UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 2004
[ ] 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
--------------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of 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. $ 2,390,099
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.
$5,656,224 (Based on price of $1.90 per share on April 6, 2005)
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 March 31, 2005
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Common Stock, Par Value 4,790,480
$.001 per share
DOCUMENTS INCORPORATED BY REFERENCE
A description of "Documents Incorporated by Reference" is contained in Part
III, Item 13.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
-1-
TRANS ENERGY, INC.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Description of Business ....................................................... 3
Item 2. Description of Property........................................................ 16
Item 3. Legal Proceedings.............................................................. 18
Item 4. Submission of Matter to a Vote of Security Holders............................. 18
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................... 18
Item 6. Management's Discussion and Analysis or Plan of Operation...................... 20
Item 7. Financial Statements........................................................... 23
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................... 23
Item 8A. Controls and Procedures........................................................ 23
Item 8B Other Information.............................................................. 24
PART III
Item 9. Directors, Executive Officers, Promoters and Control persons;
Compliance with Section 16(a) of the Exchange Act.............................. 25
Item 10. Executive Compensation......................................................... 27
Item 11. Security Ownership of Certain Beneficial Owners and Management................. 27
Item 12. Certain Relationships and Related Transactions................................. 28
Item 13. Exhibits....................................................................... 29
Item 14. Principal Accountant Fees and Services......................................... 29
Signatures..................................................................... 31
-2-
PART I
Item 1. Description of Business
History
Trans Energy, Inc. is engaged in the transportation, marketing and
production of natural gas and oil, and certain exploration and development
activities. We own and operate 203 oil and gas wells in West Virginia and an
interest in seven oil wells in Wyoming that we do not operate. We also own and
operate an aggregate of over 20 miles of 4-inch and 6-inch gas transmission
lines located within West Virginia in the Counties of Ritchie and Tyler. This
pipeline system gathers the natural gas produced from these wells and from wells
owned by third parties. We also have approximately 11,000 gross acres under
lease in the Powder River Basin in Campbell, Crook and Weston Counties, Wyoming.
In 1998, we purchased from GCRL Energy, Ltd. all of its interest in the
Powder River Basin in Campbell and Crook Counties, Wyoming, consisting of
interests in five (5) wells, four (4) of which are producing, interests in
30,000 leasehold acres, and interests in approximately seventy-three miles of
3-D seismic data. The properties include three producing fields from Minnelusa
Sandstone and were discovered on 3-D seismic. During 1999, the Sagebrush 3 well
was drilled in the Sagebrush field in Campbell County Wyoming, to be used as a
water disposal well for the Sagebrush #1 and #2. The well was put into operation
as an injection well in 2004.
On November 5, 2004, we acquired Cobham Gas Industries, Inc. and certain
wells, leases, pipelines, gas purchase agreements, oil hauling agreements,
equipment, right of ways and other miscellaneous items related to the leases
located in West Virginia. A total of 229 wells were acquired, of which 98 are
currently producing, located on approximately 15,000 leased acres.
On January 31,2005, we finalized the acquisition of Arvilla Oilfield
Services, LLC, , a West Virginia limited liability company, assuming all its
operations, assets and liabilities. Arvilla provides well servicing, workover
and related transportation services to independent oil and natural gas producers
in the northeast region of the United States. It also performs ongoing
maintenance and major overhauls necessary to optimize the level of production
from existing oil and natural gas wells and provides certain ancillary services
during the drilling and completion of new wells. Arvilla offers its services in
Ohio, Pennsylvania, New York, Virginia, Kentucky and West Virginia.
On November 29, 2004, our board of directors and stockholders holding a
majority of our outstanding common stock approved a one share for 150 shares
reverse split of our common stock. The reverse split was effected on January 28,
2005.
Our principal executive offices are located at 210 Second Street, P.O. Box
393, St. Marys, West Virginia 26170, and our telephone number is (304) 684-7053.
Business Development
In 2001, we continued our interest in the Trenton - Black River deep gas
field in the Appalachian Basin in West Virginia. We believes that this area may
become active in the counties in which we operate. We continue to focus much of
our efforts in this area to take advantage of the situation if the opportunity
becomes available. In 1999, we sold many of our Appalachian Basin assets and
purchased 51% of a producing well in the Powder River Basin in Wyoming.
In addition to the business of newly acquired Arvilla, we will continue our
current business of the transporting, marketing and producing natural gas and
oil and engaging in certain limited exploration and development activities.
-3-
Our business strategy is to economically increase reserves, production and
the sale of gas and oil from existing and acquired properties in the Powder
River Basin, Appalachian Basin and elsewhere, in order to maximize shareholders'
return over the long term. Our strategic location in West Virginia enables us to
actively pursue the acquisition and development of producing properties in that
area that will enhance our revenue base without proportional increases in
overhead costs.
We operate oil and natural gas properties and transport and market natural
gas through our transmission systems in West Virginia. Although management
desires to acquire additional oil and natural gas properties and to become more
involved in exploration and development, this can only be accomplished if we can
secure future funding. Management intends to continue to develop and increase
the production from oil and natural gas properties that we currently own.
Although we will continue to transport and market natural gas through our
pipelines, there are no current plans to acquire or to lay additional pipeline.
Accordingly, during 2004 we sold approximately 7.6 miles of our 6-inch pipeline
and approximately 10 miles of our 4-inch pipeline for cash and other
consideration. In 2004, we sold approximately 3 miles of 6-inch pipeline and
approximately 5.7 miles of 4-inch pipeline.
On December 31, 2003, we sold our 75% working interest ownership in five
oil and gas wells located in Tyler County, West Virginia to Ultra-Light
Investments for $380,000. Of the total proceeds, $30,000 was used to pay off
existing debt on the wells. The balance of $350,000 was used to settle an
ongoing dispute with Baker Hughes Oilfield Operations, Inc. d/b/a/ Baker Hughes
Inteq, Western Geophysical, a division of Western Atlas International, Inc. The
$350,000 was considered as payment in full and we were given a release of all
judgments and liens against us in the matter.
The following is a summary of our oil and gas assets including wells and
pipelines that we acquired in September 1993:
Tyler Construction Company, Inc.
--------------------------------
We acquired a 65% interest in Tyler Construction Company from Loren E.
Bagley and William F. Woodburn, both of whom are directors of Trans Energy.
Tyler Construction owns and operates a natural gas gathering pipeline system
serving the industrialized Ohio Valley, initially consisting of approximately 27
miles of 6-inch pipeline and 10 miles of 4-inch pipeline.
Tyler Construction's trunk line system consists of 6-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 4-inch pipeline begins at a point eight miles east of St. Marys
and proceeds north 10 miles to an industrial park located seven miles south of
Sistersville, West Virginia. At this point, gas is delivered to OSI Specialties
(formerly Union Carbide) and Consolidated Aluminum Corporation of America under
a marketing agreement with Sancho. Pursuant to our agreement with Sancho, we
have the right to sell natural gas subject to the terms and conditions of a
20-year contract, as amended, that Sancho entered into with Hope Gas, Inc. in
1988. This agreement is a flexible volume supply agreement whereby we receive
the full price which Sancho receives less a $.05 per Mcf marketing fee paid to
Sancho. The price of the natural gas is based upon the residential gas index and
the Inside F.E.R.C. CNG Index.
On February 28, 2003, we sold 7.6 miles of the 6-inch pipeline to PC
Pipeline, Inc., located in Morgantown, West Virginia. In consideration for the
sale, we received 35% of the outstanding stock of Tyler Construction from
Ecological Energy, Inc., an affiliate of PC Pipeline. As a result of the
transaction, we now own 100% of the capital stock of Tyler Construction.
Also on February 28, 2003, we sold 10 miles of the 4-inch pipeline to Triad
Energy Corporation, located in Marietta, Ohio, for the cash consideration of
$270,000. Proceeds from the sale were used to pay down existing short and
long-term debt.
-4-
On March 17, 2004, Tyler Construction sold 16,000 feet of 6-inch pipeline
located in Pleasants and Tyler Counties, West Virginia for $70,000. Tyler
Construction also sold 30,096 feet of 4-inch pipeline (the Pipeline Ltd.)
located in Pleasants and Ritchie Counties, West Virginia for $130,000. The buyer
in both instances was Triad Energy Corporation of Reno, Ohio. Of the total
proceeds, $161,391 was used to pay off the bank debt of the pipelines and the
balance was used as operating capital. Following the sale, we retain
approximately 16.3 miles of 6-inch pipeline in Tyler County.
Spencer Wells
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We acquired all rights, title and interest to six producing oil and gas
wells located in West Virginia, in exchange for shares of Trans Energy common
stock. Five of the wells identified as "Fowler," "Goff," "Locke," "McGill" and
"Workman" are situated in Ritchie County in a proven reservoir field. The
remaining well identified as "Spencer," is located in Tyler County. All six
wells were completed in 1991 and have been producing oil and gas through the
date hereof. In 1999, five of these wells were sold to an unaffiliated third
party and in 2000, the sixth well was sold to an unaffiliated third party.
The Pipeline, Ltd.
------------------
We acquired from Tyler Pipeline, Inc. all rights, title and interest in the
natural gas gathering pipeline system known as The Pipeline, Ltd. (the name of
the pipeline, not a legal entity), a 4-inch pipeline that begins at Twiggs, West
Virginia, nine miles east of St. Marys, West Virginia where it intercepts Tyler
Construction's trunk line system and proceeds due south for a distance of six
miles. The Pipeline, Ltd. system is used for purchasing gas from third party
producers. Mr. Woodburn, our Secretary / Treasurer and a director, is also
President and owns 50% of Tyler Pipeline. Mr. Bagley, our Vice President and a
director, also owns 50% of Tyler Pipeline.
Ritchie County Gathering Systems, Inc.
--------------------------------------
We acquired all the issued and outstanding capital stock of Ritchie County
Gathering Systems, Inc., a West Virginia corporation. Ritchie County Gathering
owns and operates a 4-inch natural gas gathering line which begins five miles
south of Cairo, West Virginia at Rutherford, and proceeds due south for 4.6
miles, crossing Mellon Ridge and ending at Macfarlan Creek approximately 1/2
mile north of the South Fork of the Hughes River. The Ritchie County Gathering
pipeline is used for purchasing gas from third party producers and delivering
such gas to Hope Gas.
Cobham Gas Industries, Inc.
---------------------------
On November 5, 2004, we finalized an agreement with Texas Energy Trust
Company, a Delaware Business Trust with offices in Irving, Texas, whereby we
acquired certain oil and gas leases and leasehold interests located in Wetzel
and Marion Counties, West Virginia, and other assets. Our acquisition of Cobham
includes its two subsidiaries, Penine Resources, Inc. and Belmont Energy, Inc.
The acquisition was accomplished by our wholly owned subsidiary, Prima Oil
Company, Inc., acquiring from Texas Energy Trust 100% of the issued and
outstanding shares (2,100 shares) of Cobham Gas Industries, Inc., a Delaware
corporation. Under the terms of the agreement, we acquired certain wells,
leases, pipelines, gas purchase agreements, oil hauling agreements, equipment,
right of ways and other miscellaneous items related to the leases located in
West Virginia. A total of 229 wells were acquired, of which 98 are currently
producing, located on approximately 15,000 leased acres. Among the assets
acquired are certain vehicles and heavy equipment and various other drilling
equipment.
In consideration for the acquired property, we paid a purchase price of
$892,344, of which approximately $489,000 is payable in cash and the balance in
244,633 shares of restricted Trans Energy common stock, post-split, to be issued
following the effectiveness of our one share for 150 shares reverse stock split
in January 2005. An initial payment of $250,000 was paid at the closing with the
remaining balance to be paid quarterly in equal installments beginning January
1, 2005, with the final payment due October 1, 2005.
-5-
The wells are situated in well defined fields producing from the shallow
Devonian formation. Big Injun, Gordon and Thirty Foot are sands in the Devonian
foundation that have produced substantial natural gas in West Virginia. The
field/acreage positions consist of three specific areas; Mannington,
Smithfiled/Wallace and Dents Run. The Mannington field consists of 107 wells
encompassing 4,573 acres. These wells are Big Injun wells, at approximately
2,900 - 3,000 feet in depth, dependent on elevation. The Smithfield/Wallace
field consists of 92 wells encompassing 9,223 acres. The preponderance of these
wells are Big Injun wells, although there are several Gordon wells in the field.
Management believes that future development can expand the Gordon and Bayard
play. The Dents Run field consists of 30 wells encompassing 1,097 acres. These
wells are completed through the Thirty Foot sand.
Powder River Basin Wyoming
--------------------------
On March 6, 1998, we entered into an agreement to purchase from GCRL
Energy, Ltd. all of its interest in the Powder River Basin in Campbell and Crook
Counties, Wyoming, consisting of interests in five (5) wells, four (4) of which
are producing, interests in 30,000 leasehold acres, and interests in
approximately seventy-three miles of 3-D seismic data. The properties include
three producing fields from Minnelusa Sandstone and were discovered on 3-D
seismic. We made an initial payment for the properties of $50,000 and the
balance of $2,987,962 was paid for with proceeds from the sale of debentures.
The following table sets forth information concerning the existing oil
production per day of the producing wells located on the GCRL property.
Gross Bbls. Net Bbls.
Name of Well Oil Per Day Net % to TSRG to TSRG
------------ ------------ ------------- -----------
Sagebrush Flat (one unit) 85 42.15% 36
Pinon Fee #1 21 51.2% 11
Swartz Draw 28 15.4% 4
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Total 97 51
Current Business Activities
We operate our oil and natural gas properties and transport and market
natural gas through our transmission systems in West Virginia. Although
management desires to acquire additional oil and natural gas properties and to
become more involved in exploration and development, this can only be
accomplished if we can secure future funding. Management intends to continue to
develop and increase the production from the oil and natural gas properties that
it currently owns.
We will continue to transport and market natural gas through our various
pipelines in 2005. Apart from one well drilled in the Powder River basin in
Wyoming (Sagebrush #3) and the seven re-entry Benson wells drilled in West
Virginia, we have not participated in any new wells in the last four years.
Powder River Basin Wyoming - Prima
----------------------------------
In December 1996 we purchased 420 acres in the Powder River basin in
Wyoming for $50,000 from an unaffiliated third party. Included in the purchase
price was a condition that the previous owners would provide all of the geologic
and geophysical work as part of the purchase price. In February 1997 we leased
an additional 480 acres that joined with our acreage position. The target
formation is the Minnelusa "B1" sand. There presently are no producing wells on
such acreage and no proved reserves located on the acreage owned by us.
-6-
Five two-dimensional ("2-D") seismic lines and a 6-square mile
three-dimensional ("3-D") seismic program have been shot across the acreage now
held by us. Unlike 2-D seismic testing which provides a cross-sectional view of
the subsurface of the Earth, 3-D testing provided a full, three-dimensional view
of the subsurface. Such views allow for greater precision in the location of
potential drilling sites. 3-D testing allows potential drillers to obtain
accurate estimates of the size of oil and gas bearing structures and the profile
of the structure. 2-D testing only informs the driller that an oil and gas
bearing structure is in a particular area, without giving information as to size
and shape. Without an accurate estimate of the size of the oil and gas bearing
structures, it is difficult to accurately estimate the reserves in the
structure, and, thus, the economic viability of drilling into a particular
structure. Without an accurate profile of the structure, a driller may not hit
the most economic portion of the structure.
Water pressure primarily is responsible for the movement of oil within the
area of our acreage. Where water pressure is the cause of oil movement, finding
the apex of the oil bearing structure is critical. Drilling into the apex of
such a structure usually assures that a maximum amount of oil, and a minimal
amount of water, will be recovered from a well. Hitting such a zone elsewhere
than at the apex will result in a lower proportion of oil to water and reduced
rates of recovery.
We completed drilling the Fowler 22-8 in January 1998 and determined the
well to be a dry hole and was plugged. We have not done further drilling on the
acreage.
Powder River Basin Wyoming - Wolffe Prospect
--------------------------------------------
In 1997, we purchased a 30% working interest in the Wolffe Prospect in the
Powder River Basin in Campbell County, Wyoming for $65,000 from an unaffiliated
third party. Included in the purchase price was a 30% working interest in the
Wolffe #1-35 well and 30% interest in 240 acres. In October 1997, we
participated in our share of the drilling of the Horizon 32-35 well. The target
formation was the Minnelusa "B1" sand. The well was determined to be a dry hole
and plugged. In November 1999 we purchased for $16,000 an additional 51% working
interest in the Wolff 1-35 well from Renor Exploration Limited. In September
2002, we transferred this well to an unaffiliated third party in settlement of a
lawsuit.
Arvilla Oilfield Services
-------------------------
On January 31, 2005, we finalized the acquisition of Arvilla Oilfield
Services, LLC through a merger of our subsidiary, Trans Energy Acquisitions,
with and into Arvilla, Inc., with Arvilla, Inc. being the survivor of the
merger. Previously in June 2004, Clarence E. Smith and Rebecca L. Smith had
acquired Arrow Oilfield Services Company from Belden & Blake Corporation
("B&B"), a privately held company engaged in the exploration, development and
production of oil and natural gas reserves. Mr. and Mrs. Smith subsequently
created Arvilla Oilfield Services, LLC as the operating entity and then created
Arvilla, Inc., that acquired all the membership interests of Arvilla Oilfield
Services, LLC. Thus, by acquiring Arvilla, Inc., we assumed all of the
operations, assets and liabilities of Arvilla Oilfield Services.
In order to consummate the acquisition of Arvilla, on November 29, 2004 our
board of directors and stockholders holding a majority of our outstanding common
stock, approved a one share for 150 shares reverse split of our common stock.
The reverse split was effected on January 28, 2005.
-7-
In consideration for Arvilla, Inc., we issued 1,185,024 shares of
post-split Trans Energy common stock to the following Arvilla stockholders:
Clarence E. Smith, 531,437 shares; Rebecca L. Smith 531,437 shares and Howell B.
Williams, 122,150 shares. These shares represent approximately 25% of our total
outstanding shares (post-split) following the transaction, including shares to
be issued in connection with the separate acquisition of the Cobham Gas
Industries assets. Arvilla, Inc. will operate as a separate business entity 100%
owned by Trans Energy.
Business of Arvilla
-------------------
Arvilla is engaged in providing well servicing, workover and related
transportation services to independent oil and natural gas producers in the
northeast region of the United States. Arvilla performs ongoing maintenance and
major overhauls necessary to optimize the level of production from existing oil
and natural gas wells and provides certain ancillary services during the
drilling and completion of new wells. Arvilla offers its services in Ohio,
Pennsylvania, New York, Virginia, Kentucky and West Virginia.
Typically, Arvilla will provide a well servicing or swab rig, the crew to
operate the rig, and such other specialized equipment as may be needed to meet a
customer's requirements. Arvilla also owns a fleet of equipment that provides:
o brine hauling and disposal;
o pipeline and facility construction;
o well location preparation and lease road construction;
o oil hauling;
o and trucking of oilfield equipment, such as rigs, casings, tubing and
rods.
Strategy
--------
Management believes that the Appalachian Basin in the northeastern portion
of the United States provides significant opportunities for exploration and
production companies to develop reserves at shallow depths. Because Arvilla
operates in Ohio, Pennsylvania, New York, Virginia, Kentucky and West Virginia,
we feel that Arvilla's well servicing operations are well positioned to
capitalize on existing market opportunities and established demand for its
services.
Arvilla's service area is located within 500 miles of major gas markets for
the United States. This strategic location is important as oil and gas companies
develop natural gas reserves for future markets. Management anticipates that
demand for natural gas will grow significantly in the next few years and, as a
result of the demand, it is expected that there to be a marked increase in
drilling activity in the Appalachian Basin served by Arvilla. As drilling
activity increases, the need for the services provided by Arvilla will increase.
Every well drilled requires service of the type that Arvilla is able to provide.
As the drilling activities increase, we anticipate demand for Arvilla's services
in its operation area to also increase.
Services
--------
Through its experienced work force, Arvilla is able to provide various
services to the oil and gas industry that include:
Trucking services. Arvilla owns a fleet of trucks that can provide
customers with the ability to move equipment, tanks, drill pipe, and other
types of trucking needs necessary in the oil and gas business. Each time a
well is drilled, all drilling equipment must be moved by trucks from one
site to the next. This equipment includes generators, water pumps, drill
pipe, air compressors, drilling rigs, and many other associated items used
in drilling.
-8-
Excavating equipment. Arvilla provides dozer, excavators, and loaders
that are used to build access roads, cut drill sites for wells, dig pits,
reclaim drill sites after drilling is completed, reclaim access roads, and
seed, fertilize, lime, and mulch disturbed areas.
Service and swab rigs. Arvilla maintains a fleet of 14 service rigs and
swab rigs capable of servicing wells up to 6,000 feet in depth. This
service includes running pipe, tubing, rods, and swabbing capabilities. All
wells drilled require services of this type.
Brine and water hauling. Arvilla provides a fleet of 20 vacuum trucks
designed to deliver water to drilling rigs and fracs. Arvilla also hauls
and disposes of brine water from producing wells and disposes of pit water
used in well completions.
Disposal wells. Arvilla has 14 brine disposal wells located at various
locations in Ohio. These wells are used for the disposal of brine and pit
water.
Oil hauling. Arvilla maintains a fleet of 6 oil tankers that pick up
oil from producers at the well site and delivers the oil to terminals, from
which it is shipped to refineries.
Pipelines. Arvilla has the capability of constructing pipelines for the
delivery of natural gas or oil. Most wells drilled require construction of
a natural gas line to deliver gas from the well to a gathering system,
which will ultimately take the gas to market.
Research and Development
We have not allocated funds for conducting research and development
activities and, due to the nature of our business. We do not anticipate
allocating funds for research and development in the immediate future.
Marketing
We operate exclusively in the oil and gas industry. Natural gas production
from wells owned by us is generally sold to various intrastate and interstate
pipeline companies and natural gas marketing companies. Sales are generally made
on the spot market or under short-term contracts (one year or less) providing
for variable or market sensitive prices. These prices often are tied to natural
gas futures contracts as posted in national publications.
Natural gas delivered through our pipeline network is sold through a
contract with Sancho Oil and Gas Corporation to Dominion Hope Gas, a local
utility. Some of the gas is sold at a fixed price on a year long basis and some
at a variable price per month per Mcf. Under our contract with Sancho, we have
the right to sell natural gas subject to the terms and conditions of a 20-year
contract, as amended, that Sancho entered into with Hope Gas in 1988. This
agreement is a flexible volume supply agreement whereby we receive the full
price which Sancho charges the end user less a $.05 per Mcf marketing fee paid
to Sancho. In addition to the natural gas produced by our wells, we also
purchased approximately 960 Mcf of natural gas per day in 2004.
We sell our oil production to third party purchasers under agreements at
posted field prices. These third parties purchase the oil at the various
locations where the oil is produced.
Although management believes that we are not dependent upon any one
customer, our marketing arrangement with Sancho accounted for approximately 78%
of our revenue for the year ended December 31, 2004, and approximately 82% for
2003. This marketing agreement is in effect until September 1, 2008.
-9-
Arvilla markets its services through its various office locations. Each
office has a designated person who will market the services for that offices's
given area. Currently, the marketing is done from Canton, Ohio, Pleasantville,
Pennsylvania and St. Marys, West Virginia. Arvilla advertises its services in
oil and gas trade journals as well as direct verbal and written communication to
oil ad gas companies operating in the areas served by Arvilla. Arvilla also
maintains a web site at http://www.arvillaoilfield.com that is available for
current and prospective customers to review. Brochures will also be prepared for
distribution that will explain those services available.
Competition
We are in direct competition with numerous oil and natural gas companies,
drilling and income programs and partnerships exploring various areas of the
Appalachian and Powder River Basins and elsewhere competing for customers. Many
competitors are large, well-known oil and gas and/or energy companies, although
no single entity dominates the industry. Many of our competitors possess greater
financial and personnel resources enabling them to identify and acquire more
economically desirable energy producing properties and drilling prospects than
us. Additionally, there is competition from other fuel choices to supply the
energy needs of consumers and industry. Management believes that there exists a
viable market place for smaller producers of natural gas and oil and for
operators of smaller natural gas transmission systems.
Under our contract with Sancho, we have the right to sell natural gas
subject to the terms and conditions of a 20-year contract, as amended, that
Sancho entered into with Dominion Hope Gas in 1988. This agreement is a flexible
volume supply agreement whereby we receive the full price which Sancho receives
less a $.05 per Mcf marketing fee paid to Sancho. The price of the natural gas
is based upon indices that include the residential gas commodity charge of
Dominion Hope Gas and the Inside F.E.R.C. CNG Index. Were it not for the
relationship between Dominion Hope Gas and Sancho, Dominion Hope Gas would
compete directly with us for the sale of gas to certain customers, specifically
OSI Specialities, Inc. and Ormet Aluminum Company.
Arvilla is in direct competition with numerous other oilfield service
companies that operate in the same areas in which Arvilla operates. Some of
Arvilla's competitors include Bishop Well Services, Key Energy, Triad, Carper
Well Services, Danny Long and S & H Water Service. Some existing and potential
competitors have greater financial resources, larger market share and more
customers than Arvilla, which may enable them to establish a stronger
competitive position than we have. There is also much competition for qualified
personnel that operate the equipment used in the oilfield service business.
Management believes that Arvilla can successfully compete with these other
businesses in securing trained personnel and additional customers.
Government Regulation
The oil and gas industry is extensively regulated by federal, state and
local authorities. The scope and applicability of legislation is constantly
monitored for change and expansion. Numerous agencies, both federal and state,
have issued rules and regulations binding on the oil and gas industry and its
individual members, some of which carry substantial penalties for noncompliance.
To date, these mandates have had no material effect on our capital expenditures,
earnings or competitive position.
Legislation and implementing regulations adopted or proposed to be adopted
by the Environmental Protection Agency ("EPA") and by comparable state agencies,
directly and indirectly, affect our operations. We are required to operate in
compliance with certain air quality standards, water pollution limitations,
solid waste regulations and other controls related to the discharging of
materials into, and otherwise protecting the environment. These regulations also
relate to the rights of adjoining property owners and to the drilling and
production operations and activities in connection with the storage and
transportation of natural gas and oil.
-10-
We may be required to prepare and present to federal, state or local
authorities data pertaining to the effect or impact that any proposed operations
may have upon the environment. Requirements imposed by such authorities could be
costly, time-consuming and could delay continuation of production or exploration
activities. Further, the cooperation of other persons or entities may be
required for us to comply with all environmental regulations. It is conceivable
that future legislation or regulations may significantly increase environmental
protection requirements and, as a consequence, our activities may be more
closely regulated which could significantly increase operating costs. However,
management is unable to predict the cost of future compliance with environmental
legislation. As of the date hereof, management believes that we are in
compliance with all present environmental regulations. Further, we believe that
our oil and gas explorations do not pose a threat of introducing hazardous
substances into the environment. If such event should occur, we could be liable
under certain environmental protection statutes and laws. We presently carry
insurance for environmental liability.
Our exploration and development operations are subject to various types of
regulation at the federal, state and local levels. Such regulation includes the
requirement of permits for the drilling of wells, the regulation of the location
and density of wells, limitations on the methods of casing wells, requirements
for surface use and restoration of properties upon which wells are drilled, and
governing the abandonment and plugging of wells. Exploration and production are
also subject to property rights and other laws governing the correlative rights
of surface and subsurface owners.
We are subject to the requirements of the Occupational Safety and Health
Act, as well as other state and local labor laws, rules and regulations. The
cost of compliance with the health and safety requirements is not expected to
have a material impact on our aggregate production expenses. Nevertheless, we
are unable to predict the ultimate cost of compliance.
Although past sales of natural gas and oil were subject to maximum price
controls, such controls are no longer in effect. Other federal, state and local
legislation, while not directly applicable to us, may have an indirect effect on
the cost of, or the demand for, natural gas and oil.
Employees
As of the date hereof Trans Energy employs eight people full-time,
consisting of three executives, two marketing and clerical persons, and three
production persons. Our newly acquired subsidiary, Arvilla Oilfield Services,
has approximately 103 full time employees consisting of the following:
o 43 rig hands that operate or work directly on a service rig or swab
rig;
o 25 truck drivers who drive various types of trucks that haul oil, brine
or oilfield equipment;
o 2 equipment operators who operate various types of excavating
equipment;
o 11 roustabouts who perform various types of labor work associated with
oil and gas production such as setting tank batteries, meter runs and
laying or repairing gas lines;
o 10 mechanics that repair and maintain all types of trucks, rigs and
equipment;
o 4 clerical employees;
o 6 managerial persons; and
o 2 executives.
None of our employees or employees of Arvilla are members of any union, nor
have they entered into any collective bargaining agreements. We believes that
our relationship with our employees is good. With the successful implementation
of our business plan, we may seek additional employees in the next year to
handle anticipated potential growth. We anticipate that we may hire additional
employees in the areas of rig operators, truck drivers, mechanics and
roustabouts.
-11-
Facilities
We currently occupy approximately 4,000 square feet of office space in St.
Marys, West Virginia, which we share with our subsidiaries, Tyler Construction
Company and Ritchie County Gathering Systems. We lease an aggregate of
approximately 4,000 square feet from an unaffiliated third party under a verbal
arrangement for $1,400 per month, inclusive of utilities. Management anticipates
that we will move our principal offices to Arvilla's corporate offices in June
2005.
Arvilla currently operates out of facilities located in or near its service
areas. Arvilla's corporate headquarters are located at 7994 South Pleasant
Highway, St. Marys, West Virginia 26170, and consist of a leased 6,400 square
foot shop and office facility. This office manages work in West Virginia,
Virginia, and Kentucky. Arvilla owns a 20,000 square foot office and shop
located on 39 acres in Canton, Ohio, that manages most of Arvilla's work in Ohio
and some in Western Pennsylvania. This office reports to the main office in St.
Marys. West Virginia. Arvilla also uses a leased shop and office located in
Cambridge, Ohio that manages work in Southern Ohio and reports to the Canton,
Ohio office. Further, Arvilla maintains a leased shop and office located in
Pleasantville, Pennsylvania that manages work in Pennsylvania and New York and
reports to the main office in St. Marys, West Virginia.
Industry Segments
No information is presented as to industry segments. We are presently
engaged in the principal business of the exploration, development, production,
transportation and marketing of natural gas and oil. Reference is made to the
statements of operations contained in the financial statements included herewith
for a statement of our revenues and operating loss for the past two fiscal
years.
Risk Factors
You should carefully consider the risks and uncertainties described below
and other information in this report. If any of the following risks or
uncertainties actually occur, our business, financial condition and operating
results, would likely suffer. Additional risks and uncertainties, including
those that are not yet identified or that we currently believe are immaterial,
may also adversely affect our business, financial condition or operating
results.
We have a history of losses and anticipate future losses
---------------------------------------------------------------------------
Although our revenues increased approximately 26% during the fiscal year
ended December 31, 2004, and we may not achieve, or subsequently maintain
profitability if anticipated revenues do not increase in the future. We have
experienced operating losses, negative cash flow from operations and net losses
in each quarterly and annual period for the past several years. As of December
31, 2004, our net operating loss carryforward was approximately $24 million and
our accumulated deficit was approximately $29 million. We expect to continue to
incur significant expenses in connection with
* exploration and development of new and existing properties,
* costs of sales and marketing efforts,
* additional personnel, and
* increased general and administrative expenses.
Accordingly, we will need to generate significant revenues to achieve and
attain, and eventually sustain profitability. If revenues do not increase, we
may be unable to attain or sustain profitability on a quarterly or annual basis.
Any of these factors could cause the price of our stock to decline.
-12-
We have a significant working capital deficit that makes it more difficult
to obtain capital necessary for our operations and which may have an
adverse effect on our future business.
---------------------------------------------------------------------------
As of December 31, 2004, we had a working capital deficit of $2,980,431. If
our business when combined with Arvilla does not produce positive working
capital in the future, our business and financial condition would most likely be
materially and negatively impacted.
It may be necessary for us to seek additional funding, which may not be
available on terms favorable to us, or at all
---------------------------------------------------------------------------
Management believes that we may need to raise funds in order to take
advantage of anticipated expansion of our business. If we cannot meet future
capital requirements through realized revenues from our ongoing business, we may
have to raise additional capital by borrowing or by selling equity or
equity-linked securities, which securities would dilute the ownership percentage
of our existing stockholders. Also, these securities could also have rights,
preferences or privileges senior to those of our common stock. Similarly, if we
raise additional capital by issuing debt securities, those securities may
contain covenants that restrict us in terms of how we operate our business,
which could also affect the value of our common stock. If we borrow more money,
we will have to pay interest and may also have to agree to restrictions that
limit operating flexibility. We may not be able to obtain funds needed to
finance operations at all, or may be able to obtain funds only on very
unattractive terms. Management may also explore other alternatives such as a
joint venture with other oil and gas companies. There can be no assurances,
however, that we will conclude any such transaction.
There are many competitors in the oil and gas industry
---------------------------------------------------------------------------
We encounter many competitors in the oil and gas industry including the
exploration and development of properties, the sale of oil and gas and oilfield
services. Management expects competition to continue and intensify in the
future. The market for the oilfield service industry is extremely competitive
and the barriers to entry are relatively low. Increased competition could result
in reduced operating margins, as well as a loss of market share for our Arvilla
operations. Many existing and potential competitors have greater financial
resources, larger market share and more customers than us, which may enable them
to establish a stronger competitive position than we have. Also, there is
considerable competition for qualified personnel to operate the equipment used
by Arvilla. If we fail to address competitive developments quickly and
effectively, we will not be able to grow and our business will be adversely
affected.
If Arvilla fails to keep up with changes affecting the markets that it
serves, it will become less competitive, adversely affecting future
financial performance.
---------------------------------------------------------------------------
In order to remain competitive and serve its customers effectively, Arvilla
must respond on a timely and cost-efficient basis to changes in technology,
industry standards and procedures and customer preferences. Arvilla needs to
continuously upgrade and update its services to address new developments and
changing customer demands. In some cases these changes may be significant and
the cost to comply with these changes may be substantial. We cannot assure you
that we will be able to adapt to any changes in the future or that we will have
the financial resources to keep up with changes in the marketplace. Also, the
cost of adapting Arvilla's services may have a material and adverse effect on
our operating results.
-13-
Our operating results are likely to fluctuate significantly and cause our
stock price to be volatile which could cause the value of your investment
in our shares to decline
---------------------------------------------------------------------------
Quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. If operating results do not meet the expectations of
securities analysts and investors, the trading price of our common stock could
significantly decline which may cause the value of your investment to decline.
Some of the factors that could affect quarterly or annual operating results or
impact the market price of our common stock include:
o our ability to develop properties and to market our oil and gas;
o the timing and amount of, or cancellation or rescheduling of, orders
for our oil and gas;
o our ability to retain key management, sales and marketing and
engineering personnel;
o a decrease in the prices of oil and gas; and
o changes in costs of exploration or marketing oil and gas.
Due to these and other factors, quarterly and annual revenues, expenses and
results of operations could vary significantly in the future, and
period-to-period comparisons should not be relied upon as indications of future
performance.
Our business could be adversely affected by any adverse economic
developments in the oil and gas industry and/or the economy in general.
---------------------------------------------------------------------------
The oil and gas industry is susceptible to significant change that may
influence our business development due to a variety of factors, many of which
are outside our control. Some of these factors include
o varying demand for oil and gas;
o fluctuations in price; o competitive factors that affect pricing;
o attempts to expand into new markets;
o the timing and magnitude of capital expenditures, including costs
relating to the expansion of operations;
o hiring and retention of key personnel;
o changes in generally accepted accounting policies, especially those
related to the oil and gas industry; and
o new government legislation or regulation.
Any of the above factors or a significant downturn in the oil and gas industry
or with economic conditions generally, could have a negative effect on our
business and on the price of our common stock.
Our future success depends on retaining existing key employees and hiring
and assimilating new key employees. The loss of key employees or the
inability to attract new key employees could limit our ability to execute
our growth strategy, resulting in lost profitability and a slower rate of
growth.
---------------------------------------------------------------------------
Our future success depends, in part, on the ability to retain Trans
Energy's and Arvilla's key employees including executive officers. Following the
acquisition of Arvilla we do not anticipate entering into employment agreements
with their executives or key personnel. Also, we do not carry, nor do we
anticipate obtaining, "key man" insurance on our executives. It would be
difficult for us to replace any one of these individuals. In addition, as we
grow we may need to hire additional key personnel. We may not be able to
identify and attract high quality employees or successfully assimilate new
employees into our existing management structure.
-14-
If we are unable to manage our growth effectively, our operations and
financial performance could be adversely affected .
---------------------------------------------------------------------------
The ability to manage and operate our business as we execute our
anticipated growth will require effective planning. Significant future growth
could strain our internal resources, leading to a lower quality of service and
other problems that could adversely affect our financial performance. Arvilla's
efforts to grow have placed, and we expect will continue to place, a strain on
its personnel, management systems, infrastructure and other resources. Our
ability to manage future growth effectively will also require us to successfully
attract, train, motivate, retain and manage new employees and continue to update
and improve our operational, financial and management controls and procedures.
If we do not manage our growth effectively, our operations could be adversely
affected, resulting in slower growth and a failure to achieve or sustain
profitability.
Going concern issue
---------------------------------------------------------------------------
Our independent auditors have expressed a going concern issue. Our ability
to continue as a going concern is dependant upon our ability to achieve a
profitable level of operations. We may need, among other things, additional
capital resources which we will seek through loans from shareholders or other
forms of financing. Presently, management anticipates that the addition of the
Arvilla Oilfield and Cobham Industries operations will be sufficient to cover
our cash flow needs through fiscal 2005. However, management cannot provide any
assurances that we will be successful in accomplishing any of our plans.
Risks relating to ownership of our common stock
The price of our common stock is extremely volatile and investors may not
be able to sell their shares at or above their purchase price, or at all.
---------------------------------------------------------------------------
Our common stock is presently traded on the OTC Bulletin Board, although
there is no assurance that a viable market will continue. The price of our
shares in the public market is highly volatile and may fluctuate substantially
because of:
* actual or anticipated fluctuations in our operating results;
* changes in or failure to meet market expectations;
* conditions and trends in the oil and gas industry; and
* fluctuations in stock market price and volume, which are particularly
common among securities of small capitalization companies.
Future sales or the potential for sale of a substantial number of shares of
our common stock could cause the market value to decline and could impair
our ability to raise capital through subsequent equity offerings.
---------------------------------------------------------------------------
If we do not generate necessary cash from our operations to finance future
business, we may need to raise additional funds through public or private
financing opportunities. Issuing a substantial number of our common shares to
individuals or in the public markets, or the perception that these sales may
occur, could cause the market price of our common stock to decline and could
materially impair our ability to raise capital through the sale of additional
equity securities. Any such issuances would dilute the equity interests of
existing stockholders. Following the acquisition of Arvilla, we have
approximately 495 million shares of common stock held in our treasury for
possible future issuance.
We do not intend to pay dividends
---------------------------------------------------------------------------
To date, we have never declared or paid a cash dividend on shares of our
common stock. We currently intend to retain any future earnings for growth and
development of business and, therefore, do not anticipate paying any dividends
in the foreseeable future.
-15-
Possible "Penny Stock" Regulation
---------------------------------------------------------------------------
Trading of our common stock on the OTC Bulletin Board may be subject to
certain provisions of the Securities Exchange Act of 1934, commonly referred to
as the "penny stock" rule. A penny stock is generally defined to be any equity
security that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on broker-dealers.
These may require a broker dealer to:
* make a special suitability determination for purchasers of penny
stocks;
* receive the purchaser's written consent to the transaction prior to the
purchase; and
* deliver to a prospective purchaser of a penny stock, prior to the first
transaction, a risk disclosure document relating to the penny stock
market.
Consequently, penny stock rules may restrict the ability of broker-dealers
to trade and/or maintain a market in our common stock. Also, many prospective
investors may not want to get involved with the additional administrative
requirements, which may have a material adverse effect on the trading of our
shares.
Item 2. Description of Property
Our properties consist essentially of working and royalty interests owned
by us in various oil and gas wells and leases located in West Virginia. On
December 31, 2003, we sold our 75% working interest ownership in five oil and
gas wells located in Tyler County, West Virginia to Ultra-Light Investments for
$380,000. The wells included Eastlack #1, Nolan #2, Nolan #3, Nolan #4 and Nolan
#5. Our proved reserves for the years ended December 31, 2004, 2003 and 2002 are
set forth below:
December 31,
2004 2003 2002
--------- ------------ ---------
Natural Gas (MMcf)
Developed 542,955 - 1,131,415
Undeveloped - - -
--------- ------------ ---------
Total Proved 542,955 - 1,131,415
========= ============ =========
Crude Oil (MBbl)
Developed 106,649 99,880 113,406
Undeveloped - - -
--------- ----------- ---------
Total Proved 106,649 99,880 113,406
========= ============ =========
These estimates are based primarily on the reports of Robert L. Richards
(Wyoming), Geologist and presently an officer and director of Trans Energy, and
Mark V. Schumacher, PE (West Virginia). Such reports are, by their very nature,
inexact and subject to changes and revisions. Proved developed reserves are
reserves expected to be recovered from existing wells with existing equipment
and operating methods. Proved undeveloped reserves are expected to be recovered
from new wells drilled to known reservoirs on undrilled acreage for which
existence and recoverability of such reserves can be estimated with reasonable
certainty, or from existing wells where a relatively major expenditure is
required to establish production. No estimates of reserves have been included in
any reports to any federal agency other than the SEC. See SFAS 69 Supplemental
Disclosures included as part of our consolidated financial statements.
-16-
Set forth in the following schedule is the average sales price per unit of
oil, expressed in barrels ("bbl"), and of natural gas, expressed in thousand
cubic feet ("mcf"), produced by us for the past three fiscal years. The increase
in the cost of oil production in 2004 is attributed to expenses incurred putting
water flood into operation.
Years ended December 31,
-----------------------------------------------------------
Average sales price: 2004 2003 2002
------------------- ------ ------ ------
Gas (per mcf) $ 7.40 $ 7.04 $ 4.73
Oil (per bbl) 30.24 23.38 17.91
Average cost of production:
Gas (per mcf) -- -- --
Oil (per bbl) $14.19 4.58 5.03
We have not filed any estimates of total, proved net oil and gas reserves
with any federal authority or agency since the beginning of our last fiscal
year.
The following schedule sets forth the capitalized costs relating to oil and
gas producing activities by us for the past three fiscal years.
Years ended December 31,
----------------------------------------------------------
2004 2003 2002
----------- ----------- -----------
Proved oil and gas
producing properties
and related lease
and well equipment $ 7,093,676 $ 3,171,426 $ 3,678,730
Unproved oil and gas
properties 95,945 99,945 95,945
Accumulated depreciation
and depletion (3,870,874) (2,555,878) (1,839,295)
Net Capitalized Costs $ 3,318,747 $ 715,493 $ 1,935,380
========== ========== ===========
The following schedule summarizes changes in the standardized measure of
discounted future net cash flows relating to our proved oil and gas reserves.
Years ended December 31,
2004 2003 2002
-------------- --------------- ---------------
Standardized measure,
beginning of year 1,864,377 $ 4,314,941 $ 3,649,994
Oil and gas sales, net
of production costs (1,539,222) (2,411,293) -
Sales of mineral in place - - -
Purchases 5,132,087 - -
Net change due to revisions
in quantity estimates (1,018,406) (39,271) 664,947
----------- ------------- ------------
Standardized measure,
end of year $ 4,438,836 $ 1,864,377 $ 4,314,941
=========== =========== ===========
-17-
We do not anticipate investing in or purchasing assets and/or property for
the purpose of capital gains. It is our intention to purchase assets and/or
property for the purpose of enhancing our primary business operations. We are
not limited as to the percentage amount of our assets we may use to purchase any
additional assets or properties.
Item 3. Legal Proceedings
Certain material pending legal proceedings to which we are a party or to
which any of our property is subject is set forth below.
Information concerning certain material pending legal proceedings to which
we are a party, or to which any of our property is subject, is set forth below:
o On September 22, 2000, Tioga Lumber Company obtained a judgment of
$43,300 plus interest in the Circuit Court of Pleasants County, West
Virginia, against Tyler Construction Company for breach of contract. On
February 28, 2002, we reached a negotiated payment schedule with Tioga
and made the initial payment. We believe that we have satisfied the
balance owed to Tioga of $26,233.58, although the judgment has not yet
been released. We are proceeding to secure the release of the judgment.
o On January 15, 2003, a suit against us entitled Lario Oil & Gas Company
vs. Trans Energy, Inc. (Civil Action No. 24575) was initiated in the
Sixth District Court of Campbell County, Wyoming. Lario's suit asks for
$50,692.10 which it claims we owe for operating fees on the Sagebrush
#1 and #2 and the Pinon Fee #1 wells, operated by Lario and in which we
have working interests. We asked for a complete accounting of all
monies owed. Lario retained our share of monthly oil production monies
and applied them to the amount owed. On August 23, 2004, the court
dismissed the action with prejudice.
Item 4. Submission of Matters to a Vote of Security Holders
In connection with the reverse stock split effected January 28, 2005, we
filed with the State of Nevada on the same date an amendment to our articles of
incorporation to reflect the reverse split. The amendment reported the reverse
stock split and stated that our current authorized capitalization will remain
unchanged at 500 million shares of common stock with a par value of $0.001. The
reverse stock split and amendment were approved by the written consent of
shareholders holding a majority of our common stock by a vote of 256,287,738
shares (51.6%) voting for, and zero shares voting against.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Our common stock is quoted on the OTC Bulletin Board under the symbol TENG.
Prior to the effectiveness of our reverse stock split on January 28, 2005, our
stock traded under the symbol of TSRG. Set forth in the table below are the
quarterly high and low prices of our common stock as obtained from the Nasdaq
Small-Cap Market and the OTC Bulletin Board for the past two fiscal years and
adjusted for the one share for 150 shares reverse stock split.
High Low
---- ---
2004
First Quarter $ 2.70 $ 1.05
Second Quarter $ 4.50 $ 0.75
Third Quarter $ 4.35 $ 1.50
Fourth Quarter $ 2.55 $ 1.35
-18-
High Low
---- ---
2003
First Quarter $ 0.60 $ 0.30
Second Quarter $ 1.05 $ 0.30
Third Quarter $ 0.90 $ 0.30
Fourth Quarter $ 4.20 $ 0.45
-----------------
As of April 15, 2005, there were approximately 406 holders of record of our
common stock, which figure does not take into account those shareholders whose
certificates are held in the name of broker-dealers or other nominee accounts.
Dividend Policy
We have not declared or paid cash dividends or made distributions in the
past, and we do not anticipate that we will pay cash dividends or make
distributions in the foreseeable future. We currently intend to retain and
reinvest future earnings to finance operations.
Recent Sales of Unregistered Securities
During 2002, we issued 60,835,938 shares of common stock for cash, services
and conversion of debt at an average of $.01 per share, or an aggregate of
$337,250.
During 2003, we issued 27,841,311 shares of common stock for the
extinguishment of certain debts and related interest valued at $75,116, or an
average price of $.0027 per share, and an additional 150,000 shares upon the
conversion of convertible debt in the amount of $5,250, or $.035 per share. We
also issued 3,500,000 shares in exchange for services valued at $10,500, or
$.003 per share.
Shares issued for cash, services and extinguishment of debt, were issued in
reliance upon the exemption from registration under the Securities Act of 1933,
provided by Section 4(2) thereunder. Issuances of shares upon conversion of
debentures or other debt were pursuant to the exemption provided by Section
3(a)(9) of said Act.
In connection with the acquisition of Cobham Gas Industries, Inc. on
November 4, 2004, we issued to Texas Energy Trust Company 244,633 "post-split"
shares of Trans Energy's authorized, but previously unissued common stock. The
shares are valued at $1,485,794. The issuance of the shares was made in an
isolated, private transaction to an informed investor having knowledge of Trans
Energy and its business. Accordingly, the transaction is considered exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) of that
Act.
In connection with the closing of the merger agreement on January 31, 2005,
Trans Energy issued to the holders of Arvilla, Inc. capital stock an aggregate
of 1,185,024 shares of Trans Energy common stock. These shares were distributed
as follows: Clarence E. Smith, 531,437 shares; Rebecca L. Smith 531,437 shares
and Howell B. Williams, 122,150 shares.
Each recipient of the Trans Energy shares is a sophisticated and
knowledgeable investor and has full access to all pertinent business and
financial information related to Trans Energy and Arvilla. Accordingly, Trans
Energy has relied upon the exemption from registration under the Securities Act
of 1933 provided by Section 4(2) of the Act that exempts a transaction not
involving a public offering.
-19-
On February 28, 2005, our board of directors authorized the issuance of
50,000 shares of authorized, but previously unissued shares of common stock to
Liberty Consulting International, Inc. The shares are in consideration for
services pursuant to a Consulting Services Agreement between the company and
Liberty Consulting International. The shares have been issued and constitute
less than 5% of the total outstanding shares of Trans Energy common stock. The
issuance of shares is being made in a private transaction to a person with
knowledge of the company's business in reliance upon an exemption from
registration under the Securities Act of 1933, pursuant to Section 4(2) of that
Act.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-KSB.
Results of Operations
The following table sets forth the percentage relationship to total
revenues of principal items contained in the statements of operations of the
consolidated financial statements included herewith for the two most recent
fiscal years ended December 31, 2004 and 2003 It should be noted that
percentages discussed throughout this analysis are stated on an approximate
basis.
Fiscal Years Ended
December 31,
2004 2003
------ ------
Total revenues........................................................ 100% 100%
Total costs and expenses.............................................. 112 162
Total other income (expenses)......................................... (9) (15)
Loss before income taxes and change in accounting principal ......... (21) (77)
Income taxes.......................................................... - -
Change in accounting principal........................................ - (6)
Net (loss)............................................................ (21) (83)
For the Year Ended December 31, 2004 Compared to the Year Ended December
31, 2003
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Total revenues of $2,390,099 for the year ended December 31, 2004 ("2004")
increased 26% compared to $1,902,836 for the year ended December 31, 2003
("2003"), due primarily to the increase of oil and gas prices and the addition
of the Cobham assets for the last two months of 2004. In 2004, oil made up 22%
of total revenues compared to 28% in 2003, and gas represented 76% of revenues
in 2004 compared to 72% in 2003. The changes were considered minimal
representing only a slight difference in percentage points.
We had an operating loss of $284,127 for 2004 compared to a loss of
$1,187,448 in 2003. Total costs and expenses decreased 13% in 2004 primarily due
to the 67% decrease in depreciation, depletion and amortization, attributed to
the sale of certain assets and assets reaching the end of their useful lives.
Salaries and wages decreased only slightly by 2% in 2004. These decreases were
partially offset by the 13% increase in cost of oil and gas, attributed to
higher oil and gas prices and increased pipeline costs, and the 14% increase in
selling, general and administrative expenses primarily due to increases in
insurance premiums and travel expenses and additional labor costs. As a
percentage of revenues, total costs and expenses decreased from 162% in 2003 to
112% in 2004.
-20-
Other expenses as a percentage of revenues decreased from 15% in 2003 to 9%
in 2004, attributed to the decrease in interest expense from $404,336 in 2003 to
$ 193,683 in 2004 due to the paying off certain debt. We realized a gain on
disposition of assets of $416,560 in 2004, compared to $231,702 in 2003, which
was offset by a loss on the extinguishment of debt of $653,257 in 2004 compared
to a loss of $11,268 in 2003.
Our net loss for 2004 was $502,848 versus a net loss of $1,582,180 for
2003. The decrease in net loss in 2004 is primarily attributed to decreases in
depreciation and depletion and increases in miscellaneous revenues related to
asset sales and debt settlement.
Net Operating Losses
--------------------
We have accumulated approximately $24 million of net operating loss
carryforwards as of December 31, 2004, which may be offset against future
taxable income through 2023. The use of these losses to reduce future income
taxes will depend on the generation of sufficient taxable income prior to the
expiration of the net operating loss carryforwards. In the event of certain
changes in control, there will be an annual limitation on the amount of net
operating loss carryforwards which can be used. No tax benefit has been reported
in the financial statements for the year ended December 31, 2004 because the
potential tax benefits of the loss carryforward is offset by valuation allowance
of the same amount.
Liquidity and Capital Resources
Historically, working capital needs have been satisfied through our
operating revenues and from borrowed funds. Working capital at December 31, 2004
was a negative $2,980,431 compared with a negative $6,359,171 at December 31,
2003. We anticipate meeting working capital needs during the 2005 fiscal year
with revenues from operations and possibly from capital raised through the sale
of either equity or debt securities. We have no other current agreements or
arrangements for additional funding and there can be no assurance such funding
will be available to us, or if available, such funding will be on acceptable or
favorable terms to us.
As of December 31, 2004, we had total assets of $4,234,111 and
stockholders' deficit of $1,169,886 compared to total assets of $1,292,875 and
total stockholders' deficit of $5,430,033 at December 31, 2003. The increase in
total assets and decrease in stockholders' deficit at December 31, 2004 is
attributed to the purchase of Cobham Gas Industries assets. We have recorded a
long-term liability of $1,571,749 as an asset retirement obligation that relates
to, in part, the estimated cost to plug 203 Cobham wells in the event it becomes
necessary.
In 1998, we issued $4,625,400 face value of 8% Secured Convertible
Debentures Due March 31, 1999. A portion of the proceeds were used to acquire
the GCRL properties and interest in Wyoming. During 2000, all but one of the
remaining outstanding debentures were converted into commons stock. At December
31, 2004, we owed $331,462 in connection with the debentures consisting of
$50,000 for a debenture and $281,462 in penalties and interest. However,
following an accounting adjustment, the amount owed has been reduced to $50,000
plus approximately $25,000 in interest.
Because we have generated significant losses from operations through
December 31, 2004 and have a working capital deficit at December 31, 2004, there
exists substantial doubt about our ability to continue as a going concern.
Revenues have not been sufficient to cover operating costs and to allow us to
continue as a going concern. Potential proceeds from the future sale of common
stock, other contemplated debt and equity financing, and increases in operating
revenues from new development would enable us to continue as a going concern.
There can be no assurance that we can or will be able to complete any debt or
equity financing.
-21-
In the opinion of management, inflation has not had a material effect on
the operations of Trans Energy.
Forward-Looking and Cautionary Statements
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements may relate to such
matters as anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services, anticipated
market performance and similar matters. When used in this report, the words
"may," "will," "expect," "anticipate," "continue," "estimate," "project,"
"intend," and similar expressions are intended to identify forward-looking
statements regarding events, conditions, and financial trends that may affect
our future plans of operations, business strategy, operating results, and
financial position. We caution readers that a variety of factors could cause our
actual results to differ materially from the anticipated results or other
matters expressed in forward-looking statements. These risks and uncertainties,
many of which are beyond our control, include:
* the sufficiency of existing capital resources and our ability to raise
additional capital to fund cash requirements for future operations;
* uncertainties involved in the rate of growth of our business and
acceptance of any products or services;
* volatility of the stock market, particularly within the technology
sector; and
* general economic conditions.
Although we believe the expectations reflected in these forward-looking
statements are reasonable, such expectations cannot guarantee future results,
levels of activity, performance or achievements.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment, which is an amendment to SFAS No. 123, Accounting for
Stock-Based Compensation. This new standard eliminates the ability to account
for share-based compensation transactions using Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and generally
requires such transactions to be accounted for using a fair-value-based method
and the resulting cost recognized in our financial statements. This new standard
is effective for awards that are granted, modified or settled in cash in interim
and annual periods beginning after June 15, 2005. In addition, this new standard
will apply to unvested options granted prior to the effective date. We will
adopt this new standard effective for the fourth fiscal quarter of 2005, and
have not yet determined what impact this standard will have on our financial
position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an
amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not believe the adoption of this Statement will have any
immediate material impact on the company.
-22
In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate
Time-sharing Transactions, which amends FASB statement No. 66, Accounting for
Sales of Real Estate, to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in AICPA
Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing
Transactions. This statement also amends FASB Statement No. 67, Accounting for
Costs and Initial Rental Operations of Real Estate Projects, to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This Statement is effective for financial statements for fiscal years
beginning after June 15, 2005. Management believes the adoption of this
Statement will have no impact on the financial statements of the company.
In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary
Assets. This Statement addresses the measurement of exchanges of nonmonetary
assets. The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions, is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The guidance
in that Opinion, however, included certain exceptions to that principle. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetrary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. This
Statement is effective for financial statements for fiscal years beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges
incurred during fiscal years beginning after the date of this statement is
issued. Management believes the adoption of this Statement will have no impact
on the financial statements of the company.
Item 7. Financial Statements
Our financial statements as of and for the fiscal years ended December 31,
2004 and 2003 have been examined to the extent indicated in their report by H J
& Associates, LLC, independent certified public accountants, and have been
prepared in accordance with generally accepted accounting principles and
pursuant to Regulation S-B as promulgated by the SEC. The aforementioned
financial statements are included herein starting with page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
This Item is not Applicable.
Item 8A. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. Based upon that evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures are effective to cause the material information required to be
disclosed by us in the reports that we file or submit under the Exchange Act to
be recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. There have been no significant changes
in our internal controls or in other factors which could significantly affect
internal controls subsequent to the date we carried out our evaluation.
-23-
Item 8B. Other Information
Reports on Form 8-K
Since the beginning of our fiscal fourth quarter commencing October 1, 2004
through the date of this report, we have filed current reports on Form 8-K
reporting the following:
o October 8, 2004 - reporting under Item 801 a preliminary agreement with
Texas Energy Trust Company, a Delaware Business Trust, whereby Trans
Energy will acquire certain oil and gas leases and leasehold interests
located in Wetzel and Marion Counties, West Virginia.
o October 26, 2004 - reporting under Item 3.02 that Trans Energy
distributed an aggregate of 203 million shares of its authorized, but
previously unissued common stock in exchange for the conversion of debt
in the amount of $2,401,424 previously incurred by Trans Energy.
o November 11, 2004 - reporting under Item 2.01 the finalization of the
agreement with Texas Energy Trust Company whereby our wholly owned
subsidiary, Prima Oil Company, Inc., acquired from Texas Energy Trust
100% of the issued and outstanding shares of Cobham Gas Industries,
Inc., a Delaware corporation. We also reported under Item 3.02 that in
connection with the transaction reported under Item 2.01, we agreed to
issue to Texas Energy Trust Company 244,633 "post-split" shares of our
authorized, but previously unissued common stock, to be issued after
the one share for 150 shares reverse split has been finalized.
o December 9, 2004 - reporting unser Item 1.01 the entering into a letter
of intent to acquire Arvilla Oilfield Services, LLC, , a West Virginia
limited liability company. The acquisition was formalize by executing
on December 3, 2004 a merger agreement and plan of reorganization by
and among Trans Energy, our wholly owned subsidiary Trans Energy
Acquisitions, Inc., Arvilla, Inc., and the controlling stockholders of
Arvilla, Inc.
o February 2, 2004 - reporting under Item 1.01, the entering of a merger
agreement and plan of reorganization dated December 3, 2004 to acquire
Arvilla Oilfield Services with our wholly owned subsidiary Trans Energy
Acquisitions, Inc., Arvilla, Inc., and the controlling stockholders of
Arvilla, Inc. Also reported (i) under Item 2.01that the merger
agreement was finalized and closed on January 31, 2005; (ii) under Item
3.02 that in connection with the closing of the merger agreement we
issued to the current holders of Arvilla, Inc. capital stock an
aggregate of 1,185,024 shares of Trans Energy common stock; (iii) under
Item 5.02 that in connection with the acquisition of Arvilla, Inc.,
immediately prior to the effective time of the merger transaction our
board of directors unanimously appointed two new directors, Clarence E.
Smith and Rebecca L. Smith, effective upon the closing of the
transaction on January 31, 2005; and (iv) under Item 5.03 that in
connection with the reverse stock split effected January 28, 2005, we
filed with the State of Nevada on the same date an amendment to our
articles of incorporation to reflect the reverse split.
-24-
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth the names, ages, and offices held by our
directors and executive officers:
Name Position Director Since Age
---- -------- -------------- ---
Clarence E. Smith C.E.O. and Director January 2005 41
Robert L. Richards President and Director September 2001 58
Loren E. Bagley Vice President and Director August 1991 63
John G. Corp Vice President and Director February 2005 45
William F. Woodburn Secretary / Treasurer August 1991 63
and Director
Rebecca L. Smith Director January 2005 37
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. There are no
agreements with respect to the election of directors. We have not compensated
our directors for service on the Board of Directors or any committee thereof,
but directors are reimbursed for expenses incurred for attendance at meetings of
the Board and any committee thereof. Executive officers are appointed annually
by the Board and each executive officer serves at the discretion of the Board.
The Executive Committee of the Board of Directors, to the extent permitted under
Nevada law, exercises all of the power and authority of the Board in the
management of the business and affairs of Trans Energy between meetings of the
Board.
On August 10, 2004 John B. Sims, a long-time director of Trans Energy,
passed away. Mr. Sims served as a director since 1988 and was formerly our
President and C.E.O. The board did not immediately name a successor to Mr. Sims.
In connection with the acquisition of Arvilla, Inc., immediately prior to
the effective time of the merger transaction our board of directors unanimously
appointed two new directors, Clarence E. Smith and Rebecca L. Smith, effective
upon the closing of the transaction on January 31, 2005.
On February 28, 2005, our board of directors appointed director Clarence E.
Smith to become the company's new Chief Executive Officer. Robert L. Richards, a
director, President and former Chief Executive Officer, will remain as President
and a director. Also on February 28, the board appointed John G. Corp as a new
director and a Vice President.
The business experience of each of the persons listed above during the past
five years is as follows:
Clarence E. Smith became a director of Trans Energy upon the closing of the
acquisition of Arvilla on January 31, 2005. He started Arvilla Well Service in
1981 providing well location construction and clean-up and wellhead hook-up
services. Mr. Smith expanded his business into pipeline construction which
became Arvilla Pipeline Construction Co., operating from Bristol, Tennessee to
Corning, New York. This business provides construction services to most large
gas companies in the area such as Dominion Transmission, Equitrans, Columbia
-25-
Natural Resources and other smaller companies. In the summer of 2004, Mr. Smith
and his wife Rebecca purchased Arrow Oilfield Services from the Belden and Blake
Corporation. Arrow was renamed Arvilla Oilfield Services, LLC. Mr. Smith also
owns Arvilla Rental & Equipment, LLC and is registered with the State of West
Virginia as an oil and gas producer. He graduated from St. Marys (West Virginia)
High School and the PRT Technical School in 1981. Mr. Smith's wife Rebecca also
serves as a director of Trans Energy.
Robert L. Richards became a director and was appointed President and C.E.O.
in September 2001. On February 28, 2004, Mr. Richards relinquished his position
as C.E.O., but remained as a director and President. 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.
Loren E. Bagley served as our President and C.E.O. from September 1993 to
September 2001, at which time he resigned as President and was appointed Vice
President. From 1979 to the present, Mr. Bagley has been self -employed in the
oil and gas industry as president, C.E.O. or vice president of various
corporations which he has either started or purchased, including Ritchie County
Gathering Systems, Inc. Mr. Bagley's experience in the oil and gas industry
includes acting as a lease agent, funding and drilling of oil and gas wells,
supervising production of over 175 existing wells, contract negotiations for
purchasing and marketing of natural gas contracts, and owning a well logging
company specializing in analysis of wells. Prior to becoming involved in the oil
and gas industry, Mr. Bagley was employed by the United States government with
the Agriculture Department. Mr. Bagley attended Ohio University and Salem
College and earned a B.S. Degree.
John C. Corp became a director and Vice President on February 28, 2005.
John G. Corp as a new director and a Vice President. Mr. Corp has more than 25
years of extensive experience in drilling, production and oilfield service
operations in the Appalachian Basin. Prior to joining Trans Energy, Inc., he
held various management positions with Belden & Blake Corp. from 1987-2004. He
has a BS degree in Petroleum Engineering from Marietta (Ohio) College and is a
member of the Society of Petroleum Engineers, the Ohio Oil & Gas Association and
is chairman of the Technical Advisory Committee or the Ohio Department of
Natural Resources.
William F. Woodburn has served as our Vice President from August 1991 to
September 2001, at which time he resigned as Vice President and was appointed
Secretary / Treasurer. Mr. Woodburn has been actively engaged in the oil and gas
business in various capacities for the past twenty years. For several years
prior to 1991, Mr. Woodburn supervised the production of oil and natural gas and
managed the pipeline operations of Tyler Construction Company, Inc. and Tyler
Pipeline, Inc. Mr. Woodburn is a stockholder and serves as President of Tyler
Construction Company, Inc., and is also a stockholder of Tyler Pipeline, Inc.
which owns and operates oil and gas wells in addition to natural gas pipelines,
and Ohio Valley Welding, Inc. which owns a fleet of heavy equipment that
services the oil and gas industry. Prior to his involvement in the oil and gas
industry, Mr. Woodburn was employed by the United States Army Corps of Engineers
for twenty four years and was Resident Engineer on several construction
projects. Mr. Woodburn graduated from West Virginia University with a B.S. in
civil engineering.
-26-
Rebecca L. Smith graduated from Harrisville (West Virginia) High School in
1986 and then from the Wilma Boyd Travel School in Pittsburgh, Pennsylvania. She
was then employed as a travel agent in Philadelphia. Mrs. Smith joined Arvilla
Well Service as a part-time employee in 1995 became a full- time employee of
Arvilla Pipeline in 2000. Mrs. Smith is currently part owner and vice president
of Arvilla Pipeline Construction Co., Inc. and is part owner and acting member
of Arvilla Rental & Equipment, LLC and Arvilla Oilfield Services, LLC. Her
responsibilities include supervising all the offices and the pipeline shop as
well as overseeing the pipeline bid process. She is also active in the public
relations business of both companies and contributed to the design of both
Arvilla's brochure and web site. Mrs. Smith's Husband Clarence also serves as a
director of Trans Energy.
The following persons are considered key employees of Arvilla:
Randy Ile. Mr. Ile is the rig superintendent for Arvilla's Ohio region and
is primarily responsible for the region's service and swag rig activity. He has
been with Arrow Oilfield Services (which is now Arvilla) since 1997. Mr. Ile
graduated from high school in 1966 and served in the armed forces from 1966 to
1969. From 1971 to 1977, he worked as a "roughneck" (oilfield worker) for three
years before becoming a driller. Mr. Ile also became a toolpusher for PEP
Drilling from 1977 to 1987 and then a drilling superintendent from 1987 to 1997.
He is a member of the Ohio Oil & Gas Association and completed BOP training in
1989.
James Hawkins. Mr. Hawkins is the supervisor of oil and water hauling for
Arvilla's Ohio region. He has been with Arrow Oilfield Services (Arvilla) since
1982 when he was initially hired as a rig hand. While with Arrow, Mr. Hawkins
has been a well tender, treat truck driver, roustabout, heavy equipment
operator, oil truck driver and dispatcher of Arrow's Ohio fluid hauling
operations.
Item 10. Executive Compensation
We do not have a bonus, profit sharing, or deferred compensation plan for
the benefit of employees, officers or directors, nor have we entered into
employment contracts with any of the aforementioned persons.
Cash Compensation
For the past three fiscal years ended December 31, 2004, we have not paid
any cash compensation for services rendered by our executive officers.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, to the best of our knowledge as
December 31, 2004, with respect to each person known by us to own beneficially
more than 5% of our outstanding common stock, each director and all directors
and officers as a group. Unless otherwise noted, the address of each person
listed below is that of Trans Energy, 210 Second Street, St. Marys, West Virgina
26170.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class(1)
------------------- -------------------- -----------
Robert L. Richards 91,275(2) 1.9 %
Loren E. Bagley 239,647(3) 5.1 %
William F. Woodburn 419,724(4) 8.9 %
Clarence E. Smith 531,437 11.2 %
Rebecca L. Smith 531,437 11.2 %
All directors and executive officers
a group (5 persons) 1,813,520 38.3 %
-27-
(1) Based upon 4,740,097 shares of common stock estimated to be outstanding
on following the one share for 150 shares reverse stock split, the
acquisition of Arvilla and the transactions contemplated thereby, and
the issuance of shares in connection with acquisition of oil and gas
leases and leasehold interests from Texas Energy Trust Company.
Percentage ownership is calculated separately for each person on the
basis of the actual number of outstanding shares immediately following
the acquisition of Arvilla.
(2) Includes 80,084 shares held in the name of Argene Richards, wife of Mr.
Richards.
(3) Includes 33,667 shares held in the name of Carolyn S. Bagley, wife of
Mr. Bagley, over which Mrs. Bagley retains voting power.
(4) Includes 133,667 shares in the name of Janet L. Woodburn, wife of Mr.
Woodburn, over which shares Mrs. Woodburn retains voting power, and
133,333 in the name of a corporation owned by William and Janet
Woodburn.
Item 12. Certain Relationships and Related Transactions
During the past two fiscal years, there have been no transactions between
us and any officer, director, nominee for election as director, or any
shareholder owning greater than five percent (5%) of our outstanding shares, nor
any member of the above referenced individuals' immediate family, except as set
forth below.
(a) Loren E. Bagley is President of Sancho, a principal purchaser of our
natural gas. Mr. Bagley's wife, Carolyn S. Bagley is a director and owner of 33%
of the outstanding capital stock of Sancho. Under our contract with Sancho, we
have the right to sell natural gas subject to the terms and conditions of a
20-year contract, as amended, that Sancho entered into with Hope Gas in 1988.
This agreement is a flexible volume supply agreement whereby we receive the full
price which Sancho receives less a $.05 per Mcf marketing fee paid to Sancho.
The price of the natural gas is based upon the greater of the residential gas
commodity index or the published Inside F.E.R.C. Index, at our option, for the
first 1,500 Mcf purchased per day by Hope Gas and thereafter the price is the
Inside F.E.R.C. Index. The residential gas commodity index does not directly
fluctuate with the overall price of natural gas. The Inside F.E.R.C. Index
fluctuates monthly with the change in the price of natural gas. While such
option provides certain price protection for us there can be no assurance that
prices paid by us to suppliers will be lower than the price which we would
receive under the Hope Gas arrangement. During 2004, we paid Sancho an aggregate
of approximately $11,059 pursuant to such contract.
(b) On May 7, 1996, we borrowed $100,000 from William Stevenson. Such
amount is repayable in one installment of principal and interest of $110,000 on
November 7, 1996. Messrs. Bagley, William F. Woodburn and John B. Sims are
jointly and severally liable with us for the repayment of such obligation. Such
obligation is secured by the pledge of 50,000 shares of common stock owned by
Mr. Woodburn's wife, Janet L. Woodburn. The note was subsequently purchased by
Culpepper Cattle Company and converted to 173,333 shares of Trans Energy common
stock on October 4, 2004.
We occupy approximately 4,000 square feet of office space in St. Marys,
West Virginia, which we share with Tyler Construction and Ritchie County
Gathering Systems. Prior to 1997, the office space was paid for by Sancho and we
used the office space rent free. We believe that the foregoing transactions with
Sancho were made on terms no less favorable to us than those available from
unaffiliated third parties.
It is our policy that any future material transactions between us and
members of management or their affiliates shall be on terms no less favorable
than those available from unaffiliated third parties.
-28-
Item 13. Exhibits
Exhibits
Exhibit No. Exhibit Name
----------- ------------
2.1(1) Stock Acquisition Agreement between Trans Energy and Loren E.
Bagley and William F. Woodburn
2.2(1) Asset Acquisition Agreement between Trans Energy and Dennis L.
Spencer
2.3(1) Asset Acquisition Agreement between Trans Energy and Tyler
Pipeline, Inc.
2.4(1) Stock Exchange Agreement between Trans Energy and Ritchie County
Gathering Systems, Inc.
2.5(1) Plan and Agreement of Merger between Trans Energy, Inc. (Nevada)
and Apple Corp. (Idaho), to facilitate the change of our
corporate domicile to Nevada
2.6(2) Agreements related to acquisition of Vulcan Energy Corporation
2.7(5) Agreement and Plan of Reorganization with Arvilla, Inc.
3.1(1) Articles of Incorporation and all amendments pertaining thereto,
for Apple Corp., an Idaho corporation
3.2(1) Articles of Incorporation for Trans Energy, Inc., a Nevada
corporation
3.3(1) Articles of Merger for the States of Nevada and Idaho
3.4(1) By-Laws 4.1(1) Specimen Stock Certificate
10.1(1) Marketing Agreement with Sancho Oil and Gas Corporation
10.2(1) Gas Purchase Agreement with Central Trading Company
10.3(1) Price Agreement with Key Oil Company
10.4(3) Settlement Agreement and Mutual Release
10.5(4) Agreement with Texas Energy Trust Company
10.6(4) Assignment and Agreement with Texas Energy Trust Company and
Cobham Gas Industries, Inc.
21.1 Subsidiaries of Registrant (Revised)
31.1 Certification of C.E.O. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Accounting Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 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
32.2 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
99.1(1) Reserve Estimate and Evaluation of oil and gas properties 99.2(1)
Reserve Estimate and Evaluation for Dennis L. Spencer wells
---------------------------
(1) Previously filed as exhibit to Form 10-SB.
(2) Previously filed as exhibit to Form 8-K dated August 7, 1995.
(3) Previously filed as exhibit to Form 8-K file January 23, 2004.
(4) Previously filed as exhibit to Form 8-K filed November 11, 2004.
(5) Incorporated by reference in the Form 8-K filed December 9, 2004
to the Preliminary Information Statement pursuant to Section 14C
filed with the SEC on December 8, 2004.
Item 14. Principal Accountants Fees and Services
We do not have an audit committee and as a result our entire board of
directors performs the duties of an audit committee. Our board of directors will
approve in advance the scope and cost of the engagement of an auditor before the
auditor renders audit and non-audit services. As a result, we do not rely on
pre-approval policies and procedures.
-29-
Audit Fees
----------
The aggregate fees billed by our independent auditors, H J & Associates,
for professional services rendered for the audit of our annual financial
statements included in our Annual Reports on Form 10-KSB for the years ended
December 31, 2004 and 2003, and for the review of quarterly financial statements
included in our Quarterly Reports on Form 10-QSB for the quarters ending April
30, June 30 and September 30, 2004 and 2003, were $24,119 for 2004 and $30,250
for 2003.
Audit Related Fees
------------------
For the years ended December 31, 2004 and 2003, there were no fees billed
for assurance and related services by H J & Associates relating to the
performance of the audit of our financial statements which are not reported
under the caption "Audit Fees" above.
Tax Fees
--------
For the years ended December 31, 2004 and 2003, fees billed by H J &
Associates for tax compliance, tax advice and tax planning were $1,101 and
$1,250, respectively.
We do not use H J & Associates for financial information system design and
implementation. These services, which include designing or implementing a system
that aggregates source data underlying the financial statements or generates
information that is significant to our financial statements, are provided
internally or by other service providers. We do not engage H J & Associates to
provide compliance outsourcing services.
The board of directors has considered the nature and amount of fees billed
by H J & Associates and believes that the provision of services for activities
unrelated to the audit is compatible with maintaining H J & Associates'
independence.
-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/ CLARENCE E. SMITH
--------------------------------------
Clarence E. Smith,
President and C.E.O.
Dated: April 27, 2005
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
--------- ----- ----
/S/ CLARENCE E. SMITH C.E.O. and Director April 27, 2005
----------------------------------
Clarence E. Smith
/S/ ROBERT L. RICHARDS President and Director April 27, 2005
----------------------------------
Robert L. Richards
/S/ LOREN E. BAGLEY Vice President and Director April 27, 2005
---------------------------------- Principal Financial Officer
Loren E. Bagley
April 27, 2005
/S/ JOHN G. CORP Vice President and Director
----------------------------------
John G. Corp
/S/ WILLIAM F. WOODBURN Secretary Treasurer/Treasurer and Director April 27, 2005
---------------------------------- Chief Accounting Officer
William F. Woodburn
/S/ REBECCA L. SMITH Director April 27, 2005
------------------------------------
Rebecca L. Smith
-31-
TRANS ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
F-1
C O N T E N T S
Report of Independent Registered Public Accounting Firm ................... 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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Trans Energy, Inc. and Subsidiaries
St. Mary's, West Virginia
We have audited the accompanying consolidated balance sheet of Trans Energy,
Inc. and Subsidiaries (the Company) as of December 31, 2004 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years ended December 31, 2004 and 2003. 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 financial position of the Company as of
December 31, 2004 and the results of their operations and its cash flows for the
year ended December 31, 2004 in conformity with United States generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 8 to the
consolidated financial statements, the Company has generated significant losses
from operations, has an accumulated deficit of approximately $29,000,000 and has
a working capital deficit of $2,980,431 at December 31, 2004, which together
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 8. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ HJ & Associates, LLC
-----------------------------------
Salt Lake City, Utah
April 16, 2005
F-3
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
December 31,
2004
----------
CURRENT ASSETS
Cash $ 79,662
Accounts receivable, net (Note 1) 653,917
Receivable from related party (Note 4) 8,825
Other current assets 1,223
----------
Total Current Assets 743,627
----------
PROPERTY AND EQUIPMENT, NET (Note 2) 3,372,599
----------
OTHER ASSETS
Bonds 50,159
Deposits 1,400
Life insurance, cash surrender value 66,326
----------
Total Other Assets 117,885
----------
TOTAL ASSETS $4,234,111
==========
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,
2004
------------
CURRENT LIABILITIES
Accounts payable - trade $ 1,277,375
Related party payables (Note 4) 719,199
Accrued expenses 844,858
Judgments payable (Note 7) 70,379
Debentures payable (Note 9) 50,000
Notes payable - current portion (Note 3) 762,247
------------
Total Current Liabilities 3,724,058
------------
LONG-TERM LIABILITIES
Notes payable (Note 3) 108,190
Asset retirement obligation (Note 1) 1,571,749
------------
Total Long-Term Liabilities 1,679,939
------------
Total Liabilities 5,403,997
------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 6)
Preferred stock; 10,000,000 shares authorized at $0.001 par
value; -0- shares issued and outstanding
--
Common stock; 500,000,000 shares authorized at $0.001 par
value; 3,555,074 shares issued and outstanding 3,555
Capital in excess of par value 27,854,647
Accumulated deficit (29,028,088)
------------
Total Stockholders' Equity (Deficit) (1,169,886)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 4,234,111
============
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,
---------------------------
2004 2003
----------- -----------
REVENUES $ 2,390,099 $ 1,902,836
----------- -----------
COSTS AND EXPENSES
Cost of oil and gas 1,736,444 1,536,434
Salaries and wages 375,539 381,743
Depreciation, depletion and amortization 321,115 961,181
Selling, general and administrative 241,128 210,926
----------- -----------
Total Costs and Expenses 2,674,226 3,090,284
----------- -----------
LOSS FROM OPERATIONS (284,127) (1,187,448)
----------- -----------
OTHER INCOME (EXPENSE)
Other income 12,891 --
Gain on disposition of debt 416,560 231,702
Interest expense (193,683) (404,336)
Loss on sale and valuation of assets, net -- (266,496)
Loss on extinguishments of debt (653,257) (11,268)
Gain on disposition of assets 198,768 172,152
----------- -----------
Total Other Income (Expense) (218,721) (278,246)
----------- -----------
LOSS BEFORE INCOME TAXES,
AND CHANGE IN ACCOUNTING PRINCIPAL (502,848) (1,465,694)
INCOME TAXES -- --
----------- -----------
CHANGE IN ACCOUNTING PRINCIPAL, NET OF
INCOME TAXES -- (116,486)
----------- -----------
NET LOSS - attributed to common shareholders $ (502,848) $(1,582,180)
=========== ===========
BASIC LOSS PER SHARE
Operations $ (0.22) $ (0.87)
Change in accounting principal -- (0.07)
----------- -----------
Total Basic Loss Per Share $ (0.22) $ (0.94)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 2,277,486 1,687,504
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
TRANS ENERGY, INC. AND SUBSIDIARIES
Restated 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, 2002
(Restated) -- -- 1,583,463 1,584 23,281,719 (26,943,060)
Common stock issued for
services -- -- 23,333 23 10,477 --
Common stock issued for
conversion of convertible
debt -- -- 1,000 1 5,249 --
Common stock issued for
extinguishments of
related party debt -- -- 152,221 152 29,891 --
Common stock issued for
extinguishments of debt -- -- 33,388 33 45,040 --
Net loss for the year ended
December 31, 2003 -- -- -- -- -- (1,582,180)
------------ ------------- ------------ ------------ ------------ ------------
Balance, December 31, 2003
(Restated) -- $ -- 1,793,405 $ 1,793 $ 23,372,376 $(28,525,240)
Common stock issued for
debt and interest
January 2004 -- -- 163,704 164 297,695 --
Common stock issued for
debt and interest
October 2004 -- -- 1,353,332 1,353 2,434,647 --
Common stock issued for
Acquisition, December 2004 -- -- 344,633 245 403,400 --
Contributed capital,
December 2004 -- -- -- -- 1,346,529 --
Net loss for the year ended
December 31, 2004 -- -- -- -- -- (502,848)
------------ ------------- ------------ ------------ ------------ ------------
Balance, December 31, 2004 -- $ -- 3,555,074 $ 3,555 $ 2,854,647 $(29,028,088)
============ ============= ============ ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
--------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (502,848) $(1,582,180)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation, depletion and amortization 321,115 961,181
Loss on sale and valuation of assets -- 266,496
Loss on extinguishments of debt 653,257 11,268
Gain on disposition of assets (198,768) (172,152)
Common stock issued for services and
beneficial conversion features -- 10,500
Gain on disposition of debt (416,560) (231,702)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (397,761) (60,070)
Decrease (increase) in other receivable 49,627 --
(Increase) decrease in prepaid and other current assets 2,872 (62,078)
(Decrease) increase in accounts payable 523,519 682,320
(Decrease) increase in advances from related parties 416,591 --
(Decrease) increase in accrued expenses 263,690 --
Decrease in judgments payable (2,500) (385,697)
Increase in environmental remediation (103,138) 200,000
----------- -----------
Net Cash Provided (Used) by Operating Activities 609,096 (362,114)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 200,000 670,000
Expenditures for property and equipment -- (152,848)
Proceeds from sale of life insurance cash value 53,367 --
Payment on other non current assets (932) --
----------- -----------
Net Cash Provided by Investing Activities 252,435 517,152
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdraft (49,120) 49,120
Principal payments to related parties (280,000) (249,161)
Proceeds from related parties -- 233,650
Principal payments on notes payable (241,402) (217,980)
Principal payments on judgment payable (212,000) (217,980)
Proceeds from notes payable -- 17,289
----------- -----------
Net Cash (Used) by Financing Activities $ (782,522) $ (167,082)
----------- -----------
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,
--------------------------
2004 2003
----------- -----------
Cash acquired in acquisition of subsidiary $ 470 $ --
----------- -----------
NET INCREASE (DECREASE) IN CASH 79,479 (12,044)
CASH, BEGINNING OF YEAR 183 12,227
----------- -----------
CASH, END OF YEAR $ 79,662 $ 183
Bzat ============= =========
1,234,567 1,234,567
CASH PAID FOR:
Interest $ -- $ 295,947
Income taxes $ -- $ --
NON-CASH FINANCING ACTIVITIES:
The Company acquired 100% of Cobham Gas Industries, Penine Resources, Inc.,
and Belmont Energy, Inc. The Company issued 244,633 shares of common stock for
net assets of $892,344 were acquired for common stock valued at $403,645 and
notes payable of $488,699.
The Company issued 163,704 shares of common stock for debt relief of $297,859.
The Company recorded a loss of $224,003 as part of this transaction.
Various key employees and consultants of the Company contributed $1,346,530 of
previously accrued liabilities.
The Company issued 1,353,332 shares of common stock for debt relief of
$2,436,000. The Company recorded a loss of $543,913 as part of this
transaction.
The Company settled $519,773 of notes payable and accrued interest for
$210,000. The Company recorded at gain on settlement of debt in the amount of
$309,773.
The Company disposed net assets of $63,632 for proceeds of $131,000. The
Company recorded a loss of $67,368 on disposal of assets.
The Company recognized $105,395 gain on settlement of aged accounts payables.
For the year ended December 31, 2003
The Company issued common stock for services and beneficial conversion
features valued at $10,500.
The Company issued common stock for conversion of debt and interest of $80,366
The Company issued common stock issued for conversion of preferred stock and
dividends.
F-9
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
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. Principles of Consolidation
The consolidated financial statements include the Company and its
wholly owned subsidiaries, Prima Oil Company, Inc., Ritchie County
Gathering Systems, Inc., Tyler Construction Company, Inc, Tyler Energy,
Inc., Cobham Gas Industries, Inc., Penine Resources, Inc., and Belmont
Energy, Inc. All significant intercompany accounts and transactions
have been eliminated.
c. 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.
F-10
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
c. Accounting Method (Continued)
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.
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, 2003, the Company
recognized an impairment loss of $87,040 on one of its natural gas
wells.
The Company has elected a December 31 year-end.
d. Basic Loss per Share of Common Stock
The basic loss per share of common stock is based on the weighted
average number of shares issued and outstanding at the date of the
consolidated financial statements. Fully diluted loss per share of
common stock is not disclosed as the common stock equivalents are
antidilutive in nature.
For the Years Ended December 31,
2004 2003
-------------- --------------
Numerator:
Loss from operations $ (502,848) $ (1,465,694)
Change in accounting principal -- (116,486)
------------- ---------------
Net Loss $ (502,848) $ (1,582,180)
============= ===============
Denominator - weighted average shares 2,277,486 1,687,504
============= ===============
Net loss per share:
Change in accounting principal $ (0.00) $ (0.07)
Loss from operations (0.22) (0.87)
------------- ---------------
Total Basic Loss Per Share $ (0.22) $ (0.94)
============= ===============
At December 31, 2004, the Company had a convertible debenture and
accrued interest which could have been converted into approximately
33,000 shares of common stock, which have been excluded from loss per
share because the effect would be anti-dilutive.
e. Provision for Taxes
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized.
F-11
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e. Provision for Taxes (Continued)
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Net deferred tax assets consist of the following components as of
December 31, 2004 and 2003:
2004 2003
----------- -----------
Deferred tax assets:
NOL carryover $ 9,747,505 $ 8,183,500
Accrued expenses 246,200 --
Deferred tax liabilities:
Accrued Wages -- (493,900)
Valuation allowance (9,993,705) (7,689,600)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rates of 39%
to pretax income from continuing operations for the years ended
December 31, 2004 and 2003 due to the following:
2004 2003
----------- -----------
Book income $ (196,110) $ (573,300)
Other 50 (16,831)
Penalties -- 5,370
Officer Insurance 1,460 6,645
Stock for Services -- 4,095
Accrued Wages -- 115,810
Loss on debt 299,490 --
Impairment Loss -- 33,945
Accrued Interest/Payroll 2,198 424,265
Valuation allowance (107,088) --
----------- -----------
$ -- $ --
=========== ===========
At December 31, 2004, the Company had net operating loss carryforwards
of approximately $24,000,000 that may be offset against future taxable
income from the year 2004 through 2024. No tax benefit has been
reported in the December 31, 2004 consolidated financial statements
since the potential tax benefit is offset by a valuation allowance of
the same amount.
Due to the change in ownership provisions of the Tax Reform Act of
1986, net operating loss carryforwards for Federal income tax reporting
purposes are subject to annual limitations. Should a change in
ownership occur, net operating loss carryforwards may be limited as to
use in future years.
F-12
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. Asset Retirement Obligation
The following is a description of the changes to the Company's asset
retirement obligation from January 1 through December 31, 2004:
Reclamation obligation (asset retirement obligation)
as reported at December 31, 2003 $ 200,000
Impact of adopting SFAS No. 143 --
Acquisition of subsidiary 1,474,887
Accretion expense:
Revision in reclamation cost estimates (103,138)
Accretion expense - January 1, 2004 through
December 31, 2004 --
------------
Reclamation obligation at December 31, 2004 $ 1,571,749
============
g. Presentation
Certain 2003 balances have been reclassified to conform to the
presentation of the 2004 consolidated financial statements.
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 accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
j. Long Lived Assets
The Company reviews long-lived assets and identifiable intangibles
whenever events or circumstances indicate that the carrying amounts of
such assets may not be fully recoverable. The Company evaluates the
recoverability of long-lived assets by measuring the carrying amounts
of the assets against the estimated undiscounted cash flows associated
with these assets. At the time such evaluation indicates that the
future undiscounted cash flows of certain long-lived assets are not
sufficient to recover the assets' carrying value, the assets are
adjusted to their fair values (based upon discounted cash flows).
F-13
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Accounts Receivable
Accounts receivable are carried at the expected net realizable value.
The allowance for doubtful accounts is based on management's assessment
of the collectibilitiy of specific customer accounts and the aging of
the accounts receivables. If there were a deterioration of a major
customer's creditworthiness, or actual defaults were higher than
historical experience, our estimates of the recoverability of the
amounts due to us could be overstated, which could have a negative
impact on operations.
l. New Accounting Pronouncements
On December 16, 2004 the FASB issued SFAS No. 123(R), Share-Based
Payment, which is an amendment to SFAS No. 123, Accounting for
Stock-Based Compensation. This new standard eliminates the ability to
account for share-based compensation transactions using Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and generally requires such transactions to be accounted for
using a fair-value-based method and the resulting cost recognized in
our financial statements. This new standard is effective for awards
that are granted, modified or settled in cash in interim and annual
periods beginning after June 15, 2005. In addition, this new standard
will apply to unvested options granted prior to the effective date. We
will adopt this new standard effective for the fourth fiscal quarter of
2005, and have not yet determined what impact this standard will have
on our financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an
amendment of ARB No. 43, Chapter 4. This Statement amends the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
Chapter 4, previously stated that ". . . under some circumstances,
items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires
that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." In addition, this
Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not
believe the adoption of this Statement will have any immediate material
impact on the Company.
F-14
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
l. New Accounting Pronouncements (Continued)
In December 2004, the FASB issued SFAS No. 152, Accounting for Real
Estate Time-sharing Transactions, which amends FASB statement No. 66,
Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP)
04-2, Accounting for Real Estate Time-Sharing Transactions. This
statement also amends FASB Statement No. 67, Accounting for Costs and
Initial Rental Operations of Real Estate Projects, to state that the
guidance for (a) incidental operations and (b) costs incurred to sell
real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject
to the guidance in SOP 04-2. This Statement is effective for financial
statements for fiscal years beginning after June 15, 2005. Management
believes the adoption of this Statement will have no impact on the
financial statements of the Company.
In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary
Assets. This Statement addresses the measurement of exchanges of
nonmonetary assets. The guidance in APB Opinion No. 29, Accounting for
Nonmonetary Transactions, is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the
assets exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance.
A nonmonetrary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of
the exchange. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges incurred during fiscal years
beginning after the date of this statement is issued. Management
believes the adoption of this Statement will have no impact on the
financial statements of the Company.
The implementation of the provisions of these pronouncements are not
expected to have a significant effect on the Company's consolidated
financial statement presentation.
m. Stock Split
On November 29, 2004 the board of directors and stockholders holding a
majority of outstanding common stock of the Company approved a one
share for 150 shares reverse split of the common stock. All references
to per share data and common stock have been restated to reflect the
effect of this reverse split.
F-15
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 2 - PROPERTY AND EQUIPMENT
At December 31, 2004, property and equipment consisted of:
Vehicles $103,118
Machinery and equipment 1,600
Furniture and Fixtures 1,848
Pipelines 1,387,440
Well equipment 280,155
Leasehold acreage 95,945
Acumulated depreciation (1,241,745)
------------
Total Fixed Assets $ 628,361
============
Depreciation expense for the year ended December 31, 2004 was $195,150.
At December 31, 2004 the Company's proved properties consist of costs
in the following:
Wells, Wyoming $ 3,079,481
Wells, West Virginia 2,346,600
Less: accumulated depletion (2,681,843)
--------------
$ 2,744,238
Depletion expense for the year ended December 31, 2004 was $125,965.
Productive Gas Wells
The following summarizes the Company's productive oil and gas wells as
of December 31, 2004. 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, Wyoming 6 2
Oil and gas wells, West Virginia 203 203
--------------- ---------------
209 205
=============== ===============
The Company operates its West Virginia wells and does not operate its
Wyoming wells.
F-16
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 2 - PROPERTY AND EQUIPMENT (Continued)
Oil and Gas Acreage
The following table sets forth the undeveloped leasehold acreage, by
area, held by the Company as of December 31, 2004. 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, approximately 11,418 10,763
West Virginia, approximately 15,000 13,125
---------- --------
26,418 23,888
=========== ========
NOTE 3 - LONG-TERM DEBT
The Company had the following debt obligations at December 31, 2004:
Note payable to an individual, due on demand, bearing interest at
New York prime +1%, interest payments due monthly, secured by
equipment. $ 292,078
Union Bank of Tyler County, interest at 10% due quarterly,
renewable, due on demand, unsecured 19,683
New York Life, 5.87% interest rate, due upon demand,
secured by life insurance cash value 63,340
Union Bank of Tyler County, $332 due monthly, 10% interest
rate, due November 20, 2005, secured by a vehicle. 3,521
BB&T Bank, bank's prime + 1.25%, due October, 17, 2008,
secured by well equipment 98,979
Ford Motor Credit, $247 due monthly, 7.90% interest rate,
due October 1, 2007, secured by a vehicle 7,098
Ford Motor Credit, $245 due monthly, 8.99% interest rate,
due August 28, 2007, secured by a vehicle 7,062
-----------
Balance forward 491,761
-----------
F-17
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 3 - LONG-TERM DEBT (Continued)
Balance forward $ 491,761
Ford Motor Credit, $277 due monthly, 8.99% interest rate,
due September1, 2007, secured by a vehicle 8,675
Ford Motor Credit, $491 due monthly, 5.90% interest rate,
due February 1, 2007, secured by a vehicle 10,453
Wesbanco, interest payable quarterly, prime +1%, due on demand,
secured by officers' personal assets. 285,417
Union Bank of Tyler County, principal and interest payments of
$326 due monthly, interest at 5.0%, secured by a vehicle. 13,357
Note due to a private individual, due on demand with interest
at 7.00%, due upon demand 60,774
-----------
Total 870,437
Less Current Portion 762,247
-----------
Total Long-Term Debt $ 108,190
===========
Future maturities of long-term debt are as follows:
2005 $ 762,247
2006 40,542
2007 36,402
2008 31,246
2009 -
2010 and thereafter -
-----------
Total $ 870,437
===========
At December 31, 2004, total interest accrued for these debt obligations
was $21,388.
NOTE 4 - RELATED PARTY TRANSACTIONS
a. Marketing Agreement - Sancho
Natural gas delivered through the Company's pipeline network is sold
either to Sancho Oil and Gas Corporation ("Sancho"), a company
controlled by the Vice President of the Company, at the industrial
facilities near Sistersville, West Virginia, or to Dominion Gas, a
local utility, on an on-going basis at a variable price per month per
Mcf.
F-18
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
a. Marketing Agreement - Sancho (Continued)
Under its contract with Sancho, the Company has the right to sell
natural gas subject to the terms and conditions of a 20-year contract,
as amended, that Sancho entered into with Dominion Gas in 1988. This
agreement is a flexible volume supply agreement whereby the Company
receives the full price which Sancho charges the end user less a $0.05
per Mcf marketing fee paid to Sancho.
b. Well Drilling and Operating Agreement
In June 2000, the Company entered into a well drilling and operating
agreement with Sancho Oil and Gas Corporation ("Sancho"), a company
controlled by the Vice President of the Company, on an on-going basis.
Sancho provided seven drill-down wells located in Tyler County, West
Virginia and the Company was to pay 100% of the cost of drilling and
completing the well including any topside equipment needed and other
related equipment. The Company will receive 75% of the working interest
in each of the wells competed.
c. Receivables and Payables
The Company has various payables to the officers and companies of the
officers. These amounts have been grouped together with a net payable
of $719,199 and receivable of $8,825 at December 31, 2004. At December
31, 2004, total interest accrued in the net related party payable was
$14,017, which is included in the total owed to the related parties.
NOTE 5 - ECONOMIC DEPENDENCE AND MAJOR CUSTOMERS
The Company's marketing arrangement with Sancho accounted for
approximately 82% and 82% of the Company's revenue for the years ended
December 31, 2004 and 2003, 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 2004 and 2003, respectively.
NOTE 6 - STOCKHOLDERS' EQUITY
Preferred Stock -The Company has authorized 10,000,000 shares of $.001
par value preferred stock. The preferred stock shall have preference as
to dividends and to liquidation of the Company.
Common Stock - The Company has authorized 500,000,000 shares of $.001
par value common stock.
In January 2003, the Company issued 23,333 shares of common stock
valued at $.45 per share for total cash consideration of $10,500.
F-19
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
In March 2003, the Company issued 1,000 shares of common stock valued
at $5.25 per share for the conversion of convertible debt of $5,250.
In June 2003, the Company issued 152,221 shares of common stock for the
extinguishment of related party debt valued at $30,043.
In December 2003, the Company issued 33,388 shares of common stock for
the extinguishment of debts valued at $33,805.
In January 2004, the Company issued 163,704 shares of common stock for
debt relief of $297,859.
In December 2004, the Company issued 1,353,332 shares of common stock
for debt relief of $2,436,000.
In December 2004, key employees of the Company contributed $1,346,529
of accrued payroll and services.
In December 2004, the Company issued 244,633 shares of common stock for
an acquisition of a subsidiary valued at $403,645.
NOTE 7 - JUDGMENTS PAYABLE
Core Laboratories, Inc.
-----------------------
On July 28, 1999, Core Laboratories, Inc. (Core) obtained a judgment
against the Company for non-payment of an accounts payable. The
judgment calls for monthly payments of $351 and is bearing interest at
10.00% per annum. At December 31, 2004, the Company had accrued a
balance of $13,587 including interest of $4,720 which is included in
judgments payable and accrued expenses, respectively.
RR Donnelly
-----------
On July 1, 1998, RR Donnelly (RR) obtained a judgment against the
Company for non-payment of accounts payable. The judgment calls for
monthly payments of $3,244 and is bearing interest at 10.00% per annum.
At December 31, 2004, the Company has accrued a balance of $56,792
including interest of $29,704 which is included in judgment payable and
accrued expenses, respectively.
NOTE 8 - GOING CONCERN
The Company's consolidated financial statements are prepared using
United States 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,
2004 of approximately $29,000,000, and has a working capital deficit at
December 31, 2004 of $2,980,431.
F-20
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 8 - GOING CONCERN (Continued)
Revenues have not been sufficient to cover its operating costs and to
allow it to continue as a going concern. The potential proceeds from
the sale of common stock, sale of drilling programs, and other
contemplated debt and equity financing, and increases in operating
revenues from new development and business acquisitions would enable
the Company to continue as a going concern. There can be no assurance
that the Company can or will be able to complete any debt or equity
financing. The Company's consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
NOTE 9 - CONVERTIBLE DEBENTURES
On September 10, 1998, the Company completed a debenture issue of
$4,625,400 face value of 8% Secured Convertible Debentures due March
31, 1999 (the "Debentures"). 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.
At December 31, 2004, the Company owed a remaining $52,500 on the
debentures consisting of $50,000 for a debenture, $24,853 in accrued
Interest, and $2,500 in penalties.
A convertible debentures dated 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 $50,000
-------
Less current portion 50,000
-------
Long-term portion $ --
=======
NOTE 10 - BUSINESS SEGMENTS
The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." The Company conducts its
operations principally as oil and gas sales with Trans Energy, Prima
Oil, and Cobham Gas & Oil, Inc., Penine Resources, Inc., and Belmont
Energy, inc. and pipeline transmission with Ritchie County and Tyler
Construction.
F-21
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 10 - BUSINESS SEGMENTS (Continued)
Certain financial information concerning the Company's operations
in different industries is as follows:
For the
Years Ended Oil and Gas Pipeline Corporate
December 31, Sales Transmission Unallocated
------------ ----------- ------------ -----------
Oil and gas revenue 2004 $ 986,220 $ 1,403,879 $ --
2003 535,278 1,367,558 --
Operating loss applicable to
industry segment 2004 523,857 68,155 --
2003 994,005 193,443 --
Interest expense 2004 (156,277) (37,407) --
2003 (344,923) (59,413) --
Other income (expenses) 2004 -- -- --
2003 20,386 105,704 --
Assets
(net of intercompany accounts) 2004 2,033,346 680,956 --
2003 766,733 638,316 --
Depreciation and amortization 2004 220,836 74,043 --
2003 870,537 90,644 --
Property and equipment
acquisitions 2004 2,613,460 -- --
2003 152,848 -- --
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.
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.
The Company had no options granted or outstanding at December 31, 2004
and 2003.
F-22
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 12- SUBSEQUENT EVENTS
Acquisition - On January 31, 2005, the Company finalized the
acquisition of Arvilla Oilfield Services, LLC., a West Virginia limited
liability company, and have assumed all operations, assets and
liabilities of Arvilla. Arvilla provides well servicing, work over and
related transportation services to independent oil and natural gas
producers in the northeast region of the United States. It also
performs ongoing maintenance and major overhauls necessary to optimize
the level of production from existing oil and natural gas wells and
provides certain ancillary services during the drilling and completion
of new wells.
Stock Issuance - Subsequent to December 31, 2004, the Company issued
50,000 shares of common stock to a consultant for services to be
rendered.
NOTE 13- RESTATEMENT
The accompanying December 31, 2003 Statement of Stockholders' Equity
has been restated to reflect changes from previously published
financial statements as follows:
As originally
published Restated
2003 2003 Change
--------------- --------------- ------------
Balance sheet data:
Accrued expenses $ 954,749 $ 675,787 $ 278,962
Retained deficit $ 28,804,202 $ 28,525,240 $ (278,962)
The Company had accrued penalties associated with the issuance of
convertible debentures. The Company failed to file a registration
statement and accrued penalties. Many of the debentures converted into
common stock as full satisfaction of liabilities. The Company failed to
reverse the accrual at the time of conversion. During 2004, the Company
recorded this transaction as a prior period adjustment and has
accordingly restated the accounts affected.
F-23
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 2004 and 2003
(Unaudited)
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES
(1) Capitalized Costs Relating to Oil
and Gas Producing Activities
December 31,
2004 2003
----------- -----------
Proved oil and gas producing properties and related
lease and well equipment $ 7,093,676 $ 3,171,426
Unproved oil and gas properties 95,945 99,945
Accumulated depreciation and depletion (3,870,878) (2,555,878)
----------- -----------
Net Capitalized Costs $ 3,318,747 $ 715,493
=========== ===========
(2) Costs Incurred in Oil and Gas Property
Acquisition, Exploration, and Development Activities
For the Years Ended
December 31,
2004 2003
---------------- ----------------
Acquisition of Properties
Proved $ 2,346,600 $ --
Unproved -- --
Exploration Costs -- --
Development Costs -- --
The Company does not have any investments accounted for by the
equity method.
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES (CONTINUED)
(3) Results of Operations for
Producing Activities
For the Year Ended
December 31,
----------------------
2004 2003
--------- ---------
Sales $ 557,765 $ 535,278
Production costs (198,000) (299,851)
Depreciation and depletion (220,837) (841,250)
Income tax expenses -- --
--------- ---------
Results of operations for producing activities
(excluding the activities of the pipeline transmission
operations, corporate overhead and interest costs) $(137,928) $(605,823)
========= =========
F-24
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 2004 and 2003
(Unaudited)
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES (CONTINUED)
(4) Reserve Quantity Information
Oil Gas
BBL CF
-------- --------
Proved developed and undeveloped reserves
End of the year 2003 99,880 --
Revisions of previous estimates
Improved recovery -- --
Purchases of minerals in place 23,506 550,866
Extensions and discoveries -- --
Production (16,287) (7,911)
Sales of minerals in place -- --
-------- --------
End of the year 2004 106,649 542,955
======== ========
Proved developed reserves:
Oil Gas
BBL CF
-------- --------
End of the year 2003 99,880 --
End of the year 2004 106,649 542,955
During the years ended December 31, 2004 and 2003, 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-25
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 2004 and 2003
(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, 2004
Trans Energy
and
Subsidiaries
------------
Future cash inflows $ 6,996,464
Future production and development costs (1,539,222)
Future income tax expense --
-----------
Future net cash flows 5,457,242
Discounted for estimated timing of cash flows (1,018,406)
-----------
Standardized measure of discounted future net cash flows $ 4,438,836
===========
At December 31, 2003
Future cash inflows $ 3,220,287
Future production and development costs (740,666)
Future income tax expense --
-----------
Future net cash flows 2,479,621
10% annual discount for estimated timing of cash flows (615,244)
-----------
Standardized measure of discounted future net cash flows $ 1,864,377
===========
Future income taxes were determined by applying the statutory income
tax rate to future pre-tax net cash flow relating to proved reserves.
F-26
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 2004 and 2003
(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 (Continued)
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,
2004 2003
----------- -----------
Standardized measure, beginning of year $ 1,864,377 $ 4,314,941
Oil and gas sales, net of production costs -- --
Sales of mineral in place (125,966) (2,411,293)
Purchases 2,375,205 --
Net change due to revisions in quantity estimates 325,220 (39,271)
Accretion of discount items -- --
----------- -----------
Sandardized measure, end of year $ 4,438,836 $ 1,864,377
=========== ===========
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-27