UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
Commission File Number 0-23530
TRANS ENERGY, INC.
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(Name of small business issuer in its charter)
Nevada 93-0997412
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
210 Second Street, P.O. Box 393, St. Marys, West Virginia 26170
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(Address of principal executive offices) (Zip Code)
Issuer's telephone no.: (304) 684-7053
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year. $ 889,764
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and ask prices of such stock as of a specified date within 60
days. $696,100 (Based on price of $0.003 on March 25, 2003)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding as of December 31, 2002
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Common Stock, Par Value 237,519,127
$.001 per share
DOCUMENTS INCORPORATED BY REFERENCE
A description of "Documents Incorporated by Reference" is contained in
Part III, Item 13.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
TRANS ENERGY, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business ....................................................... 3
Item 2. Description of Property........................................................ 11
Item 3. Legal Proceedings.............................................................. 12
Item 4. Submission of Matter to a Vote of Security Holders............................. 14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................... 14
Item 6. Management's Discussion and Analysis or Plan of Operation...................... 15
Item 7. Financial Statements........................................................... 19
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................... 19
PART III
Item 9. Directors, Executive Officers, Promoters and Control persons;
Compliance with Section 16(a) of the Exchange Act.............................. 19
Item 10. Executive Compensation......................................................... 20
Item 11. Security Ownership of Certain Beneficial Owners and Management................. 21
Item 12. Certain Relationships and Related Transactions................................. 22
Item 13. Exhibits and Reports on Form 8-K............................................... 23
Item 14. Controls and Procedures........................................................ 23
Signatures..................................................................... 24
Certifications................................................................. 25
2
PART I
Item 1. Description of Business
History
Trans Energy, Inc. is engaged in the transportation, marketing and
production of natural gas and oil, and certain exploration and development
activities. We own interests in seven oil and gas wells in West Virginia and an
interest in seven oil wells in Wyoming that we do not operate. We also own and
operate an aggregate of over 100 miles of three-inch, four-inch and six-inch gas
transmission lines located within West Virginia in the Counties of Ritchie,
Tyler and Pleasants. This pipeline system gathers the natural gas produced from
these wells and from wells owned by third parties. We also have approximately
14,000 gross acres under lease in the Powder River Basin in Campbell, Crook and
Weston Counties, Wyoming.
In 1998, we purchased from GCRL Energy, Ltd. all of its interest in the
Powder River Basin in Campbell and Crook Counties, Wyoming, consisting of
interests in five (5) wells, four (4) of which are producing, interests in
30,000 leasehold acres, and interests in approximately seventy-three miles of
3-D seismic data. The properties include three producing fields from Minnelusa
Sandstone and were discovered on 3-D seismic. During 1999, the Sagebrush 3 well
was drilled in the Sagebrush field in Campbell County Wyoming. It will be used
as a water disposal well for the Sagebrush #1 and #2. It is anticipated that the
Sagebrush #3 will be put into operation as a injection well during the summer of
2003.
Our principal executive offices are located at 210 Second Street, P.O.
Box 393, St. Marys, West Virginia 26170, and our telephone number is (304)
684-7053.
Business Development
In 2001, we continued our interest in the Trenton - Black River deep
gas field in the Appalachian Basin in West Virginia. We believes that this area
may become active in the counties in which we operate. We continue to focus much
of our efforts in this area to take advantage of the situation if the
opportunity becomes available. In 1999, we sold many of our Appalachian Basin
assets and purchased 51% of a producing well in the Powder River Basin in
Wyoming. We then focused our attention toward developing our acreage in the
Powder River Basin in Wyoming and drilling for deep gas in the Trenton- Black
River area.
Our business strategy is to economically increase reserves, production
and the sale of gas and oil from existing and acquired properties in the Powder
River Basin, Appalachian Basin and elsewhere, in order to maximize shareholders'
return over the long term. Our strategic location in West Virginia enables us to
actively pursue the acquisition and development of producing properties in that
area that will enhance our revenue base without proportional increases in
overhead costs.
In September 1993, we acquired certain oil and gas assets including
wells and pipelines, in exchange solely for shares of our authorized, but
previously unissued common stock. These acquisitions are summarized below:
Tyler Construction Company, Inc.
We acquired an interest equal to 65% of the total outstanding shares of
Tyler Construction Company from Loren E. Bagley and William F. Woodburn, both of
whom are directors of Trans Energy. Tyler Construction owns and operates a
natural gas gathering pipeline system serving the industrialized Ohio Valley.
Tyler Construction also owns and operates 27 miles of six-inch pipeline and 10
miles of four-inch pipeline.
3
Tyler Construction's trunk line system consists of a six-inch pipeline
that begins at the town of St. Marys, West Virginia, located on the Ohio River
in the County of Pleasants in western West Virginia, and proceeds twenty-seven
miles due east to Bradden Station, West Virginia. Near Bradden Station, the
pipeline intercepts major transmission lines of Equitable Natural Gas, Dominion
Transmission, Inc. and Eastern American Energy. An intercepting line consisting
of ten miles of four-inch pipeline begins at a point eight miles east of St.
Marys and proceeds north 10 miles to an industrial park located seven miles
south of Sistersville, West Virginia. At this point, gas is delivered to OSI
Specialties (formerly Union Carbide) and Consolidated Aluminum Corporation of
America under a marketing agreement with Sancho. Pursuant to our agreement with
Sancho, we have the right to sell natural gas subject to the terms and
conditions of a 20-year contract, as amended, that Sancho entered into with Hope
Gas, Inc. in 1988. This agreement is a flexible volume supply agreement whereby
we receive the full price which Sancho receives less a $.05 per Mcf marketing
fee paid to Sancho. The price of the natural gas is based upon the residential
gas index and the Inside F.E.R.C. CNG Index.
On February 28, 2003, we sold 7.6 miles of the 6-inch pipeline to PC
Pipeline, Inc., located in Morgantown, West Virginia. In consideration for the
sale, we received 35% of the outstanding stock of Tyler Construction from
Ecological Energy, Inc., an affiliate of PC Pipeline. As a result of the
transaction, we now own 100% of the capital stock of Tyler Construction.
Also on February 28, 2003, we sold 10 miles of the 4-inch pipeline to
Triad Energy Corporation, located in Marietta, Ohio, for the cash consideration
of $270,000. Proceeds from the sale are being used to pay down existing short
and long-term debt.
Spencer Wells
We acquired all rights, title and interest to six producing oil and gas
wells located in West Virginia, in exchange for shares of Trans Energy common
stock. Five of the wells identified as "Fowler," "Goff," "Locke," "McGill" and
"Workman" are situated in Ritchie County in a proven reservoir field. The
remaining well identified as "Spencer," is located in Tyler County. All six
wells were completed in 1991 and have been producing oil and gas through the
date hereof. In 1999, five of these wells were sold to an unaffiliated third
party and in 2000, the sixth well was sold to an unaffiliated third party.
The Pipeline, Ltd.
We acquired from Tyler Pipeline, Inc. all rights, title and interest in
the natural gas gathering pipeline system known as The Pipeline, Ltd. (the name
of the pipeline, not a legal entity), a four-inch pipeline that begins at
Twiggs, West Virginia, nine miles east of St. Marys, West Virginia where it
intercepts Tyler Construction's trunk line system and proceeds due south for a
distance of six miles. The Pipeline, Ltd. system is used for purchasing gas from
third party producers. Mr. Woodburn, our Secretary / Treasurer and a director,
is also President and owns 50% of Tyler Pipeline. Mr. Bagley, our Vice President
and a director, also owns 50% of Tyler Pipeline.
Ritchie County Gathering Systems, Inc.
We acquired all the issued and outstanding capital stock of Ritchie
County Gathering Systems, Inc., a West Virginia corporation. Ritchie County
Gathering owns and operates a four-inch natural gas gathering line which begins
five miles south of Cairo, West Virginia at Rutherford, and proceeds due south
for 4.6 miles, crossing Mellon Ridge and ending at Macfarlan Creek approximately
1/2 mile north of the South Fork of the Hughes River. The Ritchie County
Gathering pipeline is used for purchasing gas from third party producers and
delivering such gas to Hope Gas.
4
Powder River Basin Wyoming
On March 6, 1998, we entered into an agreement to purchase from GCRL
Energy, Ltd. all of its interest in the Powder River Basin in Campbell and Crook
Counties, Wyoming, consisting of interests in five (5) wells, four (4) of which
are producing, interests in 30,000 leasehold acres, and interests in
approximately seventy-three miles of 3-D seismic data. The properties include
three producing fields from Minnelusa Sandstone and were discovered on 3-D
seismic. We made an initial payment for the properties of $50,000 and the
balance of $2,987,962 was paid for with proceeds from the sale of debentures.
The following table sets forth information concerning the existing oil
production per day of the producing wells located on the GCRL property.
Gross Bbls.
Name of Well Oil Per Day Net % to TSRG Net Bbls. to TSRG
------------ ------------ ------------- -----------------
Sagebrush Fed #1 48 48.8% 23
Sagebrush Fed #2 21 47.5% 10
Pinon Fee #1 24 51.2% 12
Sandbar Boley 31-36 25 27.8% 7
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includes Sandbar State
1-36 and 2-36
Current Business Activities
We operate our oil and natural gas properties and transports and
markets natural gas through our transmission systems in West Virginia. Although
management desires to acquire additional oil and natural gas properties and to
become more involved in exploration and development, this can only be
accomplished if we can secure future funding. Management intends to continue to
develop and increase the production from the oil and natural gas properties that
it currently owns.
Although we will continue to transport and market natural gas through
our various pipelines, there are no current plans to acquire or to lay any
additional pipeline systems in 2003. Apart from one well drilled in the Powder
River basin in Wyoming (Sagebrush #3) and the seven re-entry Benson wells
drilled in West Virginia, we have not participated in any new wells in the last
four years.
Powder River Basin Wyoming - Prima
On December 28, 1996, we purchased 420 acres in the Powder River basin
in Wyoming for $50,000 from an unaffiliated third party. Included in the
purchase price was a condition that the previous owners would provide all of the
geologic and geophysical work as part of the purchase price. On February 3, 1997
we leased an additional 480 acres that joined with our acreage position. The
target formation is the Minnelusa "B1" sand. There presently are no producing
wells on such acreage and no proved reserves located on the acreage owned by us.
Five two-dimensional ("2-D") seismic lines and a 6-square mile
three-dimensional ("3-D") seismic program have been shot across the acreage now
held by us. Unlike 2-D seismic testing which provides a cross-sectional view of
the subsurface of the Earth, 3-D testing provided a full, three- dimensional
view of the subsurface. Such views allow for greater precision in the location
of potential drilling sites. 3-D testing allows potential drillers to obtain
accurate estimates of the size of oil and gas bearing structures and the profile
of the structure. 2-D testing only informs the driller that an oil and gas
bearing structure is in a particular area, without giving information as to size
and shape. Without an accurate estimate of the size of the oil and gas bearing
structures, it is difficult to accurately estimate the reserves in the
structure, and, thus, the economic viability of drilling into a particular
structure. Without an accurate profile of the structure, a driller may not hit
the most economic portion of the structure.
5
Water pressure primarily is responsible for the movement of oil within
the area of our acreage. Where water pressure is the cause of oil movement,
finding the apex of the oil bearing structure is critical. Drilling into the
apex of such a structure usually assures that a maximum amount of oil, and a
minimal amount of water, will be recovered from a well. Hitting such a zone
elsewhere than at the apex will result in a lower proportion of oil to water and
reduced rates of recovery.
We completed drilling the Fowler 22-8 in January 1998 and determined
the well to be a dry hole and was plugged. We have not done further drilling on
the acreage.
Powder River Basin Wyoming - Wolffe Prospect
In 1997, we purchased a 30% working interest in the Wolffe Prospect in
the Powder River Basin in Campbell County, Wyoming for $65,000 from an
unaffiliated third party. Included in the purchase price was a 30% working
interest in the Wolffe #1-35 well and 30% interest in 240 acres. In October
1997, we participated in our share of the drilling of the Horizon 32-35 well.
The target formation was the Minnelusa "B1" sand. The well was determined to be
a dry hole and plugged. On November 15, 1999, we purchased for $16,000 an
additional 51% working interest in the Wolff 1-35 well from Renor Exploration
Limited. In September 2002, we transferred this well to an unaffiliated third
party in settlement of a lawsuit.
Sistersville
In 1995, we purchased approximately 2,200 acres in a known producing
field located near Sistersville, West Virginia for $100,000. The Sistersville
field has been in operation since the 1890's, although at a very low level for
the past several years. To date the field has produced over 13 million barrels
of oil. The field contains portions of the Big Injun and Keener sands
formations, both well known oil and gas bearing formations, which are the zones
we intend to explore. These formations are approximately 1,700 feet deep.
Recoverable reserves of oil in the field are estimated at several million
barrels. We drilled a well on the Sistersville acreage in April 1997. In 1999,
we sold the Sistersville field for $125,000 to an unaffiliated third party.
Research and Development
We have not allocated funds for conducting research and development
activities and, due to the nature of our business. We do not anticipate
allocating funds for research and development in the immediate future.
Marketing
We operate exclusively in the oil and gas industry. Natural gas
production from wells owned by us is generally sold to various intrastate and
interstate pipeline companies and natural gas marketing companies. Sales are
generally made on the spot market or under short-term contracts (one year or
less) providing for variable or market sensitive prices. These prices often are
tied to natural gas futures contracts as posted in national publications.
Natural gas delivered through our pipeline network is sold through the
Sancho Oil and Gas Corporation contract to the industrial facilities near
Sistersville, West Virginia, or to Hope Gas, a local utility. Some of the gas is
sold at a fixed price on a year long basis and some at a variable price per
month per Mcf. Under our contract with Sancho, we have the right to sell natural
gas subject to the terms and conditions of a 20-year contract, as amended, that
Sancho entered into with Hope Gas in 1988. This agreement is a flexible volume
supply agreement whereby we receive the full price which Sancho charges the end
user less a $.05 per Mcf marketing fee paid to Sancho. The price of the natural
gas is based upon the greater of the residential gas commodity index and
published Inside F.E.R.C. Index, at our option, for the first 1,500 Mcf
purchased per day by Hope Gas and thereafter the price is the Inside F.E.R.C.
Index. The residential gas commodity index does not directly fluctuate with the
overall price of natural gas. The Inside F.E.R.C. Index fluctuates monthly with
the change in the price of natural gas. While such option provides certain price
protection for us, there can be no assurance that prices paid by us to suppliers
will be lower than the price which we would receive under the Hope Gas
arrangement. Prior to June 1, 1996, the price was the residential gas commodity
index and when the market price of gas rose above such index, our ability to
purchase gas from third parties was adversely effected.
We sell our oil production to third party purchasers under agreements
at posted field prices. These third parties purchase the oil at the various
locations where the oil is produced.
6
Although management believes that we are not dependent upon any one
customer, our marketing arrangement with Sancho accounted for approximately 26%
of our revenue for the year ended December 31, 2002, and approximately 49% for
the year ended December 31, 2001. This marketing agreement is in effect until
September 1, 2008.
In addition to the natural gas produced by our wells, we also purchased
approximately 250 Mcf of natural gas per day in 2002.
Competition
We are in direct competition with numerous oil and natural gas
companies, drilling and income programs and partnerships exploring various areas
of the Appalachian and Powder River Basins and elsewhere, and competing for
customers. Many competitors are large, well-known oil and gas and/or energy
companies, although no single entity dominates the industry. Many of our
competitors possess greater financial and personnel resources enabling them to
identify and acquire more economically desirable energy producing properties and
drilling prospects than us. Additionally, there is competition from other fuel
choices to supply the energy needs of consumers and industry. Management
believes that there exists a viable market place for smaller producers of
natural gas and oil and for operators of smaller natural gas transmission
systems.
Under our contract with Sancho, we have the right to sell natural gas
subject to the terms and conditions of a 20-year contract, as amended, that
Sancho entered into with Hope Gas in 1988. This agreement is a flexible volume
supply agreement whereby we receive the full price which Sancho receives less a
$.05 per Mcf marketing fee paid to Sancho. The price of the natural gas is based
upon indices that include the residential gas commodity charge of Hope Gas and
the Inside F.E.R.C. CNG Index. Were it not for the relationship between Hope Gas
and Sancho, Hope Gas would compete directly with us for the sale of gas to
certain customers, specifically OSI Specialities, Inc. and Ormet Aluminum
Company.
Government Regulation
The oil and gas industry is extensively regulated by federal, state and
local authorities. The scope and applicability of legislation is constantly
monitored for change and expansion. Numerous agencies, both federal and state,
have issued rules and regulations binding on the oil and gas industry and its
individual members, some of which carry substantial penalties for noncompliance.
To date, these mandates have had no material effect on our capital expenditures,
earnings or competitive position.
Legislation and implementing regulations adopted or proposed to be
adopted by the Environmental Protection Agency ("EPA") and by comparable state
agencies, directly and indirectly affect our operations. We are required to
operate in compliance with certain air quality standards, water pollution
limitations, solid waste regulations and other controls related to the
discharging of materials into, and otherwise protecting the environment. These
regulations also relate to the rights of adjoining property owners and to the
drilling and production operations and activities in connection with the storage
and transportation of natural gas and oil.
7
We may be required to prepare and present to federal, state or local
authorities data pertaining to the effect or impact that any proposed operations
may have upon the environment. Requirements imposed by such authorities could be
costly, time-consuming and could delay continuation of production or exploration
activities. Further, the cooperation of other persons or entities may be
required for us to comply with all environmental regulations. It is conceivable
that future legislation or regulations may significantly increase environmental
protection requirements and, as a consequence, our activities may be more
closely regulated which could significantly increase operating costs. However,
management is unable to predict the cost of future compliance with environmental
legislation. As of the date hereof, management believes that we are in
compliance with all present environmental regulations. Further, we believe that
our oil and gas explorations do not pose a threat of introducing hazardous
substances into the environment. If such event should occur, we could be liable
under certain environmental protection statutes and laws. We presently carry
insurance for environmental liability.
Our exploration and development operations are subject to various types
of regulation at the federal, state and local levels. Such regulation includes
the requirement of permits for the drilling of wells, the regulation of the
location and density of wells, limitations on the methods of casing wells,
requirements for surface use and restoration of properties upon which wells are
drilled, and governing the abandonment and plugging of wells. Exploration and
production are also subject to property rights and other laws governing the
correlative rights of surface and subsurface owners.
We are subject to the requirements of the Occupational Safety and
Health Act, as well as other state and local labor laws, rules and regulations.
The cost of compliance with the health and safety requirements is not expected
to have a material impact on our aggregate production expenses. Nevertheless, we
are unable to predict the ultimate cost of compliance.
Although past sales of natural gas and oil were subject to maximum
price controls, such controls are no longer in effect. Other federal, state and
local legislation, while not directly applicable to us, may have an indirect
effect on the cost of, or the demand for, natural gas and oil.
Employees
As of the date hereof we employ eight people full-time, consisting of
three executives, two marketing and clerical persons, and three production
persons. Management presently anticipates hiring additional employees as
business conditions warrant and as funds are available.
Facilities
We currently occupy approximately 4,000 square feet of office space in
St. Marys, West Virginia, which we share with our subsidiaries, Tyler
Construction Company and Ritchie County Gathering Systems. We lease an aggregate
of approximately 4,000 square feet from an unaffiliated third party under a
verbal arrangement for $1,400 per month, inclusive of utilities. Management
believes that our present office facilities are adequate for our current
business operations.
Industry Segments
No information is presented as to industry segments. We are presently
engaged in the principal business of the exploration, development, production,
transportation and marketing of natural gas and oil. Reference is made to the
statements of operations contained in the financial statements included herewith
for a statement of our revenues and operating loss for the past two fiscal
years.
8
Risk Factors
You should carefully consider the risks and uncertainties described
below and other information in this report. If any of the following risks or
uncertainties actually occur, our business, financial condition and operating
results, would likely suffer. Additional risks and uncertainties, including
those that are not yet identified or that we currently believe are immaterial,
may also adversely affect our business, financial condition or operating
results.
We have a history of losses and anticipate future losses
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Our revenues declined 33% during the fiscal year ended December 31,
2002, and we may not achieve, or subsequently maintain profitability if
anticipated revenues do not increase in the future. We have experienced
operating losses, negative cash flow from operations and net losses in each
quarterly and annual period for the past several years. As of December 31, 2002,
our net operating loss carryforward was approximately $19.7 million and our
accumulated deficit was approximately $27.2 million. We expect to continue to
incur significant expenses in connection with
* exploration and development of new and existing properties,
* costs of sales and marketing efforts,
* additional personnel, and
* increased general and administrative expenses.
Accordingly, we will need to generate significant revenues to achieve
and attain, and eventually sustain profitability. If revenues do not increase,
we may be unable to attain or sustain profitability on a quarterly or annual
basis. Any of these factors could cause the price of our stock to decline.
There are many competitors in the oil and gas industry
--------------------------------------------------------------------------------
We encounter many competitors in the oil and gas industry, both in the
exploration and development of properties and in the sale of oil and gas.
Management expects competition to continue and intensify in the future. If we
are unable to successfully compete with other oil and gas companies, our
business will be adversely affected.
Our operating results are likely to fluctuate significantly and cause
our stock price to be volatile which could cause the value of your
investment in our shares to decline
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Quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. If operating results do not meet the expectations of
securities analysts and investors, the trading price of our common stock could
significantly decline which may cause the value of your investment to decline.
Some of the factors that could affect quarterly or annual operating results or
impact the market price of our common stock include:
* our ability to develop properties and to market our oil and gas;
* the timing and amount of, or cancellation or rescheduling of,
orders for our oil and gas;
* our ability to retain key management, sales and marketing and
engineering personnel;
* a decrease in the prices of oil and gas; and
* changes in costs of exploration or marketing oil and gas.
Due to these and other factors, quarterly and annual revenues, expenses
and results of operations could vary significantly in the future, and
period-to-period comparisons should not be relied upon as indications of future
performance.
9
Additional share issuances could be dilutive
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If we do not generate necessary cash from our operations to finance
future business, we may need to raise additional funds through public or private
financing opportunities. Selling additional stock could dilute the equity
interests of existing stockholders. If we borrow more money, we will have to pay
interest and may also have to agree to restrictions that limit operating
flexibility. We may not be able to obtain funds needed to finance operations at
all, or may be able to obtain funds only on very unattractive terms. Management
may also explore other alternatives such as a joint venture with other oil and
gas companies. There can be no assurances, however, that we will conclude any
such transaction.
Outside factors may influence our business development
--------------------------------------------------------------------------------
We expect to experience significant fluctuations in future results of
operations due to a variety of factors, many of which are outside of our
control, including:
* demand for oil and gas;
* attempts to expand into new markets;
* competitive factors that affect pricing;
* the timing and magnitude of capital expenditures, including costs
relating to the expansion of operations;
* hiring and retention of key personnel;
* changes in generally accepted accounting policies, especially
those related to the oil and gas industry; and
* new government legislation or regulation.
Any of the above factors could have a negative effect on our business
and on the price of our common stock.
If we lose key personnel, we may be unable to successfully operate
--------------------------------------------------------------------------------
We depend on the continued contributions of our executive officers and
other technical and marketing personnel to work effectively as a team, to
execute our business strategy and to manage our business. The loss of key
personnel or their failure to work effectively could have a material adverse
effect on our business, financial condition and results of operations.
Going concern issue
--------------------------------------------------------------------------------
Our independent auditors have expressed a going concern issue. Our
ability to continue as a going concern is dependant upon our ability to achieve
a profitable level of operations. Management will need, among other things,
additional capital resources which it may seek through loans from shareholders.
We expect that we will need approximately $300,000 to cover our negative cash
flow through fiscal 2003. However, management cannot provide any assurances that
we will be successful in accomplishing any of our plans.
Risks relating to ownership of our common stock
The price of our common stock is extremely volatile and investors may
not be able to sell their shares at or above their purchase price, or
at all.
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Our common stock is presently traded on the OTC Bulletin Board,
although there is no assurance that a viable market will continue. The price of
our shares in the public market is highly volatile and may fluctuate
substantially because of:
* actual or anticipated fluctuations in our operating results;
* changes in or failure to meet market expectations;
10
* conditions and trends in the oil and gas industry; and
* fluctuations in stock market price and volume, which are
particularly common among securities of small capitalization
companies.
We do not intend to pay dividends
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To date, we have never declared or paid a cash dividend on shares of
our common stock. We currently intend to retain any future earnings for growth
and development of business and, therefore, do not anticipate paying any
dividends in the foreseeable future.
Possible "Penny Stock" Regulation
--------------------------------------------------------------------------------
Trading of our common stock on the OTC Bulletin Board may be subject to
certain provisions of the Securities Exchange Act of 1934, commonly referred to
as the "penny stock" rule. A penny stock is generally defined to be any equity
security that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on broker-dealers.
These may require a broker dealer to:
* make a special suitability determination for purchasers of penny
stocks;
* receive the purchaser's written consent to the transaction prior
to the purchase; and
* deliver to a prospective purchaser of a penny stock, prior to the
first transaction, a risk disclosure document relating to the
penny stock market.
Consequently, penny stock rules may restrict the ability of
broker-dealers to trade and/or maintain a market in our common stock. Also, many
prospective investors may not want to get involved with the additional
administrative requirements, which may have a material adverse effect on the
trading of our shares.
Item 2. Description of Property
Our properties consist essentially of working and royalty interests
owned by us in various oil and gas wells and leases located in West Virginia.
Our proved reserves for the years ended December 31, 2002, 2001 and 2000 are set
forth below:
December 31,
------------------------------------------
2002 2001 2000
--------- --------- ---------
Natural Gas (MMcf)
Developed 1,131,415 1,133,839 -
Undeveloped - -
Total Proved 1,131,415 1,133,839 356,196
Crude Oil (MBbl)
Developed 113,406 147,876 1,138,144
Undeveloped - 210,610
Total Proved 113,406 147,876 1,348,754
These estimates are bases primarily on the reports of Donald C.
Kesterson, Certified Petroleum Geologist for natural gas, and Robert L.
Richards, Geologist for oil. Such reports are, by their very nature, inexact and
subject to changes and revisions. Proved developed reserves are reserves
expected to be recovered from existing wells with existing equipment and
operating methods. Proved undeveloped reserves are expected to be recovered from
new wells drilled to known reservoirs on undrilled acreage for which existence
and recoverability of such reserves can be estimated with reasonable certainty,
or from existing wells where a relatively major expenditure is required to
establish production. No estimates of reserves have been included in any reports
to any federal agency other than the SEC. See SFAS 69 Supplemental Disclosures
included as part of our consolidated financial statements.
11
Set forth in the following schedule is the average sales price per unit
of oil, expressed in barrels ("bbl"), and of natural gas, expressed in thousand
cubic feet ("mcf"), produced by us for the past three fiscal years.
Years ended December 31,
----------------------------------------
Average sales price: 2002 2001 2000
------------------- ------ ------ ------
Gas (per mcf) $ 4.73 $ 5.22 $ -
Oil (per bbl) 17.91 16.22 24.67
Average cost of production:
Gas (per mcf) -- -- $ --
Oil (per bbl) 5.03 4.05 3.38
We have not filed any estimates of total, proved net oil and gas
reserves with any federal authority or agency since the beginning of our last
fiscal year.
The following schedule sets forth the capitalized costs relating to oil
and gas producing activities by us for the past three fiscal years.
Years ended December 31,
-----------------------------------------
2002 2001 2000
=========== ----------- -----------
Proved oil and gas
producing properties
and related lease
and well equipment $ 3,678,730 $ 3,617,505 $ 3,372,880
Unproved oil and gas
properties 95,945 114,426 180,000
Accumulated depreciation
and depletion (1,839,295) (1,009,429) (269,365)
----------- ----------- -----------
Net Capitalized Costs $ 1,935,380 $ 2,722,502 $ 3,283,515
=========== ----------- -----------
The following schedule summarizes changes in the standardized measure
of discounted future net cash flows relating to our proved oil and gas reserves.
Years ended December 31,
-----------------------------------------
2002 2001 2000
=========== ----------- -----------
Standardized measure,
beginning of year $ 3,649,994 $ 4,425,778 $ 5,216,987
Oil and gas sales, net
of production costs -- -- --
Sales of mineral in place -- (1,039,658) (1,611,730)
Purchases -- -- 820,521
Net change due to revisions
in quantity estimates 664,947 263,874 --
----------- ----------- -----------
Standardized measure,
end of year $ 4,314,941 $ 3,649,994 $ 4,425,778
=========== =========== ===========
We do not anticipate investing in or purchasing assets and/or property
for the purpose of capital gains. It is our intention to purchase assets and/or
property for the purpose of enhancing our primary business operations. We are
not limited as to the percentage amount of our assets we may use to purchase any
additional assets or properties.
Item 3. Legal Proceedings
Certain material pending legal proceedings to which we are a party or
to which any of our property is subject is set forth below.
(a) On February 7, 2001, the United States Bankruptcy Court, Southern
District of Texas, entered an Order Granting Motion to Dismiss Chapter
7 Case in the action entitled In Re: Trans Energy, Inc., Case No.
00-39496-H4-7. The Order dismissed the involuntary bankruptcy action
12
instituted against us on October 16, 2000. The sole petitioning
creditor named in the Involuntary Petition was Western Atlas
International, Inc. An Order for Relief Under Chapter 7 was entered by
the Court on November 22, 2000.
On April 23, 2000, the 189th District Court of Harris County, Texas
entered an Agreed Final Judgment in favor of Western against us in the
amount of $600,665.36, together with post judgment interest at 10% per
annum. Following the judgment, we entered into settlement negotiations
with Western concerning our satisfaction of the judgment through
payments over a four to five month period, together with the pledge of
collateral on certain unencumbered assets. Previously, on or about July
9, 1998, a judgment had been entered in the 152nd District Court of
Harris County, Texas against us in favor of Baker Hughes Oilfield
Operations, Inc. d/b/a/ Baker Hughes Inteq. Western Geophysical
("Baker"), a division of Western Atlas International, Inc., in the
amount of $41,142.00, together with interest and attorney fees. This
judgment was outstanding at the time of the filing of the Involuntary
Petition.
During our negotiations with Western for settlement of the Judgment, we
made a $200,000 "good faith payment" to Western's counsel on October
23, 2000. On December 12, 2000, Joe Hill was named as the Chapter 7
Trustee. Subsequently, Western's counsel delivered the $200,000 to the
Trustee.
On January 19, 2001, we filed with the Bankruptcy Court the Motion to
Dismiss Chapter 7 Case. The reasons cited in support of the Motion to
Dismiss included, but were not limited to, (i) the Texas Court being an
improper venue for the action, and (ii) we never receiving the
Involuntary Petition and Summons notifying it of the action. In
anticipation of the Bankruptcy Court dismissing the Involuntary
Petition, on February 2, 2001, we entered into a Settlement Agreement
with Baker Hughes Oilfield Operation, Inc., d/b/a/ Baker Hughes Inteq.
Western Geophysical, a division of Western Atlas International, Inc.
(the "Baker Entities"). In entering its order on February 7, 2001 to
dismiss the action, the Court ordered the Trustee to retain $17,694.80
for satisfaction of administrative fees and expenses, and to pay to
Western and Baker the sum of $182,736.66, on our behalf and pursuant to
the terms of the Settlement Agreement.
The Settlement Agreement provided that, subject to the approval of the
Bankruptcy Court, we agreed to pay to the Baker Entities $759,664.31,
plus interest at 10%. In addition to the $200,000 payable from the
escrow, we pledged as collateral certain properties, personal property
and fixtures and two directors each pledged 750,000 shares of our
common stock which they personally own. Subsequently, we assigned the
income stream from the sale of oil in the Pinon Fee #1, Sagebrush #1
and Sagebrush #2 to the Baker Entities as payments toward the amounts
owed. The Baker Entities continue their proceedings to enforce a
foreign judgment against us in Pleasants County, West Virginia.
(b) On April 10, 2000, Bellevue Resources, Inc. recorded and served a
Notice and Statement of Lien in the Sixth Judicial District, Campbell
County, Wyoming, against us for nonpayment of services. We recorded a
liability of $78,651 in our financial statements under accounts payable
for the year ended December 31, 2000 to reflect this claim. Bellevue
Resources has agreed to take certain lease acreage in Campbell County,
Wyoming held by us as payment for this liability. We executed the
settlement agreement and management considered the case closed on
December 18, 2002.
(c) On September 22, 2000, Tioga Lumber Company obtained a judgment of
$43,300 plus interest in the Circuit Court of Pleasants County, West
Virginia, against Tyler Construction Company for breach of contract. On
February 28, 2002, we reached a negotiated payment schedule with Tioga
and made the initial payment. The current balance owed to Tioga is
$26,091.58.
13
(d) On April 16, 2001, Ross Forbus obtained a judgment of $428,018
against us to satisfy a promissory note previously entered into with
Mr. Forbus on April 8, 1996. We agreed to payment terms and has made
several payments to Mr. Forbus. Mr. Forbus has made a demand upon for
payment in full. We are not currently making payments.
(e) In September 2001, the SEC filed a civil action in the United
States District Court for the District of Columbia (Civil Action No.
1:01CV020060) against us and two of our directors, Loren E. Bagley and
William F. Woodburn. The complaint alleged violations of the anti-fraud
and reporting provisions of the federal securities laws in connection
with press releases, wesbite postings, and SEC filings. The complaint
sought injunctive relief and civil penalties.
On February 26, 2002, the District Court entered a permanent injunction
against Trans Energy, Mr. Bagley, and Mr. Woodburn, permanently
enjoining them from future violations of the Securities Exchange Act of
1934 and certain rules promulgated thereunder. The Court also ordered
Messrs. Bagley and Woodburn to each pay a $20,000 civil penalty. Trans
Energy, Mr. Bagley and Mr. Woodburn consented to entry of the permanent
injunction and the imposition of civil penalties without admitting or
denying the Commission's allegations. Messrs. Bagley and Woodburn have
each paid their civil penalty.
(f) On December 26, 2001, George Hillyer filed a suit against Trans
Energy and William F. Woodburn and Loren E. Bagley individually. The
action seeks $250,750 in connection with certain services performed for
us. On September 3, 2002, we entered into a Mutual Settlement Agreement
and Release of All Claims whereby we conveyed a 240-acre lease and a
well located in Campbell County Wyoming in release of all claims and
dismissal of the suit by Mr. Hillyer. The Court dismissed the case on
September 20, 2002.
(g) In January 2002, a suit entitled Dennis L. Spencer vs. Trans
Energy, Inc. and Messrs. Woodburn and Bagley was filed in the Circuit
Court of Ritchie County, West Virginia ( Civil Action No. 02-C-02). The
complaint alleges that we sold certain assets which Mr. Spencer claims
to be the beneficial owner. The complaint seeks $1,000,000 in damages.
We have filed an answer to the complaint and the matter is still
pending.
(h) On January 15, 2003, a suit against us entitled Lario Oil & Gas
Company vs. Trans Energy, Inc. (Civil Action No. 24575) was initiated
in the Sixth District Court of Campbell County, Wyoming. Lario's suit
asks for $50,692.10 which it claims we owe for operating fees on the
Sagebrush #1 and #2 and the Pinon Fee #1 wells, operated by Lario and
in which we have working interests. We are preparing an answer to the
complaint and are asking for a complete accounting of all monies owed.
Lario is retaining our share of monthly oil production monies and
applying them to the amount owed.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our securities holders during
the fourth quarter of the fiscal year ended December 31, 2002.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Our common stock is quoted on the OTC Bulletin Board under the symbol
"TSRG." Set forth in the table below are the quarterly high and low prices of
our common stock as obtained from the Nasdaq Small-Cap Market and the OTC
Bulletin Board for the past two fiscal years.
14
High Low
2002
First Quarter $ .026 .005
Second Quarter $ .019 .007
Third Quarter $ .012 .002
Fourth Quarter $ .009 .002
2001
First Quarter $ .07 $ .043
Second Quarter $ .051 $ .023
Third Quarter $ .03 $ .01
Fourth Quarter $ .02 $ .007
As of December 31, 2002, there were approximately 290 holders of record
of our common stock, which figure does not take into account those shareholders
whose certificates are held in the name of broker-dealers or other nominee
accounts.
Dividend Policy
We have not declared or paid cash dividends or made distributions in
the past, and we do not anticipate that we will pay cash dividends or make
distributions in the foreseeable future. We currently intends to retain and
reinvest future earnings to finance operations.
Recent Sales of Unregistered Securities
In 2000, we issued 1,691,287 share of common stock for cash at $.05 per
share, or an aggregate of $83,000. We also issued 11,722,383 shares for services
and conversion of debt valued at an average of $.12 per share, or an aggregate
of $1,422,923. We further issued 151,930,606 shares upon conversion of
convertible debentures valued at $5,653,991, or an average of $.04 per share.
In 2001, we issued 4,655,000 shares of common stock for services valued
at an average of $.03 per share, or an aggregate of $141,305. All of these
shares were issued pursuant to registration statements on Form S-8.
During 2002, we issued 60,835,938 shares of common stock for cash,
services and conversion of debt at an average of $.01 per share, or an aggregate
of $337,250.
Except for the conversion of debentures pursuant to registration
statements, issuances of securities by us were made in reliance upon the
exemption from registration under the Securities Act of 1933, provided by
Section 4(2) thereunder. Issuances of shares conversion of debentures was
pursuant to the exemption provided by Section 3(a)(9) of said Act.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-KSB.
Results of Operations
The following table sets forth the percentage relationship to total
revenues of principal items contained in the statements of operations of the
consolidated financial statements included herewith for the two most recent
fiscal years ended December 31, 2002, and 2001. It should be noted that
percentages discussed throughout this analysis are stated on an approximate
basis.
15
Fiscal Years Ended
December 31,
2002 2001
----- ----
Total revenues......................................... 100% 100%
Total costs and expenses............................... 257 190
Total other income (expenses).......................... (62) (23)
Loss before taxes and minority interests .............. (219) (113)
Income taxes........................................... - -
Minority interests..................................... - -
Net (loss)............................................. (219) (113)
For the Year Ended December 31, 2002 Compared to the Year Ended December 31,
2001
--------------------------------------------------------------------------------
Total revenues of $889,764 for the year ended December 31, 2002
("2002") decreased 33% when compared to $1,320,868 for the year ended December
31, 2001 ("2001"). In 2002, oil made up 31% of total revenues compared to 29% in
2001, and gas sales represented 67% of sales in 2002 compared to 70% in 2001.
The changes were considered minimal representing only a slight difference in
percentage points.
We had a net loss of $1,946,959 for 2002 compared to a net loss of
$1,496,958 in 2001. Total costs and expenses decreased 9% in 2002 primarily due
to the 29% decrease in cost of oil and gas, attributed to lower sales and
production costs. As a percentage of revenues, total costs and expenses
increased from 190% in 2001 to 257% in 2002, which reflects the total lower
sales. Salaries and wages increased 38% in 2002 due to the accrual of an
additional officer's salary. Selling, general and administrative expenses
decreased 18% in 2002 when compared to 2001, primarily due to the decrease in
specific area of legal, travel, accounting, consulting and general office
expenses. Depreciation, depletion and amortization was relatively stable in 2002
increasing only 1%.
Interest expense in 2002 increased 35% in 2002 due to additional debt
and other liabilities in 2002. We also realized a gain on disposition of assets
of $82,522 in 2002, compared to $40,902 in 2001, which was offset by a loss on
sale and valuation of assets in 2002 of $103,103.
Our net loss for 2002 was $1,946,959 versus a net loss of $1,496,958
for 2001. The increase in net loss in 2002 is primarily attributed to the
decreased revenues and increased interest expense.
Net Operating Losses
We have accumulated approximately $19.7 million of net operating loss
carryforwards as of December 31, 2002, which may be offset against future
taxable income through 2022. The use of these losses to reduce future income
taxes will depend on the generation of sufficient taxable income prior to the
expiration of the net operating loss carryforwards. In the event of certain
changes in control, there will be an annual limitation on the amount of net
operating loss carryforwards which can be used. No tax benefit has been reported
in the financial statements for the year ended December 31, 2002 because the
potential tax benefits of the loss carryforward is offset by valuation allowance
of the same amount.
Liquidity and Capital Resources
Historically, working capital needs have been satisfied through our
operating revenues and from borrowed funds. Working capital at December 31, 2002
was a negative $6,332,583 compared with a negative $5,470,698 at December 31,
2001. This decrease in working capital was primarily attributed to increases in
accrued expenses, interest, salaries payable and related party payables. We
anticipate meeting working capital needs during the 2003 fiscal year with
revenues from operations and possibly from capital raised through the sale of
either equity or debt securities. We have no other current agreements or
arrangements for additional funding and there can be no assurance such funding
will be available to us, or if available, such funding will be on acceptable or
favorable terms to us.
16
As of December 31, 2002, we had total assets of $2,747,636 and
stockholders' deficit of $3,938,719 compared to total assets of $3,641,470 and
total stockholders' deficit of $2,305,796 at December 31, 2001.
In 1998, we issued $4,625,400 face value of 8% Secured Convertible
Debentures Due March 31, 1999. A portion of the proceeds were used to acquire
the GCRL properties and interest in Wyoming. During 2000, all but one of the
remaining outstanding debentures were converted into commons stock. At December
31, 2002, we owed $331,462 in connection with the debentures consisting of
$50,000 for a debenture and $281,462 in penalties and interest.
Because we have generated significant losses from operations through
December 31, 2002, and has a working capital deficit at December 31, 2002, there
exists substantial doubt about our ability to continue as a going concern.
Revenues have not been sufficient to cover operating costs and to allow us to
continue as a going concern. Potential proceeds from the future sale of common
stock, other contemplated debt and equity financing, and increases in operating
revenues from new development would enable us to continue as a going concern.
There can be no assurance that we can or will be able to complete any debt or
equity financing.
In the opinion of management, inflation has not had a material effect
on the operations of Trans Energy.
Forward-Looking and Cautionary Statements
This report on Form 10-KSB includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements may relate to
such matters as anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services, anticipated
market performance and similar matters. When used in this report, the words
"may," "will," expect," anticipate," "continue," "estimate," "project,"
"intend," and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 regarding events, conditions,
and financial trends that may affect our future plans of operations, business
strategy, operating results, and financial position. We caution readers that a
variety of factors could cause our actual results to differ materially from the
anticipated results or other matters expressed in forward-looking statements.
These risks and uncertainties, many of which are beyond our control, include (i)
the sufficiency of existing capital resources and our ability to raise
additional capital to fund cash requirements for future operations; (ii)
uncertainties involved in the rate of growth of our business and acceptance of
our products and services; (iii) volatility of the stock market, particularly
within the technology sector; and (iv) general economic conditions. Although we
believe the expectations reflected in these forward-looking statements are
reasonable, such expectations may prove to be incorrect.
Recent Accounting Pronouncements
On August 16, 2001, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards (SFAS) SFAS No. 143,
Accounting for Asset Retirement Obligations," which is effective for fiscal
years beginning after June 15, 2002. It requires that obligations associated
with the retirement of a tangible long-lived asset be recorded as a liability
when those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing an accrued retirement
obligation, an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. Although we have not completed the
process of determining the effect of this new accounting pronouncement, it
currently expects that the effect of SFAS No. 143 on the consolidated financial
statements, when it becomes effective, will not be significant.
17
In October 2001, the FASB issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Although SFAS 144 supersedes SFAS 121, it retains many of the fundamental
provisions of SFAS 121. SFAS 144 also supersedes the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, Reporting-the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. However, it retains the requirement in
APB 30 to report separately discontinued operations and extends that reporting
to a component of an entity that either has been disposed of, by sale,
abandonment, or in a distribution to owners, or is classified as held for sale.
SFAS 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. Management believes the adoption of
SFAS 144 will not have a significant effect on our consolidated financial
statements.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS 145). SFAS 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under
Statement of Financial Accounting Standards No. 4 (SFAS 4). Extraordinary
treatment will be required for certain extinguishments as provided in APB
Opinion No. 30. SFAS 145 also amends Statement of Financial Accounting Standards
No. 13 to require certain modifications to capital leases be treated as a sale-
leaseback and modifies the accounting for sub-leases when the original lessee
remains a secondary obligor (or guarantor). SFAS 145 is effective for financial
statements issued after May 15, 2002, and with respect to the impact of the
reporting requirements of changes made to SFAS 4 for fiscal years beginning
after May 15, 2002. The adoption of the applicable provisions of SFAS 145 did
not have an effect on our financial statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 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 146 applies to costs associated with
an exit activity that does not involve an entity newly acquired in a business
combination or with a disposal activity covered by SFAS 144. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002, with earlier application encouraged. Management is currently reviewing
SFAS 146.
In October 2002, the FASB issued Statement No. 147 "Acquisitions of
Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9" (SFAS 147). SFAS 147 removes acquisitions of
financial institutions from the scope of both Statement 72 and Interpretation 9
and requires that those transactions be accounted for in accordance with FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of this Statement. In addition, this Statement
amends FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that Statement 144 requires for other long-lived assets that are held
and used. SFAS 147 is effective October 1, 2002. Management does not expect that
the adoption of SFAS 147 will have a material effect on its consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure"(SFAS 148"). SFAS 148
amends SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures
18
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. SFAS 148 is effective for fiscal years beginning after
December 15, 2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. Management is currently evaluating the effect that the
adoption of SFAS 148 will have on its results of operations and financial
condition.
Item 7. Financial Statements
Our financial statements as of and for the fiscal years ended December
31, 2002 and 2001 have been examined to the extent indicated in their report by
H J & Associates, LLC, independent certified public accountants, and have been
prepared in accordance with generally accepted accounting principles and
pursuant to Regulation S-B as promulgated by the SEC. The aforementioned
financial statements are included herein starting with page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
This Item is not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth the names, ages, and offices held by our
directors and executive officers:
Name Position Director Since Age
---- -------- -------------- ---
Robert L. Richards President, C.E.O. September 2001 57
and Director
Loren E. Bagley Vice President August 1991 60
and Director
William F. Woodburn Secretary / Treasurer August 1991 61
and Director
John B. Sims Director January 1988 77
All directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified. There are no
agreements with respect to the election of directors. We have not compensated
our directors for service on the Board of Directors or any committee thereof,
but directors are reimbursed for expenses incurred for attendance at meetings of
the Board and any committee thereof. Executive officers are appointed annually
by the Board and each executive officer serves at the discretion of the Board.
The Executive Committee of the Board of Directors, to the extent permitted under
Nevada law, exercises all of the power and authority of the Board in the
management of the business and affairs of Trans Energy between meetings of the
Board.
The business experience of each of the persons listed above during the
past five years is as follows:
Robert L. Richards became a director and was appointed President and
C.E.O. in September 2001. From 1982 to the present, he has been President of
Robert L. Richards, Inc. as a consulting geologist with 27 years experience in
the petroleum industry. He has also served as a geologist with Exxon,
exploration geologist with Union Texas Petroleum, and regional exploration
manager for Carbonit Exploration, Inc. From 2000 to the present, he has been
President and C.E.O. of Derma - Rx, Inc., a formulator and marketer of skin care
19
products. Also, from 1992 to August 2000, Mr. Richards was C.E.O. of Kaire
Nutraceuticals, Inc., a developer and marketer of health and nutritional
products. Mr. Richards served as Vice President of Continental Tax Corporation
from March 1989 to August 1992. He has five and one-half years experience in the
United States Air Force as an Instructor Pilot. Mr. Richards holds a B.S. degree
in geology from Brigham Young University.
Loren E. Bagley served as our President and C.E.O. from September 1993
to September 2001, at which time he resigned as President and was appointed Vice
President. From 1979 to the present, Mr. Bagley has been self-employed in the
oil and gas industry as president, C.E.O. or vice president of various
corporations which he has either started or purchased, including Ritchie County
Gathering Systems, Inc. Mr. Bagley's experience in the oil and gas industry
includes acting as a lease agent, funding and drilling of oil and gas wells,
supervising production of over 175 existing wells, contract negotiations for
purchasing and marketing of natural gas contracts, and owning a well logging
company specializing in analysis of wells. Prior to becoming involved in the oil
and gas industry, Mr. Bagley was employed by the United States government with
the Agriculture Department. Mr. Bagley attended Ohio University and Salem
College and earned a B.S. Degree.
William F. Woodburn has served as our Vice President from August 1991
to September 2001, at which time he resigned as Vice President and was appointed
Secretary / Treasurer. Mr. Woodburn has been actively engaged in the oil and gas
business in various capacities for the past twenty years. For several years
prior to 1991, Mr. Woodburn supervised the production of oil and natural gas and
managed the pipeline operations of Tyler Construction Company, Inc. and Tyler
Pipeline, Inc. Mr. Woodburn is a stockholder and serves as President of Tyler
Construction Company, Inc., and is also a stockholder of Tyler Pipeline, Inc.
which owns and operates oil and gas wells in addition to natural gas pipelines,
and Ohio Valley Welding, Inc. which owns a fleet of heavy equipment that
services the oil and gas industry. Prior to his involvement in the oil and gas
industry, Mr. Woodburn was employed by the United States Army Corps of Engineers
for twenty four years and was Resident Engineer on several construction
projects. Mr. Woodburn graduated from West Virginia University with a B.S. in
civil engineering.
John B. Sims served as our President, C.E.O. and a director from 1988
to September, 1993 and currently is a director. Prior to joining Trans Energy
and from 1984 to 1988, Mr. Sims was the General Partner of Ben's Run Oil Company
which was acquired by the Company in January, 1988. Mr. Sims has also been the
general partner for fourteen limited partnerships from 1977 to 1984 drilling a
total of twenty eight wells. Prior to his involvement in the oil and gas
business, Mr. Sims was a real estate developer for twenty years as well as an
exclusive real estate broker for Ednam Forrest in Charlottesville, Virginia.
During 1994, Mr. Sims voluntarily initiated a personal bankruptcy proceeding
pursuant to Chapter 7 of the United States Bankruptcy Code. Pursuant to the
terms of such proceeding, Mr. Sims was discharged of certain of his debts which
were incurred as a consequence of his personal guarantees of certain business
related debts, not related to Trans Energy, upon which the primary obligor
defaulted.
Item 10. Executive Compensation
We do not have a bonus, profit sharing, or deferred compensation plan
for the benefit of employees, officers or directors, nor have we entered into
employment contracts with any of the aforementioned persons.
Cash Compensation
The following table sets forth all cash compensation paid by us for
services rendered for the years ended December 31, 2002, 2001 and 2000, to our
Chief Executive Officer. No executive officer has earned a salary greater than
$100,000 annually for any of the periods depicted.
20
Summary Compensation Table
Other All
Annual Other
Name and Compen- Compen-
Principal Position Year Salary Bonus sation sation
------------------ ------ ------- ----- ------ ------
Robert L. Richards 2000 $ -0- $ -0- $ -0- $ -0-
President and C.E.O. 2001 -0- -0- -0- -0-
Loren E. Bagley, 2002 $ -0- $ -0- $ -0- $ -0-
President and C.E.O. 2001 -0- -0- -0- -0-
2000 -0- -0- -0- -0-
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, to the best of our
knowledge as December 31, 2002, with respect to each person known by us to own
beneficially more than 5% of our outstanding common stock, each director and all
directors and officers as a group.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class(1)
------------------- --------------------- -----------
Robert L. Richards 1,691,287(2) 0.7%
210 Second Street
St. Marys, WV 26170
Loren E. Bagley * 2,074,527(3) 0.9%
210 Second Street
St. Marys, WV 26170
William F. Woodburn * 2,067,394(4) 0.9%
210 Second Street
St. Marys, WV 26170
John B. Sims * 302,614(5) 0.1%
210 Second Street
St. Marys, WV 26170
All directors and executive 6,135,822(6) 2.6%
officers as a group
(4 persons in group)
-----------------------------
* Director and/or executive officer
Note: Unless otherwise indicated in the footnotes below, we have been advised
that each person above has sole voting power over the shares indicated
above.
(1) Based upon 237,519,127 shares of common stock outstanding on December
31, 2002,but does not take into consideration stock options owned by
certain officers and directors entitling the holders to purchase an
aggregate of 650,000 shares of common stock and which are currently
exercisable. Therefore, for purposes of the table above, 238,169,127
shares of common stock are deemed to be issued and outstanding in
accordance with Rule 13d-3 adopted by the SEC under the Securities
Exchange Act of 1934, as amended. Percentage ownership is calculated
separately for each person on the basis of the actual number of
outstanding shares as of December 31, 2002 and assumes the exercise of
stock options held by such person (but not by anyone else) exercisable
within sixty days.
(2) Includes 1,012,670 shares held in the name of Argene Richards, wife of
Mr. Richards. (3) Includes 312,500 shares that may be acquired by Mr.
Bagley pursuant to stock options
exercisable at $.50 per share and 50,000 shares of common stock held in
the name of Carolyn S. Bagley, wife of Mr. Bagley, over which Ms.
Bagley retains voting power.
21
(4) Includes 312,500 shares that may be acquired by Mr. Woodburn pursuant
to stock options exercisable at $.50 per share and 31,250 shares of
common stock in the name of Janet L. Woodburn, wife of Mr. Woodburn,
over which shares Ms. Woodburn retains voting power.
(5) Includes 25,000 shares that may be acquired by Mr. Sims pursuant to
stock options exercisable at $.50 per share and 13,807 shares of common
stock held jointly with Virginia Sims, wife of Mr. Sims.
(6) Includes 650,000 shares that may be acquired by certain directors
pursuant to stock options exercisable at $.50 per share.
Item 12. Certain Relationships and Related Transactions
During the past two fiscal years, there have been no transactions
between us and any officer, director, nominee for election as director, or any
shareholder owning greater than five percent (5%) of our outstanding shares, nor
any member of the above referenced individuals' immediate family, except as set
forth below.
(a) Loren E. Bagley is President of Sancho, a principal purchaser of
our natural gas. Mr. Bagley's wife, Carolyn S. Bagley is a director and owner of
33% of the outstanding capital stock of Sancho. Under our contract with Sancho,
we have the right to sell natural gas subject to the terms and conditions of a
20-year contract, as amended, that Sancho entered into with Hope Gas in 1988.
This agreement is a flexible volume supply agreement whereby we receive the full
price which Sancho receives less a $.05 per Mcf marketing fee paid to Sancho.
The price of the natural gas is based upon the greater of the residential gas
commodity index or the published Inside F.E.R.C. Index, at our option, for the
first 1,500 Mcf purchased per day by Hope Gas and thereafter the price is the
Inside F.E.R.C. Index. The residential gas commodity index does not directly
fluctuate with the overall price of natural gas. The Inside F.E.R.C. Index
fluctuates monthly with the change in the price of natural gas. While such
option provides certain price protection for us there can be no assurance that
prices paid by us to suppliers will be lower than the price which we would
receive under the Hope Gas arrangement. During 2002, we paid Sancho an aggregate
of approximately $5,956 pursuant to such contract.
(b) On May 7, 1996, we borrowed $100,000 from William Stevenson. Such
amount is repayable in one installment of principal and interest of $110,000 on
November 7, 1996. Messrs. Bagley, William F. Woodburn and John B. Sims are
jointly and severally liable with us for the repayment of such obligation. Such
obligation is secured by the pledge of 50,000 shares of common stock owned by
Mr. Woodburn's wife, Janet L. Woodburn. The loan remains outstanding.
We occupy approximately 4,000 square feet of office space in St. Marys,
West Virginia, which we share with Tyler Construction and Ritchie County
Gathering Systems. Prior to 1997, the office space was paid for by Sancho and we
used the office space rent free. We believe that the foregoing transactions with
Sancho were made on terms no less favorable to us than those available from
unaffiliated third parties.
It is our policy that any future material transactions between us and
members of management or their affiliates shall be on terms no less favorable
than those available from unaffiliated third parties.
22
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit Name
----------- ------------
*2.1 Stock Acquisition Agreement between Trans Energy and Loren E. Bagley and William F.
Woodburn
*2.2 Asset Acquisition Agreement between Trans Energy and Dennis L. Spencer
*2.3 Asset Acquisition Agreement between Trans Energy and Tyler Pipeline, Inc.
*2.4 Stock Exchange Agreement between Trans Energy and Ritchie County Gathering Systems,
Inc.
*2.5 Plan and Agreement of Merger between Trans Energy, Inc. (Nevada) and Apple Corp.
(Idaho), to facilitate the change of our corporate domicile to Nevada
**2.6 Agreements related to acquisition of Vulcan Energy Corporation
*3.1 Articles of Incorporation and all amendments pertaining thereto, for Apple Corp., an Idaho
corporation
*3.2 Articles of Incorporation for Trans Energy, Inc., a Nevada corporation
*3.3 Articles of Merger for the States of Nevada and Idaho
*3.4 By-Laws
*4.1 Specimen Stock Certificate
*10.1 Marketing Agreement with Sancho Oil and Gas Corporation
*10.2 Gas Purchase Agreement with Central Trading Company
*10.3 Price Agreement with Key Oil Company
*21.1 Subsidiaries Schedule
*99.1 Reserve Estimate and Evaluation of oil and gas properties
*99.2 Reserve Estimate and Evaluation for Dennis L. Spencer wells
99.3 Certification of C.E.O. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.4 Certification of C.F.O. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
----------------
* Previously filed as Exhibit to Form 10-SB.
** Previously filed as Exhibit to Form 8-K dated August 7, 1995.
(b) Reports on Form 8-K
On March 14, 2003, we filed a Current Report on Form 8-K reporting
under Item 2 that our subsidiary, Tyler Construction Company, Inc., had
sold certain pipeline assets.
Item 14. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Based on an
evaluation under the supervision and with the participation of the our
management as of a date within 90 days of the filing date of this Annual Report
on Form 10-KSB, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, are effective
to ensure that information required to be disclosed in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.
Changes in Internal Controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation. There were no significant
deficiencies or material weaknesses, and therefore there were no corrective
actions taken. However, the design of any system of controls is based in part
upon certain assumptions about the likelihood of future events and there is no
certainty that any design will succeed in achieving its stated goal under all
potential future considerations, regardless of how remote.
23
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TRANS ENERGY, INC.
BY: /S/ ROBERT L. RICHARDS
-------------------------------
Robert L. Richards,
President and C.E.O.
Dated: March 28, 2003
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature Title Date
--------- ----- ----
President, C.E.O. and March 28, 2003
/S/ ROBERT L. RICHARDS Director
-----------------------------
Robert L. Richards
Vice President and March 28, 2003
/S/ LOREN E. BAGLEY Director
-----------------------------
Loren E. Bagley Principal Financial Officer
Secretary Treasurer/ March 28, 2003
/S/ WILLIAM F. WOODBURN Treasurer and Director
-----------------------------
William F. Woodburn Chief Accounting Officer
March 28, 2003
/S/ JOHN B. SIMS Director
-----------------------------
John B. Sims
24
Certifications
--------------
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert I. Richards, Chief Executive Officer of the Trans Energy,
Inc. (the "registrant"), certify that:
1. I have reviewed this annual report on Form 10-KSB of Trans Energy,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ ROBERT I. RICHARDS
------------------------------
Robert I. Richards
Chief Executive Officer
25
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William F. Woodburn, Principal Accounting Officer of the Trans
Energy, Inc. (the "registrant"), certify that:
1. I have reviewed this annual report on Form 10-KSB of Trans Energy,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ WILLIAM F. WOODBURN
----------------------------------
William F. Woodburn
Principal Accounting Officer
26
TRANS ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
F-1
C O N T E N T S
Independent Auditors' Report ............................................... F-3
Consolidated Balance Sheet ................................................. F-4
Consolidated Statements of Operations ...................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit)................... F-7
Consolidated Statements of Cash Flows ...................................... F-8
Notes to the Consolidated Financial Statements .............................F-10
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors
Trans Energy, Inc. and Subsidiaries
St. Marys, West Virginia
We have audited the accompanying consolidated balance sheet of Trans Energy,
Inc. and Subsidiaries as of December 31, 2002 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years ended December 31, 2002 and 2001. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated 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 consolidated financial position of Trans
Energy, Inc. and Subsidiaries as of December 31, 2002 and the consolidated
results of their operations and their cash flows for the years ended December
31, 2002 and 2001, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 8 to the
consolidated financial statements, the Company has generated significant losses
from operations, has an accumulated deficit of $27,222,022 and has a working
capital deficit of $6,332,583 at December 31, 2002, which together raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 8. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 13 to the consolidated financial statements, certain errors
were discovered by management during the current year resulting in the
understatement of previously reported amounts in wells, accumulated depletion,
related party payables, and accrued expenses as of December 31, 2001.
Accordingly, adjustments have been made to the above mentioned accounts. These
adjustments increased the net loss and accumulated deficit as of and for the
year ended December 31, 2001.
HJ & Associates, LLC
Salt Lake City, Utah
March 4, 2003
F-3
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
December 31,
2002
------------
CURRENT ASSETS
Cash $ 12,227
Accounts receivable, net (Note 1) 138,621
Prepaid expenses 360
-----------
Total Current Assets 151,208
-----------
PROPERTY AND EQUIPMENT (Note 2)
Vehicles 59,830
Machinery and equipment 10,092
Pipelines 2,254,908
Well equipment 49,155
Wells 3,620,868
Leasehold acreage 95,945
Accumulated depreciation (3,496,460)
-----------
Total Fixed Assets 2,594,338
-----------
OTHER ASSETS
Cash surrender value - life insurance (net) 2,090
-----------
Total Other Assets 2,090
-----------
TOTAL ASSETS $ 2,747,636
===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31,
2002
------------
CURRENT LIABILITIES
Accounts payable - trade $ 701,791
Notes payable - convertible (Note 12) 41,575
Accrued expenses 921,420
Salaries payable 969,529
Notes payable - current portion (Note 3) 1,327,333
Judgments payable (Note 7) 1,115,094
Related party payables (Note 4) 1,075,587
Debentures payable (Note 9) 331,462
------------
Total Current Liabilities 6,483,791
------------
LONG-TERM LIABILITIES
Judgments payable (Note 7) 2,702
Notes payable (Note 3) 199,862
------------
Total Long-Term Liabilities 202,564
------------
Total Liabilities 6,686,355
------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 6)
Preferred stock; 10,000,000 shares authorized at $0.001 par
value; -0- shares issued and outstanding --
Common stock; 500,000,000 shares authorized at $0.001 par
value; 237,519,127 shares issued and outstanding 237,518
Capital in excess of par value 23,045,785
Accumulated deficit (27,222,022)
------------
Total Stockholders' Equity (Deficit) (3,938,719)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 2,747,636
============
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended
December 31,
------------------------------
2002 2001
------------- -------------
(Restated)
REVENUES $ 889,764 $ 1,320,868
------------- -------------
COSTS AND EXPENSES
Cost of oil and gas 662,958 934,678
Salaries and wages 382,117 275,931
Depreciation, depletion and amortization 919,364 906,931
Selling, general and administrative 324,874 393,976
------------- -------------
Total Costs and Expenses 2,289,313 2,511,516
------------- -------------
LOSS FROM OPERATIONS (1,399,549) (1,190,648)
------------- -------------
OTHER INCOME (EXPENSE)
Other income 22,537 16,026
Gain on disposition of debt 82,522 40,902
Interest expense (488,87 (361,087)
Loss on sale and valuation of assets (Note 1 and 2) (103,103) (2,151)
Settlement expense (60,489) --
------------- -------------
Total Other Income (Expense) (547,410) (306,310
------------- -------------
NET LOSS BEFORE INCOME TAXES,
AND MINORITY INTERESTS (1,946,959) (1,496,958)
------------- -------------
INCOME TAXES (Note 1) -- --
------------- -------------
MINORITY INTERESTS -- --
------------- -------------
NET LOSS - attributed to common shareholders $ (1,946,959) $ (1,496,958)
============= =============
DIVIDEND ON PREFERRED STOCK $ -- $ (23,250)
============= =============
BASIC LOSS PER SHARE (Note 1)
Operations $ (0.01) $ (0.01 )
------------- -------------
Total Basic Loss Per Share $ (0.01) $ (0.01)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 207,824,349 175,981,559
============= =============
The accompanying notes are an integral part
of these consolidate financial statements.
F-6
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Capital in
Preferred Stock Common Stock Excess of Accumulated
Shares Amount Shares Amount Par Value Deficit
----------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 300 -- 172,028,189 $ 172,027 $ 22,608,733 $(23,754,855)
Common stock issued for services -- -- 4,655,000 4,655 136,650 --
Discount on beneficial conversion
feature of notes payable -- -- -- -- 23,988 --
Dividend on preferred stock at 7.75% -- -- -- -- -- (23,250)
Net loss for the year ended
December 31, 2001 (Restated) -- -- -- -- -- (1,496,958)
----------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001
(Restated) 300 -- 176,683,189 176,682 22,769,371 (25,275,063)
Conversion of preferred stock and
preferred dividends to common
stock (300) -- 16,835,938 16,836 6,414 --
Conversion of notes payable to
common stock -- -- 5,000,000 5,000 45,000 --
Common stock issued for services -- -- 1,000,000 1,000 28,000 --
Conversion of notes payable to
common stock -- -- 4,166,667 4,167 20,833 --
Common stock issued for cash -- -- 33,333,333 33,333 166,667 --
Common stock issued for services -- -- 500,000 500 9,500 --
Net loss for the year ended
December 31, 2002 -- -- -- -- -- (1,946,959)
----------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 -- $ -- 237,519,127 $ 237,518 $ 23,045,785 $(27,222,022)
=========== ============ ============ ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
--------------------------
2002 2001
----------- -----------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,946,959) $(1,496,958)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation, depletion and amortization 919,364 906,931
Loss on valuation of wells 103,103 36,577
Loss on impairment of leases -- 60,756
Gain on disposition of assets (2,650) (95,182)
Common stock issued for services &
beneficial conversion features 39,000 165,293
Gain on disposition of debt (82,522) (40,902)
Settlement expense 54,489 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 45,612 (115,472)
Decrease in restricted cash -- 65,689
(Increase) decrease in prepaid and other current assets 6,341 (7,371)
Increase in accounts payable and accrued expenses 656,705 461,344
Decrease in judgments payable (61,625) (122,084)
Net Cash Used by Operating Activities (269,142) (181,379)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 2,650 100,000
Expenditures for property and equipment (10,249) (522,819)
----------- -----------
Net Cash Used by Investing Activities (7,599) (422,819)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in cash overdraft -- (11,608)
Common stock issued for cash 200,000 --
Principal payments to related parties (208,754) (57,879)
Proceeds from related parties 337,896 643,308
Principal payments on notes payable (76,968) (52,992)
Proceeds from notes payable 35,303 43,285
Proceeds from convertible notes payable -- 41,575
----------- -----------
Net Cash Provided by Financing Activities $ 287,477 $ 605,689
----------- -----------
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
NET INCREASE IN CASH $ 10,736 $ 1,491
CASH, BEGINNING OF YEAR 1,491 --
CASH, END OF YEAR $ 12,227 $ 1,491
======== ========
CASH PAID FOR:
Interest $288,561 $ 87,939
Income taxes $ -- $ --
NON-CASH FINANCING ACTIVITIES:
Common stock issued for services
and beneficial conversion features $ 39,000 $165,293
Common stock issued for conversion
of debt and interest $ 75,000 $597,666
Common stock issued for conversion
of preferred stock and dividends $ 23,250 $ --
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The Company was originally incorporated in the State of Idaho on
January 16, 1964. On January 11, 1988, the Company changed its name
to Apple Corporation. In 1988, the Company acquired oil and gas
leases and other assets from Ben's Run Oil Company (a Virginia
limited partnership) and has since engaged in the business of oil
and gas production.
On November 5, 1993, the Board of Directors caused to be
incorporated in the State of Nevada, a new corporation by the name
of Trans Energy, Inc., with the specific intent of effecting a
merger between Trans Energy, Inc. of Nevada and Apple Corp. of
Idaho, for the sole purpose of changing the domicile of the Company
to the State of Nevada. On November 15, 1993, Apple Corp. and the
newly formed Trans Energy, Inc. executed a merger agreement whereby
the shareholders of Apple Corp. exchanged all of their issued and
outstanding shares of common stock for an equal number of shares of
Trans Energy, Inc. common stock. Trans Energy, Inc. was the
surviving corporation and Apple Corp. was dissolved.
b. Accounting Method
The Company uses the successful efforts method of accounting for oil
and gas producing activities. Costs to acquire mineral interests in
oil and gas properties, to drill and equip exploratory wells that
find proved reserves, and to drill and equip development wells are
capitalized. Costs to drill exploratory wells that do not find
proved reserves, geological and geophysical costs, and costs of
carrying and retaining unproved properties are expensed.
Unproved oil and gas properties that are individually significant
are periodically assessed for impairment of value, and a loss is
recognized at the time of impairment by providing an impairment
allowance. Other unproved properties are amortized based on the
Company's experience of successful drilling and average holding
period. Capitalized costs of producing oil and gas properties, after
considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the
unit-of-production method. Support equipment and other property and
equipment are depreciated over their estimated useful lives.
On the sale or retirement of a complete unit of a proved property,
the cost and related accumulated depreciation, depletion, and
amortization are eliminated from the property accounts, and the
resultant gain or loss is recognized. On the retirement or sale of a
partial unit of proved property, the cost is charged to accumulated
depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.
On the sale of an entire interest in an unproved property for cash
or cash equivalent, gain or loss on the sale is recognized, taking
into consideration the amount of any recorded impairment if the
property had been assessed individually.
F-10
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b. Accounting Method (Continued)
If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest
retained. During the year ended December 31, 2001, the Company sold
100% of a tract of leasehold acreage for $100,000. The sale resulted
in a gain of $95,182. During the year ended December 31, 2001, the
Company recognized a loss of $60,756 relating to leasehold acreage
for which the leases had expired. During the year ended December 31,
2002, the Company transferred 240 acres and one of its wells as
settlement with George Hillyer for an expense of $54,489. Also
during 2002, the Company recognized an impairment loss of $103,103
on one of its natural gas wells in West Virginia that was shut down.
The Company has elected a December 31 year-end.
c. Basic Loss per Share of Common Stock
The basic loss per share of common stock is based on the weighted
average number of shares issued and outstanding at the date of the
consolidated financial statements. Fully diluted loss per share of
common stock is not disclosed as the common stock equivalents are
antidilutive in nature.
For the Years Ended
December 31,
---------------- -------------
2002 2001
------------- -------------
Numerator:
Loss from operations $ (1,946,959) $ (1,496,958)
------------- -------------
Net Loss $ (1,946,959) $ (1,496,958 )
============= =============
Denominator - weighted average shares 207,824,349 175,981,559
============= =============
Net loss per share:
Loss from Operations $ (0.01) $ (0.01 )
------------- -------------
Total Basic Loss Per Share $ (0.01) $ (0.01)
============= =============
d. Provision for Taxes
Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely that not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
F-11
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Provision for Taxes (Continued)
Net deferred tax assets consist of the following components as of
December 31, 2002 and 2001:
2002 2001
----------- -----------
Deferred tax assets
NOL Carryover $ 7,682,610 $ 6,933,470
----------- -----------
-- --
----------- -----------
Deferred tax liabilities:
Accrued wages (378,116) --
Valuation allowance (7,304,494) (6,933,470)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate of 39% to
pretax income from continuing operations for the years ended
December 31, 2002 and 2001 due to the following:
2002 2001
--------- ---------
Book loss $(759,314) $(583,820)
Other 94 34,525
Penalties 64,620 7,820
Officer insurance 4,610 (38,146)
Stock for services/options expense 15,200 64,460
Accrued wages 127,478 --
Valuation allowance 547,312 515,161
--------- ---------
$ -- $ --
========= =========
At December 31, 2002, the Company had net operating loss
carryforwards of approximately $19,700,000 that may be offset
against future taxable income from the year 2002 through 2022. No
tax benefit has been reported in the December 31, 2002 consolidated
financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount.
Due to the change in ownership provisions of the Tax Reform Act of
1986, net operating loss carryforwards for Federal income tax
reporting purposes are subject to annual limitations. Should a
change in ownership occur, net operating loss carryforwards may be
limited as to use in the future.
F-12
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e. Principles of Consolidation
The consolidated financial statements include the Company and its
wholly owned subsidiaries, Prima Oil Company, Inc., Ritchie County
Gathering Systems, Inc. and its 65% owned subsidiary, Tyler
Construction Company, Inc. All significant intercompany accounts and
transactions have been eliminated.
f. Presentation
Certain 2001 balances have been reclassified to conform to the
presentation of the 2002 consolidated financial statements.
g. Depreciation
Fixed assets are stated at cost. Depreciation on vehicles, machinery
and equipment is provided using the straight line method over
expected useful lives of five years. Depreciation on pipelines and
well equipment is provided using the straight-line method over the
expected useful lives of fifteen years. Wells are being depreciated
using the units-of-production method on the basis of total estimated
units of proved reserves.
h. Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
i. Long Lived Assets
The Company reviews long-lived assets and identifiable intangibles
whenever events or circumstances indicate that the carrying amounts
of such assets may not be fully recoverable. The Company evaluates
the recoverability of long-lived assets by measuring the carrying
amounts of the assets against the estimated undiscounted cash flows
associated with these assets. At the time such evaluation indicates
that the future undiscounted cash flows of certain long-lived assets
are not sufficient to recover the assets' carrying value, the assets
are adjusted to their fair values (based upon discounted cash
flows).
F-13
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j. Newly Issued Accounting Pronouncements
SFAS No. 145 -- On April 30, 2002, the FASB issued FASB Statement
No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS 145 rescinds both FASB Statement No. 4 (SFAS 4), "Reporting
Gains and Losses from Extinguishment of Debt," and the amendment to
SFAS 4, FASB Statement No. 64 (SFAS 64), "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." Through this rescission,
SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS 64)
that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the
related income tax effect. However, an entity is not prohibited from
classifying such gains and losses as extraordinary items, so long as
it meets the criteria in paragraph 20 of Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. Further,
SFAS 145 amends paragraph 14(a) of FASB Statement No. 13,
"Accounting for Leases", to eliminate an inconsistency between the
accounting for sale-leaseback transactions and certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. The amendment requires that a lease
modification (1) results in recognition of the gain or loss in the 9
financial statements, (2) is subject to FASB Statement No. 66,
"Accounting for Sales of Real Estate," if the leased asset is real
estate (including integral equipment), and (3) is subject (in its
entirety) to the sale- leaseback rules of FASB Statement No. 98,
"Accounting for Leases: Sale- Leaseback Transactions Involving Real
Estate, Sales-Type Leases of Real Estate, Definition of the Lease
Term, and Initial Direct Costs of Direct Financing Leases."
Generally, FAS 145 is effective for transactions occurring after May
15, 2002. The Company does not expect that the adoption of SFAS 145
will have a material effect on its financial performance or results
of operations.
SFAS No. 146 -- In June 2002, the FASB issued SFAS No. 146,
"Accounting for Exit or Disposal Activities" (SFAS 146). SFAS 146
addresses significant issues regarding the recognition, measurement,
and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently
accounted for under EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The
scope of SFAS 146 also includes costs related to terminating a
contract that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS
146 will be effective for exit or disposal activities that are
initiated after December 31, 2002 and early application is
encouraged. The provisions of EITF No. 94-3 shall continue to apply
for an exit activity initiated under an exit plan that met the
criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The
effect on adoption of SFAS 146 will change on a prospective basis
the timing of when the restructuring charges are recorded from a
commitment date approach to when the liability is incurred. The
Company does not expect that the adoption of SFAS 146 will have a
material effect on its financial performance or results of
operations.
F-14
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j. Newly Issued Accounting Pronouncements (Continued)
SFAS No. 147 -- In October 2002, the FASB issued Statement No. 147
"Acquisitions of Certain Financial Institutions - an amendment of
FASB Statements No. 72 and 144 and FASB Interpretation No. 9" (SFAS
147). SFAS 147 removes acquisitions of financial institutions from
the scope of both Statement 72 and Interpretation 9 and requires
that those transactions be accounted for in accordance with FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and
Other Intangible Assets. Thus, the requirement in paragraph 5 of
Statement 72 to recognize (and subsequently amortize) any excess of
the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions
within the scope of this Statement. In addition, this Statement
amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions
such as depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets. Consequently, those intangible
assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that
Statement 144 requires for other long-lived assets that are held and
used. SFAS 147 is effective October 1, 2002. The Company does not
expect that the adoption of SFAS 147 will have a material effect on
its consolidated financial statements.
SFAS No. 148 -- In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and
Disclosure"(SFAS 148"). SFAS 148 amends SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
SFAS 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods
beginning after December 15, 2002. The Company is currently
evaluating the effect that the adoption of SFAS 148 will have on its
results of operations and financial condition.
k. Accounts Receivable
Accounts receivable are shown net of an allowance for bad debt of
$2,000 at December 31, 2002.
F-15
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l. Preferred Stock
The Company has authorized 10,000,000 shares of $0.001 par value
preferred stock. The preferred stock shall have preference as to
dividends and to liquidation of the Company. The board of directors
has determined that the 300 preferred shares outstanding at December
31, 2000 valued at $300,000 are convertible into common stock at a
20% discount from the closing price of the common stock on the date
of conversion and bears interest at prime plus 1%. The conversion
discount of $60,000 has been recorded and is included in retained
deficit at December 31, 2000. During the year ended December 31,
2001, the Company declared a dividend of $23,250 on the preferred
stock. During the year ended December 31, 2002, the Company
converted the preferred stock and accrued dividend payable into
16,835,938 shares of common stock. The common stock was valued at
80% of the closing price on August 31, 2001 which was the dividend
declaration date.
NOTE 2 - OIL AND GAS PROPERTY
At December 31, 2002 the Company's proved properties consist of
costs in the following areas net of accumulated depletion of
$1,781,433.
Wyoming $ 1,229,293
West Virginia 610,142
--------------
$ 1,839,435
==============
Productive Gas Wells
The following summarizes the Company's productive oil and gas wells
as of December 31, 2002. Productive wells are producing wells and
wells capable of production. Gross wells are the total number of
wells in which the Company has an interest. Net wells are the sum of
the Company's fractional interests owned in the gross wells.
Gross Net
----- ----
Productive oil wells 6 1.93
Productive gas wells 7 5.25
- ----
13 7.18
==== ====
The Company does not operate any of these wells.
F-16
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 2 - OIL AND GAS PROPERTY (Continued)
Oil and Gas Acreage
The following table sets forth the undeveloped leasehold acreage, by
area, held by the Company as of December 31, 2002. Undeveloped acres
are acres on which wells have not been drilled or completed to a
point that would permit the production of commercial quantities of
oil and gas, regardless of whether or not such acreage contains
proved reserves. Gross acres are the total number of acres in which
the Company has a working interest. Net acres are the sum of the
Company's fractional interests owned in the gross acres. In certain
leases, the Company's ownership varies at different depths;
therefore, the net acres in these leases are calculated using the
lowest ownership interest at any depth.
Gross Net
----- -----
Wyoming 14,305 12,315
West Virginia 424 424
------ -------
Total acres 14,729 12,739
====== ======
NOTE 3 - LONG-TERM DEBT
The Company had the following debt obligations at December 31, 2002:
First National Bank of St. Marys, $9,244 payable monthly,
prime plus 2% interest rate, secured by equipment and personal
guarantee of officers. $ 362,407
Union Bank of Tyler County, $332 due monthly, 10% interest
rate, due November 20, 2005, secured by vehicle. 10,303
Union Bank of Tyler County, interest at 10% due quarterly,
renewable, due on demand, unsecured 19,683
-----------
Balance forward $ 392,393
-----------
F-17
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 3 - LONG-TERM DEBT (Continued)
Balance forward $ 392,393
Union Bank of Tyler County, principal and interest payments of
$799 due monthly, interest rate of 14.4%, due September 25,
2004, secured by vehicle and personal guarantee of officers. 14,831
Wesbanco, interest payable quarterly, prime +1%, due on demand,
secured by officers' personal assets. 300,000
Note payable to an individual, due on demand, bearing interest at
NY prime +1%, interest payments due monthly, secured by
equipment. 292,078
Union Bank of Tyler County, principal and interest payments of
$230 due monthly, interest at 16.0%, secured by vehicle of the
Company. 1,974
Note due to a private individual, due on demand with interest
at 20%, secured by personal guarantee of officers. 200,919
Note payable to Raven Group, interest imputed at 10%,
due on demand, unsecured. 325,000
-----------
Total 1,527,195
Less Current Portion (1,327,333)
-----------
Total Long-Term Debt $ 199,862
===========
Future maturities of long-term debt are as follows:
2003 $ 1,327,333
2004 100,119
2005 99,743
2006 --
2007 --
2008 and thereafter --
--
-----------
Total $ 1,527,195
===========
At December 31, 2002, total interest accrued for these debt obligations
was $106,692.
NOTE 4 - RELATED PARTY TRANSACTIONS
a. Marketing Agreement - Sancho
Natural gas delivered through the Company's pipeline network is sold
either to Sancho Oil and Gas Corporation ("Sancho"), a company
controlled by the Vice President of the Company, at the industrial
facilities near Sistersville, West Virginia, or to Dominion Gas, a
local utility, on an on-going basis at a variable price per month
per Mcf.
F-18
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
a. Marketing Agreement - Sancho (Continued)
Under its contract with Sancho, the Company has the right to sell
natural gas subject to the terms and conditions of a 20-year
contract, as amended, that Sancho entered into with Dominion Gas in
1988. This agreement is a flexible volume supply agreement whereby
the Company receives the full price which Sancho charges the end
user less a $0.05 per Mcf marketing fee paid to Sancho.
b. Well Drilling and Operating Agreement
In June 2000, the Company entered into a well drillin and operating
agreement with Sancho Oil and Gas Corporation ("Sancho"), a company
controlled by the Vice President of the Company, on an on-going
basis. Sancho provided seven drill-down wells located in Tyler
County, West Virginia and the Company was to pay 100% of the cost of
drilling and completing the well including any topside equipment
needed and other related equipment. The Company will receive 75% of
the working interest in each of the wells competed.
c. Receivables and Payables
The Company has various receivables from and payables to the
officers and companies of the officers. These amounts have been
grouped together with a net payable of $1,075,587 at December 31,
2002. The net payable bears interest at 10%, is due on demand and is
unsecured. At December 31, 2002, total interest accrued in the net
related party payable was $191,945 and is included in accrued
expenses.
NOTE 5 - ECONOMIC DEPENDENCE AND MAJOR CUSTOMERS
The Company's marketing arrangement with Sancho accounted for
approximately 82% and 82% of the Company's revenue for the years
ended December 31, 2002 and 2001, respectively in Tyler Construction
Company. This marketing agreement is in effect until December 1,
2008. Another customer also generated sales of 99% and 99% of
Ritchie County total sales in 2002 and 2001, respectively.
NOTE 6 - STOCKHOLDERS' EQUITY
In 2001, the Company issued 4,655,000 shares of common stock for
services rendered. The shares were valued at an average price of
$0.03 per share for total consideration of $141,305. The shares were
issued after the services were rendered and were valued at the
closing price on the dates of issue.
During February 2002, the Company converted 300 shares of preferred
stock and $23,250 of cumulative preferred dividends into 16,835,938
shares of common stock. As a result of this conversion, the Company
has -0- shares of preferred stock issued and outstanding at December
31, 2002.
During February 2002, the Company received $200,000 for the purchase
of 33,333,333 shares of common stock and was shown as a stock
subscription deposit. During September 2002, the Company issued the
33,333,333 shares and at September 30, 2002 the stock subscription
deposit was reduced to $-0-.
F-19
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
During March 2002, the Company entered into a promissory note with
an unrelated party for $25,000. The note is payable upon demand and
accrues interest at 10% per annum. During September 2002, the
Company issued 4,166,667 shares of its common stock for the
conversion of notes payable for this amount.
During April 2002, the Company issued 5,000,000 shares of its common
stock for the conversion of notes payable in the amount of $50,000.
The Company additionally issued 1,000,000 shares of its common stock
for services rendered and valued at $29,000.
During October 2002, the Company entered into an agreement for a
proposed private offering of either its debt or equity securities
with an investment banking firm. The Company was required to pay
$10,000 at the time of the agreement as an advance towards expenses.
The advance may be paid using cash and/or the Company's common stock
not to exceed 500,000 shares regardless of the market value of the
stock at the time of issuance. During October 2002, the Company
issued 500,000 shares of its common stock valued at $10,000 as an
advance in accordance with the agreement. The Company later decided
not to proceed with the proposed private offering and forfeited the
$10,000 advance as per the terms of the agreement.
NOTE 7 - JUDGMENTS PAYABLE
Tioga Lumber Company
--------------------
A foreign judgment has been filed with the Circuit Court in
Pleasants County, West Virginia for a judgment against the Company
by Tioga Lumber Company (Tioga) rendered by the Circuit Court in
Pleasants County, West Virginia for non-payment of an accounts
payable. The judgment is for $46,375 plus prejudgment interest at
10.00%.
On February 28, 2002, the Company and Tioga reached an agreement
wherein the Company would pay Tioga $10,000 by March 5, 2002 and
$8,000 per month thereafter. The court appointed a special
commissioner to act as an arbitrator if the Company defaults. The
special commissioner would attach a lien if property is found which
does not have a lien attached. The first payment has been made, and
at December 31, 2002, the balance due including interest to Tioga
was $26,092 and is included in judgments payable and is classified
as a current liability.
Dennis L. Spencer
-----------------
In January 2002, Dennis L. Spencer filed suit against the Company
and William F. Woodburn and Loren E. Bagley in the Circuit Court of
Ritchie County, West Virginia (Civil Action No. 02-C-02). The
complaint alleges that the Company sold certain assets that Mr.
Spencer claims to be the beneficial owner. The complaint seeks
$1,000,000 in damages. The Company has filed its answer to the
allegations and feels that the Company has met its obligations in
full to Mr. Spencer. Management also believes the suit is without
merit and intends to vigorously defend the action. The Company has
not accrued any amounts for these claims as of December 31, 2002
because the Company feels that based on its defenses against the
claims that the Company will have no additional liability. Due to
the early stage of litigation, it is not possible to evaluate the
likelihood of an unfavorable outcome or estimate the extent of
potential loss.
F-20
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 7 - JUDGMENTS PAYABLE (Continued)
George Hillyer
--------------
On December 26, 2001, George Hillyer filed a suit against the
Company and William F. Woodburn and Loren E. Bagley, individually.
The action seeks $250,750 in connection with certain services
performed for the Company. On September 3, 2002, the Company entered
into a Mutual Settlement Agreement and Release of All Claims whereby
the Company conveyed a 240-acre lease and a well located in Campbell
County Wyoming in release of all claims and dismissal of the suit by
Mr. Hillyer. The court dismissed the case on September 20, 2002. The
well given to Mr. Hillyer was valued at $54,489 which was included
in the statement of operations as an expense.
Ross O. Forbus
--------------
On April 16, 2001, Ross O. Forbus obtained a judgment against the
Company for $428,018 plus post judgment interest at 10.00% per
annum. The judgment was obtained to satisfy a previous note payable.
The Company has made several small payments to Mr. Forbus and is
currently negotiating with him toward extending the payments until
the judgment can be paid in full. Mr. Forbus has made a demand upon
the Company for payment of the full obligation. The Company has
accrued the balance of $428,018 plus accrued interest. At December
31, 2002, the total amount including interest of $479,647 is
included in judgments payable and is classified as a current
liability.
Core Laboratories, Inc.
-----------------------
On July 28, 1999, Core Laboratories, Inc. (Core) obtained a judgment
against the Company for non-payment of an accounts payable. The
judgment calls for monthly payments of $351 and is bearing interest
at 10.00% per annum. At December 31, 2002, the Company had accrued a
balance including interest of $15,310 which is included in judgments
payable.
RR Donnelly
-----------
On July 1, 1998, RR Donnelly (RR) obtained a judgment against the
Company for non-payment of accounts payable. The judgment calls for
monthly payments of $3,244 and is bearing interest at 10.00% per
annum. At December 31, 2002, the Company has accrued a balance
including interest of $68,559 which is included in judgment payable
as a current liability.
F-21
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 7 - JUDGMENTS PAYABLE (Continued)
Bellevue Resources
------------------
On April 10, 2000, Bellevue Resources recorded and served its Notice
and Statement of Lien in the Sixth Judicial District, Campbell
County, Wyoming, against the Company for non-payment of services.
The Company had recorded a liability of $78,651 at December 31,
2000. During 2001, the Company has agreed to a settlement agreement
wherein the Company will transfer a portion of the Powder River
Basin leasehold acreage in Campbell County, Wyoming as full payment
of the liability. The Company recognized a gain of $38,784 on the
disposition of the debt. The Company has executed the settlement
agreement and the court dismissed the case on December 18, 2002.
Baker Hughes Entities
---------------------
On February 7, 2001, the United States Bankruptcy Court, Southern
District of Texas, entered an Order Granting Motion to Dismiss
Chapter 7 Case in the action entitled In Re: Trans Energy, Inc.,
Case No. 00-39496-H4-7. The Order dismissed the involuntary
bankruptcy action instituted against the Company on October 16,
2000. The sole petitioning creditor named in the Involuntary
Petition was Western Atlas International, Inc. ("Western"). An Order
for Relief Under Chapter 7 was entered by the Court on November 22,
2000.
On April 23, 2000, the 189th District Court of Harris County, Texas
entered an Agreed Final Judgment in favor of Western against the
Company in the amount of $600,665, together with post judgment
interest at 10% per annum. Following the judgment, Western and the
Company entered into settlement negotiations concerning the
Company's satisfaction of the judgment through payments over a four
to five month period together with the pledge of collateral on
certain unencumbered assets.
Previously, on or about July 9, 1998, a judgment had been entered in
the 152nd District Court of Harris County, Texas against the Company
in favor of Baker Hughes Oilfield Operations, Inc. d/b/a/ Baker
Hughes Inteq. Western Geophysical ("Baker"), a division of Western
Atlas International, Inc., in the amount of $41,142, together with
interest and attorney fees. This judgment was outstanding at the
time of the filing of the Involuntary Petition.
During its negotiations with Western for settlement of the Judgment,
the Company made a $200,000 "good faith payment" to Western's
counsel on October 23, 2000. On December 12, 2000, Joe Hill was
named as the Chapter 7 Trustee. Subsequently, Western's counsel
delivered the $200,000 to the Trustee.
On January 19, 2001, the Company filed with the Bankruptcy Court the
Motion to Dismiss Chapter 7 Case. The reasons cited by the Company
in support of its Motion to Dismiss included, but were not limited
to, (i) the Texas Court being an improper venue for the action, and
(ii) the Company never receiving the Involuntary Petition and
Summons notifying it of the action.
F-22
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 7 - JUDGMENTS PAYABLE (Continued)
Baker Hughes Entities (Continued)
---------------------------------
In anticipation of the Bankruptcy Court dismissing the Involuntary
Petition, on February 2, 2001, the Company entered into a Settlement
Agreement with Baker Hughes Oilfield Operations, Inc. d/b/a/ Baker
Hughes Inteq. Western Geophysical, a division of Western Atlas
International, Inc. (the "Baker Entities"). In entering its order on
February 7, 2001 to dismiss the action, the Court ordered the
Trustee to retain $17,695 for satisfaction of administrative fees
and expenses, and to pay to Western and Baker the sum of $182,737,
on behalf of the Company and pursuant to the terms of the Settlement
Agreement.
The Settlement Agreement provided that, subject to the approval of
the Bankruptcy Court, the Company agreed to pay to the Baker
Entities $759,664, plus interest at 10%. In addition to the $200,000
payable from the escrow, the Company agreed to pay to the Baker
Entities an initial payment of $117,261 within fifteen days from the
date of the Dismissal Order (due February 21, 2001).
The Company also agreed to make additional payments of $100,000
every thirty days following the initial payment, with the first
payment due beginning no later than March 23, 2001, continuing until
the total obligation plus interest is paid in full. Further, the
Company pledged as collateral certain properties, personal property
and fixtures and two directors each pledged 750,000 shares of the
Company's common stock which they personally own.
During 2002, the Company assigned the income stream from the sale of
oil from three of its wells (Pinon Fee #1, Sagebrush #1 and
Sagebrush #2) to the Baker entities as payments towards the amounts
owed. The Company believes that this payment will satisfy the Baker
Entities until the Company has paid the full obligation. The Baker
Entities continue its proceedings to enforce a foreign judgment
against the Company in Pleasants County, West Virginia. At December
31, 2002, the Company has a remaining liability including interest
of $522,189 which is included in judgments payable as a current
liability.
Lario Oil & Gas Company
-----------------------
On January 15, 2003, Lario Oil & Gas Company ("Lario") filed a suit
against the Company in the Sixth District Court of Campbell County,
Wyoming (Civil Action No. 24575). Lario asks for $50,692, which it
claims the Company owes for operating fees on the Pinon Fee #1,
Sagebrush #1 and Sagebrush #2 wells, operated by Lario and in which
the Company has working interests. The Company is preparing an
answer to the complaint and is asking for a complete accounting of
all monies owed. Lario is retaining a portion of the Company's share
of the monthly oil production monies and applying them to the amount
owed. At December 31, 2002, the Company has accrued $50,692, which
is included in accounts payable as a current liability.
F-23
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 7 - JUDGMENTS PAYABLE (Continued)
O.C. Smith
----------
On February 5, 2003, O.C. Smith obtained a judgment against the
Company for $6,000 as ordered by the Circuit Court of Ritchie
County, West Virginia. Mr. Smith had brought suit against the
Company, successor of Apple Corporation, for an accounting of all
gas purchased by the Company as well as judgment for all amounts
still owing. The Company had acquired all of Apple Corporation's
interest in this gas and management determined that there was an
unpaid balance still owing Mr. Smith. The $6,000 is payable in three
monthly installments beginning on April 25, 2003. At December 31,
2002, the Company had accrued the total amount of $6,000 and has
included it in judgments payable and has classified it as a current
liability.
NOTE 8 - GOING CONCERN
The Company's consolidated financial statements are prepared using
generally accepted accounting principles applicable to a going
concern which contemplates the realization of assets and liquidation
of liabilities in the normal course of business. The Company has
incurred cumulative operating losses through December 31, 2002 of
$27,222,022, and has a working capital deficit at December 31, 2002
of $6,332,583.
Revenues have not been sufficient to cover its operating costs and
to allow it to continue as a going concern. The potential proceeds
from the sale of common stock, sale of drilling programs, and other
contemplated debt and equity financing, and increases in operating
revenues from new development would enable the Company to continue
as a going concern. There can be no assurance that the Company can
or will be able to complete any debt or equity financing. The
Company's consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE 9 - CONVERTIBLE DEBENTURES
On September 10, 1998, the Company completed a debenture issue of
$4,625,400 face value of 8% Secured Convertible Debentures due March
31, 1999 (the "Debentures"). Interest shall accrue from the date of
issuance until payment in full of the principal sum has been made or
duly provided for. Holders of the Debentures shall have the option,
at any time, until maturity, to convert the principal amount of
their Debenture, or any portion of the principal amount which is at
least $10,000 into shares of the Company's Common Stock at a
conversion price for each share equal to the lower of (a) seventy
percent (70%) of the market price of the Company's Common Stock
averaged over the five trading days prior to the date of conversion,
or (b) the market price on the issuance date of the Debentures. Any
accrued and unpaid interest shall be payable, at the option of the
Company, in cash or in shares of the Company's Common Stock valued
at the then effective conversion price.
F-24
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 9 - CONVERTIBLE DEBENTURES (Continued)
Pursuant to the terms of the Debentures, the Company had agreed to
file a registration statement with the Commission to register the
shares of the Company's Common Stock into which the Debentures may
be converted. Upon effectiveness of the registration statement, the
shares of the Company's Common Stock underlying the Debentures, when
issued, will be deemed registered securities and will not be
restricted as to the resale of such securities.
If the Company failed to file its registration statement within
forty-five (45) days from the closing of the Debenture offering, the
Company would be obligated to increase by up to fifteen percent
(15%) the number of shares issuable upon conversion to each holder.
The Company failed to obtain an effective registration statement.
The Company has accrued and fully amortized a discount on the
Debentures of $1,445,480 to compensate for the seventy percent (70%)
market price conversion and contributed this amount to additional
paid-in capital. The Company has also accrued an additional amount
of $963,653 as a penalty payable to compensate for the non-filing of
the registration statement penalty of 15% and for the 5% discount on
the conversion of the debentures penalty and have added these
amounts to the debenture payable as of December 31, 1999. In 1999,
the Company converted $469,064 of the debenture and $60,102 of the
penalties and interest into 4,398,929 shares of common stock.
In 2000, the Company converted $1,547,655 of interest and penalties
and $4,106,337 of the debentures payable into 151,930,606 shares of
common stock. At December 31, 2002, the Company owed $331,462 on the
debentures consisting of $50,000 for a debenture and $281,462 in
penalties.
NOTE 10 - BUSINESS SEGMENTS
The Company has adopted SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." The Company conducts its
operations principally as oil and gas sales with Trans Energy and
Prima Oil and pipeline transmission with Ritchie County and Tyler
Construction.
F-25
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 10 - BUSINESS SEGMENTS (Continued)
Certain financial information concerning the Company's operations in
different industries is as follows:
For the
Years Ended Oil and Gas Pipelines Corporate
December 31, Sales Transmission Unallocated
------------ ----------- ------------ -----------
Oil and gas revenue 2002 $ 454,288 $ 435,476 $ --
2001 544,905 775,963 --
Operating loss applicable to
industry segment 2002 1,137,369 262,180 --
2001 1,005,198 185,450 --
General corporate expenses
not allocated to industry
segments 2002 -- -- --
2001 -- -- --
Interest expense 2002 (390,687) (98,190) --
2001 (275,571) (85,516) --
Other income (expenses) 2002 19,669 2,868 --
2001 16,026 -- --
Assets
(net of intercompany accounts) 2002 2,250,407 497,229 --
2001 3,079,204 792,831 --
Depreciation and amortization 2002 810,451 108,913 --
2001 798,189 108,742 --
Property and equipment
acquisitions 2002 -- 10,249 --
2001 281,203 -- --
NOTE 11 - OUTSTANDING STOCK OPTIONS
The Company applies Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees," and related
Interpretations in accounting for all stock option plans. Under APB
Opinion 25, compensation cost is recognized for stock options
granted to employees when the option price is less than the market
price of the underlying common stock on the date of grant.
F-26
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 11 - OUTSTANDING STOCK OPTIONS (Continued)
FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), requires the Company to provide proforma information
regarding net income and net income per share as if compensation
costs for the Company's stock option plans and other stock awards
had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimates the fair value of
each stock award at the grant date by using the Black-Scholes option
pricing model.
A summary of the status of the Company's stock option plans as of
December 31, 2002 and changes during the year is presented below:
Weighted
Average
Shares Exercise Price
------- ---------------
Outstanding, December 31, 2001 795,057 $ 0.50
Granted -- --
Canceled/Expired -- --
Exercised -- --
------- --------
Outstanding, December 31, 2002 795,057 $ 0.50
======= ========
Exercisable, December 31, 2002 795,057 $ 0.50
======= ========
Outstanding Exercisable
----------- -----------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/01 Life Price at 12/31/02 Price
--------------- ----------- ---- -------- ----------- --------
$ 0.50 795,057 1.00 $ 0.50 795,057 $ 0.50
The 795,057 options were issued at $0.50, which is equal to the
market price on the date of issuance. All options are fully vested,
have a five-year period to be exercised and will expire on December
31, 2003. The options were not issued pursuant to an employee stock
option plan.
F-27
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 12 - NOTES PAYABLE - CONVERTIBLE
Nine (9) convertible debentures dated between February 21, 2001
and April 27, 2001 bearing interest at 10% with interest and
principal due upon demand; unsecured; convertible into the
Company's common stock at $0.035 per share $ 41,575
---------
Less current portion (41,575)
---------
Long-term portion $ --
The Company recognized an additional expense of $23,989 because of
the additional beneficial feature offered to the debenture holders
below the market value. This beneficial conversion feature was
expensed during the year ended December 31, 2001 pursuant to the
EITF 96-18 and has been included in the general and administrative
expense in the accompanying consolidated statement of operations.
NOTE 13- CORRECTION OF AN ERROR
The Company has restated its consolidated financial statements for
the year ended December 31, 2001 to reflect adjustments made to
capitalize well costs under the successful efforts method of
accounting for oil and gas producing activities and properly record
its corresponding liabilities. The Company determined that under its
agreement with Sancho Oil and Gas Corporation, a related party, the
Company is responsible to pay 100% of the cost of drilling and
completing seven natural gas wells in Tyler County, West Virginia.
The Company had previously recognized only 75% of the costs incurred
in drilling the wells. Additionally the Company also determined that
they had not recognized its proportional share of all the expenses
in its joint working interest, with Sancho, in operating these same
seven wells.
These adjustments increased the previously reported wells at
December 31, 2001 by $241,616, increased the accumulated
depreciation/depletion on the wells by $11,047, increased related
party payable by $241,616, increased accrued expenses by $12,167,
increased revenues by $42,641, and increased cost of oil and gas by
$42,641. These adjustments had increased the net loss and
accumulated deficit by $23,214 for the year ended December 31, 2001.
A summary of the changes is as follows:
Originally As
Reported Restated Difference
-------- -------- ----------
Total Assets $ 3,641,470 $ 3,872,035 $ 230,565
Total Liabilities 5,947,266 6,201,045 253,779
Accumulated deficit (25,251,849) (25,275,063) (23,214)
Net loss (1,473,744) (1,496,958) (23,214)
Loss per share (0.01) (0.01) --
F-28
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 14 - SUBSEQUENT EVENTS
On January 31, 2003, the Company entered into an Agreement of Sale
and Exchange with PC Pipeline, Inc. ("Purchaser") for 7.6 miles of
Tyler Construction's six-inch natural gas pipeline in Pleasants
County, West Virginia in exchange for the remaining 35% of the
outstanding common stock of Tyler Construction Company. This now
makes Tyler Construction Company a wholly-owned subsidiary of the
Company.
On February 27, 2003, the Company entered into an Asset Purchase
Agreement with Triad Energy Corporation ("Triad") and Sancho Oil &
Gas Corporation ("Sancho") whereby Tyler Construction Company
("Tyler") sold 55,000 feet of gas pipeline located in Tyler and
Pleasants County, West Virginia for $270,000. $240,000 was paid at
the time of closing and the remaining $30,000 was payable 60 days
from closing. As part of the Agreement, Tyler assigned its
right-of-ways and its gas purchase contract with Sancho, along with
an agreement for Traid to use Tyler's right to transport gas which
right is not assignable.
During February 2003, the Company filed Form S-8 with the Securities
and Exchange Commission for the registration of 3,500,000 shares of
the Company's common stock to be issued to A. Thomas Crompton for
consulting services that were performed during the fourth quarter of
2002. The shares were valued at $0.003, which was the trading price
at the time the shares were registered, for a total value of
$10,500. This amount has been accrued at December 31, 2002, and is
included in accrued expenses as a current liability.
F-29
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2002 and 2001
(Unaudited)
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES
(1) Capitalized Costs Relating to
Oil and Gas Producing Activities
December 31,
2002 2001
------------ ------------
Proved oil and gas producing properties and related
lease and well equipment $ 3,678,730 $ 3,617,50
Unproved oil and gas properties 95,945 114,426
Accumulated depreciation and depletion (1,839,295) (1,060,552)
------------ ------------
Net Capitalized Costs $ 1,935,380 $ 2,671,379
============ ============
(2) Costs Incurred in Oil and Gas Property
Acquisition, Exploration, and Development Activities
For the Years Ended
December 31,
2002 2001
------------ ------------
Acquisition of Properties
Proved $ -- $ 522,819
Unproved -- --
Exploration Costs -- --
Development Costs -- --
The Company does not have any investments accounted for by the equity
method.
(3) Results of Operations for
Producing Activities
For the Years Ended
December 31,
2002 2001
------------ ------------
Sales $ 454,288 $ 544,905
Production costs (277,125) (263,643)
Depreciation and depletion (801,776) (782,921)
Income tax expenses -- --
Results of operations for producing activities
(excluding the activities of the pipeline transmission
operations, corporate overhead and interest costs$
$ (624,613) $ (501,65)
============ ============
F-30
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 2002 and 2001
(Unaudited)
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES (CONTINUED)
(4) Reserve Quantity Information
Oil Gas
BBL MCF
------------ ------------
Proved developed and undeveloped reserves
End of the year 2001 147,876 1,133,839
Revisions of previous estimates 1,928 52,048
Improved recovery -- --
Purchases of minerals in place -- --
Extensions and discoveries -- --
Production (36,398) (54,472)
Sales of minerals in place -- --
------------ ------------
End of the year 2002 113,406 1,131,415
============ =============
Proved developed reserves:
Oil Gas
BBL MCF
------------ ------------
End of the year 2001 147,876 1,133,839
End of the year 2002 113,406 1,131,415
During the years ended December 31, 2002 and 2001, the Company had
reserve studies and estimates prepared on its various properties.
The difficulties and uncertainties involved in estimating proved oil
and gas reserves makes comparisons between companies difficult.
Estimation of reserve quantities is subject to wide fluctuations
because it is dependent on judgmental interpretation of geological
and geophysical data.
F-31
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 2002 and 2001
(Unaudited)
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES (CONTINUED)
(5) Standardized Measure of Discounted
Future Net Cash Flows Relating to
Proved Oil and Gas Reserves
At December 31, 2002
Trans Energy
and
Subsidiaries
------------
Future cash inflows $ 8,063,052
Future production and development costs (1,854,502)
Future income tax expense --
-----------
Future net cash flows 6,208,550
10% annual discount for estimated timing of cash flows (1,438,849)
-----------
Standardized measure of discounted future net cash flows $ 4,314,941
===========
At December 31, 2001
Trans Energy
and
Subsidiaries
------------
Future cash inflows $ 6,582,335
Future production and development costs (1,331,000)
Future income tax expense --
-----------
Future net cash flows 5,251,335
10% annual discount for estimated timing of cash flows (1,601,341)
-----------
Standardized measure of discounted future net cash flows $ 3,649,994
===========
Future income taxes were determined by applying the statutory income
tax rate to future pre-tax net cash flow relating to proved reserves.
The following schedule summarizes changes in the standardized measure
of discounted future net cash flow relating to proved oil and gas
reserves:
For the Years Ended
December 31,
--------------------------
2002 2001
----------- -----------
Standardized measure, beginning of year $ 3,649,994 $ 4,425,778
Oil and gas sales, net of production costs -- --
Sales of mineral in place -- (1,039,658)
Purchases -- --
Net change due to revisions in quantity estimates 664,947 263,874
Accretion of discount items -- --
----------- -----------
Standardized measure, end of year $ 4,314,941 $ 3,649,994
========== ===========
F-32
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 2002 and 2001
(Unaudited)
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES (CONTINUED)
The above schedules relating to proved oil and gas reserves,
standardized measure of discounted future net cash flows and changes in
the standardized measure of discounted future net cash flows have their
foundation in engineering estimates of future net revenues that are
derived from proved reserves and prepared using the prevailing economic
conditions. These reserve estimates are made from evaluations conducted
by independent geologists, of such properties and will be periodically
reviewed based upon updated geological and production data. Estimates
of proved reserves are inherently imprecise. The above standardized
measure does not include any restoration costs due to the fact the
Company does not own the land.
Subsequent development and production of the Company's reserves will
necessitate revising the present estimates. In addition, information
provided in the above schedules does not provide definitive information
as the results of any particular year but, rather, helps explain and
demonstrate the impact of major factors affecting the Company's oil and
gas producing activities. Therefore, the Company suggests that all of
the aforementioned factors concerning assumptions and concepts should
be taken into consideration when reviewing and analyzing this
information.
F-33