Company anticipates that Dolphin will fully exercise its basic subscription rights and oversubscription privileges subject to any limitations imposed by the terms of the offering. The Company also anticipates that all directors and the Chief Executive Officer of the Company will fully exercise their basic subscription rights.
In connection with all of the foregoing considerations considered by the special committee, it received the advice of a third-party advisor and legal counsel, each of whose firms was engaged specifically by the special committee for these purposes. The advisor, on September 9, 2016, provided a report to the special committee. The advisor was not engaged to deliver an opinion concerning the proposed rights offering in any respect and did not deliver any opinion regarding the terms of the rights offering. The special committee’s recommendations regarding subscription price per share and the other terms of the offering were determined by the special committee and were presented to, and approved by, our board of directors on September 14, 2016.
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.
Limitations on the Exercise of the Rights
In no event may any subscriber purchase two additional 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 of this rights offering represent 50% or more of our issued and outstanding shares.
There is a limitation on rights purchasable in order to protect against loss of certain tax benefits owned by the Company. Under U.S. federal income tax law, the Company may carry forward its net operating losses (NOLs) as potential tax deductions until they expire. As of December 31, 2015, we had NOLs totaling approximately $24.7 million. An ownership change, as defined in Section 382 of the Code would reduce the availability of our NOLs. An ownership change could result from certain purchases of our common stock, including as a result of this rights offering. Should an ownership change occur, all NOLs incurred prior to the ownership change would be subject to limitations imposed by Section 382 of the Code, which would effectively eliminate the amount of NOLs currently available to offset taxable income.
To prevent reducing the availability of the NOLs as a result of an ownership change, in the event any subscriber who owned less than 5.0% of our common stock prior to this rights offering purchases shares in the rights offering that results in such subscriber owning 5.0% or more of our common stock following the completion of this rights offering, the issuance of such new shares at or above the 5.0% level in the rights offering will not be issued unless and until our board of directors, acting in its sole discretion, expressly consents to such issuance in whole or in any reduced amount deemed necessary to prevent reducing the availability of the Company’s NOLs by virtue of a priceSection 382 ownership change. In the event any subscriber who owned 5.0% or more of $___ perour common stock prior to this rights offering purchases shares in the rights offering that results in such purchased share.
EXPIRATION OF THE RIGHTS OFFERING
subscriber increasing its percentage ownership of our common stock following the completion of this rights offering, the issuance of such new shares at or above the previous ownership level in the rights offering will not be issued unless and until our board of directors, acting in its sole discretion, expressly consents to such issuance in whole or in any reduced amount deemed necessary to prevent reducing the availability of the Company’s NOLs by virtue of a Section 382 ownership change. For the same reasons, for any person or entity that may own 5.0% or more of the Company’s outstanding stock before the effective date of this rights offering but has not filed a Schedule 13D or 13G, as applicable, reporting his, her or its ownership stake as required by law, the issuance of any new shares issued in the rights offering to such person or entity will not be issued unless and until our board of directors, acting in its sole discretion, expressly consents to such issuance in whole or in any reduced amount deemed necessary to protect the Company from reducing availability of its NOLs by virtue of a Section 382 ownership change. Those limitations as to 5% ownership set out above in this paragraph may be waived by the board of directors as to all affected persons in the event the board determines in its discretion that such limitations have little or no practical effect to prevent reducing the availability of the Company’s NOLs or that the Company’s need to maximize proceeds from the rights offering is greater than the need to attempt to prevent reducing the availability of NOLs by enforcement of the stated limitations.
Expiration of the Rights Offering
You may exercise your subscription privilege at any time before 12:5:00 midnight,p.m., New York City time, on ______, 2003,[●], 2016, 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.documents. 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.
SUBSCRIPTION PRIVILEGES
Basic subscription privilege. With your basic subscription privilege, you
may purchase two shares
No Interest on your subscription certificate. WhenSubscription Amounts
Once you send in your subscription certificate and payment, you must also send the full purchase price for the
number of additional shares that you have requested to purchase (in addition to
the payment due for shares purchased through your basic subscription privilege).
If the number of shares remaining aftercannot revoke the exercise of all basicyour rights, even if you later learn information about us that you consider to be unfavorable or the market price of our common stock falls below the $0.66 per share subscription privileges is not sufficient to satisfy all requests for shares pursuant to
over-subscription privileges, youprice, unless we amend the terms of the offering. During this period of no revocation, subscription amounts received will be allocated additional shares pro-rata
(subject to elimination of fractional shares), based on the number of shares you
purchased through the basic subscription privilege in proportion to the total
number of shares that you and other over-subscribing shareholders purchased
through the basic subscription privilege. However, if your pro-rata allocation
exceeds the number of shares you requested on your subscription certificate,
then you will receive only the number of shares that you requested, and the
remaining shares from your pro-rata allocation will be divided among other
rights holders exercising their over-subscription privileges.
As soon as practicable after the expiration date, Mellon Investor Services
LLC, acting as our subscription agent, will determine the number of shares of
common stock that you may purchase pursuant to the over-subscription privilege.
You will receive certificates representing these shares as soon as practicable
after the expiration date. If you request and pay for more shares than are
allocated to you, we will refund that overpayment, without interest. In
connection with the exercise of the over-subscription privilege, banks, brokers
and other nominee holders of
58
subscription rights who act on behalf of beneficial owners will be required to
certify to us and toheld by the subscription agent as to the aggregate number of
subscription rights that have been exercised, and the number of shares of common
stock that are being requested through the over-subscription privilege, by each
beneficial owner on whose behalf the nominee holder is acting.
Dolphin, subject to the pricinguntil 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 agree to
exercise allterminate the offering at any time and for any reason at our sole discretion. Circumstances under which we may terminate the rights offering include without limitation insufficient subscription levels.
Nontransferability of his or its rights.
NON-TRANSFERABILITY OF THE RIGHTS
the Rights
Except in the limited circumstances described below, only you may exercise the basic subscription privilege and the over-subscriptionoversubscription privilege. You may not sell, give away or otherwise transfer the basic subscription privilege or the over-subscriptionoversubscription 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;
forlaw. 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
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.
Exercise of the Subscription Rights
You may exercise your rights by delivering the following to the subscription agent, at or prior to 12:5:00 midnight,p.m., New York City time, on ________, 2003,[●], 2016, 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 |
| · | your full subscription price payment for each share subscribed for under your basic subscription privilege and your oversubscription privilege. |
Please do not send subscription certificates or related forms to us. Please send the properly completed and executed rightsform of subscription certificate with any
required signature guaranteesfull payment to the subscription agent for this offering, Continental Stock Transfer & Trust Company, or to the record holder of your shares (such as your broker, nominee or other supplemental documentation;custodial holder, if applicable).
You should read carefully the subscription certificate and o your fullrelated instructions and forms which accompany this prospectus. You should contact the Company, 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.
Required Forms of Payment of the Subscription Price
The subscription price payment for eachis $0.66 per share subscribed for, under your basic subscription privilege and your over-subscription
privilege.
METHOD OF PAYMENT
Your payment ofpayable in cash. All payments must be cleared on or before the expiration date.
If you exercise any rights, you must deliver to the subscription price must be madeagent (or the record holder of your shares, if applicable) full payment (i) in U.S. dollars for the full numberform of shares of common stock you are subscribing for by either:
oa personal check, certified or cashier’s check or bank draft drawn upon a U.S. bank, or a U.S. postal telegraphic or
express money order, payable to the subscription agent;"Continental Stock Transfer & Trust Company, as Subscription Agent", or o(ii) by wire transfer of immediately available funds directly to the subscription account maintained by Continental Stock Transfer & Trust Company, as Subscription Agent, for purposes of accepting subscription in the rights offering at JP Morgan Chase Bank, ABA: 021000021, Account: [475-588339], Account Name: Continental Stock Transfer & Trust Company as agent for Tengasco, Inc.
In order for you to timely exercise your rights, the subscription agent at _______.
RECEIPT OF PAYMENT
Yourmust actually receive good funds, in payment will be considered received byof the subscription agent only
upon:
o receiptprice, 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 agentprice 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 uncertified check,delay in payment by you and suggest that you consider payment by means of certified or certifiedcashier’s check or bank draft drawn upon a U.S. bank, or a U.S. postal money order.
Delivery Address for Subscription Certificates and Payments
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, Continental Stock Transfer & Trust Company, as follows:
For U.S. postal service mail, overnight delivery courier, or messenger:
Continental Stock Transfer & Trust Company
Attention: Corporate Actions Department
17 Battery Place, 8th Floor
New York, NY 10004
Prohibition on Fractional Shares
Each right entitles you to purchase two shares at the subscription price. We will accept any inadvertent subscription indicating a purchase of fractional shares, by rounding down to the nearest whole number of shares 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 postal,
telegraphic or express money order; or
o receiptexercise of collected funds inthe oversubscription privilege, the related form of “Nominee Holder Certification,” and submit them on a timely basis to the subscription account designated
above.
DELIVERY OF SUBSCRIPTION MATERIALS AND PAYMENTagent, Continental Stock Transfer & Trust Company, 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.
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 stockholders that exercised rights.
Fees and Expenses
We will pay all fees charged by the subscription agent. You are responsible for paying any other commissions, fees, taxes or other expenses incurred in connection with the exercise of your subscription rights. Neither the subscription agent nor we will pay any such commissions, fees, taxes or other expenses.
Subscription Agent
We have appointed Continental Stock Transfer & Trust Company as subscription agent for this offering. The subscription agent’s address for packages sent by hand, mail or overnight courier is as follows:
Continental Stock Transfer & Trust Company
Attention: Corporate Actions Department
17 Battery Place, 8th Floor
New York, NY 10004
The subscription agent’s telephone number is (917) 262-2378. You should deliver your rightssubscription certificate and payment of the subscription price or, if applicable, notice of guaranteed delivery,only to the subscription agent, except if your shares are held on record by onea broker, dealer, nominee or other custodian, in which case you will provide your certificate and payment as directed by your broker or nominee. We will pay the fees and expenses of the methods described below:
59
If by mail, by hand or by overnight courier to: Mellon Investor Services
LLC, P.O. Box 3315, South Hackensack, NJ 07606
You may call the subscription agent and printer. 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 or payments directly to the Company. 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 (800) 370-1163.
Your deliveryleast five business days to an address other thanclear, 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, a U.S. postal money order, or wire transfer of immediately available funds.
Questions and Assistance Concerning the address set forth above will not
constitute valid delivery.
CALCULATION OF RIGHTS EXERCISED
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 as follows:
Continental Stock Transfer & Trust Company 17 Battery Place, 8th Floor New York, NY 10004 (917) 262-2378 | OR | Tengasco, Inc. 6021 S. Syracuse Way, Suite 117 Greenwood Village, CO 80111 (720) 420-4460 ext. 4 |
Calculation of Rights Exercised
If you do not indicate the number of rights being exercised, or do not forward full payment of the total subscription price for the number of rights that you indicate are being exercised, then you will be deemed to have exercised your basic subscription privilege with respect to the maximum number of rights that may be exercised with the aggregate subscription price payment you delivered to the subscription agent. If we do not apply your full subscription price payment to your purchase of shares of our common stock, we will return the excess amount to you by mail without interest or deduction as soon as practicable after the expiration date of the rights offering.
YOUR FUNDS WILL BE HELD BY THE SUBSCRIPTION AGENT UNTIL SHARES OF COMMON STOCK
ARE ISSUED
The subscription agent will hold your payment
How Procedural and procedures adopted by the subscription agent,
unless:
o your rights certificate provides that shares are to be delivered to you
as record holder of those rights; or
o you are an eligible institution.
NOTICE TO BENEFICIAL HOLDERS
If you are a broker, a trustee or a depositary for securities who holds
shares of our common stock for the account of others on _______, 2003, the
record date for the rights offering, you should notify the respective beneficial
owners of such shares of the rights offering as soon as possible to find out
their intentions with respect to exercising their rights. You should obtain
instructions from the beneficial owners with respect to the rights, as set forth
in the instructions we have provided to you for your distribution to beneficial
owners. If the beneficial owner so instructs, you should complete the
appropriate rights certificates and submit them to the subscription agent with
the proper payment. If you hold shares of our common stock for the account(s) of
more than one beneficial owner, you may exercise the number of rights to which
all such beneficial owners in the aggregate otherwise would have been entitled
had they been direct record holders of our common stock on the record date for
the rights offering, provided that, you, as a nominee record holder, make a
proper showing to the subscription agent by submitting the form entitled
"Nominee Holder Certification" which we will provide to you with your rights
offering materials.
BENEFICIAL OWNERS
If you are a beneficial owner of shares of our common stock or will receive
your rights through a broker, custodian bank or other nominee, we will ask your
broker, custodian bank or other nominee to notify you of this rights offering.
If you wish to exercise your rights, you will need to have your broker,
custodian bank or other nominee act for you. If you hold certificates of our
common stock directly and would prefer to have your broker, custodian bank or
other nominee exercise your rights, you should contact your nominee and request
it to effect the transaction for you. To indicate your decision with respect to
your rights, you should complete and return to your
60
broker, custodian bank or other nominee the form entitled "Beneficial Owners
Election Form." You should receive this form from your broker, custodian bank or
other nominee with the other rights offering materials. If you wish to obtain a
separate rights certificate, you should contact the nominee as soon as possible
and request that a separate rights certificate be issued to you.
INSTRUCTIONS FOR COMPLETING YOUR RIGHTS CERTIFICATE
You should read and follow the instructions accompanying the rights
certificate(s) carefully.
If you want to exercise your rights, you should send your rights
certificate(s) with your subscription price payment to the subscription agent.
Do not send your rights certificate(s) and subscription price payment to us.
You are responsible for the method of delivery of your rights
certificate(s) with your subscription price payment to the subscription agent.
If you send your rights certificate(s) and subscription price payment by mail,
we recommend that you send them by registered mail, properly insured, with
return receipt requested. You should allow a sufficient number of days to ensure
delivery to the subscription agent prior to the time the rights offering
expires.
DETERMINATIONS REGARDING THE EXERCISE OF YOUR RIGHTS
Other Questions Are Resolved
We will decideresolve all questions concerning the timeliness, validity, form and eligibility of yourany exercise of your rights and our determinationsrights. Our determination of such questions 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 maydetermine, or reject the purported exercise of any of your rightsright because of any defect or irregularity. WeSubscription certificates will not receivebe considered received or accept any subscriptionaccepted until all irregularities have been waived by us or cured by you within such time as we decide,determine, in our sole discretion.
Neither we nor the subscription agent has 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 be underincur any duty to notify you
of any defect or irregularity in connection with your submission of rights
certificates and we will not be liableliability for failure to notify you of any defect
or irregularity.give such notification. We reserve the right to reject yourany exercise of rights if yourthe exercise isdoes not in accordancecomply with the terms of the rights offering, oris not in proper form. We will also not accept yourform, or if the exercise of rights if our issuance of shares
of our common stock to you couldwould be deemed unlawful under applicable law or is materially burdensome to us.
REGULATORY LIMITATION
Regulatory Limitation
We will not be required to issue to you shares of common stock pursuant to the rights offering if, in our opinion, you would be required to obtain prior clearance or approval from any state or federal regulatory authority to own or control such shares if, at the time the subscription rights expire, you have not obtained such clearance or approval.
GUARANTEED DELIVERY PROCEDURES
If you wish to exercise your rights, but you do not have sufficient time to
deliver the rights certificate evidencing your rights to the subscription agent
on or before the time your rights expire, you may exercise your rights by the
following guaranteed delivery procedures:
o deliver your subscription price payment in full for each share you
subscribed for under your subscription privileges in the manner set
forth in "Method of Payment" on page 54 to the subscription agent on
or prior to the expiration date;
o deliver the form entitled "Notice of Guaranteed Delivery,"
substantially in the form provided with the "Instructions as to Use of
Tengasco Rights Certificates" distributed with your rights
certificates at or prior to the expiration date;
Expiration Date, Extensions and o deliver the properly completed rights certificate evidencing your
rights being exercised and the related nominee holder certification,
if applicable, with any required signatures
61
guaranteed, to the subscription agent within three business days
following the date of your Notice of Guaranteed Delivery.
Your Notice of Guaranteed Delivery must be delivered in substantially the
same form provided with the Instructions as to the Use of Tengasco Rights
Certificates, which will be distributed to you with your rights certificate.
Your Notice of Guaranteed Delivery must come from an eligible institution, or
other eligible guarantee institutions which are members of, or participants in,
a signature guarantee program acceptable to the subscription agent.
In your Notice of Guaranteed Delivery, you must state:
o your name;
o the number of rights represented by your rights certificates and the
number of shares of our common stock you are subscribing for under
your basic subscription privilege; and
o your guarantee that you will deliver to the subscription agent any
rights certificates evidencing the rights you are exercising within
three business days following the date the subscription agent receives
your Notice of Guaranteed Delivery.
You may deliver your Notice of Guaranteed Delivery to the subscription
agent in the same manner as your rights certificates at the address set forth
above under "--Delivery of Subscription Materials and Payment." Alternatively,
you may transmit your Notice of Guaranteed Delivery to the subscription agent by
facsimile transmission (Facsimile No.: (___) ____-_____). To confirm facsimile
deliveries, you may call (___) __________.
The subscription agent will send you additional copies of the form of
Notice of Guaranteed Delivery if you need them. Please call (__) __________ to
request any copies of the form of Notice of Guaranteed Delivery. Banks and
brokerage firms please call (800) _______ to request any copies of the form of
Notice of Guaranteed Delivery.
QUESTIONS ABOUT EXERCISING RIGHTS
If you have any questions or require assistance regarding the method of
exercising your rights or requests for additional copies of this prospectus, the
Instructions as to the Use of Tengasco Rights Certificates or the Notice of
Guaranteed Delivery, you should contact the subscription agent at the following
address and telephone number: Mellon Investor Services LLP, P.O. Box 3315, South
Hackensack, NJ 07606, (800) 370-1163.
SUBSCRIPTION AGENT
We have appointed Mellon Investor Services LLC to act as subscription agent
for the rights offering. We will pay all fees and expenses of the subscription
agent related to the rights offering and have also agreed to indemnify the
subscription agent from liabilities which it may incur in connection with the
rights offering.
NO REVOCATION
Once you have exercised your subscription privileges, you may not revoke
your exercise. Rights not exercised prior to the expiration date of the rights
offering will expire.
PROCEDURES FOR DTC PARTICIPANTS
We expect that your exercise of your basic subscription privilege may be
made through the facilities of the Depository Trust Company. If your rights are
held of record through DTC, you may exercise your basic subscription privilege
and your over-subscription privilege by instructing DTC to transfer your rights
from your account to the account of the subscription agent, together with
certification as to the aggregate number of rights you are exercising and the
number of shares of our common stock you are subscribing for under your basic
subscription
62
privilege and your over-subscription privilege, if any, and your subscription
price payment for each share you subscribed for pursuant to your basic
subscription privilege and your over-subscription privilege.
No change will be made to the cash subscription price by reason of changes
in the trading price of our common stock prior to the closing of the rights
offering.
FOREIGN AND OTHER SHAREHOLDERS
Rights certificates will be mailed to rights holders whose addresses are
outside the United States or who have an Army Post Office or Fleet Post Office
address. To exercise such rights, you must notify the subscription agent, and
take all other steps that are necessary to exercise your rights on or prior to
the expiration date of the rights offering. If the procedures set forth in the
preceding sentence are not followed prior to the expiration date your rights
will expire.
EXPIRATION DATE, EXTENSIONS AND TERMINATION
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 12:5:00 midnight,p.m., New York City time, on _________ 2003,[●], 2016, 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
sendpayment.
Shares of Common Stock Outstanding After the documentsRights Offering
Approximately [●] shares of our common stock are issued and outstanding as of the record date. Assuming exercise in compliance with the guaranteed delivery procedures
described above.
SHARES OF COMMON STOCK OUTSTANDING AFTER THE RIGHTS OFFERING
Approximately 36 millionfull of all subscription rights, we estimate that approximately 12,195,446 shares of our common stock will be issued in the rights offering, resulting in a total of [●] shares issued and outstanding after the rights offering, assuming exercise in fulloffering.
Effects of all rights.
Approximately 12 million shares are issuedRights Offering on Our Stock Option Plans and outstanding as of the date
hereof.
EFFECTS OF RIGHTS OFFERING ON OUR STOCK OPTION PLANS AND OTHER PLANS
Other Plans
As of June 30, 2003,October 14, 2016, there were outstanding options to purchase approximately 717,00037,500 shares of our common stock issued or committed to be issued pursuant to stock options granted by the Company and its predecessors.Company. None of the outstanding options have antidilution or other provisions for adjustment to the exercise price or number of shares which willwould be automatically triggered by the rights offering. Each outstanding and unexercised option will remain unchanged and will be exercisable for the same number of shares of common stock and at the same exercise price as before the rights offering.
EFFECTS OF RIGHTS OFFERING ON OUR PREFERRED STOCK
As of October 13, 2003, there were issued and outstanding an aggregate of
70,720 shares of our preferred stock as follows:
o 28,679 shares of our Series A Cumulative Convertible Preferred Stock,
with each share having a liquidation preference of $100 and
convertible into shares of our common stock at an initial conversion
rate of $7.00 of liquidation preference per one share of common stock.
As a result of adjustments made to date pursuant to the anti-dilution
provisions of such preferred stock, the current conversion rate is
$5.13 of liquidation preference per one share of common stock.
Assuming that the rights offering is exercised in full, as a result of
such anti-dilution provisions the conversion rate will be further
reduced to $__ of liquidation preference per one share of common
stock.
o 27,550 shares of our Series B Cumulative Convertible Preferred Stock,
with each share having a liquidation preference of $100 and
convertible into shares of our common stock at an
63
initial conversion rate of $9.00 of liquidation preference per one
share of common stock. As a result of adjustments made to date
pursuant to the anti-dilution provisions of such preferred stock, the
current conversion rate is $7.68 or $11.04 of liquidation preference
per one share of common stock, depending upon when such preferred
stock was issued. Assuming that the rights offering is exercised in
full, as a result of such anti-dilution provisions the conversion rate
will be further reduced to $__ or $__of liquidation preference per one
share of common stock, depending on when such preferred stock was
issued.
o 14,491 shares of our Series C Cumulative Convertible Preferred Stock,
with each share having a liquidation preference of $100 and
convertible into shares of our common stock at an initial conversion
rate of $5.00 of liquidation preference per one share of common stock.
As a result of adjustments made to date pursuant to the anti-dilution
provisions of such preferred stock, the current conversion rate is
$4.69 of liquidation preference per one share of common stock.
Assuming that the rights offering is exercised in full, as a result of
such anti-dilution provisions the conversion rate will be further
reduced to $__ of liquidation preference per one share of common
stock.
See "Description of Capital Stock."
EFFECTS OF RIGHTS OFFERING ON DOLPHIN'S SECURITIES AND OWNERSHIP
Dolphin, subject to the pricing of the rights offering, may agree to
exercise all of its rights. Set forth below, for illustrative purposes only,
scenarios which indicate the effect the rights offering and related share
issuance could have on Dolphin's relative voting and economic interest. As of
the date of this prospectus, by virtue of his position with Dolphin, Mr. Salas,
controls approximately 14.6% of the voting power of our outstanding common stock
and is deemed to beneficially own approximately 20.2% of our outstanding common
stock.
SCENARIO A -- All shares of common stock offered in the rights offering are
fully subscribed.
SCENARIO B -Dolphin is the only rights holder to acquire shares of common
stock pursuant to the rights offering.
OTHER MATTERS
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 one of those states or jurisdictions, you will not be eligible to participate in the rights offering.
PROPOSED COMMITMENT AGREEMENT
On or about [●], 2016, the Company will distribute at no cost the subscription rights to our holders of the Company’s common stock of record as of 5:00 p.m., Eastern Time, on [●], 2016. If you wish to exercise your subscription rights, you must timely comply with the exercise procedures described in “The Rights Offering—Exercise of the Subscription Rights.”
We have agreed to pay the subscription agent customary fees plus certain expenses in connection with this rights offering. We have not yet entered intoemployed any agreementbrokers, dealers or underwriters in connection with Dolphin,the solicitation of exercise of subscription rights. We are not paying any other fees, commissions, underwriting fees or discounts in connection with this rights offering.
Some of our officers and directors may solicit responses from you as a holder of rights, but we may do so
prior towill not pay our officers and directors any commissions or compensation for such services, other than their normal employment or director compensation. We estimate that the date of this prospectus, subject to the pricing of the rights
offering. Under the proposed commitment agreement, Dolphin would agree to
exercise all of its rights in the initial subscription and in the
over-subscription. Under the proposed commitment
64
agreement, the subscription price would be equal to the subscription price
applicable to all shareholders under the rights offering.
Dolphin, which is deemed to beneficially own 2,441,019 shares, or
approximately 20.1%, of our outstanding common stock, including 2,139,720
directly-owned shares, representing approximately 14.6% of our outstanding
voting stock, would agree with us to exercise all of its rights, including
over-subscription rights. Mr. Salas, a director, is also the general partner and
controlling person of Dolphin. By virtue of his position at Dolphin, Mr. Salas
has the power to vote and dispose of all of Dolphin's shares of our stock.
REPRESENTATIONS AND WARRANTIES
Under the proposed commitment agreement, we would be
expected to make representations and warranties relating to:
o our organization, good standing, qualification and other corporate
matters;
o our power and authority to execute, deliver and perform our
obligationsCompany’s total expenses in connection with the rights offering;
o required consents and approvals, and absence of violations of laws;
o the due authorization of the issuance of the rights and the common
stock;
o that we are not an "investment company" or a "public utility holding
company;" and
o brokers.
Dolphin wouldoffering will be expected to make representations and
warranties relating to:
o its organization, good standing, qualification and other corporate
matters;
o its authority to execute, deliver and perform its obligations in
connection with the rights offering;
o required consents and approvals, and absence of violations of laws;
o brokers; and
o its understanding of the investment risks associated with the rights
and the common stock it would be purchasing pursuant to the proposed
commitment agreement.
CONDITIONS TO CLOSING.
Execution of the proposed commitment agreement would not, by itself,
obligate the parties to consummate the rights offering. Each party's obligation
to consummate the rights offering would be conditioned upon the following
closing conditions:
o no legal or judicial barriers to the rights offering;
o effectiveness of the registration statement, with no stop order issued
or threatened by the SEC;
o the accuracy of the representations and warranties of the other
parties; and
o receipt of required consents, approvals, authorizations, waivers and
amendments.
65
Dolphin's obligations to consummate the purchase of securities provided for
in the proposed commitment agreement would also be conditioned upon the
following closing conditions:
o completionapproximately $150,933.
The net proceeds of the rights offering will be used initially to pay bank indebtedness in conformitythe aggregate amount of approximately $2.4 million, with the requirements
provided in the registration statement;
o approvalbalance of the net proceeds to be used for working capital and general corporate purposes. The rights offering gives you the opportunity to participate in this capital raising effort and to purchase additional shares of our common stock issuable upon exercise ofstock.
The Company has evaluated several projects that it wishes to pursue using the rights for
listing on the American Stock Exchange;
TERMINATION OF THE PROPOSED COMMITMENT AGREEMENT
The proposed commitment agreement would be terminable at any time following
its execution but prior to the closingproceeds of the rights offering by:
oafter paying down the mutual consentbank indebtedness and other general corporate expenditures. These projects include those currently identified by the Company for acquisition, and joint exploration of usoil and Dolphin;
o either usgas in Kansas and in Texas. The Company has had several rounds of negotiations with the other parties that are presenting these projects. However, no final agreements to pursue any of these projects have been signed by the Company primarily because the Company does not have the funds required to make the necessary capital investments in order to acquire an interest in or Dolphin if any governmental entity has issuedotherwise pursue such projects. The Company is unable to specifically identify the other parties to these discussions or to provide details of the discussions, as doing so may jeopardize the ongoing negotiations. Nor can the Company assure that these potential projects will be still available to the Company when the rights offering is completed. However, the following is a final and
nonappealable order enjoining the issuancegeneral description of each currently intended use of proceeds of the rights and shares of
common stock or the consummationoffering. The number of the transaction;
oprojects that may be undertaken is subject to the amount of proceeds raised in the rights offering. The initial use of proceeds is as follows:
| 1. | To repay the currently outstanding borrowings by the Company from its revolving credit facility with Prosperity Bank of Tulsa, Oklahoma in approximate amount of $2.4 million. This credit facility has a maturity date of January 20, 2018 and an interest rate of prime plus 0.50% per annum. Because the Company’s ability to borrow under this facility is limited as the long period of low crude oil prices continues, the Company has determined to pay down the loan, and raise funds through the rights offering to grow the Company as set out below, while preserving the current banking relationship to provide the opportunity for borrowings to occur in the future if higher oil prices return. |
Potential other uses of proceeds are as follows:
| 2. | To participate in a project on a non-operated basis by drilling a series of exploratory wells in Kansas. If these wells are successful, additional funds would be required to further develop these opportunities. |
| 3. | To participate in a project to acquire existing production as well as unevaluated acreage and seismic in Kansas. The Company would operate these properties, but would also bring in a partner familiar with this area to assist in evaluating and developing this opportunity. Should this prove to be economically attractive, the Company believes that would lead to additional drilling opportunities in this area. |
| 4. | To participate on a non-operated basis in a higher risk exploration play in Texas by drilling a series of wells, to test what the Company believes to be an under-explored area. Should these wells prove to be economic, this play would provide the Company similar opportunities in a large geographical area, and would present a significant upside potential for growth of the Company. |
| 5. | To further explore the Company’s lease position in Saline County, Kansas by drilling an additional exploratory well. |
The Company is continuously evaluating other similar opportunities and acquisitions. If the exploration and development or other activities undertaken by Dolphin if:
- any of our representations and warranties failthe Company prove successful, additional capital investment will be required by the Company to build upon those successful results. In such event, the Company may raise additional equity capital by means other than this rights offering as well as additional borrowings as may become available to the Company in the event commodity pricing improves. If the rights offering is not fully subscribed, the Company would be true and
correct and such failure causes a material adverse effect;limited in pursuing some or - we breach or fail to comply in any material respect with our
obligations under the agreement and do not cure such breach or
failure within 15 days after notice by Dolphin ; and
o by us if:
- anyall of the representationsabove opportunities.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2016 on an:
| · | actual basis; and |
| · | as adjusted basis giving effect to the sale of 12,195,446 shares of our common stock, assuming this rights offering is fully subscribed by subscribers, we do not limit the number of shares that may be purchased by any subscriber, and the receipt of the net proceeds from the rights offering after deducting estimated offering expenses in the amount of $150,933. |
The information presented in the table below should be read in conjunction with the consolidated financial statements and warranties of Dolphin fail to be
true and correct and such failure causes a material adverse
effect; or
- Dolphin breaches or fails to complynotes thereto included in any material respect with
its obligations under the agreement andthis prospectus. This table does not cure such breach
or failure within 15 days after notice by us.
The foregoing brief descriptionincorporate any uses of proceeds from the proposed commitment agreement is
qualified in its entirety by the textrights offering.
| (in thousands, except per share data) | Actual Basis (unaudited) | As Adjusted for Completion of the Rights Offering (unaudited) | ||||||
| Total debt: | ||||||||
| Long term debt, less current maturities | $ | 2,376 | $ | 2,376 | ||||
| Stockholders’ equity: | ||||||||
| Common stock, $0.001 par value; authorized 100,000,000 shares; 6,088,594 actual shares issued and outstanding at June 30, 2016; 18,284,040 shares issued and outstanding as adjusted | 6 | 18 | ||||||
| Additional paid–in capital | 55,778 | 63,664 | ||||||
| Accumulated deficit | (51,347 | ) | (51,347 | ) | ||||
| Total stockholders’ equity | $ | 4,437 | $ | 12,335 | ||||
| Total capitalization | $ | 6,813 | $ | 14,711 | ||||
DESCRIPTION OF CAPITALOUR COMMON STOCK
As of October 13, 2003, our authorized capital stock consisted of
50,000,000 shares of common stock, par value $0.001 per share, and 25,000,000
shares of preferred stock, par value $0.001 per share. As of that date, we had
12,049,977 shares of common stock outstanding and an aggregate of 70,720 shares
of preferred stock outstanding.
The following is a summary description of our common stock and is not intended to be complete. The Company is a Delaware corporation, and our common stock is subject to the provisions of the material termsCompany’s certificate 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 determinedamended from time to time by our Boardunder applicable Delaware law.
Our stockholders’ interests consist solely of Directors. Accordingly, subject to applicable stock
exchange rules and the termsownership 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
holdersa single unnamed series 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 electionAs 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 torecord date, to the initial
conversion rate, the current conversion rate is $5.13 of liquidation preference
of the Series A Preferred Stock per one share of our common stock. Assuming that
the rights offering is exercised in full, as a result thereof the conversion
rate of the Series A Preferred Stock will be further reduced to $___ of
liquidation preference per one share of our common stock.
The holders of the Series A Preferred Stock are entitled to a cumulative
dividend at a rate of 8% of the liquidation preference per share per annum,
payable quarterly on each March 31, June 30, September 30 and December 31, but
only when, as and if declared by the Board of Directors out of funds legally
available therefor. All accrued but unpaid dividends accrue interest after the
respective payment date at a rate of 8% per annum. In the event that we fail to
make any two of six consecutive quarterly dividend payments on the Series A
Preferred Stock, the holders of the Series A Preferred Stock have the right to
appoint directors that will constitute a majority of our board of directors.
That appointed majority of our board of directors would remain until all accrued
and unpaid dividends on the Series A Preferred Stock have been paid. During
2002, we failed to pay the third and fourth quarterly dividend payments on the
Series A Preferred Stock. In February 2003, the holders of the Series A
Preferred Stock designated four members of the board of directors, who were
elected to vacancies on the board and who currently serve.
We may redeem all, but not less than all, of the outstanding shares of
Series A Preferred Stock upon the payment of the per share liquidation
preference, plus accrued and unpaid dividends, subject to certain circumstances,
including that our common stock has a closing sale price greater than 150% of
the then conversion rate for the Series A Preferred Stock for sixty consecutive
trading days prior to the date of redemption. In addition, we are required to
redeem one-twentieth of the maximum number of shares of Series A Preferred Stock
outstanding commencing on October 1, 2003 and each quarterly date thereafter
that such shares are outstanding.
67
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[●], 2016, [●] shares of common stock or
options or securities exercisable, convertible or exchangeable into new shares
of our common stock, at a price per sharewere outstanding. Other than the single series of common stock, less than $9.00,
subject to further adjustment. As a resultthe Company currently has no other forms of adjustments already made to date
toequity ownership in the initial conversion price,Company, including preferred stock, convertible notes, or warrants, that are outstanding.
The Company files periodic reports containing financial and other information with the current conversion rate is either $7.68 or
$11.04 per one shareSEC (see “Incorporation by Reference” and “Where You Can Find More Information”). The shares of ourthe Company’s common stock depending upon whencurrently outstanding are traded on the Series B
Preferred Stock was issued. Assuming thatNYSE MKT exchange under the rights offering is exercised in
full, as a result thereof the conversion ratesymbol “TGC.”
Holders of shares of the Series B Preferred Stock
will be further reduced to either $___ or $___ of liquidation preference per one
share of ourCompany’s common stock depending on whendo not have preemptive rights to purchase additional common stock in the Series B Preferred Stock was
issued.
The holdersevent the Company issues additional common stock. Holders of the Series B Preferred StockCompany’s common stock are entitled to a cumulative
dividend at a rate of 8% of the liquidation preferenceone vote per share per annum,
payable quarterly on each March 31, June 30, September 30matters submitted to them for a vote.
The transfer agent 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 rateregistrar for the Series B Preferred Stock for sixty consecutive
trading days prior to the date of redemption. In addition, we are required to
redeem all of the outstanding Series B Preferred Stock at a price per share
equal to the liquidation preference, plus any and all accrued and unpaid
dividends, on the fifth anniversary of the first issuance of the Series B
Preferred Stock, which anniversary will be in March 2005.
If we adopt a plan of liquidation or of dissolution, or commence a
voluntary case under the federal bankruptcy laws or similar laws or upon the
occurrence of specified similar events, then the holders of Series B Preferred
Stock shall have a liquidation preference equal to the liquidation preference of
all other outstanding shares of our preferred stock, other than the Series A
Preferred Stock, which is senior to the Series B Preferred Stock in this
respect.
Series C 6% Cumulative Convertible Preferred Stock. We have outstanding
14,491 shares of our Series C Preferred Stock, with each share having a
liquidation preference of $100. The Series C Preferred Stock has no voting
rights prior to the conversion of such shares into shares of our common stock.
Each $100 liquidation preference of Series C Preferred Stock is convertible at
the election of the holder into shares of our common stock at an initial rate of
$5.00 of liquidation preference of the Series C Preferred Stock per one share of
our common stock. In addition, such conversion may be required by us as to all,
but not less than all, of the outstanding Series C Preferred Stock in the event
that our common stock has a closing sale price greater than 150% of the then
conversion rate for the Series C Preferred Stock for twenty consecutive trading
days prior to such forced conversion. The conversion price will be adjusted
downwards in the event of the issuance of any new shares of common stock, or
options or securities exercisable, convertible or exchangeable into new shares
of our common stock, at a price per share of common stock less than $5.00,
subject to further adjustment. As a result of adjustments already made to date
to the initial conversion price, the current conversion rate is $4.69 per one
share of our common stock. Assuming that the rights offering is exercised in
full, as a result thereof the conversion rate of the Series C Preferred Stock
will be further reduced to $___ of liquidation preference per one share of our
common stock.
The holders of the Series C Preferred Stock are entitled to a cumulative
dividend at a rate of 6% of the liquidation preference per share per annum,
payable quarterly on each March 31, June 30, September 30 and
68
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.
69
UNITED STATESContinental Stock Transfer & Trust Company, 17 Battery Place, 8th Floor, New York, NY 10004.
The following discussion is a summary of the material U.S. federal income tax consequences relating to the receipt and exercise (or expiration) of the subscription rights acquired through the rights offering and the ownership and disposition of shares of our common stock received upon exercise of the subscription rights.
This summary deals only with subscription rights acquired through the rights offering, and shares of our common stock acquired upon exercise of subscription rights that are held as capital assets by a beneficial owner. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to such beneficial owners in light of their personal circumstances. This discussion also does not address tax consequences to holders that may be subject to special tax rules, including, without limitation, insurance companies, real estate investment trusts, regulated investment companies, grantor trusts, tax-exempt organizations, employee stock purchase plans, partnerships and other pass-through entities or persons holding subscription rights or shares of our common stock as part of a hedging, integrated, conversion or constructive sale transaction or a straddle, financial institutions, brokers, dealers in securities or currencies, traders that elect to mark-to-market their securities, persons that acquired subscription rights or shares of our common stock in connection with employment or other performance of services, U.S. Holders (as defined below) that have a functional currency other than the U.S. dollar, U.S. expatriates, and certain former citizens or residents of the United States. In addition, the discussion does not describe any tax consequences arising out of the tax laws of any state, local or foreign jurisdiction, or any U.S. federal tax considerations other than income taxation (such as Medicare contribution taxation or estate, generation skipping or gift taxation).
The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, and regulations, rulings and judicial decisions thereunder, as of the date hereof, and such authorities may be repealed, revoked or modified, perhaps retroactively. We have not sought, and will not seek, any rulings from the Internal Revenue Service, or the IRS, regarding the matters discussed below. There can be no assurance that the IRS or a court will not take positions concerning the tax consequences of the receipt of subscription rights acquired through the rights offering by persons holding shares of our common stock, the exercise (or expiration) of the subscription rights, or the acquisition, ownership or disposition of shares of our common stock that hold suchare different from those discussed below.
As used herein, a “U.S. Holder” means a beneficial owner of shares of our common stock as a capital asset for federal income tax purposes. This discussionor subscription rights and (1) an individual who 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; (2) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States a
domestic partnership, a domestic corporation,or any state thereof or the District of Columbia; (3) an estate, the income of which is subject to U.S. federal income taxation regardless of its source, and anysource; or (4) a trust so long as(a) the administration of which is subject to the primary supervision of a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more U.S.United States persons as described in Section 7701(a)(30) of the Code have the authority to control all substantial decisions of the trust.
This discussion does not address all aspects of federal income taxationtrust, or (b) that mayhas a valid election in effect to be relevant to holders in light of their particular circumstancestreated as a United States person. A “Non-U.S. Holder” is such a beneficial owner (other than an entity or to
holders who may be subject to special tax treatment under the Internal Revenue
Code of 1986,arrangement that is treated as amended, including holders who are dealers in securities or
foreign currency, foreign persons (defined as all persons other thana partnership for 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 consequencespurposes) that is not a U.S. Holder.
If any entity or arrangement that is treated as a partnership for U.S. federal income tax purposes is such a beneficial owner, the U.S. federal income tax treatment of a partner will generally depend upon the status of the rights offering orpartner and the related share issuance. The following summary does
not address the tax consequencesactivities of the rights offering or the related share
issuance under foreign, state, or localpartnership. Holders that are partnerships (and partners in such partnerships) are urged to consult their own tax laws. ACCORDINGLY, EACH HOLDERadvisors.
HOLDERS OF SHARES OF OUR COMMON STOCK SHOULD CONSULT ITSTHEIR OWN TAX ADVISOR WITH RESPECT TOADVISORS REGARDING THE PARTICULAR TAX
CONSEQUENCESAPPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AND THE CONSEQUENCES UNDER FEDERAL ESTATE AND GIFT TAX LAWS, FOREIGN, STATE, AND LOCAL LAWS AND TAX TREATIES OF THE RECEIPT, OWNERSHIP AND EXERCISE OF SUBSCRIPTION RIGHTS OFFERING ORAND THE RELATED SHARE ISSUANCE TO SUCH
HOLDER.
The federal income tax consequences for a holderACQUISITION, OWNERSHIP, AND DISPOSITION OF SHARES OF OUR COMMON STOCK ACQUIRED UPON EXERCISE OF SUBSCRIPTION RIGHTS.
Tax Consequences to U.S. Holders
Taxation of Subscription Rights
Receipt of Subscription Rights
Your receipt of subscription rights underpursuant to the rights offering areshould be treated as follows:
A holder will not recognize taxable incomea non-taxable distribution for U.S. federal income tax purposespurposes. Under Section 305 of the Code, a stockholder who receives a right to acquire common stock will, in connection withcertain circumstances, be treated as having received a taxable dividend in an amount equal to the value of such right. A U.S. holder of the Company’s common stock or warrants who receives a right to acquire common stock generally will be treated as having received a taxable dividend if such holder’s proportionate interest in the earnings and profits or assets of the corporation is increased, and any other holder receives a distribution of cash or other property. The application of this rule is very complex and subject to uncertainty. We believe, however, that pursuant to Section 305 of the Code and the Treasury Regulations issued thereunder, the receipt of subscription rights inshould generally not be taxable to a U.S. holder for U.S. federal income tax purposes.
This position, however, is not binding on the rights offering.
Except as provided inIRS or the following sentence,courts. If this position is finally determined by the tax basisIRS or a court to be incorrect, the fair market value of the subscription rights received bywould be taxable to U.S. holders of the Company’s common stock as a holderdividend to the extent of the holder’s pro rata share of our current and accumulated earnings and profits, if any, with any excess being treated as a return of capital to the extent thereof and then as capital gain. The remaining discussion assumes that the subscription right issuance will be treated as a non-taxable distribution for U.S. federal income tax purposes under Section 305 of the Code.
Tax Basis and Holding Period in the Subscription Rights
If the fair market value of the subscription rights offeringyou receive is less than 15% of the fair market value of your existing shares of common stock on the date you receive the subscription rights, the subscription rights will be zero.allocated a zero basis for U.S. federal income tax purposes, unless you elect to allocate your basis in your existing shares of common stock between your existing shares of common stock and the subscription rights in proportion to the respective fair market values of the existing shares of common stock and the subscription rights determined on the date you receive the subscription rights. If either (i)you choose to allocate basis between your existing shares of common stock and the subscription rights, you must make this election on a statement included with your tax return for the taxable year in which you receive the subscription rights. Such an election is irrevocable.
However, if the fair market value of the subscription rights you receive is 15% or more of the fair market value of your existing shares of common stock on the date you receive the subscription rights, then you must allocate your basis in your existing shares of common stock between your existing shares of common stock and the subscription rights you receive in proportion to their respective fair market values determined on the date you receive the subscription rights.
The fair market value of the subscription rights on the date suchthe subscription rights arewill be distributed is equaluncertain, and we have not obtained, and do not intend to at least 15%obtain, an appraisal 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 on that date. In determining the holder's tax basis in the common stock will be allocated between the common
stock andfair market value of the subscription rights, in proportion to their respective fair market
values on the dateyou should consider all relevant facts and circumstances.
Your holding period of the subscription rights are distributed. A holder'swill include your holding period forof the subscription rights received in the rights offering will include
the holder's holding period for theshares of common stock with respect to which the subscription rights were received. We dodistributed.
Exercise of Subscription Rights
Generally, you will not expectrecognize gain or loss on the exercise of subscription rights and the related receipt of a share of common stock. Your tax basis in a new share of common stock acquired when you exercise subscription rights will be equal to the sum of (a) your adjusted tax basis in the subscription rights, if any, plus (b) the subscription price paid for such share. The holding period of a share of common stock acquired when you exercise your subscription rights will begin on the date of exercise.
Expiration of Subscription Rights
If you allow subscription rights received in the rights offering to expire, you will not recognize any gain or loss for U.S. federal income tax purposes, and you should reallocate any portion of the tax basis in your existing shares of common stock previously allocated to the subscription rights that have expired to your existing shares of common stock.
Taxation of the Common Stock
Distributions
Certain distributions with respect to shares of our common stock acquired upon exercise of subscription rights may be taxable as dividend income when actually or constructively received to the extent of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes.
Dividend income received by certain non-corporate U.S. Holders with respect to shares of our common stock generally will be “qualified dividends” subject to preferential rates of U.S. federal income tax, provided that the U.S. Holder meets applicable holding period and other requirements. Subject to similar exceptions for short-term and hedged positions, dividend income on our shares of common stock paid to U.S. Holders that are domestic corporations generally will qualify for the dividends received deduction. To the extent that the amount of a distribution exceeds our current and accumulated earnings and profits, such distribution will be treated first as a tax-free return of capital to the extent of your adjusted tax basis in such shares of our common stock and thereafter as capital gain.
Dispositions
If you sell or otherwise dispose of shares of common stock acquired upon exercise of subscription rights in a taxable transaction, you will generally recognize capital gain or loss equal to the difference between the amount realized and your adjusted tax basis in the shares. Such capital gain or loss will be long-term capital gain or loss if your holding period for such shares is more than one year at the time of disposition. Long-term capital gain of a non-corporate U.S. Holder is generally taxed at preferential rates of U.S. federal income tax. The deductibility of capital losses is subject to limitations.
Information Reporting and Backup Withholding
You may be subject to information reporting and/or backup withholding with respect to the gross proceeds from the disposition of shares of our common stock acquired through the exercise of subscription rights or dividend payments. Backup withholding (currently at the rate of 28%) may apply under certain circumstances if you (1) fail to furnish your social security or other taxpayer identification number, or TIN, (2) furnish an incorrect TIN, (3) fail to report interest or dividends properly, or (4) fail to provide a certified statement, signed under penalty of perjury, that the TIN provided is correct, that you are not subject to backup withholding and that you are a U.S. person on IRS Form W-9 or Substitute Form W-9. Any amount withheld from a payment under the backup withholding rules is allowable as a credit against (and may entitle you to a refund with respect to) your U.S. federal income tax liability, provided that the required information is timely furnished to the IRS. Certain persons are exempt from information reporting and backup withholding, including corporations and financial institutions, provided that they demonstrate this fact, if requested. You are urged to consult your own tax advisor as to your qualification for exemption from backup withholding and the procedure for obtaining such exemption.
Tax Consequences to Non-U.S. Holders
Taxation of the Subscription Rights
Receipt of the Subscription Rights
The discussion assumes that the receipt of subscription rights will be treated as a nontaxable distribution. See “Tax Consequences to U.S. Holders—Taxation of Subscription Rights—Receipt of Subscription Rights” above. You will not be subject to U.S. federal income tax (or any withholding thereof) on the receipt, exercise or expiration of the subscription rights.
Tax Basis and Holding Period in the Subscription Rights
If the fair market value of the subscription rights will exceedyou receive is less than 15% of the fair market value of your existing shares of common stock on the date you receive the subscription rights, the subscription rights will be allocated a zero basis for U.S. federal income tax purposes, unless you elect to allocate your basis in your existing shares of common stock between your existing shares of common stock and the subscription rights in proportion to the respective fair market values of the existing shares of common stock and the subscription rights determined on the date you receive the subscription rights. If you choose to allocate basis between your existing shares of common stock and the subscription rights, you must make this election on a statement included with your tax return for the taxable year in which you receive the subscription rights. Such an election is irrevocable.
However, if the fair market value of the subscription rights you receive is 15% or more of the fair market value of your existing shares of common stock on the date you receive the subscription rights, then you must allocate your basis in your existing shares of common stock between your existing shares of common stock and the subscription rights you receive in proportion to their respective fair market values determined on the date you receive the subscription rights.
The fair market value of the subscription rights on the date the subscription rights will be distributed is uncertain, and we have not obtained, and do not intend to obtain, an appraisal of the fair market value of the subscription rights on that date. In determining the fair market value of the subscription rights, you should consider all relevant facts and circumstances.
Your holding period of the subscription rights will include your holding period of the shares of common stock with respect to which the subscription rights are received.
A holder that allowswere distributed.
Exercise of Subscription Rights
Generally, you will not recognize gain or loss on the exercise of subscription rights and the related receipt of a share of common stock. Your tax basis in a new share of common stock acquired when you exercise subscription rights will be equal to the sum of (a) your adjusted tax basis in the subscription rights, if any, plus (b) the subscription price paid for such share. The holding period of a share of common stock acquired when you exercise your subscription rights will begin on the date of exercise.
Expiration of Subscription Rights
If you allow subscription rights received in the rights offering to expire, you will not recognize any gain or loss for U.S. federal income tax purposes, and you should reallocate any portion of the tax basis in your existing shares of the common stock owned by such holderpreviously allocated to the subscription rights that have expired to your existing shares of common stock.
Taxation of Distributions on Common Stock
Any distributions of cash or property made with respect to which such subscription rights
were distributedour common stock generally will be equalsubject to withholding tax to the extent paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes, if any, at a rate of 30% (or a lower rate prescribed in an applicable income tax treaty). In order to obtain a reduced withholding tax rate, if applicable, you will be required to provide an IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable, certifying your entitlement to benefits under a treaty. In addition, you will not be subject to withholding tax if you provide an IRS Form W-8ECI certifying that the distributions are effectively connected with your conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment within the United States); instead, you generally will be subject to U.S. federal income tax, net of certain deductions, with respect to such income at the same rates applicable to U.S. persons, and if you are a corporation, a “branch profits tax” of 30% (or a lower rate prescribed in an applicable income tax treaty) also may apply to such effectively connected income.
Non-U.S. Holders may be required to periodically update their IRS Forms W-8. Any distributions with respect to the shares of our common stock, to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles), will constitute dividends for U.S. federal income tax purposes and will be subject to U.S. federal withholding tax at a 30% rate or such lower rate as specified by an applicable income tax treaty, provided that such dividends are not effectively connected with the Non-U.S. Holder’s conduct of U.S. trade or business. Distributions in excess of our current and accumulated earnings and profits (as determined under U.S. federal income tax principles) will first constitute a return of capital that is applied against and reduces the Non-U.S. Holder’s adjusted tax basis in our common stock (determined on a share by share basis), and, to the extent such distribution exceeds the Non-U.S. Holder’s adjusted tax basis, the excess will be treated as gain realized on the sale or other disposition of our common stock as described below under “Sale or Other Disposition of Our Common Stock.”
Under the terms of an applicable U.S. income tax treaty (if any), the withholding tax might not apply, or might apply at a reduced rate. A Non-U.S. Holder who wishes to claim the benefit of an applicable income tax treaty is required to satisfy applicable certification and disclosure requirements (generally by providing our paying agent or a relevant withholding agent with an IRS Form W-8BEN or IRS Form W-8BEN-E). If a Non-U.S. Holder is eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty, such Non-U.S. Holder may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.
Dividends that are effectively connected with the conduct of a Non-U.S. Holder’s trade or business within the United States are not subject to U.S. federal withholding tax if such Non-U.S. Holder provides our paying agent or a relevant withholding agent with an IRS Form W-8ECI, but generally will be subject to U.S. federal income tax on a net income basis at applicable graduated individual or corporate rates, unless an applicable income tax treaty provides otherwise. A foreign corporation may be subject to an additional branch profits tax (at a 30% rate or such lower rate as specified by an applicable income tax treaty) on its effectively connected earnings and profits attributable to such income.
Sale or Other Disposition of Our Common Stock
Subject to the discussions below under “Information Reporting and Backup Withholding” and “Foreign Account Tax Compliance Act,” any gain realized by a Non-U.S. Holder upon the sale or other disposition of shares of our common stock generally will not be subject to U.S. federal income tax unless:
| · | that gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the U.S. (and, if required by an applicable income tax treaty, is attributable to a U.S. “permanent establishment” maintained by the Non-U.S. Holder); |
| · | the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or |
| · | we are or have been a United States real property holding corporation (a “USRPHC”) for U.S. federal income tax purposes at any time during the shorter of (i) the five-year period ending on the date of disposition, and (ii) the Non-U.S. Holder’s holding period for its shares of our common stock and, if shares of our common stock are “regularly traded on an established securities market,” the Non-U.S. Holder held, directly or indirectly, at any time during such period, more than 5% of our issued and outstanding common stock. |
Gain described in the first bullet point above will be subject to U.S. federal income tax in the same manner as that of a U.S. person, unless an applicable income tax treaty provides otherwise. If such Non-U.S. Holder is a foreign corporation, such gain may also be subject to a branch profits tax (at a 30% rate or such lower rate as specified by an applicable income tax treaty) on its effectively connected earnings and profits attributable to such income. A Non-U.S. Holder described in the second bullet point above will be subject to a 30% U.S. federal income tax on the gain derived from the sale, which may be offset by certain U.S.-source capital losses.
It is likely that we are currently a USRPHC for U.S. federal income tax purposes, and it is likely that we will remain one in the future. However, so long as our common stock continues to be regularly traded on an established securities market within the meaning of the applicable Treasury regulations, only a Non-U.S. Holder who holds or held more than 5% of our common stock at any time during the shorter of (i) the five-year period preceding the date of disposition and (ii) the holder’s holding period (a “greater-than-five percent shareholder”) will be subject to U.S. federal income tax on the disposition of our common stock. A greater-than-five percent shareholder generally will be subject to U.S. federal income tax on the net gain derived from the sale in the same manner as a U.S. person, unless an applicable income tax treaty provides otherwise. Such a Non-U.S. Holder generally will be required to file a U.S. federal income tax return in respect of such gain. No withholding is required upon any sale or other taxable disposition of our common stock immediately
before the receipt of the subscription rights in the rights offering.
A holderif it is regularly traded on an established securities market. If our common stock ceases to be regularly traded on an established securities market, a Non-U.S. Holder will not recognizebe subject to tax on any gain recognized on the sale or loss upon the exerciseother taxable disposition of the
subscription rights received in the rights offering.
The tax basis of theour common stock, acquired through exerciseand withholding, generally at a rate of 15%, on the subscription rights will equalgross proceeds thereof, regardless of such Non-U.S. Holder’s percentage ownership of our common stock.
Information Reporting and Backup Withholding
We and other withholding agents must report annually to the sumIRS the amount of the subscription price for thedividends or other distributions paid to Non-U.S. Holders on shares of our common stock and the holder'samount of tax basis, ifwe and other withholding agents withhold on these distributions. Copies of the information returns reporting such distributions and any withholding may also be made available to the tax authorities in the rights as described above.
70
The holding period forcountry in which the Non-U.S. Holder resides, under the provisions of an applicable income tax treaty.
A Non-U.S. Holder will not be subject to backup withholding (the current rate of which is 28%) on reportable payments the Non-U.S. Holder receives on shares of our common stock acquired through exercise of the
subscription rights will begin on the date the subscription rights are
exercised.
PLAN OF DISTRIBUTION
On or about _________, 2003, we will distribute the subscription rights,
subscription certificates, and copies of this prospectus to persons that owned
shares of common stock on _______, 2003. If you wish to exercise your
subscription rights and purchase shares of common stock, you should complete the
subscription certificate and return it with payment for the shares, to the
subscription agent, Mellon Investor Services LLC, at the address on page 55. If
you have any questions, you should contact _______________, [title], at the
telephone number and address on page 57.
We have agreed to pay the subscription agent a fee plus certain expenses,
which we estimate will total approximately $______. We estimate that our total
expenses in connection with the rights offering will be approximately $______.
TENNESSEE ANTI-TAKEOVER LAW
The Tennessee Control Share Acquisition Act which strips a purchaser's
shares of voting rights any time an acquisition of shares in a Tennessee
corporation brings the purchaser's voting power to one-fifth, one-third or a
majority of all voting power. The purchaser's voting rights can be reinstated
only after a majority vote of the other stockholders. The purchaser may demand a
special meeting of stockholders to conduct such a vote. A corporation may or may
not redeem the purchaser's shares if the purchaser's sharesNon-U.S. Holder provides proper certification (usually on an IRS Form W-8BEN or IRS Form W-8BEN-E) of its status as a non-U.S. person.
Information reporting and backup withholding generally are not granted
voting rights. The Tennessee Control Share Acquisition Act applies only to a
Tennessee corporation that has adopted a provision in its charter or bylaws
expressly declaring that the Tennessee Control Share Acquisition Act applies to
it. The Tennessee Control Share Acquisition Act currently does not apply to the
Company .
The Tennessee Greenmail Act applies to any corporation chartered under the
laws of Tennessee which has a class of voting stock registered or traded on a
national securities exchange or registered with the U.S. Securities Exchange
Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934. The
Tennessee Greenmail Act provides that it is unlawful for any corporation to
purchase, either directly or indirectly, any of its shares at a price above
their market value, from any person who holds more than three percent of the
class of the securities purchased if such person has held shares or less than
two years, unless either the purchase is first approved by the affirmative vote
of a majority of the outstanding shares of each class of voting stock issued by
the corporation or the corporation makes an offer of at least equal value per
share to all stockholders of the class.
The Tennessee Investor Protection Act applies to tender offers directed at
corporations that have substantial assets in Tennessee and that are either
incorporated in or have a principal office in Tennessee. The Act requires an
offeror making a tender offer for such a corporation to file a registration
statement with the Commissioner of Commerce and Insurance. If the offeror
intends to gain control of the corporation, the registration statement must
indicate any plans the offeror has for the corporation. The Commissioner may
require additional information material to the takeover offer and may call for
hearings. The Act does not apply to an offeror if the target corporation's board
of directors recommends the offer to its stockholders. The Tennessee Investor
Protection Act also requires the offeror and the corporation to deliver to the
Commissioner all solicitation materials used in connection with the tender
offer. This act also prohibits fraudulent, deceptive or manipulative acts or
practices by the offeror or the target corporation. The Tennessee Business
Combination Act requires a five-year moratorium on transactions between certain
Tennessee corporations and an "interested stockholder" (generally, a 10% or
greater stockholder) unless the transaction or the stockholder's becoming an
"interested stockholder" is approved by the directors before the stockholder
attains the status of "interested stockholder." A corporation that would
otherwise be covered by this Act may exempt itself from the Act by adopting a
charter provision specifically stating the corporation's option to be exempt.
71
LIMITATION OF LIABILITY OF DIRECTORS
All directors are indemnified by us, both by operation of Tennessee Code
Annotated Sections 48-18-501 through 509 and since 1995 by resolution of our
board of directors, against liability and expenses including attorney's fees
incurred by them as a result of serving on our board of directors. The statutory
provisions require a finding that the conduct of the director was in good faith
and in the best interest of the company and does not extend to cases where a
director is found to be liable to the company itself. Such a finding may be made
by uninvolved directors, a committee of the board or independent counsel.
Tennessee Code Annotated Section 48-15-503 provides for the indemnification
of directors and of corporate officers where the director or officer is
successful in defense of any proceeding he or she became involved in as a result
of being or having been in such position, unless the corporate charter forbids
such indemnification. Our corporate chart contains no such bar or prohibition of
indemnification of our directors or officers.
Tennessee statutes further provide that the rights to indemnification of a
director do not preclude other bases of indemnification, whether such rights
arise by charter, bylaws, shareholder resolution, agreement or board resolution,
provided there is no breach of duty of loyalty to the company, bad faith,
intentional misconduct or knowing violation of law. Accordingly, our board of
directors on August 17, 1995, unanimously resolved to indemnify directors and
executive officers on a mandatory basis to the fullest extent of the laws
referenced above for the entire period a party is subject to any possible legal
action or claim by reason of having so served.
Tennessee law permits, but does not require, insurance to be obtained to
fund indemnity obligations. We do not have any such insurance.
Holders of common stock have no preemptive, subscription, redemption, or
conversion rights.
The transfer agent and registrar for the common stock is Mellon Investor
Services LLC.
72
LEGAL MATTERS
Certain legal mattersrequired with respect to the amount of any proceeds from the sale or other disposition of shares of our common stock outside the United States through a foreign office of a foreign broker that does not have certain specified connections to the United States. However, information reporting will apply if a Non-U.S. Holder sells shares of our common stock outside the United States through a U.S. broker or a broker that is a controlled foreign corporation, a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, or a foreign partnership that, at any time during its tax year, either is engaged in the conduct of a trade or business in the United States or has as partners one or more U.S. persons that, in the aggregate, hold more than 50% of the income or capital interests in the partnership. If a sale or other disposition is made through a U.S. office of any broker, the broker will be required to report the amount of proceeds paid to the Non-U.S. Holder to the IRS and also to backup withhold on that amount unless the Non-U.S. Holder provides appropriate certification (usually on an IRS Form W-8BEN or IRS Form W-8BEN-E) to the broker certifying the Non-U.S. Holder’s status as a non-U.S. person or other exempt status.
Any amounts withheld under the backup withholding rules will generally be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is properly furnished to the IRS on a timely basis.
Foreign Account Tax Compliance Act
Sections 1471 through 1474 of the Code (commonly referred to as “FATCA”) generally impose a 30% withholding tax on “withholdable payments,” which include dividends on our common stock and gross proceeds from the disposition of our common stock paid to (i) a foreign financial institution (as defined in Section 1471 of the Code) unless it agrees to collect and disclose to the IRS information regarding direct and indirect U.S. account holders and (ii) a non-financial foreign entity unless it certifies certain information regarding substantial U.S. owners of the entity, which generally includes any U.S. person who directly or indirectly owns more than 10% of the entity. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules. Under U.S. Treasury regulations and IRS guidance, the withholding obligations described above apply to payments of dividends on our common stock, and will apply to payments of gross proceeds from a sale or other disposition of our common stock on or after January 1, 2019. Prospective Non-U.S. Holders should consult their own tax advisors with respect to the potential tax consequences of FATCA.
NONE OF THE PRECEDING DISCUSSION IN THIS SECTION ENTLTLED “MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES” IS TAX ADVICE. HOLDERS OF SHARES OF OUR COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AND THE CONSEQUENCES UNDER FEDERAL ESTATE AND GIFT TAX LAWS, FOREIGN, STATE, AND LOCAL LAWS AND TAX TREATIES OF THE RECEIPT, OWNERSHIP AND EXERCISE OF SUBSCRIPTION RIGHTS AND THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF SHARES OF OUR COMMON STOCK ACQUIRED UPON EXERCISE OF SUBSCRIPTION RIGHTS.
The validity of the issuance of the
shares of common stock offered by this Prospectusprospectus will be passed upon for us by Cary V. Sorensen, Esq.
the General Counsel of the Company.
Our consolidated financial statements as of December 31, 20022013, 2014 and 2001 and2015 incorporated in this prospectus by reference from the Tengasco, Inc. Annual Report on Form 10-K for each of the three years in the periodyear ended December 31, 2002 included in
this Prospectus and in the Registration Statement on Form S-12015 have been so included in reliance upon the reports of BDO SeidmanHein & Associates LLP, independent certifiedregistered public accountantsaccounting firm, to the extent and for the periods set forth in theirits 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 analysesanalysis and information as of December 31, 2002,2015, included in this Prospectusprospectus and the Registration Statement on Form S-1 that includes this prospectus have been so included in reliance on the reserve reportsreport dated February 10, 2003 and March 28, 2003,
respectively,January 25, 2016 prepared by Ryder Scott Company, L.P.LaRoche Petroleum Consultants, Ltd. of Houston,Dallas, Texas.
We are subject to the informational requirements of the Securities Exchange
Act of 1934. Accordingly, we file annual, quarterly and current 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 SECWe 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, withincluding exhibits, under the SECSecurities Act with respect to the securities covered by this rights offering.prospectus. This prospectus is a part of the registration statement, but does not contain all of the information included in the registration statement.statement or the exhibits. You may wish to inspectread and copy the registration statement and any other document that we file at the exhibit to that registration statementSEC’s public reference room at 100 F Street, N.E., Washington D.C. 20549. You can call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. You can also find our public filings with respectthe SEC on the internet at a website maintained by the SEC located at http://www.sec.gov. We also make available on our website our annual, quarterly and current reports and amendments as soon as reasonably practicable after such documents are electronically filed with, or furnished to, usthe SEC. Our website address is www.tengasco.com. The information on our website is not incorporated by reference into this prospectus and the securities offereddoes not constitute a part of this prospectus.
[●], 2016
TENGASCO, INC.
SUBSCRIPTION RIGHTS TO PURCHASE AN AGGREGTE OF UP TO 12,195,446 SHARES OF COMMON STOCK
UP TO 12,195,446 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE SUBSCRIPTION RIGHTS
PROSPECTUS
We have not authorized any dealer, salesperson or other person to give you written information other than this prospectus or to make representations as to matters not stated in this prospectus. CopiesYou must not rely on unauthorized information. This prospectus is not an offer to sell these securities or our solicitation of your offer to buy these securities in any jurisdiction where that would not be permitted or legal. Neither the registration
statement and the exhibit to such registration statement are on file at the
officesdelivery 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 concerningnor any sales made hereunder after the provisionsdate 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.
73
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report................................. F-2
Consolidated Financial Statements
Consolidated Balance Sheets.............................. F-3 and F-4
Consolidated Statements of Loss.......................... F-5
Consolidated Statements of Stockholders' Equity.......... F-6 and F-7
Consolidated Statements of Cash Flows.................... F-8 through F-10
Notes to Consolidated Financial Statements............... F-11 through F-33
F-1
Independent Auditors' Report
Board of Directors
Tengasco, Inc. and Subsidiaries
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheets of Tengasco, Inc.
and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of loss, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to expressthis prospectus shall create 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 assumingimplication that the Company will continue as a going concern. As discussed in Note 1 toinformation contained herein or the financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit of $27,776,726. Additionally, during 2002, the
Company's primary lender has classified the remaining amount of $7,501,777 as
immediately due and payable, resulting in a significant working capital
deficiency. Such matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Atlanta, Georgia
February 27, 2003
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-9
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
1. GOING CONCERN The accompanying consolidated financial
UNCERTAINTY statements have been prepared in
conformity with accounting principles
generally accepted in the United States
of America, which contemplate
continuationaffairs of the Company as a going
concern and assume realization of
assets and the satisfaction of
liabilities in the normal course of
business. The Company continues to be
in the early stages of its oil and gas
related operating history as it
endeavors to expand its operations
through the continuation of its
drilling program in the Tennessee Swan
Creek Field. Accordingly, the Company
has incurred continuous losses through
these operating stages and had an
accumulated deficit of $27,776,726 and
a working capital deficit of
$7,998,835, as of December 31, 2002,
and an accumulated deficit of
$29,491,533 and a working capital
deficit of $9,194,357, as of June 30,
2003. During 2002, the Company was
informed by its primary lender that the
entire amount of its outstanding credit
facility was immediately due and
payable, as provided for in the Credit
Agreement (see Note 7). These
circumstances raise substantial doubt
about the Company's ability to continue
as a going concern.
The Company has disputed its obligation
to make this payment and is attempting
to resolve the dispute or to obtain
alternative refinancing arrangements to
repay this current obligation. There
can be no assurance that the Company
will be successful in its plans to
obtain the financing necessary to
satisfy their current obligations.
2. SUMMARY OF ORGANIZATION
SIGNIFICANT ACCOUNTING
POLICIES Tengasco, Inc. (the "Company"), a
publicly held corporation, was
organized under the laws of the State
of Utah on April 18, 1916, as Gold
Deposit Mining and Milling Company. The
Company subsequentlyhave not changed its name
to Onasco Companies, Inc.
Effective May 2, 1995, Industrial
Resources Corporation, a Kentucky
corporation ("IRC"), acquired voting
control of the Company in exchange for
approximately 60% of the assets of IRC.
Accordingly, the assets acquired, which
included certain oil and gas leases,
equipment, marketable securities and
vehicles, were recorded at IRC's
historical cost. The transaction was
accomplished through the Company's
issuance of 4,000,000 shares of its
common stock and a $450,000, 8%
promissory note payable to IRC. The
promissory note was converted into
83,799 shares of Tengasco, Inc. common
stock in December 1995.
The Company changed its domicile from
the State of Utah to the State of
Tennessee on May 5, 1995 and its name
was changed from "Onasco Companies,
Inc." to "Tengasco, Inc."
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Amounts presented relating to June 30, 2003 and the six months ended June 30,
2003 and 2002 are unaudited)
The Company's principal business
consists of oil and gas exploration,
production and related property
management in the Appalachian region of
eastern Tennessee and in the state of
Kansas. The Company's corporate offices
are in Knoxville, Tennessee. The
Company operates as one reportable
business segment, based on the
similarity of activities.
During 1996, the Company formed
Tengasco Pipeline Corporation ("TPC"),
a wholly-owned subsidiary, to manage
the construction and operation of a
65-mile gas pipeline as well as other
pipelines planned for the future.
During 2001, TPC began transmission of
natural gas through its pipeline to
customers of Tengasco.
BASIS OF PRESENTATION
The consolidated financial statements
include the accounts of the Company,
Tengasco Pipeline Corporation and
Tennessee Land and Mineral, Inc. All
significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
The accompanying financial statements
are prepared in conformity with
accounting principles generally
accepted in the United States of
America which require management to
make estimates and assumptions that
affect the reported amounts of assets
and liabilities and disclosure of
contingent assets and liabilities atsince the date of the financial statements
and the reported amountsthis prospectus.
PART II
II—INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
| Item 13. | Other Expenses of Issuance and Distribution. |
The following is an itemization of all expenses (subject to future contingencies) incurred or to be incurred by us in connection with the issuance and distribution of the securities being offered. All items below are estimates
other than the Securities and Exchange Commission registration fee and the AMEX
listing fee.estimates. The registrant will pay all of such expenses.
Securities and Exchange Commission registration fee $ 1,833
AMEX listing
fee*............................................................
Printing and engraving
expenses*.......................................................
Accounting fees and
expenses*.......................................................
Legal fees and
expenses*.......................................................
Subscription Agent fees and
expenses*.......................................................
Miscellaneous*..................................................
Total........................................ $150,000
* To
| Securities and Exchange Commission registration fee | $ | 933 | ||
| NYSE MKT listing fee | 14,000 | |||
| Accounting and advisor fees and expenses | 66,000 | |||
| Legal fees and expenses | 60,000 | |||
| Subscription agent fees and expenses | 10,000 | |||
| Total | $ | 150,933 |
| Item 14. | Indemnification of Directors and Officers. |
Tengasco, Inc. (the “Company”) is incorporated in Delaware. Section 145(a) of the Delaware General Corporation Law (the “DGCL”) provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Tennessee Code Annotated Sections 48-18-502 through 509 grant Tennessee
corporations broad powers to indemnify their present and former directors and
officers and thoseor in the right of affiliated corporationsthe corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or other enterprise, against expenses (including attorneys'attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed actions,
suitsaction or proceedingssuit by or in the right of the corporation to which they are parties or are threatened to be made
partiesprocure a judgment in its favor by reason of beingthe fact that such person acted in any of the capacities set forth above, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or havingsettlement of such action or suit if he or she acted under similar standards to those set forth above, except that no indemnification may be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such directorsaction or officers, subjectsuit was brought shall determine that despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to specified conditions and exclusions; givebe indemnified for such expenses which the court shall deem proper.
Section 145 of the DGCL further provides that, to the extent a director or officer who successfully
defends an action the right to be so indemnified; and permitof a corporation has been successful in the defense of any action, suit or proceeding referred to buy directors'in subsection (a) and officers' liability insurance. Such(b) or in the defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection therewith; that indemnification isprovided for by Section 145 of the DGCL shall not be deemed exclusive of any other rights to which thosethe indemnified party may be entitledentitled; and that the corporation may purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against such officer or director and incurred by him or her in any such capacity or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liabilities under any by-laws, agreement, voteSection 145 of stockholders or otherwise.
Tennessee Code Annotated Section 48-18-102(b) permits a Tennessee
corporation to include in itsthe DGCL.
The Company’s amended certificate of incorporation a provision
eliminatingprovides that directors of the potential monetaryCompany shall have no personal liability of a director to the corporationCompany or its stockholders for monetary damages for breach of fiduciary duty as a director providedto the fullest extent that such
provision maythe DGCL or any other law of the State of Delaware and permits the limitation or elimination of the liability of directors.
The Company’s amended bylaws provide that the Company will indemnify its directors and officers to the fullest extent permitted by Delaware law. The Company’s amended bylaws also permit the Company to purchase insurance on behalf of any officer, director, employee or other agent for any liability arising out of that person’s actions as its officer, director, employee or agent, regardless of whether Delaware law would permit indemnification. Any amendment, repeal or modification of these provisions will be prospective only and would not eliminate theaffect any limitation on liability of a director (i) for acts or omissions not in good faiththat occurred prior to any such amendment, repeal or which involve intentional misconduct or a knowing
violationmodification. The Company has purchased and maintains directors’ and officers’ liability insurance pursuant to these provisions.
The Company has entered into indemnification agreements with each of law, (ii) for any transaction from whichits current directors and officers and intends to enter into indemnification agreements with each of its future directors and officers. These agreements require the director receives an
improper personal benefit or (iii) in connection with any proceeding in which
the director was adjudged liableCompany 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 dutiesindemnify these individuals to the fullest extent in which elimination or limitationpermitted under Delaware law against liability that may arise by reason of the liability of directors is
permitted by the foregoing Section, which does not applytheir service to the registrant.
II-1
All directors are indemnified by the registrant, both by operation of
Tennessee Code Annotated Sections 48-18-501 through 509Company, and since 1995 by
resolution of the registrant's board of directors, against liability andto advance expenses including attorney's fees incurred by them as a result of serving on
the registrant's board of directors.any proceeding against them as to which they could be indemnified. The statutory provisions require a findingCompany believes that the conductindemnification agreements will facilitate its ability to continue to attract and retain qualified individuals to serve as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”), may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the director was in good faithSecurities and Exchange Commission such indemnification is against public policy as expressed in the best interestSecurities Act and is therefore unenforceable.
| Item 15. | Recent Sales of Unregistered Securities |
None.
| Item 16. | Exhibits and Financial Statement Schedules. |
The exhibits and financial statement schedules filed as part of this registration statement are as follows:
| (a) | List of Exhibits. |
See the company and doesExhibit Index filed as part of this registration statement.
| (b) | Financial Statement Schedules. |
No financial statement schedules are filed because the required information is not extend to cases where a directorapplicable or is found to be liable
to the company itself. Such a finding may be made by uninvolved directors, a
committee of the board or independent counsel.
Tennessee Code Annotated Section 48-15-503 provides for the indemnification
of directors and of corporate officers where the director or officer is
successful in defense of any proceeding he or she became involved in as a result
of being or having been in such position, unless the corporate charter forbids
such indemnification. The registrant's corporate charter contains no such bar or
prohibition of indemnification of the registrant's directors or officers.
Tennessee statutes further provide that the rights to indemnification of a
director do not preclude other bases of indemnification, whether such rights
arise by charter, bylaws, shareholder resolution, agreement or board resolution,
provided there is no breach of duty of loyalty to the corporation, bad faith,
intentional misconduct or knowing violation of law. Accordingly, the
registrant's board of directors on August 17, 1995, unanimously resolved to
indemnify directors and executive officers on a mandatory basis to the fullest
extent of the laws referenced above for the entire period a party is subject to
any possible legal action or claim by reason of having so served.
Tennessee law permits, but does not require, insurance to be obtained to
fund indemnity obligations. The registrant does not have any such insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In approximately October 1998, the registrant sold 28,679 shares of its
Series A 8% Cumulative Convertible Preferred Stock to private investors for an
aggregate purchase price of $2,733,000, net of commissions to a placement agentincluded in the aggregate amountconsolidated financial statements or related notes.
| Item 17. | Undertakings. |
The undersigned registrant hereby undertakes:
(i)
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(a)
(i) To include any prospectus required by sectionSection 10(a)(3) of the Securities Act of 1933;
(b)
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any
II-5
increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation“Calculation of Registration Fee"Fee” table in the effective registration statement; and
(c)
(iii) 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)
(2) 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)
(3) 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
(4) That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness; provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant hereby undertakes that:
that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) ForAny preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(6) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the information omitted fromregistrant’s annual report pursuant to Section 13(a) or Section 15(d) of the formSecurities Exchange Act of prospectus filed as part1934 (and, where applicable, each filing of thisan employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the 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)
(7) 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 ourits counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us areit is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Companyregistrant has duly caused this registration statement to be signed on ourits behalf by the undersigned, thereunto duly authorized in the cityCity of Knoxville, Tennessee.
TENGASCO INC.
By: /s/ Richard T. Williams
-------------------------------
Richard T. Williams
Greenwood Village, State of Colorado, on October 17, 2016.
| . | Tengasco, Inc. | ||
| (Registrant) | |||
| By: | /s/ Michael J. Rugen | ||
| Name: | Michael J. Rugen | ||
| Title: | Chief Executive Officer (Principal Financial and Accounting Officer) | ||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that theeach person whose signature appears below on this registration statement hereby constitutes and appoints jointlyMichael J. Rugen and severally, Richard T. Williams and
Jeffrey R. Bailey,Cary V. Sorensen, and each of them as hisseverally with full power to act without the other, such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for himsuch person and in hissuch person’s name, place and stead, in any and all capacities, to sign any and all amendments (including pre-effective and post-effective amendments) to this registration statement on Form S-1 and to sign any registration statement and amendments
thereto for the samerelated to this offering filed pursuant to Rule 462(b)462 under the Securities Act of 1933, as amended, and to file the same, with all exhibits and schedules thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as hesuch person might or could do in person, hereby ratifying and confirming all whichthat said attorneys-in-fact and agents or any of them, or their or hisany substitute or
substitutes,therefor, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | |
| /s/ Matthew K. Behrent | Director | October 17, 2016 | |
| Matthew K. Behrent | |||
| /s/ Hughree F. Brooks | Director |
| October 17, 2016 | |||
| Hughree F. Brooks | |||
| /s/ Peter E. Salas | Director | October 17, 2016 | |
| Peter E. Salas | |||
| /s/ Richard M. | Director | October 17, 2016 | |
| Richard M. Thon |
EXHIBIT INDEX
| Exhibit No. | Description | |
| 3.1 | Delaware Certificate of Incorporation (Incorporated by reference to Exhibit B to registrant’s Definitive Proxy Statement on Schedule 14A filed on May 2, 2011). | |
| 3.2 | Amended and Restated Bylaws as of November 13, 2014 (Incorporated by reference to Exhibit 3.2 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 30, 2015). | |
| 3.3 | Agreement and Plan of Merger of Tengasco, Inc., a Tennessee corporation, with and into Tengasco, Inc., a Delaware corporation dated April 15, 2011 (Incorporated by reference to Exhibit B to registrant’s Definitive Proxy Statement on Schedule 14A filed on May 2, 2011). | |
| 3.4 | Certificate of Amendment to Certificate of Incorporation filed on March 23, 2016 (Incorporated by reference to Exhibit 3.4 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 filed on March 30, 2016). | |
| Form of Rights Certificate. | ||
| Subscription Agent Agreement dated October 13, 2016 between Tengasco, Inc. and Continental Stock Transfer & Trust Company. | ||
| Opinion of Cary V. Sorensen. | ||
| 10.1+ | Tengasco, Inc. Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-8 filed on October 26, 2000). | |
| 10.2+ | Amendment to the Tengasco, Inc. Stock Incentive Plan dated May 19, 2005 (Incorporated by reference to Exhibit 4.2 to the registrant’s Registration Statement on Form S-8 filed on June 3, 2005). | |
| 10.3 | Loan and Security Agreement dated June 29, 2006 between Tengasco, Inc. and Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated June 29, 2006). | |
| 10.4 | Subscription Agreement of Hoactzin Partners, L.P. for the registrant’s ten well drilling program on its Kansas Properties dated August 3, 2007 (Incorporated by reference to Exhibit 10.15 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 31, 2008 [the “2007 Form 10-K”]). | |
| 10.5 | Agreement and Conveyance of Net Profits Interest dated September 17, 2007 between Manufactured Methane Corporation, as Grantor, and Hoactzin Partners, L.P., as Grantee (Incorporated by reference to Exhibit 10.16 to the 2007 Form 10-K). | |
| 10.6 | Agreement for Conditional Option for Exchange of Net Profits Interest for Convertible Preferred Stock dated September 17, 2007 between Tengasco, Inc., as Grantor, and Hoactzin Partners, L.P., as Grantee (Incorporated by reference to Exhibit 10.17 to the 2007 Form 10-K). |
| Exhibit No. | Description | |
| 10.7 | Assignment of Notes and Liens dated December 17, 2007 between Citibank, N.A., as Assignor, Sovereign Bank, as Assignee, and Tengasco, Inc., Tengasco Land & Mineral Corporation and Tengasco Pipeline Corporation, as Debtors (Incorporated by reference to Exhibit 10.18 to the 2007 Form 10-K). | |
| 10.8 | Management Agreement dated December 18, 2007 between Tengasco, Inc. and Hoactzin Partners, L.P. (Incorporated by reference to Exhibit 10.20 to the 2007 Form 10-K). | |
| 10.9+ | Amendment to the Tengasco, Inc. Stock Incentive Plan dated February 1, 2008 (Incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-8 filed on June 3, 2008). | |
| 10.10 | Assignment of Credit Facility to F&M Bank and Trust Company (Incorporated by reference to Exhibit 10.15 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 31, 2011). | |
| 10.11 | Twelfth Amendment to Loan and Security Agreement dated January 29, 2013 between Tengasco, Inc., as borrower, and F&M Bank & Trust Company, as lender (Incorporated by reference to Exhibit 10.19 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 29, 2013). | |
| 10.12 | Thirteenth Amendment to Loan and Security Agreement dated March 6, 2013 between Tengasco, Inc., as borrower, and F&M Bank & Trust Company, as lender (Incorporated by reference to Exhibit 10.20 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 29, 2013). | |
| 10.13 | Fourteenth Amendment to Loan and Security Agreement dated October 24, 2013 between Tengasco, Inc., as borrower, and F&M Bank & Trust Company, as lender (Incorporated by reference to Exhibit 10.16 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 31, 2014). | |
| 10.14 | Fifteenth Amendment to Loan and Security Agreement dated March 17, 2014 between Tengasco, Inc., as borrower, and F&M Bank & Trust Company, as lender (Incorporated by reference to Exhibit 10.17 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 31, 2014). | |
| 10.15 | Sixteenth Amendment to Loan and Security Agreement dated September 23, 2014 between Tengasco, Inc., as borrower, and Prosperity Bank, as lender (Incorporated by reference to Exhibit 10.18 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 30, | |
| 10.16 | Seventeenth Amendment to Loan and Security Agreement dated March 16, 2015 between Tengasco, Inc., as borrower, and Prosperity Bank, as lender (Incorporated by reference to Exhibit 10.19 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 30, 2015). |
| Exhibit No. | Description | |
| 10.18 | Eighteenth Amendment to Loan and Security Agreement dated March 28, 2016 between Tengasco, Inc., as borrower, and Prosperity Bank, as lender (Incorporated by reference to Exhibit 10.20 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 30, 2015). | |
| 21.1 | List of subsidiaries (Incorporated by reference to Exhibit 21 to the 2007 Form 10-K). | |
| Consent of LaRoche Petroleum Consultants, Ltd. | ||
| Consent of Hein & Associates LLP. | ||
| 23.3* | Consent of Cary V. Sorensen (included in the Exhibit 5.1). | |
| 24.1 | Power of Attorney (included on the signature page hereof). | |
| 99.1 | Report of LaRoche Petroleum Consultants, Ltd. has been added to the filing for the year ended December 31, 2015 (Incorporated by reference to Exhibit 99.1 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 filed on March 30, 2016). | |
| Form of Instructions for Use of Subscription Rights Certificates. | ||
| Form of Letter to Record Holders of Common Stock. | ||
| Form of Letter to Brokers and Other Nominee Holders. | ||
| Form of Letter to Beneficial Holders. | ||
| Form of Beneficial Owner Election Form. | ||
| Form of Nominee Holder Certification. |
| * | Filed herewith. |
| + | Management contract or compensatory plan or arrangement. |
II-8