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, 2001
[ ] 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
(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. $
1,278,227
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. $2,515,749 (Based on price of $0.013 on April 8, 2002)
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, 2001
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Common Stock, Par Value 176,683,189
$.001 per share
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format. Yes [ ] No [X]
1
TRANS ENERGY, INC.
TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business ....................................................... 3
Item 2. Description of Property........................................................ 8
Item 3. Legal Proceedings.............................................................. 10
Item 4. Submission of Matter to a Vote of Security Holders............................. 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................... 12
Item 6. Management's Discussion and Analysis or Plan of Operation...................... 13
Item 7. Financial Statements........................................................... 16
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................... 16
PART III
Item 9. Directors, Executive Officers, Promoters and Control persons;
Compliance with Section 16(a) of the Exchange Act.............................. 16
Item 10. Executive Compensation......................................................... 17
Item 11. Security Ownership of Certain Beneficial Owners and Management................. 18
Item 12. Certain Relationships and Related Transactions................................. 18
PART IV
Item 13. Exhibits and Reports on Form 8-K............................................... 20
Signatures..................................................................... S-1
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PART I
Item 1. Description of Business
History
Trans Energy, Inc., a Nevada corporation (the "Company" or "TSRG"), is
primarily engaged in the transportation, marketing and production of natural gas
and oil, and also conducts exploration and development activities. The Company
owns an interest in seven oil and gas wells in West Virginia, owns and operates
one oil well in Wyoming, and owns an interest in seven oil wells in Wyoming that
it does not operate. It also owns and operates 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. TSRG also has approximately 16,500 gross acres under lease in the
Powder River Basin in Campbell, Crook and Weston Counties, Wyoming. In 2001, the
Company participated in the drilling of three drill downs to the Benson Sand in
West Virginia.
On March 6, 1998, the Company entered into an agreement to purchase
from GCRL Energy, Ltd. ("GCRL") all of GCRL's 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. The Company made an initial payment for the
properties of $332,500 and the balance of $2,987,962 was paid for with proceeds
from the sale of Convertible Debentures. 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 disposal well during the summer of
2002.
The Company's principal executive offices are located at 210 Second
Street, P.O. Box 393, St. Marys, West Virginia 26170, and its telephone number
is (304) 684-7053.
Business Development
In 2001, management continued its interest in the Trenton - Black River
deep gas field in the Appalachian Basin in West Virginia. Management believes
that this area may become active in the counties in which the Company operates.
The Company continues to focus much of its efforts in this area to take
advantage of the situation if the opportunity becomes available. In 1999, the
Company sold many of its Appalachian Basin assets and purchased 51% of a
producing well in the Powder River Basin in Wyoming. The Company then focused
its attention toward developing its acreage in the Powder River Basin in Wyoming
and drilling for deep gas in the Trenton-Black River area.
TSRG's business strategy is to economically increase its reserves,
production and sale of gas and oil from existing and acquired properties in the
Powder River Basin and Appalachian Basin and elsewhere in order to maximize
shareholders' return over the long term. The Company's strategic location in
West Virginia enables the Company to actively pursue the acquisition and
development of producing properties in that area that will enhance the Company's
revenue base without proportional increases in overhead costs.
In September 1993, the Company acquired certain oil and gas assets
including wells and pipelines, in exchange solely for shares of the Company's
authorized but previously unissued common stock. These acquisitions are
summarized below:
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Tyler Construction Company, Inc.
In September 1993, the Company acquired an interest equal to 65% of the
total outstanding shares of Tyler Construction Company ("Tyler Construction")
from Loren E. Bagley and William F. Woodburn, both of whom are directors of the
Company. 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.
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 its agreement 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 Hope
Gas, Inc. ("Hope") in 1988. This agreement is a flexible volume supply agreement
whereby the Company receives 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.
Spencer Wells
Also in September 1993, the Company acquired from Dennis L. Spencer all
rights, title and interest to six producing oil and gas wells located in West
Virginia, in exchange for the Company shares. 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.
Also in September 1993, the Company acquired from Tyler Pipeline, Inc.
("Tyler Pipeline") 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, Secretary / Treasurer and a director of the Company, is also President
and owns 50% of Tyler Pipeline. Mr. Bagley, Vice President and a director of the
Company, also owns 50% of Tyler Pipeline.
Ritchie County Gathering Systems, Inc.
In September 1993, the Company acquired all the issued and outstanding
capital stock of Ritchie County Gathering Systems, Inc., a West Virginia
corporation ("Ritchie County Gathering"). 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.
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Powder River Basin Wyoming
On March 6, 1998, the Company entered into an agreement to purchase
from GCRL Energy, Ltd. ("GCRL") all of GCRL's 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. The Company 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 the Company's 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 51 48.8% 25
Sagebrush Fed #2 37 47.5% 18
Pinon Fee #1 28 51.2% 14
Sandbar Boley 31-36 11 27.8% 3
includes Sandbar State
1-36 and 2-36
Wolff 1-35 6 68% 4
-- ----- --
TOTAL 133 64
Current Business Activities
The Company is operates its oil and natural gas properties and
transports and markets natural gas through its 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 the Company 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 the Company will continue to transport and market natural gas
through its various pipelines, there are no current plans to acquire or to lay
any additional pipeline systems in 2002. 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, the Company has not participated in any new wells in
the last three years.
Powder River Basin Wyoming - Prima
On December 28, 1996, the Company purchased 420 acres in the Powder
River basin in the State of 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 the Company leased an additional 480 acres that
joined with its 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 the Company.
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 the Company. 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
-5-
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.
Water pressure primarily is responsible for the movement of oil within
the area of the Company's 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.
The Company completed the drilling of the Fowler 22-8 in January 1998
and determined the well to be a dry hole and was plugged. The Company did not
drill additional wells on this acreage during 1999, 2000, or 2001.
Powder River Basin Wyoming - Wolffe Prospect
On May 27, 1997, the Company 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, the Company participated in its 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, the Company
purchased for $16,000 an additional 51% working interest in the Wolff 1-35 well
from Renor Exploration Limited.
Sistersville
Effective June 1, 1995, the Company 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 ten 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 the Company intends to explore. These formations
are approximately 1,700 feet deep. Recoverable reserves of oil in the field are
estimated at several million barrels. The Company drilled a well on its
Sistersville acreage in April 1997. On December 3, 1999, the Company sold the
Sistersville field for $125,000 to an unaffiliated third party.
Vulcan Energy Corporation.
During March 1997, the Company ceased operations of Vulcan Energy
Corporation ("Vulcan"), its 80% owned subsidiary, engaged in the lease crude oil
gathering and marketing in Southeast Texas.
Research and Development
The Company has not allocated funds for conducting research and
development activities and, due to the nature of the Company's business, it is
not anticipated that funds will be allocated for research and development in the
immediate future.
Marketing
The Company operates exclusively in the oil and gas industry. Natural
gas production from wells owned by the Company is generally sold to various
intrastate and interstate pipeline companies and natural gas marketing
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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 the Company's pipeline network is sold
through the Sancho Oil and Gas Corporation ("Sancho") contract to the industrial
facilities near Sistersville, West Virginia, or to Hope, 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 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 Hope 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 $.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 the
Company's option, for the first 1,500 Mcf purchased per day by Hope 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 the Company there
can be no assurance that prices paid by the Company to suppliers will be lower
than the price which the Company would receive under the Hope 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, the Company's ability to purchase gas
from third parties was adversely effected.
The Company sells its 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.
Although management believes that the Company is not dependent upon any
one customer, its marketing arrangement with Sancho Oil and Gas Corporation
accounted for approximately 49% of the Company's revenue for the year ended
December 31, 2001, and approximately 30% for the year ended December 31, 2000.
This marketing agreement is in effect until September 1, 2008.
In addition to the natural gas produced by the Company's wells, it also
purchased approximately 250 Mcf of natural gas per day in 2001.
Competition
TSRG is 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 TSRG's
competitors possess greater financial and personnel resources enabling them to
identify and acquire more economically desirable energy producing properties and
drilling prospects than TSRG. 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 its contract with Sancho, TSRG 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 Hope in 1988. This agreement is a flexible volume
supply agreement whereby TSRG receives 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 and
the Inside F.E.R.C. CNG Index. Were it not for the relationship between Hope and
Sancho, Hope would compete directly with TSRG for the sale of gas to certain
customers, specifically OSI Specialities, Inc. and Ormet Aluminum Company.
-7-
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 the Company's 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 the Company's operations. The Company
is 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.
TSRG 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 the Company to comply with all environmental regulations. It is
conceivable that future legislation or regulations may significantly increase
environmental protection requirements and, as a consequence, TSRG's 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
the Company is in compliance with all present environmental regulations.
Further, the Company believes that its oil and gas explorations do not pose a
threat of introducing hazardous substances into the environment. If such event
should occur, the Company could be liable under certain environmental protection
statutes and laws. The Company does presently carry insurance for environmental
liability.
TSRG's 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.
The Company is 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 the Company's aggregate production
expenses. Nevertheless, the Company is 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 the Company, may have an
indirect effect on the cost of, or the demand for, natural gas and oil.
Employees
As of the date hereof the Company employs eight people full-time,
consisting of three executives, two marketing and clerical persons, and three
production persons. Management presently anticipates hiring additional employees
as the business warrants and as funds are available.
-8-
Facilities
The Company's operations currently occupy approximately 4,000 square
feet of office space in St. Marys, West Virginia, which it shares with its
subsidiary Tyler Construction Company, Inc. and Ritchie County Gathering
Systems, Inc. The Company leases 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 its present office
facilities are adequate for the Company's current business operations.
Industry Segments
No information is presented as to industry segments. The Company is
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 Company's financial
statements included herewith for a statement of the Company's revenues and
operating profit (loss) for the past two fiscal years.
Item 2. Description of Property
The Company's properties consist essentially of the working and royalty
interests owned by the Company in various oil and gas wells and leases located
in West Virginia. The Company's proved reserves for the years ended December 31,
2001, 2000 and 1999 are set forth below:
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December 31,
----------------------------------------------------
2001 2000 1999
-------- ----------- -----------
Natural Gas (MMcf)
Developed 1,133,839 - -
Undeveloped - - -
Total Proved 1,133,839 356,196 -
Crude Oil (MBbl)
Developed 147,876 1,138,144 1,225,648
Undeveloped - 210,610 210,610
Total Proved 147,876 1,348,754 1,436,258
These estimates are bases primarily on the reports of Donald C.
Kasterson, 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 Securities and Exchange Commission. See
SFAS 69 Supplemental Disclosures included as part of the Consolidated Financial
Statements of the Company.
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 the Company for the past three fiscal years.
Years ended December 31,
------------------------------------------------------------
Average sales price: 2001 2000 1999
------------------- ------ ------ ------
Gas (per mcf) $ 5.22 $ - $ 3.04
Oil (per bbl) 16.22 24.67 13.83
Average cost of production:
Gas (per mcf) - $ - 1.31
Oil (per bbl) 4.05 3.38 7.52
The Company has not filed any estimates of total, proved net oil and
gas reserves with any federal authority or agency since the beginning of the
Company's last fiscal year.
The following schedule sets forth the capitalized costs relating to oil
and gas producing activities by the Company for the past three fiscal years.
Years ended December 31,
---------------------------------------------------------
2001 2000 1999
------------- ------------- ----------------
Proved oil and gas
producing properties
and related lease
and well equipment $ 3,617,505 $ 3,372,880 $ 4,730,577
Unproved oil and gas
properties 114,426 180,000 180,000
Accumulated depreciation
and depletion (1,009,429) (269,365) (25,930)
----------- ------------ -----------
Net Capitalized Costs $ 2,722,502 $ 3,283,515 $ 4,884,647
=========== ============ ===========
The following schedule summarizes changes in the standardized measure
of discounted future net cash flows relating to the Company's proved oil and gas
reserves.
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Years ended December 31,
-----------------------------------------------------------
2001 2000 1999
-------------- --------------- ---------------
Standardized measure,
beginning of year $4,425,778 $5,216,987 $9,495,694
Oil and gas sales, net
of production costs - - (313,619)
Sales of mineral in place (1,039,658) (1,611,730) (3,965,088
Purchases 820,521 -
Net change due to revisions
in quantity estimates 263,874 - -
------------ ------------------- ------------------
Standardized measure,
end of year $3,649,994 $4,425,778 $5,216,987
========== =========== ===========
The Company does not anticipate investing in or purchasing assets
and/or property for the purpose of capital gains. It is the Company's intention
to purchase assets and/or property for the purpose of enhancing its primary
business operations. The Company is not limited as to the percentage amount of
the Company's assets it may use to purchase any additional assets or properties.
Item 3. Legal Proceedings
Certain material pending legal proceedings to which the Company is a
party or to which any of its 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
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 $600,665.36, 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 $41,142.00, 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. In anticipation of the Bankruptcy
Court dismissing the Involuntary Petition, on February 2, 2001, the
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Company 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 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 $759,664.31, plus interest at 10%. In addition to the
$200,000 payable from the escrow, 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. Subsequently, the Company 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. Management
believes that this payment will satisfy the Baker Entities until the
obligation can be paid in full.
(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 the Company for non- payment of services. The
Company recorded a liability of $78,651 in its 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 the Company as payment for this
liability. The Company has agreed to this settlement and management
anticipates the transaction will be finalized during the second quarter
of 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.
The Company has accrued $47,741 which is included in the Company's
financial statements for the year ended December 31, 2000 under
accounts payable. Management has represented that the Company has
reached a negotiated payment schedule with Tioga. The Company has made
the initial payment pursuant to the settlement and management expects
the full amount will be paid by the third quarter 2002.
(d) On April 16, 2001, Ross Forbus obtained a judgment of $428,018
against the Company to satisfy a promissory note previously entered
into by the Company with Mr. Forbus on April 8, 1996. The Company has
agreed to payment terms and has made small payments to Mr. Forbus.
Management is currently attempting to extend the term of the payments.
(e) On December 26, 2001, George Hillyer filed a suit against the
Company and William F. Wooburn and Loren E. Bagley individually. The
action seeks $250,750 in connection with certain services performed for
the Company. Management has indicated that the suit is not justified
and that the Company and the individual defendants intend to vigorously
defend the action. The Company has not accrued any amounts for these
claims as of December 31, 2001 because the Company feels that the based
on its defenses against the claims it will have no additional
liability. Due to the early stage of the litigation, it is not possible
to evaluate the likelihood of an unfavorable outcome or estimate the
extent of potential loss.
(f) In September 2001, the Securities and Exchange Commission filed a
civil action in the United States District Court for the District of
Columbia (Civil Action No. 1:01CV020060) against Trans Energy, Inc.
(the "Company") and two of its 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 Commission filings. The
Commission's complaint sought injunctive relief and civil penalties.
-12-
On February 26, 2002, the District Court entered a permanent
injunction against the Company, 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. The Company, 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.
(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 the Company sold certain assets which Mr.
Spencer claims to be the beneficial owner. The complaint seeks
$1,000,000 in damages. Management 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, 2001 because
the Company feels that the based on its defenses against the claims it
will have no additional liability. Due to the early stage of the
litigation, it is not possible to evaluate the likelihood of an
unfavorable outcome or estimate the extent of potential loss.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's Securities Holders
during the fourth quarter of the Company's fiscal year ending December 31, 2001.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's 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 the Company's common stock as obtained from the Nasdaq Small-Cap
Market and the OTC Bulletin Board for the past two fiscal years obtained from
published quotations.
High Low
---- ---
2001
First Quarter $ .07 $ .043
Second Quarter $ .051 .023
Third Quarter $ .03 $ .01
Fourth Quarter $ .02 $ .007
2000
First Quarter $ .35 $ .065
Second Quarter $ .22 $ .10
Third Quarter $ .155 $ .0156
Fourth Quarter $ .31 $ .04
As of December 31, 2001, there were approximately 290 holders of record
of the 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.
-13-
Dividend Policy
The Company has not declared or paid cash dividends or made
distributions in the past, and the Company does not anticipate that it will pay
cash dividends or make distributions in the foreseeable future. The Company
currently intends to retain and reinvest future earnings to finance its
operations.
Recent Sales of Unregistered Securities
During 1999, the Company issued 440,000 shares of its common stock in
exchange for services rendered to the Company valued at an average of $.59 per
share, or an aggregate of $260,000. The Company also issued 94,000 shares for
services and conversion of debt valued at an average of $.98 per share, or an
aggregate of $92,200. The Company further issued 4,398,929 shares upon
conversion of convertible debentures valued at $529,166, or an average of $.12
per share.
In 2000, the Company issued 1,691,287 share of its common stock for
cash at $.05 per share, or an aggregate of $83,000. The Company 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. The Company 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, the Company issued 4,655,000 shares of its common stock for
services and conversion of debt 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.
Except for the conversion of debentures pursuant to registration
statements, issuances of securities by the Company were made in reliance upon
the exemption from registration under the Securities Act of 1933, as amended,
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 Company's Statements of Operations
for the two most recent fiscal years ended December 31, 2001, and 2000. It
should be noted that percentages discussed throughout this analysis are stated
on an approximate basis.
Fiscal Years Ended
December 31,
2001 2000
---- ----
Total revenues........................................................ 100% 100%
Total costs and expenses.............................................. 192 335
Total other income (expenses)......................................... (26) (127)
Loss before taxes and extraordinary item ............................. (118) (362)
Extraordinary item - gain on disposal of debt......................... 3 24
Income taxes.......................................................... - -
Net (loss)............................................................ 115 338
-14-
For the Year Ended December 31, 2001 Compared to the Year Ended December 31,
2000
Total revenues of $1,278,227 for the year ended December 31, 2001
("2001") increased 14% when compared to $1,125,257 for the year ended December
31, 2000 ("2000"). In 2001, oil made up 30% of total revenues compared to 70% in
2000. Accordingly, gas sales increased from 30% of sales in 2000 to 70% in 2001.
This increase in gas revenues was due to higher gas prices and four wells
drilled in 2000 and three wells in 2001.
The Company had a net loss of $1,473,744 for 2001 compared to a net
loss of $3,807,071 in 2000. The Company's total costs and expenses decreased 35%
in 2001 and, as a percentage of revenues, decreased from 335% in 2000 to 192% in
2001. The cost of oil and gas increased 96% in 2001 due to increased production
costs and the addition of wells. As a percentage of revenues, cost of oil
increased from 30% in 2000 to 52% in 2001, due to higher production costs.
Selling, general and administrative expenses decreased 77% in 2001 when compared
to 2000, primarily due to fewer stock issuances for services in 2001. Salaries
and wages decreased 29% in 2001 due to the elimination of one full time
employee. Depreciation, depletion and amortization increased 171% in 2001 from
2000 due to the re-evaluation of reserves. Interest expense in 2001 decreased
18% from 2000 due to the pay-off of certain notes and the reduction of interest
rates.
Net Operating Losses
The Company has accumulated approximately $18,246,000 of net operating
loss carryforwards as of December 31, 2001, which may be offset against future
taxable income through 2021. 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 of the Company, 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, 2001
because the potential tax benefits of the loss carryforward is offset by
valuation allowance of the same amount.
Liquidity and Capital Resources
Historically, the Company's working capital needs have been satisfied
through its operating revenues and from borrowed funds. Working capital at
December 31, 2001 was a negative $5,470,698 compared with a negative $4,550,117
at December 31, 2000. This change was primarily attributed to increases in
accrued interest and accounts payable. The Company anticipates meeting its
working capital needs during the 2002 fiscal year with revenues from operations
and possibly from capital raised through the sale of either equity or debt
securities. The Company has no other current agreements or arrangements for
additional funding and there can be no assurance such funding will be available
to the Company or, if available, it will be on acceptable or favorable terms to
the Company.
As of December 31, 2001, the Company had total assets of $3,641,470 and
stockholders' deficit of $2,305,796 compared to total assets of $4,299,654 and
total stockholders' deficit of $974,095 at December 31, 2000.
In 1998, the Company 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, 2001, the Company owed $331,462 in connection with the debentures
consisting of $50,000 for a debenture and $281,462 in penalties and interest.
-15-
Because the Company has generated significant losses from operations
through December 31, 2001, and has a working capital deficit at December 31,
2001, there exists substantial doubt about its ability to continue as a going
concern. Revenues have not been sufficient to cover operating costs and to allow
the Company 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 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. If these endeavors are
not successful, management is committed to meeting the operational cash flow
needs of the Company.
In the opinion of management, inflation has not had a material effect
on the operations of the Company.
Forward-looking and Cautionary Statements
Forward-looking statements in this report are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. The Company wishes to advise readers that actual results may differ
substantially from such forward-looking statements. Forward-looking statements
involve risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements, including, but
not limited to, the following: the ability of the Company to secure additional
financing, the possibility of success in the Company's drilling endeavors,
competitive factors, and other risks detailed in the Company's periodic report
filings with the Securities and Exchange Commission.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities. The new standard establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Accounting for changes in the values of
those derivatives depends on the intended use of the derivatives and whether
they qualify for hedge accounting. SFAS 133, as amended by SFAS 137 and SFAS
138, was adopted as of April 1, 2001. Management believes the adoption of this
statement will have no material impact on the Company's financial statements.
In June 2001, the FASB issued SFAS 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 as well as all purchase method business combinations completed after
June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocatable to an assembled
workforce may not be accounted for separately. SFAS 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortize, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 also requires that intangible assets with
estimatable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. The Company adopted SFAS 141 upon
issuance and SFAS 142 effective April 1, 2001. The adoption of SFAS 141 and 142
did not affect the Company's consolidated financial statements.
-16-
On August 16, 2001, the FASB issued 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 management has 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 Company's financial statements, when it becomes effective, will
not be significant.
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 the Company's financial
statements.
-17-
Item 7. Financial Statements
The Company's financial statements as of and for the fiscal years ended
December 31, 2001 and 2000 have all 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 with
the Company by it's directors and executive officers:
Name Position Director Since Age
---- -------- -------------- ---
Robert L. Richards President, C.E.O. September 2001 56
and Director
Loren E. Bagley Vice President August 1991 59
and Director
William F. Woodburn Secretary / Treasurer August 1991 60
and Director
John B. Sims Director January 1988 76
On July 2, 2001, Gary F. Lawyer tendered his resignation as a director,
effective June 29, 2001, for personal reasons and to pursue other ventures. Mr.
Lawyer agreed to continue to work with Trans Energy on a consulting basis as
needed. Mr. Lawyer served as a director of Trans Energy since February 1998.
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. The Company has not
compensated its 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 of Directors and any committee of the Board of Directors.
Executive officers are appointed annually by the Board of Directors and each
executive officer serves at the discretion of the Board of Directors. 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 of Directors
in the management of the business and affairs of the Company between meetings of
the Board of Directors.
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. of the Company 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 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.
-18-
Loren E. Bagley served as President and C.E.O. of the Company 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 Vice President of the Company 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 President, C.E.O. and a director of the Company
from 1988 to September, 1993 and currently is a director. Prior to joining the
Company 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 the Company, upon which the primary obligor
defaulted.
Item 10. Executive Compensation
The Company does not have a bonus, profit sharing, or deferred
compensation plan for the benefit of its employees, officers or directors, nor
has the Company entered into employment contracts with any of the aforementioned
persons.
Cash Compensation
The following table sets forth all cash compensation paid by the
Company for services rendered to the Company for the years ended December 31,
2001, 2000 and 1999, to the Company's Chief Executive Officer. No executive
officer of the Company has earned a salary greater than $100,000 annually for
any of the periods depicted.
-19-
Summary Compensation Table
Other All
Annual Other
Name and Compen- Compen-
Principal Position Year Salary Bonus sation sation
------------------ ------ ------- ----- ------ ------
Robert L. Richards 2001 $ -0- $ -0- $ -0- $ -0-
President and C.E.O.
Loren E. Bagley, 2001 $ -0- $ -0- $ -0- $ -0-
President and C.E.O. 2000 $ -0- $ -0- $ -0- $ -0-
1999 $ -0- $ -0- $ -0- $ -0-
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, to the best knowledge of
the Company as December 31, 2001, with respect to each person known by the
Company to own beneficially more than 5% of the Company's 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) 1.0%
210 Second Street
St. Marys, WV 26170
Loren E. Bagley * 2,074,527(3) 1.2%
210 Second Street
St. Marys, WV 26170
William F. Woodburn * 2,067,394(4) 1.2%
210 Second Street
St. Marys, WV 26170
John B. Sims * 302,614(5) 0.2%
210 Second Street
St. Marys, WV 26170
All directors and executive 6,135,822(6) 3.5%
officers as a group
(4 persons in group)
-----------------------
* Director and/or executive officer
Note: Unless otherwise indicated in the footnotes below, TSRG has been
advised that each person above has sole voting power over the shares
indicated above.
(1) Based upon 176,683,189 shares of common stock outstanding on December
31, 2001,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, 177,333,189
shares of common stock are deemed to be issued and outstanding in
accordance with Rule 13d-3 adopted by the Securities and Exchange
Commission 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,
2001 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.
-20-
(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.
(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 last two fiscal years, there have been no transactions
between the Company and any officer, director, nominee for election as director,
or any shareholder owning greater than five percent (5%) of The Company's
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
The Company's natural gas. Mr. Bagley's wife, Carolyn S. Bagley is a director
and owner of 33% of the outstanding capital stock of Sancho. 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
Hope in 1988. This agreement is a flexible volume supply agreement whereby the
Company receives 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 The Company's option, for the first 1,500 Mcf purchased per day by
Hope 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 the
Company there can be no assurance that prices paid by the Company to suppliers
will be lower than the price which the Company would receive under the Hope
arrangement. During 2001, the Company paid Sancho an aggregate of approximately
$3,180 pursuant to such contract.
(b) On May 7, 1996, the Company 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 the Company 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.
The Company occupies approximately 4,000 square feet of office space in
St. Marys, West Virginia, which it shares with its subsidiaries Tyler
Construction Company, Inc. and Ritchie County Gathering Systems, Inc. Prior to
1997, the office space was paid for by Sancho and the Company used the office
space rent free. The Company believes that the foregoing transactions with
Sancho were made on terms no less favorable to the Company than those available
from unaffiliated third parties.
It is the Company's policy that any future material transactions
between it and members of its management or their affiliates shall be on terms
no less favorable than those available from unaffiliated third parties.
-21-
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit Name
----------- --------------------------------
*2.1 Stock Acquisition Agreement between the Company and Loren E.
Bagley and William F. Woodburn
*2.2 Asset Acquisition Agreement between the Company and Dennis L.
Spencer
*2.3 Asset Acquisition Agreement between the Company and Tyler
Pipeline, Inc.
*2.4 Stock Exchange Agreement between the Company 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 the Company's
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
* 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 October 11, 2001, the Company filed a Current Report on Form 8-K
reporting under Item 5 that on September 28, 2001 the Securities and
Exchange Commission filed a complaint against the Company and two of
its directors. The Report also disclosed that on September 10, 2001 the
Company's President and Chief Executive Officer resigned as did the
Company's Vice President, and Robert I. Richards was elected as the new
President, Chief Executive Officer and a director.
-22-
TRANS ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
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
McGLADREY NETWORK American Institute of
----------------- Certified Public
An Independently Owned Member Accountants
Worldwide Services
Through RSM International Utah Association of
Certified Public
Accountants
SEC Practice Section
Private Companies
Practice Section
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, 2001 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years ended December 31, 2001 and 2000. 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, 2001 and the consolidated
results of their operations and their cash flows for the years ended December
31, 2001 and 2000, 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
financial statements, the Company has generated significant losses from
operations, has an accumulated deficit of $25,251,849 and has a working capital
deficit of $5,471,698 at December 31, 2001, 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 these uncertainties.
/s/HJ & Associates, LLC
-----------------------
HJ & Associates, LLC
Salt Lake City, Utah
March 15, 2002
50 South Main Street, Suite 1450 * Salt Lake City, Utah 84144 *
Telephone (801) 328-4408 * Facsimile (801) 328-4461
F-3
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
December 31,
2001
-------------------
CURRENT ASSETS
Cash $ 1,491
Accounts receivable, net (Note 1) 186,478
-------------------
Total Current Assets 187,969
-------------------
PROPERTY AND EQUIPMENT (Note 2)
Vehicles 59,013
Machinery and equipment 10,092
Pipelines 2,254,908
Well equipment 49,155
Wells 3,559,644
Leasehold acreage 114,426
Accumulated depreciation (2,602,528)
-------------------
Total Fixed Assets 3,444,710
-------------------
OTHER ASSETS
Cash surrender value - life insurance (net) 8,791
-------------------
Total Other Assets 8,791
-------------------
TOTAL ASSETS $ 3,641,470
===================
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,
2001
-------------------
CURRENT LIABILITIES
Accounts payable - trade $ 754,552
Notes payable - convertible (Note 12) 41,575
Accrued expenses 619,678
Salaries payable 642,662
Notes payable - current portion (Note 3) 1,311,695
Judgments payable (Note 7) 1,228,964
Related party payables (Note 4) 704,829
Debentures payable (Note 9) 331,462
Dividends payable (Note 1) 23,250
-------------------
Total Current Liabilities 5,658,667
-------------------
LONG-TERM LIABILITIES
Judgments payable (Note 7) 6,434
Notes payable (Note 3) 282,165
-------------------
Total Long-Term Liabilities 288,599
-------------------
Total Liabilities 5,947,266
-------------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 6)
Preferred stock; 10,000,000 shares authorized
at $0.001 par value; 300 shares issued
and outstanding --
Common stock; 500,000,000 shares authorized
at $0.001 par value; 176,683,189 shares issued
and outstanding 176,682
Capital in excess of par value 22,769,371
Accumulated deficit (25,251,849)
-------------------
Total Stockholders' Equity (Deficit) (2,305,796)
-------------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,641,470
===================
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,
-----------------------------------
2001 2000
--------------- -----------------
(Restated)
REVENUES $ 1,278,227 $ 1,125,257
-------------- -----------
Cost of oil and gas 668,893 340,950
Salaries and wages 275,931 383,142
Depreciation, depletion and amortization 895,884 330,469
Selling, general and administrative 617,120 2,712,591
-------------- -----------
Total Costs and Expenses 2,457,828 3,767,152
LOSS FROM OPERATIONS (1,179,601) (2,641,895)
-------------- -----------
OTHER INCOME (EXPENSE)
Other income 16,026 14,850
Interest expense (348,920) (425,930)
Loss on sale and valuation of assets (Note 1 and 2) (2,151) (1,020,188)
-------------- -----------
Total Other Income (Expense) (335,045) (1,431,268)
------------- -----------
LOSS FROM OPERATIONS BEFORE INCOME TAXES,
EXTRAORDINARY ITEM AND MINORITY INTERESTS (1,514,646) (4,073,163)
-------------- -----------
INCOME TAXES (Note 1) -- --
-------------- -----------
EXTRAORDINARY ITEM
Gain on disposition of debt 40,902 266,092
-------------- -----------
MINORITY INTERESTS -- --
-------------- -----------
NET LOSS - attributed to common shareholders $ (1,473,744) $ (3,807,071)
============== ===========
DIVIDEND ON PREFERRED STOCK $ 23,250 --
============== ===========
BASIC LOSS PER SHARE
Operations $ (0.01) $ (0.05)
Gain on disposition of debt $ -- $ 0.00
Total Basic Loss Per Share $ (0.01) $ (0/05)
============== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 175,981,559 77,197,928
============== ===========
The accompanying notes are an integral part of these
consolidated 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, 1999 -- $ -- 7,107,746 $ 7,107 $ 15,250,242 $(19,887,784)
Common stock issued for cash
at $0.05 per share -- -- 1,691,287 1.691 81,309 --
Common stock issued for services
and conversion of debt to equity
at $0.12 per share -- -- 11,722,383 11,722 1,411,201 --
Common stock issued for conversion
of debentures, penalty and interest
at $0.04 per share -- -- 151,930,806 151,931 5,502,060 --
Cancellation of common stock -- -- (423,833) (424) 424 --
Preferred stock issued for
acquisition 300 -- -- -- 300,000 --
Discount for beneficial conversion
feature of preferred stock -- -- -- -- 60,000 (60,000)
Warrants granted below
market value -- -- -- -- 3,497 --
Net loss for the year ended
Decemger 31, 2000 (Restated) -- -- -- -- -- (3,807,071)
------------ ---------- ------------ ------------ ------------ ------------
Balance, December 1, 2000 300 $ -- 172,028,189 $ 172,027 $ 22,608,733 $(23,754,855)
Common stock issued for
services at $0.03 per share -- -- 4,655,000 6,655 136,650 --
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 -- -- -- -- -- (1,473,744)
------------ ---------- ------------ ------------ ------------ ------------
Balance, December 31, 2001 300 $ -- 176,683,189 $ 176,682 $ 22,769,371 $(25,251,849)
============ ========== ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
SPLIT TABLE
For the Years Ended
December 31,
--------------------------------------------
2001 2000
------------------ ----------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,473,744) $ (3,807,071)
Adjustments to reconcile net loss to net cash (used) by
operating activities:
Depreciation, depletion and amortization 895,884 330,469
Loss on valuation of wells 36,577 1,022,287
Loss on impairment of leases 60,756 -
Loss (gain) on disposition of assets (95,182) (2,199)
Common stock issued for services
and beneficial conversion features 165,293 1,274,579
Gain on disposition of debt (40,902) (266,092)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (115,472) 56,148
Decrease in erstricted cash 65,689 196,400
Decrease in prepaid and other current assets 1,420 2,372
Increase in accounts payable and accrued expenses 472,927 852,693
(Decrease) in judgments payable (154,625) -
------------------ ----------------
Net Cash (Used) by Operating Activities (181,379) (340,314)
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 100,000 12,000
Expenditures for property and equipment (281,203) (269,520)
------------------ ----------------
Net Cash (Used) by Investing Activities (181,203) (257,520)
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in cash overdraft (11,608) 11,608)
Common stock issued for cash - 83,000
Proceeds from related parties 401,692 126.572
Principal payments on notes payable (110,871) (116,715)
Proceeds from notes payable 43,285 479,892
Proceeds from convertible notes payable 41,575 -
------------------ ----------------
Net Cash Provided by Financing Activities $ 364,073 $ 584,357
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)
For the Years Ended
December 31,
--------------------------------------------
2001 2000
------------------ ----------------
(Restated)
NET INCREASE IN CASH $ 1,491 $ (13,477)
CASH AND CSH EQUIVALENTS, BEGINNING OF YEAR - 13,477
------------------ ----------------
CASH AND CASH EQUIVALENTS, DNE OF YEAR $ 1,491 $ -
================== ================
CASH PAID FOR:
Interest $ 87,939 $ -
Income taxes $ - $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued for services
and beneficial conversion features $ 165,293 $ 1,334,579
Common stock issued for debt $ 597,666 $ 5,742,335
Note payable issued for vehicle $ - $ 6,532
T6he 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, 2001 and 2000
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, 2001 and 2000
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.
The Company has elected a calendar 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.
All references to shares have been retroactively restated to
reflect a 1-for-4 reverse stock split.
2001 2000
-------------------- -------------------
Numerator:
Loss from operations $ (1,514,646) $ (4,073,163)
Gain on disposition of debt $ 40,902 $ 266,092
Denominator - wedighted average shares 175,981,559 77,197,928
Net loss per share:
Loss from Operations $ (0.01) $ (0.05)
Gain on disposition of debt -- 0.00
Total Basic Loss Per Share $ (0.01) $ (0.05)
d. Provision for Taxes
At December 31, 2001, the Company had net operating loss
carryforwards of approximately $18,246,000 that may be offset
against future taxable income through 2021. No tax benefit has
been reported in the consolidated financial statements as the
Company believes that the carryforwards will expire unused.
Accordingly, the potential tax benefits of the net operating loss
carryforwards are offset by a valuation allowance of the same
amount.
F-11
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Provision for Taxes (Continued)
The income tax benefit differs from the amount computed at federal
statutory rates of approximately 38% as follows:
For the Years Ended
December 31,
----------------------------
2001 2000
------------ ------------
Income tax benefit at statutory rate $ 515,161 $ 384,508
Change in valuation allowance (515,161) ( 384,508)
------------ -------------
$ -- $ --
============ =============
Deferred tax assets (liabilities) are comprised of the following:
For the Years Ended
December 31,
------------------------------
2001 2000
------------ --------------
Income tax benefit at statutory rate $ 6,933,470 $ 6,418,309
Change in valuation allowance (6,933,470) (6,418,309)
------------ --------------
$ -- $ --
============ ==============
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 future years.
e. Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
f. 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.
g. Presentation
Certain 2000 balances have been reclassified to conform to the
presentation of the 2001 consolidated financial statements.
F-12
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
h. 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.
i. Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
j. Long Lived Assets
All long lived assets are evaluated yearly for impairment per SFAS
121. Any impairment in value is recognized as an expense in the
period when the impairment occurs.
k. Changes in Accounting Principles
The Company has adopted the provisions of FASB Statement No. 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (a replacement of FASB Statement
No. 125.)@ This statement provides accounting and reporting
standard for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on
consistent application of a financial- components approach that
focuses on control. Under that approach, the transfer of financial
assets, the Company recognized the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. This statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001.
This statement is effective for recognition and reclassification
of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December
15, 2000. The adoption of this principle had no material effect on
the Company's consolidated financial statements.
F-13
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Changes in Accounting Principles
(Continued)
The Company has adopted the provisions of FIN 44 "Accounting for
Certain Transactions Involving Stock Compensation (an
interpretation of APB Opinion No. 25.)" This interpretation is
effective July 1, 2000. FIN 44 clarifies the application of
Opinion No. 25 for only certain issues. It does not address any
issues related to the application of the fair value method in
Statement No. 123. Among other issues, FIN 44 clarifies the
definition of employee for purposes of applying Opinion 25, the
criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or
award, and accounting for an exchange of stock compensation awards
in a business combination. he adoption of this principle had no
material effect on the Company's consolidated financial
statements.
SFAS No.'s 141 and 142 -- In June 2001, the Financial Accounting
Standards Board (FASB) adopted Statement of Financial Accounting
Standards SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 is effective
as to any business combination occurring after June 30, 2001 and
certain transition provisions that affect accounting for business
combinations prior to June 30, 2001 are effective as of the date
that SFAS No. 142 is applied in its entirety, which will be
January 1, 2002 for the Company. SFAS No. 142 is effective,
generally, in fiscal years beginning after December 15, 2001,
which will be the fiscal year ending December 31, 2002 for the
Company.
SFAS No. 141 provides standards for accounting for business
combinations. Among other things, it requires that only the
purchase method of accounting be used and that certain intangible
assets acquired in a business combination (i.e. those that result
from contractual or other legal rights or are separable) be
recorded as an asset apart from goodwill. The transition
provisions require that an assessment be made of previous business
combinations and, if appropriate, reclassifications be made to or
from goodwill to adjust the recording of intangible assets such
that the criteria for recording intangible assets apart from
goodwill is applied to the previous business combinations.
SFAS No. 142 provides, among other things, that goodwill and
intangible assets with indeterminate lives shall not be amortized.
Goodwill shall be assigned to a reporting unit and annually
assessed for impairment. Intangible assets with determinate lives
shall be amortized over their estimated useful lives, with the
useful lives reassessed continuously, and shall be assessed for
impairment under the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Goodwill is also assessed for impairment on an
interim basis when events and circumstances warrant. Upon adoption
of SFAS No. 142, the Company will assess whether an impairment
loss should be recognized and measured by comparing the fair value
of the "reporting unit" to the carrying value, including goodwill.
F-14
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Changes in Accounting Principles (Continued)
If the carrying value exceeds fair value, then the Company will
compare the implied fair value of the goodwill" (as defined in
SFAS No. 142) to the carrying amount of the goodwill. If the
carrying amount of the goodwill exceeds the implied fair value,
then the goodwill will be adjusted to the implied fair value.
While the Company has not completed the process of determining the
effect of these new accounting pronouncements on its consolidated
financial statements, the Company currently expects that there
will be no reclassification in connection with the transition
provisions of SFAS No. 141 based on clarifications of the
transition provisions issued by the FASB in October 2001.
Accordingly, the Company expects that, after implementation of
SFAS No. 142, all intangible assets will be amortizable and the
goodwill will not be amortizable.
SFAS No. 143 -- On August 16, 2001, the FASB issued 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 a liability for 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. While
the Company has not completed the process of determining the
effect of this new accounting pronouncement on its consolidated
financial statements, the Company currently expects that the
effect of SFAS No. 143 on the Company's consolidated financial
statements, when it becomes effective, will not be significant.
SFAS No. 144 - On October 3, 2001, the Financial Accounting
Standards Board issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which is effective
for financial statements issued for fiscal years beginning after
December 15, 2001 and, generally, its provisions are to be applied
prospectively. SFAS 144 supercedes SFAS Statement No. 121 (FAS
121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS 144 applies to all
long-lived assets (including discontinued operations) and
consequently amends Accounting Principles Board Opinion No. 30
(APB 30), "Reporting Results of Operations Reporting the Effects
of Disposal of a Segment of a Business."
SFAS 144 develops one accounting model (based on the model in SFAS
121) for long- lived assets that are to be disposed of by sale, as
well as addresses the principal implementation issues.
F-15
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Changes in Accounting Principles (Continued)
SFAS 144 requires that long-lived assets that are to be disposed
of by sale be measured at the lower of book value or fair value
less cost to sell. That requirement eliminates the requirement of
APB 30 that discontinued operations be measured at net realizable
value or that entities include under "discontinued operations" in
the financial statements amounts for operating losses that have
not yet occurred.
Additionally, FAS 144 expands the scope of discontinued operations
to include all components of an entity with operations that (1)
can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal
transaction.
While the Company has not completed the process of determining the
effect of this new accounting pronouncement on its consolidated
financial statements, the Company currently expects that the
effect of SFAS No. 144 on the Company's consolidated financial
statements, when it becomes effective, will not be significant.
l. Accounts Receivable
Accounts receivable are shown net of an allowance for bad debt of
$1,800 at December 31, 2000.
m. 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% (9% at December 31, 2000). 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.
Subsequent to year end, 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, the Company's proved properties consist of costs
in the following areas net of accumulated depletion of $995,661
2001
-----------------
Wyoming $ 2,050,167
West Virginia 513,816
-----------------
$ 2,563,983
F-16
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 2 - OIL AND GAS PROPERTY (Continued)
Productive Gas Wells
The following summarizes the Company's productive oil and gas
wells as of December 31, 2001. 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.
Oil and Gas Acreage
The following table sets forth the undeveloped leasehold acreage,
by area, held by the Company as of December 31, 2001. 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 16,678 13,687
West Virginia 424 424
------------------ -----------------
Total acres 17,102 14,111
================== =================
NOTE 3 - LONG-TERM DEBT
The Company had the following debt obligations at December 31,
2001:
First National Bank of St. Marys, $9,244 payable monthly,
12.5% interest rate, secured by equipment and personal
guarantee of officers. $ 430,167
Union Bank of Tyler County, interest at 11.5% due quarterly,
renewable, due on demand, secured by equipment and
personal guarantee of officers. 19,733
-----------------
Balance forward $ 449,900
-----------------
F-17
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 3 - LONG-TERM DEBT (Continued)
Balance forward $ 449,900
Union Bank of Tyler County, principal and interest payments of
$799 due monthly, interest rate of 14%, due September 25, 2004,
secured by vehicle and personal guarantee of officers. 21,746
Wesbanco, interest payable quarterly, prime +2%, due on demand,
secured by officers' personal assets. 300,000
Note payable to an individual, due on demand, bearing interest at
9.75%, interest payments due monthly, unsecured. 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. 4,217
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 1,593,860
Less Current Portion (1,311,695)
-----------------
Total Long-Term Debt $ 282,165
=================
Future maturities of long-term debt are as follows:
2002 $ 1,311,695
2003 89,234
2004 96,668
2005 96,263
2006 -
2007 and thereafter -
--------------------
Total $ 1,593,860
====================
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 owned by the President of the Company, at the industrial
facilities near Sistersville, West Virginia, or to Hope, a local
utility, on a year long basis ending January 31, 2002 at a
variable price per month per Mcf.
F-18
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
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 Hope 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. Receivables
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 $704,829 at December 31,
2001. The net payable bears interest at 10%, is due on demand and
is unsecured.
NOTE 5 - ECONOMIC DEPENDENCE AND MAJOR CUSTOMERS
The Company's marketing arrangement with Sancho accounted for
approximately 82% and 84% of the Company's revenue for the years
ended December 31, 2001 and 2000, 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 2001 and 2000, respectively.
NOTE 6 - STOCKHOLDERS' EQUITY
In 2000, the Company issued 1,691,287 shares of common stock for
cash of $83,000. The Company issued 11,722,383 shares of common
stock for services and conversion of debt at approximately $0.12
per share or a total of $1,422,923. The shares for services were
issued after the services had been performed and were valued at
the closing prices on the dates of issue. The Company also issued
151,930,606 shares of common stock to convert debentures, interest
and penalties at approximately $0.04 per share or $5,653,991 (See
Note 9). Additionally, the Company canceled 423,833 shares of
common stock that had been previously authorized but never issued,
the Company does believe it has any further obligation related to
these shares.
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.
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 District Court in
Harris County, Texas for non-payment of an accounts payable. The
judgment is for $46,375 plus prejudgment interest at 10.00%.
F-19
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 7 - JUDGMENTS PAYABLE (Continued)
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. At December 31, 2001, the
balance due to Tioga was $47,234 and is included in judgments
payable and is classified as a current liability.
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. Management 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, 2001
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.
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. The Company has indicated that the suit
is not justified and that the Company and the individual
defendants intend to vigorously defend the action. The Company has
not accrued any amounts for these claims as of December 31, 2001
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.
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 accrued the balance of $428,018 plus
accrued interest of $25,372. The total amount of $453,390 is
included in judgments payable and is classified as a current
liability.
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, 2001, the
Company had accrued a balance of $14,669 which is included in
judgments payable. $6,434 has been classified as a long-term
liability.
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. The Company has accrued a balance of $62,880 which is
included in judgment payable as a current liability.
F-20
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 7 - JUDGMENTS PAYABLE (Continued)
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 entered into a
settlement agreement wherein the Company transferred a portion of
the Powder River Basin leasehold acreage in Campbell County,
Wyoming. At December 31, 2001, the balance was $55,259 that is
included judgments payable as a current liability.
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.
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.
F-21
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 7 - JUDGMENTS PAYABLE (Continued)
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. At
December 31, 2001, the Company has a remaining liability of
$601,966 which is included in judgments payable as a current
liability.
On September 28, 2001, the U.S. Securities & Exchange Commission
("SEC") filed a civil action in the U.S. District Court for the
District of Columbia against the Company, Loren E. Bagley, its
President and William Woodburn, its Vice President.
The SEC sought a judgment against the Company enjoining it from
future violations of Sections 10(b) and 13(a) of the Securities
and Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12B-20,
13a-1, and 13a-13. Further, the SEC sought a judgment against
Messrs. Bagley and Woodburn enjoining them from future violations
of Section 10(b) of the Exchange Act and Rule 10b-5, from aiding
and abetting future violations of Section 13(a) of the Exchange
Act and Rules 12b-20, 13a-1, and 13a-13, and assessing civil
penalties against them.
On February 26, 2002, the United States District Court for the
District of Columbia entered a permanent injunction against the
Company, its former President, Loren E. Bagley, and its former
Vice President and principal financial officer, William F.
Woodburn, permanently enjoining them from future violations of
Sections 10(b) and 13(a) of the Securities Exchange Act of 1934
(Exchange Act) and Rules 10b-5, 12b-20, 13a-1, and 13a-13
thereunder. The Court's order further enjoins Messrs. Bagley and
Woodburn from aiding and abetting violations of Section 13(a) of
the Exchange Act and Rules 12b- 20, 13a-1, and 13a-13 thereunder
and orders Messrs. Bagley and Woodburn to each pay a $20,000 civil
penalty. The Company and Messrs. Bagley and Woodburn consented to
entry of the permanent injunction and the imposition of civil
penalties without admitting or denying the SEC's allegations.
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, 2001 of $25,251,849, and has a working capital deficit at
December 31, 2001 of $5,471,698.
F-22
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
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, 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. If these are not
successful, management is committed to meeting the operational
cash flow needs of the Company. (See also Notes 10 and 11).
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.
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, 2001, the
Company owed $331,462 on the debentures consisting of $50,000 for
a debenture and $281,462 in penalties and interest.
F-23
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 10 - BUSINESS SEGMENTS
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related
Information." Prior period amounts have been restated to conform
to the requirements of this statement. 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.
Certain financial information concerning the Company's operations
in different industries is as follows:
For the
Years Ended Oil and Gas Pipeline Corporate
December 31, Sales Transmission Unallocated
------------ ------------ ------------ -----------
Oil and gas revenue 2001 $ 502,264 $ 775,963 $ --
2000 796,390 328,867 --
Operating loss applicable to
industry segment 2001 1,223,017 250,726 --
2000 3,429,277 449,336 --
General corporate expenses
not allocated to industry
segments 2001 -- -- --
2000 -- -- --
Interest expense 2001 (232,588) (85,516) --
2000 (380,165) (57,305) --
Other income (expenses) 2001 16,026 -- --
2000 14,850 -- --
Assets
(net of intercompany accounts) 2001 3,630,556 10,914 --
Depreciation and amortization 2001 787,142 108,742 --
2000 221,705 108,764
Property and equipment
acquisitions 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-24
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
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 with
the following weighted average assumptions used for grants,
respectively; dividend yield of zero percent for all years;
expected volatility of 246%; risk-free interest rates of 6.15
percent and expected lives of 0.1 years.
Under the accounting provisions of SFAS No. 123, the Company's net
loss would have been changed by the pro forma amounts indicated
below:
December 31,
--------------------------------------
2001 2000
----------------- -------------------
Net loss:
As reported $ (1,473,744) $ (3,807,071)
Pro forma $ (1,473,744) $ (3,819,936)
Basic loss per share:
As reported $ (0.01) $ (0.06)
Pro forma $ (0.01) $ (0.06)
A summary of the status of the Company's stock option plans as of
December 31, 2001 and changes during the year is presented below:
December 31, 2000
Weighted
Average
Shares Exercise Price
------------------ -------------------
Outstanding, December 31, 2000 795,057 $ 0.50
Granted -- --
Canceled -- --
Exercised -- --
------------------ -------------------
Outstanding, December 31, 2001 795,057 $ 0.50
================== ===================
Exercisable, December 31, 2001 795,057 $ 0.50
================== ===================
F-25
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
NOTE 11 - OUTSTANDING STOCK OPTIONS (Continued)
Outstanding Exercisable
----------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/00 Life Price at 12/31/01 Price
--------------- ----------- ----------- -------- ----------- --------
$ 0.50 795,057 2.00 $ 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
and have a five year period to be exercised. The options were not
issued pursuant to an employee stock option plan.
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 currently 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 - PRIOR PERIOD ADJUSTMENT
The Company has restated its consolidated financial statements for
the year ended December 31, 2000 to reflect adjustments related to
the preferred stock. The Company inappropriately accrued a
dividend payable, when in fact the dividend was not declared until
August 2001, and the Company expensed the beneficial conversion
feature instead of recording the transaction in the retained
deficit. The determination reduced the net loss for the year ended
December 31, 2000 by $71,540 and the current liabilities by
$11,540. Correction of this error had the following effect on the
December 31, 2000 consolidated financial statements:
Originally As
Reported Restated Difference
--------------- ------------------ ------------------
Net loss $ (3,878,611) $ (3,807,071) $ 71,540
Accumulated deficit (23,766,395) (23,754,855) 11,540
Loss per share $ (0.05) $ (0.05) --
F-26
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
(Unaudited)
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES
(1) Capitalized Costs Relating to
Oil and Gas Producing Activities
December 31,
-------------------------------------
2001 2000
----------------- -----------------
Proved oil and gas producing properties and related
lease and well equipment $ 3,372,880 $ 3,373,880
Unproved oil and gas properties 114.426 180,000
(1,009,429) (269,365)
---------------- -----------------
Net Capitalized Costs $ 2,722,502 $ 3,283,515
================ ================
(2) Costs Incurred in Oil and Gas Property
Acquisition, Exploration, and Development
Activities
For the Years Ended
December 31,
-------------------------------------
2001 2000
----------------- -----------------
Acquisition of Properties
Proved $ 281,203 $ 269,520
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,
-------------------------------------
2001 2000
----------------- -----------------
Sales $ 502,264 $ 788,224
Production costs (9,518) (18,623)
Depreciation and depletion (603,731) (198,857)
Income tax expenses -- --
----------------- -----------------
Results of operations for producing activities
(excluding the activities of the pipeline transmission
operations, corporate overhead and interest costs $ (110,985) $ 570,744
================= ================
F-27
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 2001 and 2000
(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 2000 1,348,754 356,196
Revisions of previous estimates (1,154,569) --
Improved recovery -- --
Purchases of minerals in place -- 831,968
Extensions and discoveries -- --
Production (46,309) (54,325)
Sales of minerals in place -- --
------------------- ------------------
End of the year 2001 147,876 1,133,839
=================== ==================
Proved developed reserves:
Oil Gas
BBL MCF
------------------- ------------------
Beginning of the year 2001 1,348,754 356,196
End of the year 2001 147,876 1,133,839
During 2001, 2000, 1998, 1996, 1995, 1992, 1991 and 1990, 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-28
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 2001 and 2000
(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, 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
================
At December 31, 2000
Trans Energy
and
Subsidiaries
----------------
Future cash inflows $ 18,793,524
Future production and development costs (6,768,854)
Future income tax expense (4,061,312)
----------------
Future net cash flows 7,963,358
10% annual discount for estimated timing of cash flows (3,537,580)
----------------
Standardized measure of discounted future net cash flows $ 4,425,778
================
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,
-------------------------------------
2001 2000
----------------- -----------------
Standardized measure, beginning of year $ 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 263,874 --
Accretion of discount items -- --
Standardized measure, end of year $ 3,649,994 $ 4,425,778
================= =================
F-29
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 2001 and 2000
(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-30
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: April 12, 2002
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 April 12, 2002
/S/ ROBERT L. RICHARDS Director
---------------------------
Robert L. Richards
Vice President and April 12, 2002
/S/ LOREN E. BAGLEY Director
---------------------------
Loren E. Bagley Principal Financial Officer
Secretary Treasurer / Treasurer April 12, 2002
/S/ WILLIAM F. WOODBURN and Director
---------------------------
William F. Woodburn Chief Accounting Officer
April 12, 2002
/S/ JOHN B. SIMS Director
---------------------------
John B. Sims
S-1