UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
-----------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- --------------
Commission File Number 0-23530
TRANS ENERGY, INC.
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 93-0997412
(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)
Registrant's telephone no., including area code: (304) 684-7053
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
----- ------
APPLICABLE ONLY TO CORPORATE ISSUERS
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 September 30, 2002
----------------------------- ------------------------------------
Common Stock, $.001 par value 237,019,127
-1-
TABLE OF CONTENTS
Heading Page
------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................... 3
Consolidated Balance Sheets -- September 30, 2002 and December 31, 2001............ 4
Consolidated Statements of Operations -- three and nine months ended
September 30, 2002 and 2001...................................................... 6
Consolidated Statements of Stockholders' Equity (Deficit).......................... 7
Consolidated Statements of Cash Flows - nine months ended
September 30, 2002 and 2001...................................................... 8
Notes to Consolidated Financial Statements ........................................ 9
Item 2. Management's Discussion and Analysis and Results of Operations.......................... 15
Item 3. Controls and Procedures................................................................. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 17
Item 2. Changes In Securities and Use of Proceeds............................................... 19
Item 3. Defaults Upon Senior Securities......................................................... 19
Item 4. Submission of Matters to a Vote of Securities Holders................................... 19
Item 5. Other Information....................................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................ 20
Signatures.............................................................................. 21
Certifications.......................................................................... 22
-2-
PART I
Item 1. Financial Statements
We have prepared the following unaudited consolidated financial
statements for the period ended September 30, 2002.
TRANS ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and December 31, 2001
-3-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
------
September 30, December 31,
2002 2001
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash $ -- $ 1,491
Accounts receivable, net 197,216 186,478
Prepaid expenses 360 --
----------- -----------
Total Current Assets 197,576 187,969
----------- -----------
PROPERTY AND EQUIPMENT
Vehicles 59,013 59,013
Machinery and equipment 10,092 10,092
Pipelines 2,254,908 2,254,908
Well equipment 49,155 49,155
Wells 3,523,731 3,559,644
Leasehold acreage 114,426 114,426
Accumulated depreciation, depletion and amortization
(3,101,728) (2,602,528)
----------- -----------
Total Property and Equipment, net 2,909,597 3,444,710
OTHER ASSETS
Cash surrender value - life insurance, net 5,795 8,791
----------- -----------
Total Other Assets 5,795 8,791
----------- -----------
TOTAL ASSETS $ 3,112,968 $ 3,641,470
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Cash overdraft $ 3,370 $ --
Accounts payable - trade 774,357 754,552
Notes payable - convertible 48,570 41,575
Accrued expenses 619,824 619,678
Salaries payable 769,562 642,662
Notes payable - current portion 1,299,241 1,311,695
Judgments payable (Note 5) 1,140,840 1,228,964
Notes payable - related party 1,001,323 704,829
Debentures payable 346,462 331,462
Dividends payable -- 23,250
Total Current Liabilities 6,003,549 5,658,667
------------ ------------
LONG-TERM LIABILITIES
Judgments payable (Note 5) 6,434 6,434
Notes payable 282,165 282,165
------------ ------------
Total Long-Term Liabilities 288,599 288,599
Total Liabilities 6,292,148 5,947,266
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock; 10,000,000 shares authorized at $0.001
par value; -0- and 300 shares issued and
outstanding, respectively -- --
Common stock; 500,000,000 shares authorized at $0.001
par value; 237,019,127 and 176,683,189 shares issued
and outstanding, respectively 237,018 176,682
Capital in excess of par value 23,034,285 22,769,371
Accumulated deficit (26,450,483) (25,251,849)
------------ ------------
Total Stockholders' Equity (Deficit) (3,179,180) (2,305,796)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 3,112,968 $ 3,641,470
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUES $ 283,478 $ 374,722 $ 629,072 $ 1,036,553
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of oil and gas 191,675 318,042 558,198 731,860
Salaries and wages 65,713 65,371 196,734 192,545
Depreciation, depletion and
amortization 418,547 52,252 526,248 183,145
Selling, general and
administrative 30,677 25,737 224,217 355,607
----------- ----------- ----------- -----------
Total Costs and Expenses 706,612 461,402 1,505,397 1,463,157
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (423,134) (86,680) (876,325) (426,604)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Other income 4,826 60 9,104 1,218
Interest expense (66,920) (58,668) (266,831) (169,609)
Settlement expense (Note 5) (64,582) -- (64,582) --
----------- ----------- ----------- -----------
Total Other Income
(Expense) (126,676) (58,608) (322,309) (168,391)
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS
BEFORE INCOME TAXES AND
MINORITY INTERESTS (549,810) (145,288) (1,198,634) (594,995)
----------- ----------- ----------- -----------
INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
MINORITY INTERESTS -- -- -- --
----------- ----------- ----------- -----------
NET LOSS $ (549,810) $ (145,288) $ (1,198,634) $ (594,995)
=========== =========== =========== ===========
BASIC LOSS PER SHARE $ (0.00) $ (0.00) $ (0.01) $ (0.00)
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 207,671,301 176,552,754 197,870,431 174,429,507
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Preferred Stock Common Stock Capital In
------------------------- -------------------------- Excess of Accumulated
Shares Amount Shares Amount Par Value Deficit
----------- ------------ ----------- ------------ ------------ ------------
Balance, December 31, 2000 300 $ -- 172,028,189 $ 172,027 $ 22,608,733 $(23,754,855)
Common stock issued for services
at $0.03 per share -- -- 4,655,000 4,655 136,650 --
Discount on beneficial conversion
feature of notes payable -- -- -- -- 23,988 --
Dividend on preferred stock at 7.75% -- -- -- -- -- (23,250)
Net loss for the year ended
December 31, 2001 -- -- -- -- -- (1,473,744)
----------- ------------ ----------- ------------ ------------ ------------
Balance, December 31, 2001 300 -- 176,683,189 176,682 22,769,371 (25,251,849)
Conversion of preferred stock and
preferred dividends to common
stock (unaudited) (300) -- 16,835,938 16,836 6,414 --
Conversion of notes payable to
common stock (unaudited) -- -- 5,000,000 5,000 45,000 --
Common stock issued for services
(unaudited) -- -- 1,000,000 1,000 26,000 --
Conversion of notes payable to
common stock (unaudited) -- -- 4,166,667 4,167 20,833 --
Common stock issued for cash
(unaudited) -- -- 33,333,333 33,333 166,667 --
Net loss for the nine months
ended September 30, 2002
(unaudited) -- -- -- -- -- (1,198,634)
----------- ------------ ----------- ------------ ------------ ------------
Balance, September 30, 2002
(unaudited) -- $ -- 237,019,127 $ 237,018 $ 23,034,285 $(26,450,483)
=========== ============ =========== ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
-7-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the
Nine Months Ended
September 30,
-------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,198,634) (594,995)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation, depletion and amortization 526,248 183,145
Common stock issued for services 27,000 172,200
Settlement expense 64,582 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (10,738) (155,025)
Increase in prepaid and other current assets 2,636 --
Increase (decrease) in accounts payable and accrued
expenses 347,205 237,846
--------- ---------
Net Cash Used by Operating Activities (241,701) (156,829)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (49,463) (134,522)
--------- ---------
Net Cash Used by Investing Activities (49,463) (134,522)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in cash overdraft 3,370 70,757
Common stock issued for cash 200,000 --
Proceeds from related party notes 366,431 176,477
Proceeds from notes payable 25,000 150,147
Principal payments on notes payable
(130,136) (85,242)
Principal payments on related party notes (174,992) (20,788)
--------- ---------
Net Cash Provided by Financing Activities 289,673 291,351
--------- ---------
NET DECREASE IN CASH (1,491) --
CASH, BEGINNING OF PERIOD 1,491 --
CASH, END OF PERIOD $ -- $ --
CASH PAID FOR:
Interest $ -- $ 106,234
Income taxes $ - $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued for debt reduction $ 25,000 $ --
Common stock issued for services $ 27,000 $ 172,200
Common stock issued for conversion of
preferred stock and dividends $ 23,250 $ --
The accompanying notes are an integral part of these
consolidated financial statements.
-8-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted in
accordance with such rules and regulations. The information
furnished in the interim condensed consolidated financial
statements include normal recurring adjustments and reflects all
adjustments, which, in the opinion of management, are necessary
for a fair presentation of such financial statements. Although
management believes the disclosures and information presented are
adequate to make the information not misleading, it is suggested
that these interim condensed consolidated financial statements be
read in conjunction with the Company's most recent audited
financial statements and notes thereto included in its December
31, 2001 Annual Report on Form 10-KSB. Operating results for the
three and nine months ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2002.
NOTE 2 - GOING CONCERN
The Company's consolidated financial statements are prepared using
generally accepted accounting principles applicable to a going
concern which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The
Company has incurred cumulative operating losses through September
30, 2002 of $26,450,483, and has a working capital deficit at
September 30, 2002 of $5,805,973. 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.
NOTE 3 - RECLASSIFICATIONS
Certain 2001 amounts have been reclassified to conform to the 2002
presentations.
NOTE 4 - MATERIAL EVENTS
Lario Oil & Gas Company
On July 18, 2002, Lario Oil & Gas Company (Lario), the operator of
the Pinon Fee #1, Sagebrush #1 and Sagebrush #2, filed a lien
against the Company in the amount of $70,567 to secure payment of
operating fees. Production monies have been suspended to the Baker
Entities until this lien has been satisfied.
-9-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 4 - MATERIAL EVENTS (Continued)
Stockholders' Equity
During February 2002, the Company converted 300 shares of
preferred stock and $23,250 of cumulative preferred dividends into
16,835,938 shares of common stock. As a result of this conversion,
the Company has -0- shares of preferred stock issued and
outstanding at September 30, 2002.
During February 2002, the Company received $200,000 for the
purchase of 33,333,333 shares of common stock. During September
2002, the Company issued the 33,333,333 shares and at September
30, 2002 the stock subscription deposit has been reduced to $-0-.
During April 2002, the Company issued 5,000,000 shares of its
common stock for the conversion of notes payable in the amount of
$50,000. The Company additionally issued 1,000,000 shares of its
common stock for services rendered and valued at $27,000.
Notes Payable
During March 2002, the Company entered into a promissory note with
an unrelated party for $25,000. The note is payable upon demand
and accrues interest at 10% per annum. During September 2002, the
Company issued 4,166,667 shares of its common stock for the
conversion of notes payable for this amount.
Notes Payable - Related Party
During the nine months ended September 30, 2002, the Company had
entered into multiple promissory notes with several related
parties for a total of $165,000. The notes are payable upon demand
and interest is imputed at 10% per annum.
NOTE 5 - JUDGMENTS PAYABLE
Tioga Lumber Company
A foreign judgment has been filed with the Circuit Court in
Pleasants County, West Virginia for a judgment against the Company
by Tioga Lumber Company (Tioga) rendered by the Circuit Court in
Pleasants County, West Virginia for non-payment of an accounts
payable. The judgment is for $46,375 plus prejudgment interest at
10.00%.
On February 28, 2002, the Company and Tioga reached an agreement
wherein the Company would pay Tioga $10,000 by March 5, 2002 and
$8,000 per month thereafter. The court appointed a special
commissioner to act as an arbitrator if the Company defaults. The
special commissioner would attach a lien if property is found
which does not have a lien attached. The first payment has been
made, however, the Company is currently three payments behind. At
September 30, 2002, the balance due to Tioga was $21,234 and is
included in judgments payable and is classified as a current
liability.
-10-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 5 - JUDGMENTS PAYABLE (Continued)
Dennis L. Spencer
In January 2002, Dennis L. Spencer filed suit against the Company
and William F. Woodburn and Loren E. Bagley in the Circuit Court
of Ritchie County, West Virginia (Civil Action No. 02-C-02). The
complaint alleges that the Company sold certain assets that Mr.
Spencer claims to be the beneficial owner. The complaint seeks
$1,000,000 in damages. The Company has filed its answer to the
allegations and feels that the Company has met its obligations in
full to Mr. Spencer. Management also believes the suit is without
merit and intends to vigorously defend the action. The Company has
not accrued any amounts for these claims as of September 30, 2002
because the Company feels that based on its defenses against the
claims that the Company will have no additional liability. Due to
the early stage of litigation, it is not possible to evaluate the
likelihood of an unfavorable outcome or estimate the extent of
potential loss.
George Hillyer
On December 26, 2001, George Hillyer filed a suit against the
Company and William F. Woodburn and Loren E. Bagley, individually.
The action seeks $250,750 in connection with certain services
performed for the Company. The Company has indicated that the suit
is not justified and that the Company and the individual
defendants intend to vigorously defend the action. On September 3,
2002, the Company entered into a Mutual Settlement Agreement and
Release of All Claims whereby the Company conveyed a 240-acre
lease and a well located in Campbell County Wyoming in release of
all claims and dismissal of the suit by Mr. Hillyer. The court
dismissed the case on September 20, 2002. The well given to Mr.
Hillyer was valued at $64,582 which was included in the statement
of operations as an expense.
Ross O. Forbus
On April 16, 2001, Ross O. Forbus obtained a judgment against the
Company for $428,018 plus post judgment interest at 10.00% per
annum. The judgment was obtained to satisfy a previous note
payable. The Company has made several small payments to Mr. Forbus
and is currently negotiating with him toward extending the
payments until the judgment can be paid in full. Mr. Forbus has
made a demand upon the Company for payment of the full obligation.
The Company has accrued the balance of $428,018 plus accrued
interest. At September 30, 2002, the total amount of $450,603 is
included in judgments payable and is classified as a current
liability.
Core Laboratories, Inc.
On July 28, 1999, Core Laboratories, Inc. (Core) obtained a
judgment against the Company for non-payment of an accounts
payable. The judgment calls for monthly payments of $351 and is
bearing interest at 10.00% per annum. At September 30, 2002, the
Company had accrued a balance of $12,869 which is included in
judgments payable. $6,434 has been classified as a long-term
liability.
-11-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 5 - JUDGMENTS PAYABLE (Continued)
RR Donnelly
On July 1, 1998, RR Donnelly (RR) obtained a judgment against the
Company for non-payment of accounts payable. The judgment calls
for monthly payments of $3,244 and is bearing interest at 10.00%
per annum. At September 30, 2002, the Company has accrued a
balance of $56,792 which is included in judgment payable as a
current liability.
Bellevue Resources
On April 10, 2000, Bellevue Resources recorded and served its
Notice and Statement of Lien in the Sixth Judicial District,
Campbell County, Wyoming, against the Company for non-payment of
services. The Company had recorded a liability of $78,651 at
December 31, 2000. During 2001, the Company has agreed to a
settlement agreement wherein the Company will transfer a portion
of the Powder River Basin leasehold acreage in Campbell County,
Wyoming as full payment of the liability. The Company has executed
the settlement agreement and expects to have it completed during
the fourth quarter 2002. At September 30, 2002, the balance was
$48,134 that is included judgments payable as a current liability.
Baker Hughes Entities
On February 7, 2001, the United States Bankruptcy Court, Southern
District of Texas, entered an Order Granting Motion to Dismiss
Chapter 7 Case in the action entitled In Re: Trans Energy, Inc.,
Case No. 00-39496-H4-7. The Order dismissed the involuntary
bankruptcy action instituted against the Company on October 16,
2000. The sole petitioning creditor named in the Involuntary
Petition was Western Atlas International, Inc. ("Western"). An
Order for Relief Under Chapter 7 was entered by the Court on
November 22, 2000.
On April 23, 2000, the 189th District Court of Harris County,
Texas entered an Agreed Final Judgment in favor of Western against
the Company in the amount of $600,665, together with post judgment
interest at 10% per annum. Following the judgment, Western and the
Company entered into settlement negotiations concerning the
Company's satisfaction of the judgment through payments over a
four to five month period together with the pledge of collateral
on certain unencumbered assets.
Previously, on or about July 9, 1998, a judgment had been entered
in the 152nd District Court of Harris County, Texas against the
Company in favor of Baker Hughes Oilfield Operations, Inc. d/b/a/
Baker Hughes Inteq. Western Geophysical ("Baker"), a division of
Western Atlas International, Inc., in the amount of $41,142,
together with interest and attorney fees. This judgment was
outstanding at the time of the filing of the Involuntary Petition.
During its negotiations with Western for settlement of the
Judgment, the Company made a $200,000 "good faith payment" to
Western's counsel on October 23, 2000. On December 12, 2000, Joe
Hill was named as the Chapter 7 Trustee. Subsequently, Western's
counsel delivered the $200,000 to the Trustee.
-12-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 5 - JUDGMENTS PAYABLE (Continued)
Baker Hughes Entities (Continued)
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.
The Settlement Agreement provided that, subject to the approval of
the Bankruptcy Court, the Company agreed to pay to the Baker
Entities $759,664, plus interest at 10%. In addition to the
$200,000 payable from the escrow, the Company agreed to pay to the
Baker Entities an initial payment of $117,261 within fifteen days
from the date of the Dismissal Order (due February 21, 2001).
The Company also agreed to make additional payments of $100,000
every thirty days following the initial payment, with the first
payment due beginning no later than March 23, 2001, continuing
until the total obligation plus interest is paid in full. Further,
the Company pledged as collateral certain properties, personal
property and fixtures and two directors each pledged 750,000
shares of the Company's common stock which they personally own.
During 2002, the Company assigned the income stream from the sale
of oil from three of its wells (Pinon Fee #1, Sagebrush #1 and
Sagebrush #2) to the Baker entities as payments towards the
amounts owed. The Company believes that this payment will satisfy
the Baker Entities until the Company has paid the full obligation.
The Baker Entities continue its proceedings to enforce a foreign
judgment against the Company in Pleasants County, West Virginia.
At September 30, 2002, the Company has a remaining liability of
$557,642 which is included in judgments payable as a current
liability.
NOTE 6 - BUSINESS SEGMENTS
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.
-13-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2002 and December 31, 2001
NOTE 6 - BUSINESS SEGMENTS (Continued)
Certain financial information concerning the Company's operations
in different industries is as follows:
For the Nine
Months Ended Oil and Gas Pipeline Corporate
September 30, Sales Transmission Unallocated
------------- ----- ------------ -----------
Oil and gas revenue 2002 $ 359,568 $ 269,504 $ -
2001 392,439 644,114 -
Operating loss applicable to
industry segment 2002 (697,869) (178,456) -
2001 (278,144) (148,460) -
General corporate expenses
not allocated to industry
segments 2002 - - -
2001 - - -
Interest expense 2002 (219,412) (47,419) -
2001 (107,863) (61,746) -
Other income (expenses) 2002 (274,890) (47,419) -
2001 (106,645) (61,746) -
Assets
(net of intercompany accounts) 2002 2,303,279 809,689
2001 3,460,669 945,387 -
Depreciation and amortization 2002 444,692 81,556 -
2001 101,589 81,556
Property and equipment
Acquisitions 2002 49,463 - -
2001 134,522 - -
-14-
Item 2. Management's Discussion and Analysis or Plan of Operations
The following table sets forth the percentage relationship to total
revenues of principal items contained in the our consolidated statements of
operations for the three and nine month periods ended September 30, 2002 and
2001. It should be noted that percentages discussed throughout this analysis are
stated on an approximate basis.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Total revenues.............................. 100% 100% 100% 100%
Total costs and expenses.................... 249 123 239 141
Loss from operations........................ (149) (23) (139) (41)
Other income (expense)...................... (45) (16) (51) (16)
Net loss.................................... (194) (39) (190) (57)
Total revenues for the three months ("third quarter") and nine months
ended September 30, 2002 decreased 24% and 39% respectively, when compared with
the third quarter and first nine months of 2001. The decreases during the 2002
periods are due primarily to less oil production and lower oil and gas prices.
Our cost of oil and gas for the third quarter and first nine months of 2002
decreased 40% and 24% from the respective 2001 periods due to decreased oil
production. Selling, general and administrative expenses for the third quarter
of 2002 increased 19% due to increased cost of insurance benefits, and decreased
37% for the first nine months of 2002 attributed to decreases in legal, travel,
accounting consulting and general office expenses. Depreciation, depletion and
amortization increased in the third quarter and first nine months of 2002 by
701% and 187%, respectively, attributed to increased depletion of oil and gas
wells based on estimated oil and gas reserves.
Our loss from operations for the third quarter of 2002 was $423,134
compared to $86,680 for the third quarter of 2001, and was $876,325 for the
first nine months of 2002 compared to $426,604 for the first nine months of
2001. Total other expenses increased 116% and 91 % for the third quarter and
first nine months of 2002, respectively, due primarily to increased interest
expenses.
As a percentage of total revenues, total costs and expenses increased
from 123% in the third quarter of 2001 to 249% for the third quarter of 2002,
and from 141% or the first nine months of 2001 to 239% for the first nine months
of 2002. Actual total costs and expenses increased 53% for the third quarter
2002 and 3% for the first nine months of 2002. The increase in total costs and
expenses is primarily attributed to increased depreciation, depletion and
amortization.
Our net loss for the third quarter of 2002 was $549,810 compared to
$145,288 for the third quarter of 2001, and $1,198,634 for the first nine months
of 2002 compared to $594,995 for the 2001 period.
For the remainder of fiscal year 2002, management expects selling,
general and administrative expenses to remain at approximately the same rate as
the first nine months of 2002. The cost of oil and gas produced is expected to
fluctuate with the amount produced and with prices of oil and gas, and
management anticipates that revenues are likely to increase during the remainder
of 2002.
-15-
We have included a footnote to our financial statements for the periods
ended September 30, 2002 stating that because of our continued losses, working
capital deficit and need for additional funding, there is substantial doubt as
to whether we can continue as a going concern. See Note 2 to the consolidated
financial statements.
Net Operating Losses
We have accumulated approximately $19,400,000 of net operating loss
carryforwards as of September 30, 2002, which may be offset against future
taxable income through the year 2021 when the carryforwards expire. 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 our 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 or the nine month period ended September 30,
2002 because the potential tax benefits of the loss carryforward is offset by
valuation allowance of the same amount.
Liquidity and Capital Resources
Historically, we have satisfied our working capital needs with
operating revenues and from borrowed funds. At September 30, 2002, we had a
working capital deficit of $5,805,973 compared to a deficit of $5,470,698 at
December 31, 2001. This 6% decrease in working capital is primarily attributed
to the 20% increase in salaries payable and 42% increase in related party
payables.
During the first nine months of 2002, operating activities used net
cash of $241,701 compared to $156,829 in the first nine months of 2001,
primarily attributed to our increased net loss for the period and a decrease in
common stock issued for services. Net cash used by investing activities in the
first nine months of 2002 was $49,463, compared to $134,522 in the 2001 period.
The decline is attributed to the decrease in expenditures for property and
equipment during 2002. During the first nine months of 2002,we realized a net
$289,673 in cash from financing activities compared to $291,351 in the first
nine months of 2001. During this period, we realized $200,000 from common stock
issued for cash and proceeds from related party notes increased 108% in the
first nine months of 2002.
We anticipate meeting our working capital needs during the remainder of
the current fiscal year with revenues from operations, particularly from our
Powder River Basin interests in Wyoming and New Benson gas wells drilled in West
Virginia. In the event revenues are not sufficient to meet our working capital
needs, we will explore the possibility of additional funding from either the
sale of debt or equity securities. There can be no assurance such funding will
be available to us or, if available, it will be on acceptable or favorable
terms.
As of September 30, 2002, we had total assets of $3,112,968 and total
stockholders' deficit of $3,179,180, compared to total assets of $3,641,470 and
total stockholders' deficit of $2,305,796 at December 31, 2001.
In 1998, we issued $4,625,400 face value of 8% secured convertible
debentures due September 30, 1999. A portion of the proceeds were used to
acquire the oil and gas properties and interest in Wyoming. During 2000, all but
one of the remaining outstanding debentures were converted into commons stock.
At September 30, 2002, we owed $346,462 in connection with the debentures
consisting of $50,000 for one debenture holder that we have been unable to
contact and the balance in penalties and interest.
-16-
Inflation
In the opinion of our management, inflation has not had a material
effect on our operations.
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. We 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: our ability to secure additional financing, the possibility of
success in our drilling endeavors, competitive factors, and other risks detailed
in the our periodic report filings with the SEC.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Based on their
evaluation, as of a date within 90 days prior to the date of the filing of this
Form 10-QSB, of the effectiveness of the Company's disclosure controls and
procedures, as defined in Rules 13a-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934, the principal executive officer and the principal
financial officer of the Company have each concluded that such disclosure
controls and procedures are effective and sufficient to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the SEC's rules and forms.
Changes in Internal Controls. Subsequent to the date of their
evaluation, there have not been any significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls, including any corrective action with regard to significant
deficiencies and material weaknesses.
PART II
Item 1. Legal Proceedings
Certain material pending legal proceedings to which we are a party or
to which any of our property is subject is set forth below.
(a) On February 7, 2001, the United States Bankruptcy Court, Southern
District of Texas, entered an Order Granting Motion to Dismiss Chapter
7 Case in the action entitled In Re: Trans Energy, Inc., Case No.
00-39496-H4-7. The Order dismissed the involuntary bankruptcy action
instituted against us on October 16, 2000. The sole petitioning
creditor named in the Involuntary Petition was Western Atlas
International, Inc. An Order for Relief Under Chapter 7 was entered by
the Court on November 22, 2000.
On April 23, 2000, the 189th District Court of Harris County,
Texas entered an Agreed Final Judgment in favor of Western against us
in the amount of $600,665.36, together with post judgment interest at
10% per annum. Following the judgment, we entered into settlement
negotiations with Western concerning our satisfaction of the judgment
through payments over a four to five month period together with the
pledge of collateral on certain unencumbered assets. Previously, on or
about July 9, 1998, a judgment had been entered in the 152nd District
-17-
Court of Harris County, Texas against us in favor of Baker Hughes
Oilfield Operations, Inc. d/b/a/ Baker Hughes Inteq. Western
Geophysical ("Baker"), a division of Western Atlas International, Inc.,
in the amount of $41,142.00, together with interest and attorney fees.
This judgment was outstanding at the time of the filing of the
Involuntary Petition.
During its negotiations with Western for settlement of the
Judgment, we made a $200,000 "good faith payment" to Western's counsel
on October 23, 2000. On December 12, 2000, Joe Hill was named as the
Chapter 7 Trustee. Subsequently, Western's counsel delivered the
$200,000 to the Trustee.
On January 19, 2001, we filed with the Bankruptcy Court the
Motion to Dismiss Chapter 7 Case. The reasons we cited in support of
our Motion to Dismiss included, but were not limited to, (i) the Texas
Court being an improper venue for the action, and (ii) our never
receiving the Involuntary Petition and Summons notifying it of the
action. In anticipation of the Bankruptcy Court dismissing the
Involuntary Petition, on February 2, 2001, we entered into a Settlement
Agreement with Baker Hughes Oilfield Operation, Inc., d/b/a/ Baker
Hughes Inteq. Western Geophysical, a division of Western Atlas
International, Inc. (the "Baker Entities"). In entering its order on
February 7, 2001 to dismiss the action, the Court ordered the Trustee
to retain $17,694.80 for satisfaction of administrative fees and
expenses, and to pay to Western and Baker the sum of $182,736.66, on
behalf of us and pursuant to the terms of the Settlement Agreement.
The Settlement Agreement provided that, subject to the
approval of the Bankruptcy Court, we agreed to pay to the Baker
Entities $759,664.31, plus interest at 10%. In addition to the $200,000
payable from the escrow, we pledged as collateral certain properties,
personal property and fixtures and two directors each pledged 750,000
shares of our common stock which they personally own. Subsequently, we
assigned the income stream from the sale of oil in the Pinon Fee #1,
Sagebrush #1 and Sagebrush #2 to the Baker Entities as payments toward
the amounts owed. Management believes that this payment will satisfy
the Baker Entities until the obligation can be paid in full. The Baker
Entities continue its proceedings to enforce a foreign judgment against
us in Pleasants County, West Virginia. At September 30, 2002, there was
a remaining liability of $557,642 which is included in judgments
payable as a current liability.
(b) On April 10, 2000, Bellevue Resources, Inc. recorded and served a
Notice and Statement of Lien in the Sixth Judicial District, Campbell
County, Wyoming, against us for non-payment of services. We 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 us as payment for this liability. We have executed the
settlement agreement and expect to have it completed during the fourth
quarter 2002. At September 30, 2002, the balance of $48,134 has been
included in our financial statements as a current liability under
judgments payable.
(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. We
have accrued $47,741 which is included in our financial statements for
the year ended December 31, 2000 under accounts payable. On February
28, 2002, we reached a negotiated payment schedule with Tioga. We have
made the initial payment, however, we are currently three payments
behind. At September 30, 2002, the balance due to Tioga was $21,234 and
is included in judgments payable and classified as a current liability.
(d) On April 16, 2001, Ross Forbus obtained a judgment of $428,018
against us to satisfy a promissory note that we previously entered into
with Mr. Forbus on April 8, 1996. We agreed to payment terms and made
-18-
several payments to Mr. Forbus. We are presently negotiating to extend
the term of the payments until the judgment is paid in full. Mr. Forbus
has made a demand upon for payment in full.
(e) On December 26, 2001, George Hillyer filed a suit against us and
William F. Woodburn and Loren E. Bagley individually. The action seeks
$250,750 in connection with certain services performed for us. On
September 3, 2002, we entered into a Mutual Settlement Agreement and
Release of All Claims whereby we conveyed a 240-acre lease and a well
located in Campbell County Wyoming in release of all claims and
dismissal of the suit by Mr. Hillyer. The court dismissed the case on
September 20, 2002.
(f) In January 2002, a suit entitled Dennis L. Spencer vs. Trans
Energy, Inc. and Messrs. Woodburn and Bagley was filed in the Circuit
Court of Ritchie County, West Virginia ( Civil Action No. 02-C-02). The
complaint alleges that we sold certain assets which Mr. Spencer claims
to be the beneficial owner. The complaint seeks $1,000,000 in damages.
Management believes the suit is without merit and intends to vigorously
defend the action. We have not accrued any amounts for these claims as
of December 31, 2001 because we feel that based on our defenses against
the claims we 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 2. Changes In Securities and Use of Proceeds
During the third quarter of 2002, we issued 4,166,667 shares of common
stock to two persons upon the conversion of notes payable, valued at $25,000.
This transaction was exempt from registration under the Securities Act of 1933
pursuant to Section 3(a)(9) of that Act. Also during the third quarter of 2002,
we issued 33,333,333 to one person for cash in the amount of $200,000. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act. The cash realized from the sale of shares was used for general
operating expenses.
Item 3. Defaults Upon Senior Securities
In 1998, we issued $4,625,400 face value of 8% secured convertible
debentures due June 30, 1999. Interest on the debentures accrued upon the date
of issuance until payment in full of the principal sum was been made or duly
provided for. Holders of the debentures 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 our common
stock at a conversion price for each share equal to the lower of (a) seventy
percent (70%) of the market price of the our 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 our option, in cash or in shares of our common stock valued at the
then effective conversion price. During 2000, all but one of the remaining
outstanding debentures were converted into commons stock. At September 30, 2002,
we owed $346,462 in connection with the debentures consisting of $50,000 to one
debenture holder and $296,462 in penalties and interest.
Item 4. Submission of Matters to a Vote of Security Holders
This Item is not applicable.
-19-
Item 5. Other Information
This Item is not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certification of C.E.O. Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 99.2 Certification of Principal Accounting
Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
There were no current reports filed on Form 8-K for the three
month period ended September 30, 2002.
-20-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANS ENERGY, INC.
Date: November 15, 2002 By /S/ ROBERT I. RICHARDS
-----------------------------------------------
ROBERT I. RICHARDS, President,
Chief Executive Officer and Director
Date: November 15, 2002 By /S/ WILLIAM F. WOODBURN
-----------------------------------------------
WILLIAM F. WOODBURN
Secretary / Treasurer
(Principal Accounting Officer)
-21-
Certifications
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert I. Richards, Chief Executive Officer of the Trans Energy,
Inc. (the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Trans
Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 15, 2002
/s/ ROBERT I. RICHARDS
-----------------------------
Robert I. Richards
Chief Executive Officer
-22-
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William F. Woodburn, Principal Accounting Officer of the Trans
Energy, Inc. (the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Trans
Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 15, 2002
/s/ WILLIAM F. WOODBURN
-----------------------------
William F. Woodburn
Principal Accounting Officer
-23-