As Filed with the Securities and Exchange Commission on September 30, 1998
Registration No. 333-xxxxx
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
TRANS ENERGY, INC.
(Name of small business issuer in its charter)
Nevada 93-0997412
(State or other jurisdiction of Industrial(I.R.S. Employer
incorporation or organization) Number)Identification Number)
1311
(Primary Standard
Classification Code
210 Second Street, P.O. Box 393, St. Marys, West Virginia 26170
(304) 684-7053
(Address and telephone number of principal executive offices)
210 Second Street, P.O. Box 393, St. Marys, West Virginia 26170
(Address of principal place of business or intended principal place of business)
Loren E. Bagley
Trans Energy, Inc.
210 Second Street, P.O. Box 393
St. Marys, West Virginia 26170
(304) 684-7053
(Name, address and telephone number of agent for service)
Copies to:
Leonard E. Neilson, Esq. Roger V. Davidson, Esq.
Leonard E. Neilson, P.C. Cohen Brame & Smith
1121 East 3900 South, Suite C-200 One Norwest Center, Suite 1800
Salt Lake City, Utah 84124 1700 Lincoln Street
Denver, Colorado 80203
Approximate date of proposed sale to the public: As promptly as practicable
after the effective date of this Registration Statement
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check he following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box:[ ]
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
Proposed Amount
Maximum of
Aggregate Registra-
Title each class of Securities Amount to be Proposed Maximum Offering tion
to be Registered Registered Offering Price Per Share Price Fee(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock issuable upon 5,034,750 Shares(2)(3) $1.3125 per Share (2)(3) $6,608,110 $2,003
conversion of 8% Convertible
Secured Debenture
=================================== ========================= ============================ =============== ===========
Common Stock, 1,000,000 Shares $1.3125 per Share(2) $1,312,500 $ 398
=================================== ========================= ============================ =============== ===========
TOTAL FEE $2,401
</TABLE>
(1) The fee with respect to these share and as required by Section 6(b) of
the Securities Act of 1933, as amended, (the "Securities Act"), has
been calculated pursuant to Rule 457(c) under the Securities Act and
based upon the last sale price per share of the Issuer's common stock
on a date within five (5) days prior to the date of filing this
Registration Statement, as reported by The Nasdaq SmallCap Market.
(2) Estimated solely for purposes of calculating the registration fee and
base on the last sale price per share on September 28, 1998.
(3) Estimated 5,034,471 shares issuable upon conversion of $4,625,400
aggregate principal amount of 8% Convertible Secured Debentures at a
conversion price for each share equal to the lower of (a) seventy
percent (70%) of the market price of TSRG Common Stock averaged over
the five trading days prior to the date of conversion, or (b) the
market price on the issuance date of the Debentures. The maximum
offering price per share is based upon the closing price of the Common
Stock on September 28, 1998, or $1.3125 because it is higher than the
estimated conversion price per share of the 8% Convertible Secured
Debentures (in accordance with Rule 457(g)). The amount shown in the
table above includes an additional 279 shares for the possible issuance
of fractional shares.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION
PROSPECTUS
TRANS ENERGY, INC.
6,034,471 Shares of Common Stock
($.001 par value)
Of the 6,034,471 shares of Common Stock, par value $.001 per share (the
"Common Stock"), of Trans Energy, Inc., a Nevada corporation ("TSRG"), an
estimated 5,034,471 shares are being offered by certain selling securityholders
(the "Selling Securityholders"), which shares are issuable upon conversion by
the Selling Securityholders of $4,625,400 in principal amount of 8% Secured
Convertible Debentures Due March 31, 1999 (the "Debentures"). This Prospectus
relates to not only the offer and sale by Selling Securityholders, but also the
issuance of the Common Stock upon the conversion of Debentures by the Selling
Securityholders. The Selling Securityholders may be deemed to be "underwriters"
under Section 2(11) of the Securities Act of 1933, as amended (the "Securities
Act"). See "Selling Securityholders."
TSRG will not receive any proceeds from the sale of Common Stock by the
Selling Securityholders. Upon conversion of the remaining balance of the
Debentures, TSRG will have benefitted from the cessation of its indebtedness
represented by the Debentures in the amount of $4,625,400. TSRG will bear all
costs relating to the registration of the Common Stock, which are estimated to
be approximately $50,000. See "Plan of Distribution."
It is anticipated that the Selling Securityholders will offer such
shares of Common Stock from time to time in market transactions at the then
prevailing market price and terms, or in negotiated transactions or otherwise,
and without the payment of any underwriting discount or commission, except for
usual and customary selling commissions paid to brokers or dealers. The Selling
Securityholders also may sell such shares of Common Stock from time to time, as
might be permitted under Rule 144 promulgated under the Securities Act. All
expenses associated with the sale of shares of Common Stock by the Selling
Securityholders will be paid by the Selling Securityholders.
An additional 1,000,000 shares of authorized but previously unissued
Common Stock will be offered hereunder from time to time by TSRG. TSRG will
offer these shares to the public at such time as the prevailing market
conditions are considered favorable.
TSRG Common Stock currently trades on The Nasdaq SmallCap Market under
the symbol "TSRG." On September 28, 1998, the last sale price of the Common
Stock as reported by The Nasdaq SmallCap Market was $1.3125 per share. See "Plan
of Distribution."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH
DEGREE OF RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" (SEE PAGE 5 OF THIS
PROSPECTUS) AND "DILUTION."
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The date of this Prospectus is _________, 1998
<PAGE>
No person has been authorized in connection with this offering to give
any information or to make any representation other than as contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by TSRG. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any
securities covered by this Prospectus in any state or other jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such state
or jurisdiction. Neither the delivery of this Prospectus nor any sales made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of TSRG since the date hereof.
ADDITIONAL INFORMATION
TSRG is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and files annual,
quarterly and current reports, proxy statements and other information with the
Commission. Such reports, statements or other information may be inspected and
copied at the Commission's public reference rooms at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the following Regional
Offices of the Commission: Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material may also be obtained at the prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. The Commission also maintains a World Wide Web site that
contains reports, proxy and information statements, and other information
regarding registrants (including TSRG) that file electronically with the
Commission (http://www.sec.gov). TSRG Common Stock is included on The Nasdaq
SmallCap Market and reports, proxy statements and other information relating to
TSRG can be inspected at the offices of the NASD, 1735 K Street, Washington,
D.C., 20006.
TSRG has filed the Registration Statement to register with the
Commission the shares of TSRG Common Stock to be issued hereunder. This
Prospectus constitutes a part of the Registration Statement. As allowed by the
Commission rules, this Prospectus does not contain all the information that can
be found in the Registration Statement or the exhibits to thereto.
There can be no assurance that the trading market for the Common Stock
on the Nasdaq Small Cap Market will continue following the Offering. TSRG
intends to continue trading its Common Stock, including the shares of Common
Stock which are the subject of this Offering, under the symbol "TSRG."
TSRG will furnish its shareholders with annual reports containing
audited financial statements and such other information as TSRG deems
appropriate or as may be required by law. TSRG's fiscal year ends on December 31
of each year.
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<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain selected information contained
elsewhere in this Prospectus and is qualified in its entirety by the more
detailed information and financial statements set forth herein. This summary
highlights selected information from this Prospectus and may not contain all of
the information that is important to you. Prospective investors are urged to
read this Prospectus in its entirety.
Trans Energy, Inc.
TSRG is primarily engaged in the transportation, marketing and
production of natural gas and oil, and also oil and gas exploration and
development activities. TSRG owns and operates oil and gas wells in West
Virginia and Wyoming and also owns and operates gas transmission lines located
in West Virginia. During the past three years, TSRG has engaged in limited
developmental drilling and no exploratory drilling. TSRG has operated primarily
in the Appalachian Basin in Northwestern West Virginia, which is geographically
one of the largest gas and oil producing regions, and also in the Powder River
Basin in Wyoming.
On June 26, 1998, TSRG entered into a Merger Agreement whereby Natural
Gas Technologies, Inc., a Texas corporation ("NGT") is to be merged with and
into TSRG (the "Merger"). NGT is an energy company engaged in the exploration,
development, acquisition and production of crude oil and natural gas. All of
NGT's properties and its subsidiary's properties and operations are currently
located in the States of Texas and Wyoming. NGT's objective is to build
shareholder value through consistent growth in per share reserves, production
and the resulting cash flow and earnings. To accomplish this, NGT has targeted
properties which are expected to produce secondary recoveries of oil and gas
through the use of new technologies, waterfloods or additional drilling. These
types of properties can usually be acquired on more favorable terms than
properties in primary production, although lease operating costs for these
properties are higher upon acquisition than properties in primary production.
Since January 31, 1997, NGT has been acquiring additional properties and
reworking its existing properties using cash invested by two of NGT's directors.
Following consummation of the Merger, the combined company will be
engaged in transportation, marketing and production of natural gas and oil, and
also exploration and development activities. TSRG's business strategy is to
economically increase its reserves, production and sale of gas and oil from
existing and acquired properties in the Appalachian Basin and elsewhere in order
to maximize shareholders' return over the long term. TSRG intends to actively
pursue the acquisition and development of producing properties in areas that
will enhance TSRG's revenue base without proportional increases in overhead
costs. To accomplish this strategy, TSRG has focused on increasing its gas and
oil revenues through well recompletions, property acquisitions and exploitation
programs.
TSRG operates exclusively in the oil and gas industry. Natural gas
production from wells owned by TSRG 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 TSRG's pipeline network is sold under contract to
one of two primary customers. As of the date hereof, TSRG employs ten people
full-time and anticipates hiring additional employees as business warrants and
as funds are available. See "Business of TSRG."
Following the Merger, TSRG's principal executive offices will be at
NGT's offices located at 16775 Addison Road, Suite 300, Dallas, Texas 75248, and
its telephone number will be (972) 713-6050. TSRG will also maintain as a field
office its current principal executive offices located at 210 Second Street,
P.O. Box 393, St. Marys, West Virginia 26170, and its telephone number is (304)
684-7053.
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<PAGE>
THE OFFERING
Securities Offered....... Selling Securityholders are offering an estimated
5,034,471 shares of Common Stock issuable upon
conversion of 8% Convertible Secured Debentures at
a conversion price for each share equal to the
lower of (a) seventy percent (70%) of the market
price of TSRG Common Stock averaged over the five
trading days prior to the date of conversion, or
(b) the market price on the issuance date of the
Debentures. An additional 1,000,000 shares of
Common Stock are being offered to the public by
TSRG.
Common Stock Outstanding
Before Offering:..............2,138,450 shares (1)
Common Stock Outstanding
After Offering:.............8,172,921 shares (2)
Nasdaq Small Cap Market
Symbols (3)..................Common Stock: TSRG
Use of Proceeds...............TSRG will not receive any proceeds from sales of
the Shares by the Selling Securityholders.
Proceeds from the sale by TSRG of the 1,000,000
shares of Common Stock will be used for the
development of existing properties and wells and
the acquisition of additional properties, wells
and equipment.
Risk Factors..................The securities offered hereby involve a high
degree of risk and immediate substantial dilution
and should not be purchased by investors who
cannot afford the loss of their entire investment.
Before purchasing any securities offered, should
review carefully and consider the information
contained in this Prospectus and particularly the
items set forth under "Risk Factors" and
"Dilution."
- ---------------------
(3) Does not include approximately 6,415,350 shares to be issued pursuant
to the Merger.
(4) Includes approximately 5,034,471 shares of Common Stock issuable upon
conversion of all the outstanding Debentures based on the current price
of the Common Stock and also includes 1,000,000 shares of Common Stock
offered by TSRG. Does not include approximately 6,415,350 shares to be
issued pursuant to the Merger.
(5) Although TSRG's Common Stock presently is traded on the Nasdaq SmallCap
Market, there is no assurance that such trading will continue. If TSRG
fails to meet certain maintenance standards imposed by the NASD,
delisting of its securities from the Nasdaq SmallCap Market is
possible. Such standards include, but are not limited to, requirements
that TSRG have at least $2,000,000 in net tangible assets, at least 300
shareholders and a minimum bid price for its Common Stock of $1.00 per
share.
-4-
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative in nature
and involves a high degree of risk including, but not necessarily limited to,
the factors described below. Prospective purchasers should carefully consider
the following risk factors, among others, as well as the remainder of this
Prospectus and attached financial statements, prior to making an investment in
the securities of TSRG.
Going Concern
TSRG has incurred operating losses for the years ended December 31,
1997 and 1996 and the six months ended June 30, 1998, and net operating losses
during each of such periods. TSRG's management has included a footnote in TSRG's
Consolidated Financial Statements for the periods ended December 31, 1996 and
1997 relating to TSRG's need for potential proceeds from contemplated debt and
equity financing, increases in operating revenues from new developments and the
Merger with Natural Gas Technologies to continue as a going concern. See Note 8
to TSRG Consolidated Financial Statements. See Note 8 to TSRG Consolidated
Financial Statements.
Uncertainties Related to Merger
In determining to proceed with the Merger with NGT, TSRG Board of
Directors addressed the cost savings, operating efficiencies, revenue
enhancement and other synergies that may result from the consummation of the
Merger. The consolidation of functions and integration of departments, systems
and procedures, present significant management challenges and require special
attention. There can be no assurance that such actions will be successfully
accomplished as rapidly as currently expected or that the combined company will
realize any of the anticipated benefits of the Merger. See "The Merger."
Working Capital Deficit; Need for Additional Capital
At December 31, 1997, TSRG had a working capital deficit of $1,922,429,
shareholders' equity of $2,012,481 and sustained a net loss of $2,029,450 for
its fiscal year ended December 31, 1997. At June 30, 1998, TSRG had a working
capital deficit of $6,430,985, shareholders' equity of $3,847,731, and
accumulated deficit of $9,022,371 and a net loss of $282,210 for the six month
period then ended. No assurance can be given that TSRG or the combined company
will be profitable in the future or that it will not continue to incur
substantial losses in the future. Development of the businesses of the combined
company and the ongoing exploration and development of oil and gas properties
will continue to require significant capital expenditures. Failure to have
access to sufficient funds for capital expenditures on acceptable terms or the
failure to achieve capital expenditure synergies may require the combined
company to delay or abandon some of its plans, which could have a material
adverse effect on the success of the proposed Merger and the combined company.
Competition
The oil and gas industry is extremely competitive and TSRG expects that
competition will intensify in the future. TSRG and NGT face significant direct
competition from numerous major and independent oil and gas companies and other
companies with greater market share and resources. Many competitors are large,
well-known oil and gas and/or energy companies, although no single entity
dominates the industry. Many competitors possess greater financial and personnel
resources enabling them to identify and more economically acquire desirable
energy producing properties and drilling prospects than TSRG and NGT.
Additionally, there is competition from other fuel choices to supply the energy
needs of consumers and industry. See "Business of TSRG Competition."
Volatility of Gas and Oil Prices
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<PAGE>
TSRG's reserves, profitability and future rate of growth are
substantially dependent upon prevailing prices for gas and oil. Such prices can
be volatile. Prices are affected by market supply and demand factors as well as
governmental action and weather conditions which are beyond the control of TSRG.
These external factors and the volatile nature of the energy markets make it
difficult to estimate future prices of gas and oil. Since 1991 TSRG's annual
average gas sales price has ranged from a high of $3.56 per Mcf in 1996 to a low
of $2.02 per Mcf in 1995. TSRG's annual average oil sales price has ranged from
a high of $19.22 per Bbl in 1996 to a low of $14.89 per Bbl in 1993. For the
year ended December 31, 1997, TSRG's average sales prices for gas and oil were
$2.95 per Mcf and $16.44 per Bbl, respectively. During the first half of 1998,
oil prices dropped to a low of $9.00 per Bbl and, as of August 5, 1998, the
price of oil was $13.80 according to the WTI Crude Oil Posted Price. This
decline in oil prices has adversely affected TSRG's revenue Any significant or
extended decline in the prices of gas and oil could have a material adverse
effect on TSRG's financial condition and results of operations. See Business of
TSRG - Estimated Proved Reserves" and Business of NGT - Estimated Proved
Reserves."
Quarterly Variations
TSRG's operating results are subject to quarterly variation due to,
among other factors, weather conditions and the supply and demand factors
affecting the natural gas markets. Historically, the demand and price paid for
natural gas has increased in the cold winter months and decreased in the warm
summer months. Consequently, TSRG believes that its results of operations should
be viewed on an annual basis.
Uncertainties in Reserve Estimates
Estimates of TSRG's and NGT's proved reserves and future net revenues
appearing elsewhere in this Prospectus are based primarily on engineering
reports. Gas and oil reserves cannot be measured in an exact way, and estimates
of other engineering reports might differ materially from those shown herein.
Certain events, including production history, acquisitions and sales of
properties, changes in prices and further drilling and development could result
in increases or decreases of estimated proved reserves or estimates of future
net earnings. Reported estimates of future cash flows reflect historical average
gas and oil prices, however there can be no assurance that such prices will be
realized or that the volumes projected will be produced during future periods.
Future performance that deviates from the engineering reports could have a
material adverse effect on the combined company. In addition to the
uncertainties in projecting future prices and rates of production, there are
numerous uncertainties inherent in estimating quantities of recoverable natural
gas and oil reserves, production costs and future development expenditures,
including many factors which are beyond the control of the combined company. See
S.F.A.S. 69 Supplemental Disclosure Footnote to the Consolidated Financial
Statements of TSRG.
Reserve Replacement Risks
The future success of TSRG's operations will be largely dependent upon
its ability to replace and expand its gas and oil reserves through the
acquisition of producing properties and the exploration for and development of
gas and oil reserves. Without successful acquisitions and exploitation,
exploration and development operations, the combined company will not be able to
replace the reserves being depleted by production, and its assets and revenues
will decline over time. There can be no assurance that TSRG's acquisition,
exploitation, exploration and development activities will result in the
replacement of, or additions to, the combined company's reserves. Successful
acquisition of producing properties generally requires, among other things,
accurate assessments of recoverable reserves, future gas and oil prices,
operating costs and potential environmental risks and other liabilities. Such
assessments are necessarily inexact and their accuracy is inherently uncertain.
Exploration and development of gas and oil reserves by TSRG involves a degree of
risk that no commercial production will be obtained or that production will be
insufficient to recover drilling and completion costs. Drilling also may be
curtailed, delayed or canceled as a result of many factors, including, among
other things, unacceptably low prices, title problems, weather conditions, labor
shortages and equipment delivery problems.
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<PAGE>
Marketing Risks
The availability of a ready market for TSRG's gas and oil depends on
numerous factors beyond its control, including, among other factors, the demand
for and supply of gas and oil, the proximity of TSRG's natural gas and oil
reserves to pipelines, the capacity of such pipelines, the cooperation of
pipeline owners, general economic conditions, fluctuations in seasonal demand
and the effects of inclement weather and governmental regulation. In addition,
under certain gas purchase arrangements, TSRG is subject to the risk of periodic
reduced purchases or access to pipelines. Any significant reduction or
curtailment of production for an extended period of time could have a material
adverse effect on the combined company's future results of operation. See
"Business of TSRG - Marketing."
Operating Hazards and Environmental Risks
TSRG and NGT are subject to all risks normally incident to the
exploration for and production of gas and oil, including blow-outs,
uncontrollable flows of gas, oil, brine or well fluids into the environment,
fires, explosions, cratering, pollution and other environmental risks. Certain
of these risks, however, are relatively lower for Appalachian-based producers
because of low production volumes, lower pressures and the minimal quantities of
oil and brine production. The occurrence of any of these hazards could,
nonetheless, result in substantial losses to the combined company due to damage
or destruction of gas and oil wells, formations or production facilities, damage
or injury to property and persons or suspension of operations. Based on its loss
experience, TSRG believes that it has adequate insurance coverage. The
occurrence of an event not fully covered by insurance could, however, have a
material adverse effect on the financial condition and operations of the
combined company.
Dependence on Key Personnel
TSRG's future success is dependent on certain key management personnel.
The loss of key personnel or the inability to attract and retain highly
qualified personnel could adversely affect TSRG's business. TSRG faces
competition for such personnel from other companies and organizations. There can
be no assurance that TSRG will be successful in hiring or retaining qualified
personnel. TSRG has not entered into employment agreements with any of its key
employees. See "Management."
Uncertain Effects of Government Regulation
TSRG and NGT, in common with other companies in the oil and gas
industry, are extensively regulated by federal, state and local authorities.
Legislation affecting the industry is constantly changing and/or expanding,
particularly with respect to environmental matters. Although management believes
that both TSRG and NGT are in material compliance with all such laws and
regulations, there can be no assurance that new laws or regulations or new
interpretations of existing laws and regulations will not subsequently increase
the cost of compliance or otherwise adversely affect the combined company's
future operations. See "Business of TSRG - Government Regulation."
Federal Energy Regulatory Commission ("FERC") Order 636, as revised
("Order 636"), requires, among other things, the "unbundling" or separating of
various components of the services of interstate pipeline companies, such as
supply, gathering, transportation and sales. As an oil and gas producer and an
intrastate pipeline company, TSRG is not directly subject to these regulations.
However, because TSRG's pipelines connect to pipelines of interstate pipeline
companies, and such "unbundling" could have an effect on the Appalachian Basin
premium on gas prices, the combined company's future operations may be effected
by these regulations. Consequently, TSRG is unable to predict the ultimate
impact of these regulations on TSRG's gas sales or prices. See "Business of TSRG
- - Government Regulation."
Control of TSRG
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<PAGE>
Immediately following completion of this Offering and assuming the
Merger is closed and all shares of TSRG Common Stock issuable thereunder are
issued, TSRG's executive officers, directors and other principal shareholders,
including those principals of NGT receiving shares of Common Stock pursuant to
the Merger, will beneficially own approximately 12% of TSRG's outstanding Common
Stock. These shareholders may be able to effectively control the outcome of all
issues submitted to a vote of shareholders, including the election of a
significant number of TSRG's directors. See "Principal Shareholders" and
"Description of Securities".
Dilution
Purchasers in this Offering will incur immediate and substantial
dilution in that the net tangible book value of each outstanding share of Common
Stock immediately after the Offering will be significantly less than the public
conversion price of the Debentures. See "Dilution".
Possible "Penny Stock" Regulation
Trading of TSRG's Common Stock on The Nasdaq SmallCap Market may be
subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), commonly referred to as
the "penny stock" rule. Section 15(g) sets forth certain requirements for
transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of
penny stock as that used in Rule 3a51-1 of the Exchange Act. The Commission
generally defines penny stock to be any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. Section 3(a)(51)(A) of
the Exchange Act provides that any equity security is considered to be a penny
stock unless that security is: (a) registered or approved for registration and
traded on a national securities exchange meeting specified criteria set by the
Commission; (b) authorized for quotation on an automated quotation system
sponsored by a registered securities association meeting certain criteria set by
the Commission; (c) issued by a registered investment company registered under
the Investment Company Act of 1940; (d) excluded from the definition on the
basis of price (at least $5.00 per share), the issuer's net tangible assets; or
(e) exempted from the definition by rule, regulation or order of the Commission.
If TSRG's shares are deemed to be a penny stock, trading in the shares will be
subject to additional sales practice requirements on broker-dealers who sell
penny stocks to persons other than established customers and accredited
investors, generally persons with assets in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 together with their spouse.
For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of such securities and must
have received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document relating to the penny stock market. A broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information for the
penny stocks held in the account and information on the limited market in penny
stocks. Consequently, these rules may restrict the ability of broker-dealers to
trade and/or maintain a market in TSRG's Common Stock and may affect the ability
of shareholders to sell their shares.
No Dividends
TSRG has not paid any cash or other dividends or made distributions on
its Common Stock and TSRG does not anticipate paying cash dividends or making
distributions in the foreseeable future. See "Dividend Policy".
Shares Eligible for Future Sale
Sale of substantial amounts of TSRG Common Stock in the public market
by existing shareholders, including shares issued pursuant to the Merger and
shares issued upon the exercise of certain stock options, warrants and
convertible debentures, or the perception that such sales could occur, could
materially and adversely affect the prevailing market price for such shares.
-8-
<PAGE>
Actual sales, or the prospect of sales by the present TSRG shareholders, or by
future holders of restricted securities under Rule 144 of the Securities Act or
otherwise, may, in the future, have a depressive effect upon the price of TSRG
Common Stock in the public trading market. See "Business of TSRG Principal
Shareholders." Additionally, all shares of Common Stock issued hereunder will be
immediately tradeable in the public market unless held by an affiliate or
controlling shareholder of TSRG. See "Description of TSRG Securities - Shares
Eligible for Future Sale."
Possible Volatility of Price of Common Stock
TSRG Common Stock is currently traded on The Nasdaq SmallCap Market.
There can be no assurance that a significant public market for TSRG Common Stock
will be sustained following this offering. See "Market Prices of TSRG Common
Stock and Dividends." The trading price of TSRG Common Stock may respond to
quarterly variations in operating results, announcements of oil and gas
discoveries or acquisitions, and other events or factors including the sale or
attempted sale of a large amount of TSRG Common Stock into the market. These
broad market fluctuations may adversely affect the market price of TSRG Common
Stock.
Risks Associated with Forward-looking Statements
Forward-looking statements in this Prospectus are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. TSRG wishes to advise readers that actual results may differ substantially
from such forward-looking statements. Forward-looking statements included herein
are based on current expectations that involve a number of risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by the statements, including, but not limited to, the
following: (i) the ability of TSRG to secure additional financing, (ii) the
success of the Merger with NGT, (iii) the possibility of success in TSRG's
drilling endeavors, (iv) competitive factors, and other risks detailed in TSRG's
periodic report filings with the Securities and Exchange Commission. The
foregoing assumptions are based on management's judgments with respect to, among
other things, future economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond TSRG's control. Accordingly, although
management believes that the assumptions underlying the forward-looking
statements are reasonable, any such assumption could prove to be inaccurate and
therefore there can be no assurance that the results contemplated in
forward-looking statements will be realized. In addition, as disclosed elsewhere
in the "Risk Factors" section of this Prospectus, there are a number of other
risks inherent in TSRG's business and operations which could cause TSRG's
operating results to vary markedly and adversely from prior results or the
results contemplated by the forward-looking statements. Growth in absolute and
relative amounts of cost of goods sold and selling, general and administrative
expenses or the occurrence of extraordinary events could cause actual results to
vary materially from the results contemplated by the forward-looking statements.
Management decisions, including budgeting, are subjective in many respects and
periodic revisions must be made to reflect actual conditions and business
developments, the impact of which may cause TSRG to alter its marketing, capital
investment and other expenditures, which may also materially adversely affect
TSRG's results of operations. In light of significant uncertainties inherent in
the forward-looking information included in this Prospectus, the inclusion of
such information should not be regarded as a representation by TSRG or any other
person that TSRG's objectives or plans will be achieved. See "Management's
Discussion and Analysis" and "Business."
-9-
<PAGE>
USE OF PROCEEDS
TSRG will not receive any proceeds from the sale of Common Stock by the
Selling Securityholders. Upon conversion of the remaining balance of the
Debentures, TSRG will have benefitted from the cessation of its indebtedness
represented by the Debentures in the amount of $4,625,400.
Upon the sale by TSRG of the additional 1,000,000 shares of Common
Stock, TSRG would realize gross proceed of $1,312,500, based on the current
price of the Common Stock. It is estimated that the costs associated to the
offering and the registration statement to which this Prospectus relates will be
approximately $50,000, assuming no commissions are paid for the sale of the
additional shares. Presently, TSRG has not entered into any agreement or
arrangement for the underwriting of the 1,000,000 shares or the assistance of
any broker-dealer in the offering and sale of such shares. Any such arrangement
to pay a commission would reduce the net amount of the proceeds accordingly.
After deducting the expenses associated with the registration
statement, it is expected that TSRG will realize approximately $1,268,500 if all
of the 1,000,000 shares are sold at the current price of the Common Stock. It is
anticipated that the net proceeds will be used approximately as follows:
Development of Powder River Basin Properties $600,000; Retirement of debt
$200,000; development of other existing properties, $200,000; and working
capital, $268,500. There can be no assurance that TSRG will be able to sell all
or a portion of these additional 1,000,000 shares and, accordingly, there can be
no assurance that it will realize any proceeds from the offering.
MARKET PRICES AND DIVIDENDS
TSRG Common Stock is traded on The Nasdaq SmallCap Market under the
symbol "TSRG". The following table sets forth, for the periods indicated the
range of quarterly high and low sales prices of TSRG as obtained from The Nasdaq
SmallCap Market for the past two fiscal years. All prices have been adjusted to
reflect the one share for four shares reverse split effected by TSRG on June 5,
1998. Price quotations reflect inter-dealer prices, without retail market
mark-up, mark-down or commission and may not represent actual transactions.
High Low
1996
First Quarter $ 14.00 $ 10.52
Second Quarter $ 24.00 $ 10.00
Third Quarter $ 21.00 $ 11.52
Fourth Quarter $ 25.00 $ 13.00
1997
First Quarter $ 26.24 $ 8.00
Second Quarter $ 13.12 $ 5.00
Third Quarter $ 8.00 $ 2.52
Fourth Quarter $ 8.00 $ 2.52
1998
First Quarter $ 6.68 $ 2.00
Second Quarter $ 5.00 $ 2.13
Third Quarter (1) $ 2.38 $ .50
----------
(1) Through September 29, 1998
As of September 29, 1998, there were 188 holders of record of TSRG
Common Stock, which figure does not take into account those shareholders whose
certificates are held in the name of broker-dealers and other nominees. TSRG
estimates that there are approximately 300 beneficial owners of TSRG Common
Stock including shareholders whose certificates are held by broker-dealers or
other nominees. Also, approximately 183 shareholders of NGT will become
shareholders of TSRG following consummation of the Merger.
-10-
<PAGE>
TSRG has not declared or paid cash dividends or made distributions in
the past and does not anticipate that it will pay cash dividends or make
distributions in the foreseeable future. TSRG currently intends to retain and
reinvest future earnings, if any, to finance its operations.
The TSRG Stock Split
In May 1998, the TSRG Board declared the TSRG Stock Split in connection
with the Merger. Accordingly, on June 5, 1998, the shares of TSRG Common Stock
then outstanding were reverse split on a one (1) share for four (4) shares
basis. All shares of TSRG Common Stock referred to in this Prospectus and in the
Merger Agreement, including price quotations, are stated on a post-split basis.
The TSRG Stock Split will have no effect on the terms of the Merger Agreement.
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
Prospectus. Please note that results of operations for the 1996 fiscal year have
been restated.
Results of Operations
For the Year Ended December 31, 1997 Compared to the Year Ended December 31,
1996.
The following table sets forth the percentage relationship to total
revenues of principal items contained in TSRG's Statements of Operations for the
two most recent fiscal years ended December 31, 1997, and 1996. It should be
noted that percentages discussed throughout this analysis are stated on an
approximate basis.
Fiscal Years Ended
December 31,
1997 1996
---- ----
Total revenues..................................... 100% 100%
Total costs and expenses........................... 245 151
Total other income (expenses)...................... (33) (109)
Net income (loss) before taxes and
minority interest................................ (178) (160)
Income taxes....................................... - -
Net loss from discontinued operations.............. (4) (139)
Minority interest................................ 0 3
Net income (loss).................................. (182) (296)
- ----------
Total revenues of $1,115,037 for the year ended December 31, 1997
("1997") compared to $1,236,740 for the year ended December 31, 1996 ("1996").
The decline in revenues was 10% in total and was the result of several factors.
First, there was a decline in the market price of gas during 1997. Second, much
of the gas for which TSRG had contracted to purchase was set at a price higher
than TSRG's customers, principally Sancho and Hope, would pay. Thus, as
permitted under the contracts between TSRG and its third party suppliers, TSRG
declined to purchase the gas. This decision resulted in lower sales, but avoided
additional losses for TSRG. The decline in sales was primarily attributable to
one customer. In 1997, oil made up 3% of total revenues as compared to 4% in
1996. Accordingly, gas sales increased from 96% of sales in 1996 to 97% in 1997.
TSRG had a net loss of $2,029,450 for 1997. TSRG's total costs and
expenses increased from 151% of sales in 1996 to 245% of sales in 1997. The cost
of oil and gas increased from 64% of sales in 1996 to 67% of sales in 1997.
Selling, general and administrative expenses also increased 80% due in part to
the issuance of stock by TSRG for services rendered. Salaries and wages
increased 96% due to TSRG's executives being awarded a salary which is being
accrued by TSRG. Depreciation, depletion and amortization increased 95% in 1997
from 1996 due to the amortization
-11-
<PAGE>
of offering costs in a capital raising transaction. Interest expense in 1997
decreased 78% over 1996 due to decreased loans by TSRG.
For the Three and Six Months Ended June 30, 1998 Compared to the Three and Six
Months Ended June 30, 1997.
The following table sets forth the percentage relationship to total
revenues of principal items contained in TSGR's Consolidated Statements of
Operations for the three month and six month periods ended June 30, 1998, and
June 30, 1997. It should be noted that percentages discussed throughout this
analysis are stated on an approximate basis.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ------------------------------
1998 1997 1998 1997
----- ----- ---- -----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Total revenues................ 100% 100% 100% 100%
Total costs and expenses...... 187 337 181 216
Net income (loss form
operations.................. (87) (237) (81) (116)
Other income (expense)........ 62 (87) 21 (50)
Net (loss) before income
taxes and minority
interest ................... (25) (324) (60) (166)
Income taxes.................. - - - -
Minority interest............. - - - -
Net income (loss)............. (25) (324) (60) (166)
</TABLE>
- ----------
Total Revenues for the second quarter ended June 30, 1998 and the six
months ended June 30, 1998 decreased 2% and 13% respectively when compared with
the corresponding periods in 1997. This decrease is attributed to TSRG's
continuing decision not to purchase gas from its suppliers at a price higher
than management believed it could profitably resell the gas and was partially
offset by higher prices and higher volumes of oil and gas produced from TSRG
owned wells. Total costs and expenses as a percentage of total revenues
decreased from 337% in the second quarter of 1997 to 187% for the second quarter
of 1998, and from 216% for the first six months of 1997 to 181% for the same
period in 1998. Total costs and expenses for the second quarter of 1998
decreased 46% compared to the 1997 period and decreased 27% for the first six
months of 1998, compared to the same period in 1997. This decrease is primarily
attributed to the 34% decrease in selling, general and administrative costs
which was partially offset by the 22% increase in the cost of oil and gas due to
TSRG's decision not to purchase higher priced gas from its suppliers. Salaries
and wages decreased 73% to $26,802 for the second quarter of 1998 and decreased
55% for the first half of 1998, compared to the same periods in 1997.
Depreciation and depletion decreased 72% in the second quarter and decreased 54%
for the first half of 1998 compared to the corresponding periods in 1997.
Selling, general and administrative expenses decreased 48% to $271,480 in the
second quarter and decreased 34% for the first six months of 1998 compared to
the same periods in 1997. Interest expense decreased 49% to $74,449 for the
second quarter and has decreased 23% for the first six months of 1998 due to
decreased borrowings.
TSRG's net loss was $67,837 for the second quarter with a net loss of
$282,210 for the first half of 1998 compared to losses of $882,959 and $903,949
for the respective periods in 1997. TSRG's smaller net loss in the second
quarter of 1998, as compared to the same period in 1997, is attributed to the
$248,453 (48%) decrease in Selling, General and Administrative costs, the
$72,833 decrease in salaries and wages in 1998, and a $100,000 uncollectible
loan provision taken in 1997. TSRG also reported a gain of $239,129 during 1998
on the sale of certain assets.
-12-
<PAGE>
For the remainder of fiscal year 1998, management expects salaries and
wages to remain level and other general and administrative expenses to remain at
approximately the same rate as for the second quarter of 1998. The cost of oil
and gas produced is expected to fluctuate with the amount produced and with
prices of oil and gas, and management anticipates that revenues are likely to
increase during the remainder of 1998.
Net Operating Losses
TSRG has accumulated approximately $9,022,371 of net operating loss
carryforwards as of June 30, 1998, which may be offset against future taxable
income through the year 2012 when the carryforwards expire. The use of these
losses to reduce future income taxes will depend on the generation of sufficient
taxable income prior to the expiration of the net operating loss carryforwards.
In the event of certain changes in control of TSRG, 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 period
ended June 30, 1998 because the potential tax benefits of the loss carryforward
is offset by valuation allowance of the same amount.
Liquidity and Capital Resources
Historically, TSRG's working capital needs have been satisfied through
its operating revenues, from borrowed funds and from the sale of its securities.
Working capital at June 30, 1998 was a negative $6,430,985 compared to a
negative $1,922,429 at December 31, 1997. This change is primarily attributed to
the $4,625,400 increase in face value convertible debentures due in 1999. TSRG
anticipates meeting its working capital needs during the remainder of the
current fiscal year with revenues from operations. However, it must be noted
that TSRG has experienced a net loss for several quarters and therefore may be
dependent upon borrowed funds or sales of securities to satisfy its working
capital requirements.
As of June 30, 1998, TSRG had total assets of $12,428,664 and total
shareholders' equity of $3,847,731, compared to total assets of $5,680,601 and
total shareholders' equity of $2,012,481 at December 31, 1997. This represents a
$6,748,063 (119%) increase in total assets due to the purchase of wells, prepaid
promotion expenses of $1,061,628 and loan acquisition costs of $2,706,898, and a
$1,835,250 (91%) increase in total shareholders' equity for the period due to
the issuance of stock. For this same period, cash decreased from $185,881 to $0
and total current assets decreased 82% due to decreased accounts receivable and
cash. Total current liabilities increased 184% primarily attributed to an
increase in TSRG's accounts payable, accrued expenses and debentures payable.
At June 30, 1998, TSRG's current portion of its long term debt was
$25,313. TSRG currently anticipates that it will be able to provide for its debt
obligations and repayments coming due during the remainder of 1998 from
operating revenues generated by TSRG. However, it must be noted that TSRG has
experienced a net loss for several quarters and, due to the current environment
of the oil and gas industry, TSRG may have to explore alternative sources of
capital to satisfy its current and ongoing obligations.
Year 2000
Year 2000 issues may arise if computer programs have been written using
two digits (rather than four) to define the applicable year. In such case,
programs that have time-sensitive logic may recognize a date using "00" as the
year 1900 rather than the year 2000, which could result in miscalculations or
system failures.
TSRG has completed its assessment of the Year 2000 issue and believes
that any costs of addressing the issue will not have a material adverse impact
on TSRG's financial position. TSRG believes that its existing computer systems
and software will not need to be upgraded to mitigate the Year 2000 issues. TSRG
has not incurred any costs associated with its assessment of the Year 2000
problem. In the event that Year 2000 issues impact TSRG's accounting operations
-13-
<PAGE>
and other operations aided by its computer system, TSRG believes, as part of a
contingency plan, that it has adequate personnel to perform those functions
manually until such time that any Year 2000 issues are resolved.
TSRG believes that third parties with whom it has material
relationships will not materially be affected by the Year 2000 issues as those
third parties are relatively small entities which do not rely heavily on
information technology ("IT") systems and non-IT systems for their operations.
However, if TSRG and third parties upon which it relies are unable to address
any Year 2000 issues in a timely manner, it could result in a material financial
risk to TSRG, including loss of revenue and substantial unanticipated costs.
Accordingly, TSRG plans to devote all resources required to resolve any
significant Year 2000 issues in a timely manner.
Inflation
In the opinion of management, inflation has not had a material effect
on the operations of TSRG.
BUSINESS OF TSRG
TSRG is primarily engaged in the transportation, marketing and
production of natural gas and oil, and also conducts exploration and development
activities. TSRG owns and operates 105 oil and gas wells and also owns and
operates an aggregate of over 100 miles of three-inch, four-inch and six-inch
gas transmission lines located within West Virginia in the Counties of Ritchie,
Tyler, Doddridge, and Pleasants, which pipeline system gathers the gas emanating
from certain of these wells and from wells owned by third parties. TSRG has
approximately 2,200 leasehold acres in the Sistersville, West Virginia field
which forms part of the Keener and Big Injun sands geological formations, and
800 acres in the Powder River Basin in Crook County, Wyoming, none of which has
contributed to the revenues of TSRG to date.
TSRG was originally organized on January 16, 1964 under the laws of the
State of Idaho as Alter Creek Mining Company, Inc. TSRG changed its name to
Apple Corp. in January, 1988, and then to Trans Energy, Inc. in September 1993,
at which time its domicile was changed to the State of Nevada.
TSRG's principal executive offices are located at 210 Second Street,
P.O. Box 393, St. Marys, West Virginia 26170, and its telephone number is (304)
684-7053.
Business Development
TSRG has engaged in limited developmental drilling and no exploratory
drilling in the last three years. Exploratory drilling involves drilling wells
in areas where there are no proved reserves of gas or oil, to find a new
commercially productive area in a field previously found to be productive or to
significantly extend a known field. Development drilling involves the drilling
of wells within proven areas of an oil and gas reservoir to depths where
hydrocarbons are known to exist. Exploratory drilling involves a higher degree
of risk of failure than developmental drilling, although there can be no
assurance that a developmental well will yield commercial quantities of oil and
gas. In 1997, TSRG participated in two developmental drilling projects. One well
was drilled on the Big Injun formation underlying TSRG's Sistersville, West
Virginia acreage and one well was drilled on TSRG's acreage in the Powder River
Basin in Wyoming.
TSRG has operated primarily in the Appalachian Basin, principally in
Northwestern West Virginia. In Northwestern West Virginia, shallow wells drilled
to a depth of up to 6,000 feet are characterized by long producing lives with
low-volume production from low permeability reservoirs with a thickness ranging
from 10 to 40 feet. A typical shallow well will encounter commercial gas
production from between 4 and 10 separate and distinct production horizons. Due
to mechanical and technical limitations, it is usually possible to produce only
up to 2 to 5 of these formations simultaneously, and consequently, necessitates
either the drilling of a twin well or recompletion of the original well at a
later date where multiple productive formations are penetrated.
-14-
<PAGE>
TSRG intends to focus its activities in the Appalachian Basin, which is
geographically one of the largest gas and oil producing regions, and also in the
Powder River Basin in Wyoming. Operators in the Appalachian Basin historically
have experienced high drilling success rates in the formations of the Basin,
with wells generally producing for more than 25 years although at low production
volumes. The Appalachian Basin is located in close proximity to the largest gas
markets in the United States and, historically, this has generally resulted in
wellhead gas prices somewhat higher than those prices received in the Gulf Coast
and the Mid-Continent producing regions.
TSRG's business strategy is to economically increase its reserves,
production and sale of gas and oil from existing and acquired properties in the
Appalachian Basin and elsewhere in order to maximize shareholders' return over
the long term. TSRG's strategic location in West Virginia enables TSRG to
actively pursue the acquisition and development of producing properties in that
area that will enhance TSRG's revenue base without proportional increases in
overhead costs. TSRG has directed its attention to Appalachian Basin properties
in which it will have a significant ownership interest and will serve as
operator.
To accomplish this strategy, TSRG has focused on increasing its gas and
oil revenues through well recompletions, property acquisitions and exploitation
programs. Since 1992, TSRG's proved reserves of natural gas and oil have
increased by an aggregate of 71% to 1,789 MMcf and 1% to 199 MBbl, respectively.
There can be no assurance, however, that TSRG will be able to continue to expand
its proved reserves of natural gas and oil.
In September 1993, TSRG acquired certain oil and gas assets including
wells and pipelines, in exchange solely for shares of TSRG's authorized but
previously unissued common stock. These acquisitions are summarized below:
Tyler Construction Company, Inc.
In September 1993, TSRG acquired an interest equal to 65% of the total
outstanding shares of Tyler Construction Company ("Tyler Construction") from
Loren E. Bagley, TSRG's President and a director, and William F. Woodburn,
TSRG's Vice President of Operations and a director. Tyler Construction owns and
operates a natural gas gathering pipeline system serving the industrialized Ohio
Valley. Tyler Construction also owns and operates 27 miles of six-inch pipeline
and 10 miles of four-inch pipeline.
Tyler Construction's trunk line system consists of a six-inch pipeline
that begins at the town of St. Marys, West Virginia, located on the Ohio River
in the County of Pleasants in western West Virginia, and proceeds twenty-seven
miles due east to Bradden Station, West Virginia. Near Bradden Station, the
pipeline intercepts major transmission lines of Carnegie Natural Gas,
Consolidated Natural Gas and Columbia Natural Gas. An intercepting line
consisting of ten miles of four-inch pipeline begins at a point eight miles east
of St. Marys and proceeds north 10 miles to an industrial park located seven
miles south of Sistersville, West Virginia. At this point, gas is delivered to
OSI Specialties (formerly Union Carbide) and Consolidated Aluminum Corporation
of America under a marketing agreement with Sancho. Pursuant to its agreement
with Sancho, TSRG has the right to sell natural gas subject to the terms and
conditions of a 20-year contract, as amended, that Sancho entered into with Hope
Gas, Inc. ("Hope") in 1988. This agreement is a flexible volume supply agreement
whereby TSRG receives the full price which Sancho receives less a $.05 per Mcf
marketing fee paid to Sancho. The price of the natural gas is based upon the
residential gas index and the Inside F.E.R.C. Index.
Spencer Wells
Also in September 1993, TSRG acquired from Dennis L. Spencer all
rights, title and interest to six producing oil and gas wells located in West
Virginia, in exchange for TSRG shares. Five of the wells identified as "Fowler,"
"Goff," "Locke," "McGill" and "Workman" are situated in Ritchie County in a
proven reservoir field. The remaining well identified as "Spencer," is located
in Tyler County. All six wells were completed in 1991 and have been producing
oil and gas through the date hereof.
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<PAGE>
The Pipeline, Ltd.
Also in September 1993, TSRG acquired from Tyler Pipeline, Inc. ("Tyler
Pipeline") all rights, title and interest in the natural gas gathering pipeline
system known as The Pipeline, Ltd. (the name of the pipeline, not a legal
entity), a four-inch pipeline that begins at Twiggs, West Virginia, nine miles
east of St. Marys, West Virginia where it intercepts Tyler Construction's trunk
line system and proceeds due south for a distance of six miles. The Pipeline,
Ltd. system is used for purchasing gas from third party producers. Mr. Woodburn,
Vice President and a director of TSRG, is also President and owns 50% of Tyler
Pipeline. Mr. Bagley, President and a director of TSRG, also owns 50% of Tyler
Pipeline.
Ritchie County Gathering Systems, Inc.
In September 1993, TSRG acquired all the issued and outstanding capital
stock of Ritchie County Gathering Systems, Inc., a West Virginia corporation
("Ritchie County Gathering"). Ritchie County Gathering owns and operates a
four-inch natural gas gathering line which begins five miles south of Cairo,
West Virginia at Rutherford, and proceeds due south for 4.6 miles, crossing
Mellon Ridge and ending at Macfarlan Creek approximately 1/2 mile north of the
South Fork of the Hughes River. The Ritchie County Gathering pipeline is used
for purchasing gas from third party producers and delivering such gas to Hope.
Recent Business Developments
On March 6, 1998, TSRG entered into an agreement to purchase from GCRL
Energy, Ltd. ("GCRL") all of GCRL's interest in the Powder River Basin in
Campbell and Crook Counties, Wyoming, consisting of interests in five (5) wells,
four (4) of which are producing, interests in 30,000 leasehold acres, and
interests in approximately seventy-three miles of 3-D seismic data. The
properties include three producing fields from Minnelusa Sandstone and were
discovered on 3-D seismic. TSRG 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 TSRG's Debentures. TSRG obtained the $50,000 for the initial payment for the
properties from a loan in that amount from NGT on February 25, 1998.
The following table sets forth information concerning the existing oil
production per day of the producing wells located on the GCRL property.
<TABLE>
<CAPTION>
Name of Well Gross Bbls. Oil Per Day Net % to TSRG Net Bbls. to TSRG
- ------------ ----------------------- ------------- -----------------
<S> <C> <C> <C> <C>
Sagebrush Fed #1 100 48.8% 48
Sagebrush Fed #2 120 47.5% 57
Pinon Fee #1 45 51.2% 23
Sandbar Boley 31-36 130 2.2% 3
Sandbar State 1-36 375 14.2% 53
Sandbar State 2-36 100 33% 33
--- ----
TOTAL 870 217
</TABLE>
Current Business Activities
TSRG is actively engaged in the operation of its oil and natural gas
properties and in the transportation and marketing of its natural gas through
its transmission systems in West Virginia. Management has expressed its desire
to acquire additional oil and natural gas properties and to become more involved
in exploration and development, specifically in the Powder River Basin in
Wyoming. Management intends to continue to develop and increase the production
from the oil and natural gas properties that it currently owns.
Although TSRG will continue to transport and market natural gas through
its various pipelines, there are no current plans to acquire or to lay any
additional pipeline systems in 1998. Apart from the two wells drilled in the
Powder River Basin in Wyoming and Sistersville, West Virginia, TSRG has not
drilled any new wells in the last three years.
-16-
<PAGE>
Powder River Basin Wyoming
On December 28, 1996, TSRG purchased 420 acres in the Powder River
basin in the State of Wyoming for $50,000 from an unaffiliated third party.
Included in the purchase price was a condition that the previous owners would
provide all of the geologic and geophysical work as part of the purchase price.
On February 3, 1997 TSRG leased an additional 480 acres that joined with its
acreage position. The target formation is the Minnelusa "B1" sand. There
presently are no producing wells on such acreage and no proved reserves located
on the acreage owned by TSRG.
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 TSRG. 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 TSRG's acreage. Where water pressure is the cause of oil movement,
finding the apex of the oil bearing structure is critical. Drilling into the
apex of such a structure usually assures that a maximum amount of oil, and a
minimal amount of water, will be recovered from a well. Hitting such a zone
elsewhere than at the apex will result in a lower proportion of oil to water and
reduced rates of recovery.
TSRG completed the drilling of the Fowler 22-8 in January 1998 and
determined the well to be a dry hole and was plugged. TSRG intends to drill
additional wells on its acreage during 1998.
Powder River Basin Wyoming - Wolffe Prospect
On May 27, 1997, TSRG 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, TSRG participated in its share of the drilling of the Horizon 32-35 well.
The target formation was the Minnelusa "B1" sand. The well was determined to be
a dry hole and plugged.
Sistersville
Effective June 1, 1995, TSRG purchased approximately 2,200 acres in a
known producing field located near Sistersville, West Virginia for $100,000. The
Sistersville field has been in operation since the 1890's, although at a very
low level for the past ten years. To date the field has produced over 13 million
barrels of oil. The field contains portions of the Big Injun and Keener sands
formations, both well known oil and gas bearing formations, which are the zones
TSRG intends to explore. These formations are approximately 1,700 feet deep.
Recoverable reserves of oil in the field are estimated at several million
barrels.
TSRG has observed the success of oil and gas exploration in the
Sistersville field by other entities after expensive studies. The preliminary
studies conducted by the seller of the Sistersville property to TSRG indicating
substantial reserves were included in the purchase price paid by TSRG for the
Sistersville acreage. TSRG drilled a well on its Sistersville acreage in April
1997. TSRG is currently attempting to liquidate its position in the property.
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Vulcan Energy Corporation.
During March 1997, TSRG announced plans to cease operations and attempt
to sell Vulcan Energy Corporation ("Vulcan"), its 80% owned subsidiary, engaged
in the lease crude oil gathering and marketing in Southeast Texas. Financial
information with respect to discontinued operations is presented in Note 9 to
TSRG's consolidated financial statements.
Research and Development
TSRG has not allocated funds for conducting research and development
activities and, due to the nature of TSRG's business, it is not anticipated that
funds will be allocated for research and development in the immediate future.
Marketing
TSRG operates exclusively in the oil and gas industry. Natural gas
production from wells owned by TSRG 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 TSRG's pipeline network is sold either to
Sancho Oil and Gas Corporation ("Sancho") at the industrial facilities near
Sistersville, West Virginia, or to Hope, a local utility, on a year long basis
ending January 31, 1999 at a variable price per month per Mcf. Under its
contract with Sancho, TSRG has the right to sell natural gas subject to the
terms and conditions of a 20-year contract, as amended, that Sancho entered into
with Hope in 1988. This agreement is a flexible volume supply agreement whereby
TSRG receives the full price which Sancho charges the end user less a $.05 per
Mcf marketing fee paid to Sancho. The price of the natural gas is based upon the
greater of the residential gas commodity index and published Inside F.E.R.C.
Index, at TSRG's option, for the first 1,500 Mcf purchased per day by Hope and
thereafter the price is the Inside F.E.R.C. Index. The residential gas commodity
index does not directly fluctuate with the overall price of natural gas. The
Inside F.E.R.C. Index fluctuates monthly with the change in the price of natural
gas. While such option provides certain price protection for TSRG there can be
no assurance that prices paid by TSRG to suppliers will be lower than the price
which TSRG would receive under the Hope arrangement. Prior to June 1, 1996, the
price was the residential gas commodity index and when the market price of gas
rose above such index, TSRG's ability to purchase gas from third parties was
adversely effected.
TSRG sells its oil production to third party purchasers under
agreements at posted field prices. These third parties purchase the oil at the
various locations where the oil is produced.
Although management believes that TSRG is not dependent upon any one
customer, its marketing arrangement with Sancho Oil and Gas Corporation
accounted for approximately 47% of TSRG's revenue for the year ended December
31, 1997, and approximately 45% for the year ended December 31, 1996. This
marketing agreement is in effect until September 1, 2003. The majority of the
balance of the gas sold by TSRG is marketed under a one year contract with Hope.
The price under the agreement is set monthly and gas is sold as available with
no volume requirements or restrictions. Sales to this customer made up
approximately 49% of net revenues in 1997. No other single customer accounts for
more than 10% of TSRG's business.
In addition to the natural gas produced by TSRG's wells, it also
purchased approximately 700 Mcf of natural gas per day in 1997.
Competition
TSRG is in direct competition with numerous oil and natural gas
companies, drilling and income programs and partnerships exploring various areas
of the Appalachian and Powder River Basins and elsewhere, and competing for
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customers. Many competitors are large, well-known oil and gas and/or energy
companies, although no single entity dominates the industry. Many of TSRG's
competitors possess greater financial and personnel resources enabling them to
identify and acquire more economically desirable energy producing properties and
drilling prospects than TSRG. Additionally, there is competition from other fuel
choices to supply the energy needs of consumers and industry. Management
believes that there exists a viable market place for smaller producers of
natural gas and oil and for operators of smaller natural gas transmission
systems.
Under its contract with Sancho, TSRG has the right to sell natural gas
subject to the terms and conditions of a 20-year contract, as amended, that
Sancho entered into with Hope in 1988. This agreement is a flexible volume
supply agreement whereby TSRG receives the full price which Sancho receives less
a $.05 per Mcf marketing fee paid to Sancho. The price of the natural gas is
based upon indices that include the residential gas commodity charge of Hope and
the Inside F.E.R.C. Index. Were it not for the relationship between Hope and
Sancho, Hope would compete directly with TSRG for the sale of gas to certain
customers, specifically OSI Specialities, Inc. and Consolidated Aluminum of
America, Inc.
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 TSRG's capital
expenditures, earnings or competitive position.
Legislation and implementing regulations adopted or proposed to be
adopted by the Environmental Protection Agency ("EPA") and by comparable state
agencies, directly and indirectly affect TSRG's operations. TSRG is required to
operate in compliance with certain air quality standards, water pollution
limitations, solid waste regulations and other controls related to the
discharging of materials into, and otherwise protecting the environment. These
regulations also relate to the rights of adjoining property owners and to the
drilling and production operations and activities in connection with the storage
and transportation of natural gas and oil.
TSRG may be required to prepare and present to federal, state or local
authorities data pertaining to the effect or impact that any proposed operations
may have upon the environment. Requirements imposed by such authorities could be
costly, time-consuming and could delay continuation of production or exploration
activities. Further, the cooperation of other persons or entities may be
required for TSRG to comply with all environmental regulations. It is
conceivable that future legislation or regulations may significantly increase
environmental protection requirements and, as a consequence, TSRG's activities
may be more closely regulated which could significantly increase operating
costs. However, management is unable to predict the cost of future compliance
with environmental legislation. As of the date hereof, management believes that
TSRG is in compliance with all present environmental regulations.
TSRG's exploration and development operations are subject to various
types of regulation at the federal, state and local levels. Such regulation
includes the requirement of permits for the drilling of wells, the regulation of
the location and density of wells, limitations on the methods of casing wells,
requirements for surface use and restoration of properties upon which wells are
drilled, and governing the abandonment and plugging of wells. Exploration and
production are also subject to property rights and other laws governing the
correlative rights of surface and subsurface owners.
TSRG is subject to the requirements of the Occupational Safety and
Health Act, as well as other state and local labor laws, rules and regulations.
The cost of compliance with the health and safety requirements is not expected
to have a material impact on TSRG's aggregate production expenses. Nevertheless,
TSRG is unable to predict the ultimate cost of compliance.
Although past sales of natural gas and oil were subject to maximum
price controls, such controls are no longer in effect. In any case, the
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deregulated price of natural gas under current market conditions tends to be
substantially lower than most regulated ceilings. Other federal, state and local
legislation, while not directly applicable to TSRG, may have an indirect effect
on the cost of, or the demand for, natural gas and oil.
Employees
As of the date hereof TSRG employs ten people full-time, consisting of
two executives, three marketing and clerical person, and five production
persons. Following the Merger, each position will be evaluated as to the future.
Facilities
TSRG's operations currently occupy approximately 4,000 square feet of
office space in St. Marys, West Virginia, which it shares with its subsidies
Tyler Construction Company, Inc. and Ritchie County Gathering Systems, Inc. TSRG
leases an aggregate of approximately 4,000 square feet from an unaffiliated
third party under a verbal arrangement for $1,400 per month, inclusive of
utilities. Management believes that its present office facilities are adequate
for TSRG's current business operations.
Description of TSRG Property
TSRG operates and receives gas and oil revenues from 105 wells. Of
these wells, 85 gross wells (wells in which a working interest is owned) are gas
wells and represent 77 net wells. A net well is deemed to exist when the sum of
fractional ownership working interests in gross wells equals one. The remaining
20 gross wells are oil wells which represent 18 net wells. A total of 28 wells
are considered to have multiple completions, one or more completions in the same
bore hole. It is TSRG's policy to acquire existing wells and to continually
review its holdings and either add new wells or dispose of existing wells.
Seventy-five percent of TSRG's wells are shallow wells with depths of less than
3,000 feet. The remaining wells are Devonian shale wells with a depth of greater
than 4,000 feet. Appalachian Basin development wells have relatively high
success rates and are characterized by low permeability and low porosity,
thereby resulting in relatively low production rates and long producing lives of
over 25 years. TSRG's ownership interest varies from well to well with the
composite ownership working interest in the wells at approximately 91% at the
end of 1997.
TSRG's producing wells hold approximately 5,636 gross acres under
lease, which TSRG believes include a substantial number of promising development
prospects. In addition, TSRG's has approximately 800 acres under lease in
Wyoming. TSRG's Sistersville acreage consists of approximately 2,200 acres and
has been extensively explored by numerous oil and gas operators and has proved
undeveloped reserves.
TSRG's productive wells are situated on 5,636 gross acres (acres upon
which a working interest is owned) which represent 5,412 net acres. A net acre
is deemed to exist when the sum of fractional ownership working interests in
gross acres equals one.
Substantially all of TSRG's interests are held pursuant to leases from
third parties. Title to properties is subject to royalty, over-riding royalty,
carried, net profits, working and other similar interests and contractual
arrangements customary in the oil and gas industry, liens incident to operating
agreements, liens relating to amounts owed to the operator, liens for current
taxes not yet due and other encumbrances. TSRG believes that such burdens
neither materially detract from the value of such properties nor the respective
interests therein, or materially interfere with their use in the operation of
the business.
As is customary in the industry in the case of undeveloped properties,
little investigation of record title is made at the time of lease acquisition
(other than a preliminary review of local records). Investigations, including a
title opinion of local counsel, are generally made prior to the consummation of
an acquisition of larger properties and before commencement of drilling
operations.
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<PAGE>
Estimated Proved Reserves.
TSRG's properties consist essentially of the working and royalty
interests owned by TSRG in various oil and gas wells and leases located in West
Virginia. TSRG's proved reserves for the years ended December 31, 1997, 1996 and
1995 are set forth below:
December 31,
----------------------------------------------------
1997 1996 1995
-------- ----------- -----------
Natural Gas (MMcf)
Developed 979,662 875,705 988,000
Undeveloped 801,654 801,654 801,654
Total Proved 1,781,316 1,677,359 1,789,654
Crude Oil (MBbl)
Developed 30,870 16,343 19,070
Undeveloped 180,000 180,000 180,000
Total Proved 210,870 196,343 199,070
These estimates are bases primarily on the reports of Sam M. Deal &
Associates, independent petroleum engineers. Such reports are, by their very
nature, inexact and subject to changes and revisions. Proved developed reserves
are reserves expected to be recovered from existing wells with existing
equipment and operating methods. Proved undeveloped reserves are expected to be
recovered from new wells drilled to known reservoirs on undrilled acreage for
which existence and recoverability of such reserves can be estimated with
reasonable certainty, or from existing wells where a relatively major
expenditure is required to establish production. No estimates of reserves have
been included in any reports to any federal agency other than the Securities and
Exchange Commission. See SFAS 69 Supplemental Disclosures included as part of
the Consolidated Financial Statements of TSRG.
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 TSRG for the past three fiscal years.
Years ended December 31,
----------------------------------
Average sales price: 1997 1996 1995
- ------------------- ------ ------ ------
Gas (per mcf) $ 2.95 $ 3.56 $ 2.02
Oil (per bbl) 16.44 19.22 16.44
Average cost of production:
- ---------------------------
Gas (per mcf) 1.09 $ 1.02 $ 1.12
Oil (per bbl) 6.54 6.12 6.72
TSRG has not filed any estimates of total, proved net oil and gas
reserves with any federal authority or agency since the beginning of TSRG's last
fiscal year.
The following schedule sets forth the capitalized costs relating to oil
and gas producing activities by TSRG for the past three fiscal years.
Years ended December 31,
---------------------------------------------------
1997 1996 1995
-------------- -------------- ---------------
Proved oil and gas
producing properties
and related lease
and well equipment $4,122,311 $3,799,387 $3,733,388
Accumulated depreciation
and depletion (433,799) (407,934) (390,540)
--------- -------- ----------
Net Capitalized Costs $3,688,512 $3,391,453 $3,342,848
========== ========== ==========
The following schedule summarizes changes in the standardized measure
of discounted future net cash flows relating to TSRG's proved oil and gas
reserves.
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<PAGE>
Years ended December 31,
--------------------------------
1997 1996 1995
-------------- --------------- -------------
Standardized measure,
beginning of year $3,611,702 $4,063,885 $3,602,626
Oil and gas sales, net
of production costs (76,874) (452,183) (107,818)
Sales of mineral in place - - -
Quantity estimates made - - 569,077
---------- --------- --------
Standardized measure,
end of year $3,534,828 $3,611,702 $4,063,885
========== ========== ==========
TSRG does not anticipate investing in or purchasing assets and/or
property for the purpose of capital gains. It is TSRG's intention to purchase
assets and/or property for the purpose of enhancing its primary business
operations. TSRG is not limited as to the percentage amount of TSRG's assets it
may use to purchase any additional assets or properties.
TSRG Legal Proceedings
There are no material pending legal proceedings to which TSRG is a
party or to which any of its property is subject except as set forth below.
On May 14, 1997, a complaint entitled R&K Oil Company, Inc. vs. Vulcan
Energy Corporation and Trans Energy, Inc. was filed in District Court, Andrews
County, Texas, 109th Judicial District (File #14,430). The complaint alleges
TSRG owes R&K Oil Company, Inc. $126,978 as a result of business transacted by
Vulcan Energy Corporation. The complaint also seeks $500,000 for breach of
contract. TSRG denies all allegations and intends to vigorously defend its
position.
On March 12, 1997, a complaint entitled F. Worthy Walker vs. Loren
Bagley, William Woodburn, Mark Woodburn, Trans Energy, Inc. and Vulcan Energy
Corporation, was filed in the District Court of Dallas, Texas (# 9702304C). The
complaint alleges that TSRG breached certain contracts related to Mr. Walker's
employment with Vulcan Energy Corporation, and seeks punitive and exemplary
damages. TSRG denies all allegations and intends to vigorously defend its
position. Management believes that the results of the proceedings will not have
a material adverse effect on TSRG. On February 17, 1998, TSRG and the above
named defendants filed a countersuit against F. Worthy Walker alleging breach of
contract, fraud and fraudulent inducement, conversion, and breach of fiduciary
duty and seeks punitive damages. TSRG intends to vigorously pursue its
countersuit against Mr. Walker.
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THE MERGER
General
At the "Effective Date" of the merger (the date of the filing of the
Articles of Merger or a Certificate of Merger, as applicable, with the Secretary
of State of Nevada and the Secretary of State of Texas), NGT will be merged with
and into TSRG, with TSRG being the surviving corporate entity. As a result of
the Merger, the separate corporate existence of NGT will cease and TSRG will
succeed to all the rights and be responsible for all the obligations of NGT in
accordance with the Nevada Revised Statutes. Subject to the terms and conditions
of the Merger Agreement, 100% of the issued and outstanding shares of NGT Common
Stock and NGT Preferred Stock will be exchanged for fully registered TSRG Common
Stock at the Exchange Ratio. The "Exchange Ratio" shall be determined by
dividing 6,415,350 (three times the number of shares of TSRG Common Stock
outstanding) by the aggregate number of shares of NGT Common Stock and NGT
Preferred Stock outstanding immediately prior to the Effective Date. Thus,
assuming an aggregate of 6,135,417 shares of NGT Common Stock and NGT Preferred
Stock outstanding on the Effective Date, the Exchange Ratio shall be 1.04562
shares of TSRG Common Stock for each one share of NGT Common Stock or NGT
Preferred Stock. The Exchange Ratio would change if the number of outstanding
shares of TSRG Common Stock, NGT Common Stock or NGT Preferred Stock changed
prior to the Effective Date.
On the Effective Date, all issued and outstanding shares of NGT Common
Stock and NGT Preferred Stock shall, without any action on the part of the
holders thereof, automatically become and be converted into the right to receive
TSRG Common Stock at the Exchange Ratio. TSRG's transfer agent shall be
instructed to issue new certificates of TSRG Common Stock, based upon the
Exchange Ratio, to each of the shareholders of NGT, at the address listed in the
register of NGT shareholders. No fractional shares will be issued, rather each
fractional share resulting from application of the Exchange Ratio will be
rounded up to the next whole share. The Effective Date may not occur until all
conditions precedent set forth in the Merger Agreement are satisfied or waived,
to the extent permitted by law.
TSRG and NGT have agreed that the number of shares of TSRG Common Stock
issued to NGT shareholders in connection with the Merger shall represent at
least seventy five percent (75%) of the total number of issued and outstanding
shares of TSRG Common Stock immediately after completion of the Merger.
Accordingly, if between the date of the Merger Agreement and the Effective Date,
the number of issued and outstanding shares of TSRG Common Stock has increased,
the numerator of the Exchange Ratio shall be adjusted upward to the number which
represents 75% of the total number of issued and outstanding shares of TSRG
Common Stock immediately after the issuance thereof to NGT shareholders in
connection with the Merger. Calculation of the shares to be issued to NGT
shareholders and the 75% criteria does take into consideration any shares of
Common Stock to be issued by this Prospectus.
Based on 2,138,450 shares of TSRG Common Stock outstanding and,
assuming an aggregate of 6,135,417 shares of NGT Common Stock, a total of
approximately 6,415,350 shares of TSRG Common Stock will be issued to holders of
NGT Common Stock and Preferred Stock in accordance with the Exchange Ratio of
1.04562. Thus, taking into consideration the issuance of the 6,415,350 shares of
TSRG Common Stock pursuant to the Merger, immediately after the Effective Date,
TSRG will have approximately 8,553,800 shares of Common Stock outstanding,
without giving the effect of the rounding up of fractional shares.
Following the completion of the Merger, TSRG will have oil and gas
properties and production in the Appalachian, Rocky Mountain and Permian basins.
Pending finalization of the Merger, both TSRG and NGT will continue to be
operated in the ordinary course of business as separate entities. During the
period, Loren E. Bagley, President of TSRG and Michael Stewart, President of NGT
shall act as a special operating committee to coordinate all significant
operations of TSRG and NGT.
TSRG Financing Related to the Merger
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<PAGE>
In connection with the Merger, TSRG committed to raise a minimum of
$4,000,000 pursuant to a private placement of its securities. Accordingly, TSRG
made an offering of the "Debentures in an aggregate maximum amount of
$4,850,000. TSRG declared the offering closed on September 10, 1998. Gross
proceeds realized from the sale of the Debentures was $4,625,400. Shares
issuable upon conversion of the Debentures are subject to this Prospectus.
Interest shall accrue upon the date of issuance of the Debentures until
payment in full of the principal sum has been made or duly provided for. Holders
of the Debentures shall have the option, at any time, until maturity, to convert
the principal amount of their Debenture, or any portion of the principal amount
which is at least $10,000, into shares of TSRG Common Stock at a conversion
price for each share equal to the lower of (a) seventy percent (70%) of the
market price of TSRG Common Stock averaged over the five trading days prior to
the date of conversion, or (b) the market price on the issuance date of the
Debentures. Any accrued and unpaid interest shall be payable, at the option of
TSRG, in cash or in shares of TSRG Common Stock valued at the then effective
conversion price.
Pursuant to the terms of the Debentures, TSRG has agreed to file a
registration statement with the Commission to register the shares of TSRG Common
Stock into which the Debentures may be converted. This Prospectus forms a part
of that registration statement. Upon effectiveness of the registration
statement, the shares of TSRG 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 TSRG fails to file its registration statement
within forty-five (45) days from the closing of the Debenture offering, TSRG may
be obligated to increase by up to fifteen percent (15%) the number of shares
issuable upon conversion to each holder.
Proceeds from the sale of Debentures have been used to purchase the
assets of Gulf Canada Resources Limited in the Powder River Basin in Wyoming and
to retain the services of Corporate Relations Group, a public relations firm.
Conduct of Business Pending the Merger
Each of TSRG and NGT has agreed that until the Effective Date, except
as expressly contemplated or permitted by the Merger Agreement, indicated on its
disclosure schedule, required by law, or to the extent that the other party
shall otherwise consent in writing, each will conduct its business in the usual,
regular and ordinary course of business in all material respects, in
substantially the same manner as conducted prior to the Merger Agreement.
Further, each party will use all reasonable efforts to preserve intact their
present lines of business, maintain its rights and franchises and preserve its
relationships with customers, suppliers and others having business dealings with
it to the end that its ongoing businesses are not impaired in any material
respect at the Effective Date.
Each of TSRG and NGT has further agreed and appointed Loren E. Bagley
and Michael Stewart to act as an operating committee (the "Committee") to
coordinate all significant operations of TSRG and NGT until the Effective Date.
The activities and decisions to be coordinated include, but are not limited to,
contracts, drilling activities, hiring and staffing activities, expenditures and
commitments in excess of $20,000. Each of TSRG and NGT has further agreed that,
during the period from the date of the Merger Agreement and continuing until the
Effective Date, except as permitted by the prior consent of the Committee, TSRG
or NGT shall:
(i) conduct their affairs and business only in the ordinary
course of business;
(ii) not create or incur any additional liability, mortgage,
lien, pledge, hypothecation, share encumbrance or restriction of any
kind in excess of $20,000, nor make any capital expenditure, capital
addition or betterment, nor pay any obligation or liability in excess
of $20,000, absolute or contingent, except current liabilities shown on
NGT's financial Statements dated January 31, 1998, or enter into any
contract or commitment pursuant to which they are obligated to expend
in excess of $20,000;
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<PAGE>
(iii) not declare or pay any dividends on or make other
distributions in respect of any of their capital stock, or issue or
sell any warrants, rights or options to acquire any such shares, except
NGT shall have the unconditional right to issue up to a maximum of
1,600,000 additional shares of NGT Common Stock in exchange for fair
consideration, as determined in the sole discretion of NGT;
(iv) not amend in any material respect, or propose to amend
their respective certificates of incorporation, bylaws or other
governing documents, except to the extent required to comply with their
respective obligations under the Merger Agreement, required by law or
required by the rules and regulations of the NASD;
(v) maintain its properties, assets and business in good
condition and not sell, lease, encumber or otherwise dispose of, any of
its properties, assets or business which are material, except sales of
oil and gas in the ordinary course of business;
(vi) not pay, or agree to pay, conditionally or otherwise, any
bonus, extra compensation, pension or severance pay to any director,
shareholder, officer, consultant, agent or employee under any pension
plan or otherwise, or increase the compensation paid by them at January
31, 1998 to any officer, director, agent, consultant or employee;
(vii) duly comply with all material governmental laws, rules
and regulations applicable to them, their operations, business,
employees or assets and use reasonable commercial efforts to preserve
their business organizations intact;
(viii) except with respect to the Merger, not merge or
consolidate, or obligate to do so, with or into any other entity;
(ix) not enter into any transaction or take any acts which if
effected or performed prior to the date of the Merger Agreement, would
constitute a breach of the representations, warranties and agreements
contained therein; or
(x) not institute, settle or agree to settle any action or
proceeding before any court or governmental body.
Conditions Precedent to the Merger
The respective obligations of NGT and TSRG to effect the Merger are
subject, among other things, to the satisfaction or waiver on or prior to the
Effective Date of the following conditions:
(i) the representations and warranties of NGT and TSRG set
forth in the Merger Agreement that are qualified as to materiality
being true and correct on the date of the Merger Agreement, and each of
the representations and warranties of the parties that is not so
qualified being true and correct in all material respects on the date
of the Merger Agreement, and the receipt by the respective parties of a
certificate of the other parties to such effect;
(ii) the delivery by each party of their respective Disclosure
Schedules and all other schedules and exhibits to the Merger Agreement,
in a form and substance reasonable satisfactory to each party and such
schedules shall not disclose any material adverse change from the
financial statements of the respective parties delivering said
schedules;
(iii) the receipt from the Commission of approval of the
Registration Statement including the Joint Proxy Statement / Prospectus
which is to be mailed to the shareholders of TSRG and NGT, and the
approval by the shareholders of TSRG and NGT of the Merger and Merger
Agreement in accordance with the Registration Statement; and
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<PAGE>
(iv) the continued listing of TSRG's securities on The Nasdaq
SmallCap Market following consummation of the Merger.
The obligations of TSRG to effect the Merger are also subject to the
satisfaction of, or waiver by TSRG, on or prior to the Effective Date of the
following conditions:
(i) NGT shall have performed in all material respects its
obligations under the Merger Agreement and required to be performed by
it at or prior to the Effective Date;
(ii) TSRG shall have received a minimum of $4,000,000 of
bridge financing as set forth in the Merger Agreement;
(iii) TSRG shall have successfully restructured all of its
indebtedness which is personally guaranteed by officers or directors of
TSRG to eliminate such personal guarantees;
(iv) there shall not have accrued or been threatened any
material adverse effect, including as a result of any threatened or
pending action, suit, proceeding or investigation, on the financial
condition, assets, business, prospects or results of operations of NGT;
and
(v) completion by TSRG of its due diligence investigation of
NGT in scope, detail, substance and result reasonably satisfactory to
TSRG prior to the Effective Date.
The obligations of NGT to effect the Merger are also subject to the
satisfaction of, or waiver by NGT, on or prior to the Effective Date of the
following conditions:
(i) TSRG shall have performed in all material respects its
obligations under the Merger Agreement and required to be performed by
it at or prior to the Effective Date;
(ii) NGT shall have either purchased or caused all holders of
its Series 1994-A Preferred Stock to convert such preferred stock into
NGT Common Stock;
(iii) NGT shall have terminated its Agreement and Plan of
Share Exchange with Lyric Energy, Inc. and it shall have sold or
otherwise disposed of all shares of Lyric Energy, Inc. common stock
owned by NGT;
(iv) there shall not have accrued or been threatened any
material adverse effect, including as a result of any threatened or
pending action, suit, proceeding or investigation, on the financial
condition, assets, business, prospects or results of operations of
TSRG; and
(v) completion by NGT of its due diligence investigation of
TSRG in scope, detail, substance and result reasonably satisfactory to
NGT prior to the Effective Date.
BUSINESS OF NGT
NGT is an energy company engaged in the exploration, development,
acquisition and production of crude oil and natural gas. All of NGT's properties
and its subsidiary's properties and operations are currently located in the
States of Texas and Wyoming. As of March 31, 1998, NGT had estimated net proved
reserves of approximately 658 MBbls of oil and 15 MMcf of natural gas, or an
aggregate of 661 MBOE with a PV-10 value based on the prices being received on
March 31, 1998 of $4.9 million. Because of the recent wide fluctuations of oil
prices, management has also requested of Pearl Petroleum Engineering ("PPE") to
evaluate these same reserves based on the $19 per bbl received just 5 months
earlier. Based on that engineering NGT had estimated net proved reserves of 682
MBbls of oil and 18 MMcf of natural gas, or an aggregate of 685 MBOE with a PV-
10 value of $7.9 million.
From April 30, 1997 through March 31, 1998, NGT wrote down its
estimated net proved reserves by 529 MBOE at an average cost of approximately
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<PAGE>
$7.46 per BOE based on the March 31, 1998 prices. Average daily production
increased from 15 BOE per day in the last fiscal year ended April 30, 1997 to
over 75 BOE per day as of March 31, 1998. This major increase was due to the
development drilling and acquisitions of several properties in the last quarter
of fiscal 1997 and subsequent thereto. NGT currently has 4 new wells completed
and shut in awaiting electricity and gas lines prior to commencing production.
NGT's Business Strategy
NGT's objective is to build shareholder value through consistent growth
in per share reserves, production and the resulting cash flow and earnings. To
accomplish this, NGT had been targeting properties, which are expected to
produce secondary recoveries of oil and gas through the use of new technologies,
waterfloods or additional drilling. These types of properties can usually be
acquired on more favorable terms than properties in primary production, although
lease operating costs for these properties are higher upon acquisition than
properties in primary production. Recent developments in the price of oil have
presented NGT with new opportunities in the field of prime properties for
exploration. NGT will be concentrating more on developing its considerable
undeveloped and unproven gas leases it currently holds in Crockett County, Texas
and less on the older properties at these price levels. From April 30, 1995 to
April 30, 1997, NGT's production declined from an average of 33.7 BOE per day to
15 BOE per day. This was mainly due to a lack of available capital for well
reworks. Since January 31, 1997, NGT has been acquiring additional properties
and reworking its existing properties using cash invested by the two directors
of NGT.
NGT has contracted with Wagman Petroleum, Inc. ("WPI") to operate its
properties. WPI is approximately 45 percent owned by Brent A. Wagman, a former
officer and director of NGT. Mr. Wagman is also a director and president of WPI.
See "Certain Relationships and Related Transactions."
Market and Dividend Information for NGT
There is currently no public trading market for NGT Common Stock or NGT
Preferred Stock. As of September 8, 1998, there were 181 holders of record of
NGT Common Stock and 2 holders of NGT's Series 1994-B Preferred Shares.
NGT's Office Facilities
NGT leases approximately 2,000 square feet of office space in Dallas,
Texas, for its executive offices. NGT also has a month-to-month agreement for
yard space in Abilene, Texas, where it stores excess pipe, valves and fittings.
NGT believes that its current facilities are adequate for its anticipated needs
during the next twelve months.
NGT's Oil and Gas Properties
NGT's exploration, development and acquisition activities are focused
in two areas of Texas and in Northeast Wyoming. Set forth below is information
concerning each of NGT's and its wholly-owned subsidiary's major areas of
operations based upon the estimated net proved reserves as of March 31, 1998.
<TABLE>
<CAPTION>
Oil Gas MBOE PV-10 Value
--- --- ---- -----------
(MBbls) (MMcf) Amount Percent (In Thousands) Percent
------- ------ ------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
North Texas 401 0 401 61 2,968 61
Region
Central West 257 15 260 39 1,918 39
Texas Region
Northeast 0 0 0 0 0 0
Wyoming
</TABLE>
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<PAGE>
North Texas Region. NGT acquired Interior Energy, Inc., a Texas
corporation ("Interior") in April 1997. Interior owns two fields with an
aggregate of 75 wells located in the north Texas county of Wilbarger. Both
properties had been shut-in for the past few years by the previous operators.
Interior owns 100 percent of the working interest in both fields. The larger
property is known as the East Milham Sand Unit covering approximately 1,026
acres. This property contains approximately 45 wells including the disposal and
injection wells. It was originally drilled in the late 1920's by several major
oil companies. The producing formation is a sand that varies in thickness from 5
feet to over 35 feet. The property was unitized and waterflooded in the early
1960's. Records indicate that the water "broke through" or channeled through the
oil prematurely leaving behind a large amount of oil. Core analysis of the sand
indicates that there were three feet of sand which had permeability in excess of
900 millidarcies which created an excellent path for the water to channel
through. An independent engineering report prepared by Pearl Petroleum
Engineering Consulting Service of Abilene, Texas ("PPE") estimates that in
excess of 1 MMBbls of oil should still be recoverable using polymers to block
water channels and change the flood pattern. Due to the recent drop in oil
prices, this property accounts for the largest portion of reserves which NGT is
writing down. Preliminary results from polymer injection have been inconclusive
and NGT i reevaluating the prospect in terms of the use of other technology. NGT
is currently in the process of permitting new injection wells and setting up a
pilot flood in the south section of the field. This project accounted for a
substantial percentage of the operating expenses incurred by NGT in its last
fiscal year and during the first two quarters of this fiscal year. The reworks
on this project are now substantially complete.
The other property in North Texas is known as the Waggoner M lease.
This property has multiple pays and produced over 300,000 barrels of oil while
in primary production. A study by Ryder Scott in 1958 regarding the feasibility
of waterflooding the property showed the property to be a very good candidate
for secondary recovery. The operators at the time chose not to implement the
plan and records indicate that they completed wells into other pays instead. NGT
is currently investigating water flood patterns in anticipation of commencing
polymer injection. Currently seven wells are producing five to seven BPD out of
the 30 wells on the property. No reserves have been assigned to this property at
this time. If the polymer injection is successful, NGT hopes to recover as much
as 150,000 barrels of oil from the property, but there can be no assurance of
any significant recovery.
Central West Texas Region. As of March 31, 1998, NGT had acquired
several leases located in Runnels County, Texas, just north of Norton, Texas.
The purchase of this property included six adjacent leases totaling 1,208 acres.
The principal interest here is the Lower Palo Pinto Limestone and the Gardner
Sandstone. The Palo Pinto formation produced extensively during the 1960's and
under primary recovery produced over 3,000,000 barrels of oil. The formation
produces large volumes of water along with the oil. The Wilde #1 well was
completed in this formation in December 1996 and had an initial daily production
rate of 80 barrels of oil and 60 barrels of water. Research and engineering by
independent sources indicated that the field was plugged while many of the wells
were still producing at rates of over 10 barrels of oil per day. Information has
also been found which suggests that the field may be a good candidate for
pressure maintenance or waterflood. PPE also located ten undeveloped locations
similar to the Wilde #1 location. NGT has drilled an injection well and four
exploratory wells and a test well for the Palo Pinto in this field since
acquiring it. All the wells found the Lower Palo Pinto Limestone to be
productive. At this time, two wells have been completed into a deeper payzone
called the Gardner Sandstone which was discovered to hold substantial gas and
oil. The first well tested with a potential of 1,420 Mcf per day absolute open
flow and is currently shut-in awaiting a gas pipeline. The second well has been
completed in the Gardner Sandstone swab tested 30 to 50 Bbls oil, 120 Bbls water
and estimated 75 to 100 MCF of gas per day. This well is currently awaiting
electricity. There are two wells still awaiting completion (pumpjacks to be set)
prior to beginning production. NGT hopes to inject the water produced from the
lower levels into the Palo Pinto Limestone and test to see if a secondary
recovery is feasible.
In July 1997, NGT acquired a lease on the Miller Ranch located in
Crockett County, Texas. The lease gives NGT three years to drill the first well
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<PAGE>
and up to five years to fully develop a 1,280 acre lease. Additionally, the
lease gives NGT an option on approximately 18,000 acres owned by the Miller
Ranch adjacent to the leased acreage. The option exercise price is $100 per
acre. The property is located in the Ozona Canyon Sand gas field. U.S.
Department of Energy reports production from wells in this field average .7 Bcf
of gas from the Canyon Sand formation, although there can be no assurance that
this property will produce at that rate. Management believes approximately 6,000
acres of the property may be productive from the Canyon Sand. Additionally,
Amoco Oil Company currently operates several wells producing from the
Ellenburger formation at approximately 13,000 feet deep. These wells have
cumulative production from .1 Bcf to over 19 Bcf of gas per well. NGT's lease
covers all depths. Although there are direct offset drilling locations on the
lands covered by the option, NGT has assigned no reserves to this property
because the exercise of the option would require additional capital and no
source for such capital has been identified.
During August 1997, NGT loaned $160,000 to Kodiak Corporation for
planned drilling activities. At the end of September 1997, NGT converted its
loan to a forty percent equity ownership interest in Kodiak. In November 1997,
NGT exchanged its equity interest in Kodiak for an equity interest in Mirae LLC,
which was formed to hold a royalty interest in some of Kodiak's production and
some of Kodiak's oil and gas leases, as well as other leases. Mirae currently
holds the royalty interest and a number of leases in Wilbarger County, and has
commenced drilling on one of the leases using funds loaned by NGT. NGT has not
assigned any reserves to the Mirae LLC interests.
NGT also owns working interests in approximately 30 wells located on
various leases in Coke, Runnels and Coleman counties in Texas. The depths of
these wells range from 2,100 feet to 5,600 feet. These wells are classified as
strippers and represent a small part of the NGT's total reserves.
Northeast Wyoming Region. In December 1997, NGT entered into a joint
venture agreement with TSRG for the formation of a limited liability company
called Sundance Producers LLC to own oil and gas properties for joint
development. TSRG contributed to Sundance Producers all of its leasehold
interests in approximately 900 acres in the Powder River Basin in Crook County,
Wyoming. The target formation is the Minnelusa "B1" sand. TSRG performed 3-D
seismic surveys on the property which have revealed two separate structures in
the target formation at a depth of 5,850 feet. Sundance Producers completed a
well into one of the structures which turned out to be a dry hole. NGT is
obligated to provide funds to Sundance Producers to drill a well into the second
structure. NGT has not assigned reserves to this property pending results from
the second hole.
Estimated Net Proved Reserves
NGT has employed PPE to evaluate 100 percent of its PV-10 values
acquired since March31, 1998. PPE also evaluated PV-10 values as of July 1994
which have been used as the basis of the PV-10 values for the periods prior to
March 31, 1998. The following table reflects summary information with respect to
the estimates of NGT's net proved oil and gas reserves for each of the fiscal
years ended April 30, 1996 and 1997 and March 31, 1998.
Fiscal Year Ended
---------------------------------------------------
April 30, 1996 April 30,1997 March 31,1998
-------------- ------------- -------------
RESERVE DATA:(1)
Oil (MBbls).............. 298[*] 1,161[*] 658[*]
Gas (MMcf)............... 211[*] 156[*] 15[*]
MBOE..................... 333[*] 1,187[*] 661[*]
PV-10 Value $2,708[*] $8,812[*] $4,886[*]
(thousands)..............
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<PAGE>
(1) No values were used or included for the Miller Ranch prospect or the
Waggoner M leases. Values for the year ended April 30, 1997 used $19
per barrel of oil and $1.80 per Mcf of gas, and the year ended April
30, 1996 used $17.00 per barrel of oil and $1.80 per Mcf of gas. The
valued for March 31, 1998 used $13.83 to $14.31 per barrel for oil and
$1.50 to $2.61 per MCF of gas.
Production, Price and Cost History
The following table summarizes the average net daily volumes of oil and
gas produced from properties in which NGT held an interest during the periods
indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
April 30, 1996 April 30, 1997 March 31, 1998
-------------- -------------- --------------
OPERATING
DATA:
<S> <C> <C> <C>
Net production:
Oil................ 6,004 3,833 14,048
Gas (Mcf).......... 17,210 10,316 17,183
MBOE............... 8,872 5,552 16.9
Average net
daily production:
Oil................ 16 11 38
Gas (Mcf).......... 47 28 47
MBOE............... 24 16 .047
Average sales
price:
Oil (per Bbl)...... 17.53 20.71 17.28
Gas (per Mcf)...... 1.55 2.12 2.10
Additional per
BOE data:
Average
lifting cost............ 12.89 17.73 25.89(1)
</TABLE>
(1) A total of 61 percent of the operating costs were associated with the
costs associated with setting up the pilot flood on the Milham Sand
Unit and reworking costs on the Waggoner M leases. During this time NGT
realized very little in the way of production and or revenues from
these leases. Work on those properties has substantially been completed
and NGT does not foresee having the large expenditures in the future.
See "NGT Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Productive Wells
The following table sets forth information regarding the number of
productive wells in which NGT held a working interest as of the end of each of
the fiscal years April 30, 1996 and 1997 and March 31, 1998. Productive wells
are either currently producing wells or shut-in wells capable of commercial
production. One or more completions in the same bore hole are counted as one
well. A well is categorized under state reporting regulations as an oil well or
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<PAGE>
a gas well based upon the ratio of gas to oil produced when it first commenced
production, and such designation may not be indicative of current production.
Year Ended April 30, Year ended March 31,
-------------------- --------------------
1996 1997 1998
-------------------- ------------------- -----------------
Gross Net Gross Net Gross Net
Oil......... 20 10.7 90 83.1 92 86
Gas......... 3 2.1 2 1.1 1 1
-- ---- -- ---- ---- ---
Total 23 12.8 92 84.2 93 87
Drilling Activities
The table below sets forth the number of new wells drilled in which NGT
held a working interest for the last three fiscal years.
<TABLE>
<CAPTION>
Year Ended April 30, Year Ended March 31,
-------------------- --------------------
1996 1997 1998
--------------------------------------------------------------------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Development
Oil................ 0 0 0 0 2 2
Gas................ 0 0 0 0 1 1
Dry................ 0 0 0 0 2 2
--- --- --- --- --- --
Total 0 0 0 0 5 5
Exploratory
Oil................ 0 0 0 0 0 0
Gas................ 0 0 0 0 0 0
Dry................ 0 0 0 0 2 .8
--- --- --- --- --- ---
Total 0 0 0 0 2 .8
Grand Total 0 0 0 0 7 5.8
</TABLE>
All of NGT's drilling activities and completion activities are
conducted on a contract basis with outside operators and drilling contractors.
NGT owns no drilling equipment or workove r rigs.
Leasehold and Other Interests
The following table sets forth the gross and net acres of developed and
undeveloped oil and gas leases and lease options held by NGT as of the end of
each of the last three fiscal years. Undeveloped acreage includes leasehold
interest which may already have been classified as containing proved undeveloped
reserves.
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<PAGE>
Developed Undeveloped
Acreage (1) Acreage (2) Total
----------- ----------- -----
Gross Net Gross Net Gross Net
4/30/96 1,415 551 0 0 1,415 551
4/30/97 2,252 1,648 1,088 1,087 3,340 2,735
3/31/98 2,287 1,815 12,200 10,486 14,487 12,301
(1) Developed acreage is acreage assigned to producing wells for the
spacing unit of the producing formation. Developed acreage in certain
of NGT's properties that include multiple formations with different
well spacing requirements may be considered undeveloped for certain
formations, but have been included only as developed acreage in the
presentation above.
(2) Undeveloped acreage is lease acreage 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 such acreage
contains estimated net proved reserves.
NGT Management's Discussion And Analysis of Financial Condition And Results of
Operations
Overview
NGT was incorporated in April 1993 and commenced operations in June
1993. NGT acquired interests in various oil and gas properties in February 1994
and June 1994 and has been active in the oil and gas industry since that time.
During fiscal year 1998, NGT changed its year end to March 31.
NGT uses the full cost method of accounting for its oil and gas
producing activities and, accordingly, capitalized all costs incurred in the
acquisition, exploration and development of proved oil and gas properties,
including the costs of abandoned properties, dry holes, geophysical costs and
annual lease rentals. In general, sales or other dispositions of oil and gas
properties are accounted for as adjustments to capitalized costs, with no gain
or loss recorded.
Results of Operation
The following table sets forth for the periods indicated the percentage
of total revenues represented by certain line items included in NGT's Statements
of Operations.
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<PAGE>
Year ended March 31, Year Ended April 30
1998 1997
------ ------
Total revenues 100% 100%
Total expenses 1,260 347
(Loss) from operations (1,160) (247)
Net interest (expense) (111) (57)
Loss on impairment of assets (108) -
--
Loss on debt extinguishment (64) -
Net (loss) (1,443) (304)
Comparison of Years Ended April 30, 1997 and March 31, 1998
Oil and gas revenues. Oil and gas revenues increased by $186,846, or
185%, to $287,833 for the year ended March 31, 1998 compared with $100,987 for
the year ended April 30,1997. Production increased from 3,833 Bbls of oil and
10,316 Mcf of gas in the year ended April 30, 1997 to 14,048 Bbls and 17,183 Mcf
of gas in the year ended March 31, 1998. The increase in production resulted
from the exploration and development drilling, acquisitions and reworking of
older properties. Average prices for oil and gas decreased from $20.71 Bbl and
$2.12 per Mcf in the 1997 period to $17.28 per Bbl and $2.10 per Mcf in the 1998
period.
Lease operating expenses. Lease operating expenses for the year ended
March 31,1998 were $442,963, an increase of $339,317, compared with $103,646 for
the year ended April 30,1997. Lease operating expenses for the 1998 period were
154 % of oil and gas revenues compared with 97 % of oil and gas revenues for the
1997 period. The increase in lease operating expenses as a percentage of revenue
was due to extraordinary costs of setting up the pilot floods at the Milham Sand
Unit waterflood and the Waggoner M lease. Both fields are located in the North
Texas Vernon area. NGT has completed most all of that work at this time and does
not expect to encounter similar costs in the foreseeable future. These expenses
accounted for approximately 60% of the lease operating expenses for fiscal 1997.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization ("DDA") increased by $202,090 to $245,266 for the year ended March
31, 1998 compared with $43,176 for the year ended April 30,1997. DDA was 85% of
oil and gas revenue for the 1998 period and 43 % of oil and gas revenue for the
1997 period. NGT recorded a depletion cost of $13.07 per BOE for the 1998 period
compared with $7.03 per BOE for the 1997 period. This difference, caused by the
acquisition by NGT of substantial additional reserves during the 1997 period at
a higher cost per barrel than existing reserves, accounted for the increase in
DDA as a percentage of revenue, partially offset by higher volume of sales for
production during the 1997 period.
Professional fees. Professional fees increased by $184,983, or 413%, to
$229,799 for the year ended March 31, 1998, compared with $44,816 for the year
ended April 30, 1997. The increase was primarily due to legal and accounting
services with respect to NGT's pending merger with Trans Energy, Inc., the legal
and accounting services with respect to the filings with Lyric Energy, Inc. and
litigation involving Terrence Huston and/or Mobile Americlean, Inc.
Management and consulting fees. Management and consulting fees
increased by $10,000, or 8.5%, to $125,000 for the year ended March 31, 1998
compared with $115,000 for the year ended April 30, 1997. These fees were
attributable to financial advisory services rendered.
Rent. Rent increased $20,397, or 281%, to $27,646 for the year ended
March 31, 1998 compared with $7,249 for the year ended April 30, 1997 due to
NGT's move to larger offices.
Director Fees. No Directors fees paid for the year ended March 31,
1998. Fees of $20,833 were paid for the year ended April 30, 1997.
Travel. Travel expenses for the year ended March 31, 1998 of $39,866
were attributable to management's meetings with business partners and
professionals. Travel expenses for the year ended April 30, 1997 were $7,610.
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<PAGE>
Other expenses. Other expenses for the year ended March 31, 1998
increased $38,202, or 386%, to $48,098 compared with $9,896 for the year ended
April 30, 1997 primarily due to additional expenses incurred while traveling or
entertaining professionals with regards to advice on merger candidates.
Interest expense. Interest expense for the year ended March 31, 1998
increased $346,563, or 592%, to $405,049 compared with $58,486 for the year
ended April 30, 1997 primarily due to assumption of the $3 million note in
connection with NGT's acquisition of Interior Energy, Inc. and loans made to NGT
by Wagman Petroleum, Inc.
Net loss. Net loss for the year ended March 31, 1998 increased
$4,829,089 or 1,572%, to $5,136,194 compared with $307,105 for the year ended
April 30, 1997 primarily due to a write down of oil and gas values due to the
price drop, a re-evaluation of recoverable reserves, increased depreciation,
depletion and amortization and increased professional fees, management and
consulting fees and travel and other expenses associated with NGT's
reorganization with Trans Energy and more aggressive acquisitions of oil and gas
properties, partially offset by lower director fees, the lack of offering costs,
and increased revenues.
Comparison of Three Month Periods Ended June 30, 1998 and June 30, 1997
Results of Operations
The following table sets forth for the periods indicated the percentage
of total revenues represented by certain line items included in NGT's Statements
of Operations.
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
-------------- -------------
Total revenues 100% 100%
Total expenses 405 463
(Loss) from operations (305) (363)
Net other expense 13 176
Less unpaid dividend 9 11
Net (loss) (327) (550)
Results for the three month period ended June 30, 1998 included
operating revenues of $62,738 as compared to $59,119 for the comparable period
ended June 30, 1997. This six percent (6%) increase in revenues is primarily
attributable to an increase in oil and gas production.
Expenses for the period ended June 30, 1998 decreased from $273,527
during the corresponding 1997 period to approximately $254,157. Production
expenses and taxes decreased by $66,983, or fifty two percent (52%), primarily
due to extraordinary costs of setting up the pilot water flood project at the
Milham Sand Unit located at the Waggoner M Lease during 1997.
The net loss decreased from $318,645 during the three months ended June
30, 1997 to $199,287 during the comparable 1998 period, primarily as a result of
the aforementioned decrease in production expenses and a substantial decrease of
$96,862 in interest expenses.
The net loss is also attributable to a continuance of relatively low
prices for crude, liquid hydrocarbons and natural gas during the three month
period commencing April, May and June of 1998. The spring months are normally
periods of low demand and seasonal prices for such products prevail.
Liquidity and Capital Resources
On June 30, 1998, NGT had $4,808 in cash on hand and net working
capital deficit of $803,428. This compares with $14,261 in cash on hand and a
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<PAGE>
net working capital deficit of $320,145 as of March 31, 1998. NGT's primary
sources of liquidity are proceeds from stock issuances, advances from related
parties and borrowings. NGT's principal cash needs are for the acquisition,
exploration and development of oil and gas properties. NGT anticipates
continuing to raise capital during the next twelve (12) months through the sale
of securities and/or through bank loans in order to fund its planned activities
and to repay WPI for work performed. The amount of future capital expenditures
will depend upon a number of factors including the impact of oil and gas prices
on investment opportunities, the availability of capital and investor perception
of the Merger.
NGT's net cash provided by operating activities decreased $6,897 to
$104,923 for the three months ended June 30, 1998 compared with $111,820 for the
three months ended June 30, 1998, primarily due to much larger accounts payable
financing during the 1998 period, partially offset by the larger net loss for
the 1997 period. Net cash used in investing activities decreased $1,158,701 to
$104,568 for the three months ended June 30, 1998 compared to $1,263,269 for the
three months ended June 30, 1997 due to the purchases of lease and well
equipment during the 1997 period.
Net cash used by financing activities was $9,808 for the three months
ended June 30, 1998, attributed to repayments to related parties, partially
offset by loans and advances from related parties, compared with net cash
provided of $1,632,125 for the three month period ended June 30, 1997
attributable to proceeds from the issuance of stock.
NGT's accounts payable balance significantly increased during the year
ended March 31, 1998 and the three months ended June 30, 1998. The increase,
also attributable to issuances of stock and to advances, was primarily due to
drilling activities. However, most of the increase was paid off by issuing NGT
Common Stock prior to the end of the March 31, 1998 fiscal year. As of June 30,
1998, the total accounts payable includes $522,496 payable to Wagman Petroleum,
Inc. ("WPI") for drilling and lease operating expenses incurred since February
1997, and an additional $206,958 payable to a related party. At this time, WPI,
a related party due to common management, is content to wait for NGT to be able
repay these costs. NGT anticipates raising additional capital in the next twelve
months through a public or private sale of securities and/or through bank loans
in order to fund its planned activities and to repay WPI for the work already
done. Timing for that offering is dependent on several factors. There is no
assurance that NGT will be successful in raising the capital necessary to repay
past costs as well as to fund activities planned for the future. Should NGT fail
to raise the necessary capital to fund its planned activities, cash flows are
not expected to be sufficient to fund them and portions of the assets would, in
all likelihood, not be realizable. No accounting adjustments have been made to
reflect this outcome, which is not anticipated.
Capital expenditures. NGT's expenditures for the purchase of fixed
assets and oil and gas properties are the primary use of its capital resources.
NGT has committed to contribute up to $700,000 for the drilling of two wells in
the Powder River Basin by Sundance Producers LLC, a limited liability company
owned fifty percent by NGT and fifty percent by TSRG (see "NGT's Oil and Gas
Properties"). NGT's current business plan anticipates additional material
capital expenditures during the fiscal year ended March 31, 1999, subject to the
availability of capital. NGT raised $335,000 through the sale of 47,857 shares
of common stock to its president during the year ended March 31, 1998, and
raised an additional $1,150,000 through the sale of 191,667 shares to unrelated
parties in December 1997. NGT also agreed to issue 1,600,000 shares for of
common stock for settlement of accounts payable and notes payable totaling
$3,630,190 held by related parties. This capital will be used to fund
operations, for capital expenditures and to pay off some of NGT's debt. As
discussed above, NGT anticipates raising additional capital in the next twelve
months. The amount of future capital expenditures will depend upon a number of
factors including the impact of oil and gas prices on investment opportunities,
the availability of capital and the success of its development activity which
could lead to funding requirements for further development.
Effects of Inflation and Changing Prices
NGT's results of operations and cash flows are affected by changing oil
and gas prices. At present, NGT does not expect that changes in the rates of
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<PAGE>
overall economic growth or inflation will significantly impact product prices in
the short-term. While gas prices seem most dependent on weather in North America
and corresponding usage, oil prices are more subject to global economic forces
and supply. NGT cannot predict the extent of any such effect. If oil and gas
prices increase, there could be a corresponding increase in the cost to NGT for
drilling and related services as well as an increase in revenues.
Year 2000
Year 2000 issues may arise if computer programs have been written using
two digits (rather than four) to define the applicable year. In such case,
programs that have time-sensitive logic may recognize a date using "00" as the
year 1900 rather than the year 2000, which could result in miscalculations or
system failures.
NGT has not completed its assessment of the Year 2000 issue, but
currently believes that costs of addressing the issue will not have a material
adverse impact on NGT's financial position. NGT has not automated many of its
operations with information technology ("IT") systems and non IT systems because
of the size of NGT, and presently believes that NGT's existing computer systems
and software will not need to be upgraded to mitigate the Year 2000 issues. NGT
has not incurred any costs associated with its assessment of the Year 2000
problem. In the event that Year 2000 issues impact NGT's accounting operations
and other operations aided by its computer system, NGT believes, as part of a
contingency plan, that it has adequate personnel to perform those functions
manually until such time that any Year 2000 issues are resolved.
NGT believes that the third parties with whom NGT has material
relationships will not materially be affected by the Year 2000 issues as those
third parties are relatively small entities which do not rely heavily on IT and
non-IT systems for their operations. However, if NGT and third parties upon
which it relies are unable to address any Year 2000 issues in a timely manner,
it could result in a material financial risk to NGT, including loss of revenue
and substantial unanticipated costs. Accordingly, NGT plans to devote all
resources required to resolve any significant Year 2000 issues in a timely
manner.
Officers and Directors of NGT
The following table sets froth the names, ages and offices held with
NGT by its directors and executive officers
Name Position Director Since Age
---- -------- -------------- ---
Michael Stewart President, Chairman of September 1998 48
the Board and Director
Warren Donohue Secretary and Director October 1993 57
All directors hold office until the next annual meeting of shareholders
and until their successors have been duly elected and qualified. There are no
arrangements with respect to election of directors of NGT. No directors or
officers of NGT received any compensation for serving in those capacities during
NGT's last three fiscal years.
The business experience of each person listed above for the past five
years is as follows:
Michael Stewart. Mr. Stewart has been the President, Chairman of the
Board and a Director since September 1998. Mr. Stewart was the Vice President of
NGT from June 1997 until September 1998. Mr. Stewart has served as Vice
President of Administration for Mrs. Baird's Bakeries, Inc. since 1995. From
1985 until 1995, Mr. Stewart worked with the Chemical Group of Occidental
Petroleum, serving in various senior level executive positions both in
divisional and corporate staff. He received a B.A. degree in Pre-Law from the
University of Alabama in 1975 and he did graduate work in finance at the
University of Georgia in 1978.
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<PAGE>
Warren Donohue. Mr. Donohue has been a Director of NGT since October
1993 and was appointed Secretary in August 1996. Mr. Donohue held various
positions with Volvo Cars of North America, Inc., from November 1958 until
December 1996, at which time he was Sales Development Manager. Mr. Donohue also
is President of Donohue Enterprises, inc., a marketer of women's bridal apparel.
Mr. Donohue serves as a director of Lyric International, Inc., a public company
engaged Primarily in the oil and gas business. He serves as a director of Haber,
Inc., a public company which manufactures high speed separation devices. He
studied at Farleigh Dickenson and Austin Peay Universities.
NGT Related Party Transactions
Wagman Petroleum, Inc. ("WPI"), which is approximately 45 percent owned
by Brent Wagman, a former officer and director of NGT, operates most of the
properties in which NGT has interests. As operator, WPI incurs expenses for
drilling, reworking and normal lease operating expenses and then bills these
expenses to the working interest owners. WPI collects a portion of NGT's gas
production revenues and offsets such amounts against amounts that are due from
NGT. At March 31, 1998, NGT owed WPI $259,687 in accounts payable. The bulk of
this amount is due to drilling and reworking on the properties that NGT has
acquired and reworking interests previously held.
Through March 31, 1997, NGT reimbursed WPI for rent, postage, travel
and other office expenses. Office rent reimbursement to WPI totaled $4,200 for
each of fiscal 1997 and 1996. WPI also advanced funds to NGT for other expenses
during March 1997. These advances were reflected in a demand note effective
April 30, 1997 for $79,067 which bears interest at 5% per annum. Beginning in
April 1997, WPI began reimbursing NGT for one-half of the rent and office costs
incurred by NGT in its Dallas office.
In July 1996, NGT repaid a note payable to WPI with a balance of
$396,988, accrued interest of $24,681 and other liabilities owed to WPI in the
amount of $89,997 through the issuance of 354,994 shares of NGT Common Stock. In
connection with such transaction, WPI also agreed to forgive the then-accrued
but undeclared dividends on its 194,376 shares of Series 1994-B Preferred Stock
and all future dividends on such shares until NGT had a class of securities
registered under the Exchange Act. In recognition of that forgiveness, NGT
voluntarily converted its shares of Series 1994-B Preferred Stock into 194,376
shares of NGT without receipt of accumulated dividends in May 1997.
In July 1996, NGT issued 26,661 shares of NGT to Brent Wagman as
payment for $53,332 in unreimbursed expenses and cash advances.
In February 1997, Brent Wagman loaned $50,000 and Warren Donohue loaned
$50,000 to NGT pursuant to demand notes bearing interest at 5% per annum. These
funds were used to loan $100,000 to Lyric pursuant to the Convertible Note. In
April 1997, these notes were converted as partial payment for 112,500 shares of
NGT issued to each of Mr. Wagman and Mr. Donohue for $7.00 per share.
In May 1997, NGT purchased the remaining one half working interest in
the Wilde #1 well and lease located in Runnels County, Texas, from Brent Wagman
in consideration for a $200,000 demand note bearing interest at 5% per annum
with principal and interest due two years from issuance and an option
exercisable for two years to purchase 100,000 shares of NGT at $7.00 per share.
In August and September 1997, NGT issued 55,000 shares of NGT Common
Stock to Brent Wagman for $7.00 per share. In September 1997, NGT issued 7,143
shares of NGT Common Stock to Warren Donohue for $7.00 per share.
NGT entered into a letter of intent dated January 2, 1997 and modified
March 17, 1997 with Lyric Energy, Inc. for a share exchange transaction. As part
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<PAGE>
of that transaction, NGT loaned $100,000 to Lyric, which loan was converted to
203,041,517 shares of Lyric's common stock upon Lyric becoming current with its
filing requirements pursuant to the Exchange Act and obtaining a waiver from the
Amarillo National Bank of certain non-dilution rights in favor of the bank. This
was accomplished on April 10, 1997. In January, 1998, NGT terminated its merger
plans with Lyric and sold the 203,041,517 shares of the Lyric's common stock to
Brent Wagman in exchange for the cancellation of $150,000 in debt.
In February, 1998, NGT issued 1,600,000 shares of NGT common stock to
Ameritech Petroleum, Inc., a company controlled by Brent Wagman, in satisfaction
of debts in the amount of $3,630,192 owed by NGT to WPI, Interior Energy, Inc.
and Ameritech Petroleum, Inc.
During July, 1998, NGT entered into an agreement with Michael Stewart
pursuant to which Mr. Stewart received 50,000 shares of NGT common stock and is
entitled to receive 150,000 additional shares of NGT common stock upon the
earliest to occur of the effective date of a merger with TSRG or any other
public company or NGT becoming a reporting company with the Securities and
Exchange Commission.
NGT believes that the foregoing transactions were on terms at least as
favorable as those which it could have obtained from unaffiliated parties.
Ownership of NGT Capital Stock
The following table sets forth information, to the best knowledge of
NGT as September 8, 1998, with respect to each person known by NGT to own
beneficially more than 5% of outstanding NGT, each director and all directors
and officers as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership of Class(1)
- ------------------------ -------------------- -----------
<S> <C> <C>
Warren Donohue * ........................... 1,969,643(3) 32.1%
16775 Addison Road, Suite 300
Dallas, TX 75248
Michael Stewart * .......................... 200,000 3.3%
16775 Addison Road, Suite 300
Dallas, TX 75248
All Officers and ........................... 2,169,643 25.4%
Directors as a
Group (two persons)
Brent A. Wagman ............................ 2,804,376(2) 45.7%
16775 Addison Road, Suite 300
Dallas, TX 75248
Ameritech Petroleum ........................ 1,600,000(2)(3) 26.1%
16901 Dallas Parkway, #111
Dallas, TX 75248
Longboat Trust ........................... 537,500(2) 8.8%
3788 Harvest Glen
Celina, TX 75099
- ----------------
* Director
</TABLE>
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<PAGE>
(1) Rule 13d-3 under the Exchange Act, involving the determination of
beneficial owners of securities, includes as beneficial owners of securities,
among others, any person who directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise has, or shares, voting
power and/or investment power with respect to such securities; and, any person
who has the right to acquire beneficial ownership of such security within sixty
days through means, including but not limited to, the exercise of any option,
warrant or conversion of a security.
(2) The shares shown for Brent Wagman include 1,600,000 shares held by
Ameritech Petroleum, 537,500 shares held by Longboat Trust, and 193,376 shares
held by WPI because Mr. Wagman may be deemed to beneficially own those shares
pursuant to Rule 13d-3. The shares owned by Ameritech Petroleum are included in
the table as being beneficially owned by Ameritech Petroleum, Mr. Wagman and
Warren Donohue. Mr. Wagman controls Ameritech Petroleum, his minor children are
the beneficiaries of the Longboat Trust, and he is the president of WPI.
(3) The shares shown for Warren Donohue include 1,600,000 shares held
by Ameritech Petroleum because Mr. Donohue may be deemed to beneficially own
those shares pursuant to Rule 13d-3. Mr. Donohue is a director of Ameritech
Petroleum.
MANAGEMENT OF TSRG
Officers and Directors
The following table sets forth the names, ages, and offices held with
TSRG by it's directors and executive officers:
Name Position Director Since Age
---- -------- -------------- ---
Loren E. Bagley President, C.E.O. August 1991 55
and Director
William F. Woodburn Vice President August 1991 56
and Director
John B. Sims Director January 1988 72
Gary F. Lawyer Director December 1997 50
All directors hold office until the next annual meeting of shareholders
and until their successors have been duly elected and qualified. There are no
agreements with respect to the election of directors. TSRG has not compensated
its directors for service on the TSRG Board or any committee thereof, but
directors are reimbursed for expenses incurred for attendance at meetings of the
TSRG Board and any committee thereof. Executive officers are appointed annually
by the TSRG Board and each executive officer serves at the discretion of the
TSRG Board. The Executive Committee of the TSRG Board, to the extent permitted
under Nevada law, exercises all of the power and authority of the TSRG Board in
the management of the business and affairs of TSRG between meetings of the TSRG
Board.
The business experience of each of the persons listed above during the
past five years is as follows:
Loren E. Bagley has been Executive Vice President of TSRG since August,
1991, and became President and C.E.O. in September, 1993. 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.
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<PAGE>
William F. Woodburn has served as Vice President in charge of
Operations and a director of TSRG since August, 1991 and has been actively
engaged in the oil and gas business in various capacities for the past fifteen
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 shareholder and serves
as President of Tyler Construction Company, Inc., and is also a shareholder of
Tyler Pipeline, Inc. which owns and operates oil and gas wells in addition to
natural gas pipelines, and Ohio Valley Welding, Inc. which owns a fleet of heavy
equipment that services the oil and gas industry. Prior to his involvement in
the oil and gas industry, Mr. Woodburn was employed by the United States Army
Corps of Engineers for twenty four years and was Resident Engineer on several
construction projects. Mr. Woodburn graduated from West Virginia University with
a B.S. in civil engineering.
John B. Sims served as President, C.E.O. and a director of TSRG from
1988 to September, 1993 and currently is a director. Prior to joining TSRG and
from 1984 to 1988, Mr. Sims was the General Partner of Ben's Run Oil Company
which was acquired by TSRG in January, 1988. Mr. Sims has also been the general
partner for fourteen limited partnerships from 1977 to 1984 drilling a total of
twenty eight wells. Prior to his involvement in the oil and gas business, Mr.
Sims was a real estate developer for twenty years as well as an exclusive real
estate broker for Ednam Forrest in Charlottesville, Virginia. During 1994, Mr.
Sims voluntarily initiated a personal bankruptcy proceeding pursuant to Chapter
7 of the United States Bankruptcy Code. Pursuant to the terms of such
proceeding, Mr. Sims was discharged of certain of his debts which were incurred
as a consequence of his personal guarantees of certain business related debts,
not related to TSRG, upon which the primary obligor defaulted.
Gary F. Lawyer became a director of TSRG in December 1997. Gary F.
Lawyer has been President and a major shareholder of GeoSense, Inc. which is an
international oil and gas exploration/exploitation and production consulting
company based in Englewood, Colorado since 1991. Prior to founding GeoSense,
Inc., Mr. Lawyer has been employed in several executive and managerial positions
with various energy companies for the past 25 years. Mr. Lawyer received his
Master of Science degree in Geology from Brigham Young University.
Directors and Management of TSRG Following the Merger
Upon completion of the Merger, the TSRG Board will consist of five (5)
persons, of which two (2) persons from the current TSRG Board and two (2)
persons from NGT will be directors of the combined company. Loren E. Bagley and
William F. Woodburn, both current TSRG directors, will be directors of the
combined company. Michael Stewart, Vice President of NGT, and Warren Donohue, a
current NGT director, will also be directors of the combined company. Mr.
Stewart shall serve as President and Chief Operating Officer and Mr. Bagley
shall serve as Chairman of the Board. The fifth director has not yet been
determined, however, such director will be appointed prior to completion of the
Merger by the mutual agreement of NGT and TSRG. Until the Merger is completed,
both corporations are being managed pursuant to a joint committee consisting of
Mr. Bagley and Mr. Stewart. The directors constituting the TSRG Board shall
serve until the next annual meeting of TSRG shareholders.
The directors and officers of NGT do not own any shares of TSRG Common
Stock, either as of March 26, 1998 or the date hereof. As of the date hereof,
Mr. Stewart beneficially owns 200,000 shares of NGT Common Stock and Mr. Donohue
beneficially owns1,969,643 shares of NGT Common Stock. The number of shares of
NGT Common Stock indicated for Mr. Donohue includes 1,600,000 shares owned by
Ameritech Petroleum because Mr. Donohue may be deemed to beneficially own such
shares under Rule 13d-3 under the Exchange Act. See "Ownership of NGT Capital
Stock." Based on the assumed Exchange Ratio of 1.04562, the NGT Common Stock of
the above two persons would be converted into the right to receive the following
shares of TSRG Common Stock upon the Effective Date: Mr. Stewart, 209,124
shares, and Mr. Donohue, 2,059,498 shares. The current holdings of TSRG Common
Stock by the two director designees of TSRG are Mr. Bagley, 104,894 shares, and
Mr. Woodburn, 112,027 shares. Mr. John Sims, a current director of TSRG, owns
13,807 shares.
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<PAGE>
Cash Compensation
The following table sets forth all cash compensation paid by TSRG for
services rendered to TSRG for the years ended December 31, 1995, 1996 and 1997,
to TSRG's Chief Executive Officer. No executive officer of TSRG has earned a
salary greater than $100,000 annually for any of the periods depicted.
Summary Compensation Table
Other All
Annual Other
Name and Compen- Compen-
Principal Position Year Salary Bonus sation sation
- ------------------ ------ ------ ----- ------ ------
Loren E. Bagley, ........... 1997 $ 18,000 $ -0- $ -0- $ -0-
President, C.E.O .......... 1996 -0- -0- -0- -0-
1995 -0- -0- -0- -0-
Principal Shareholders
The following table sets forth information, to the best knowledge of
TSRG as of September 29, 1998, with respect to each person known by TSRG to own
beneficially more than 5% of the outstanding TSRG Common Stock, each director
and all directors and officers as a group.
<TABLE>
<CAPTION>
Percent of Class(1)
-------------------
Name and Address Amount and Nature of Before After
of Beneficial Owner Beneficial Ownership Offering Offering
- ------------------- -------------------- ------------------
<S> <C> <C> <C>
Loren E. Bagley * ............................. 104,894(2)(5) 4.9% 1.3%
210 Second Street
St. Marys, WV 26170
William F. Woodburn * ......................... 112,027(3)(5) 5.2% 1.4%
210 Second Street
St. Marys, WV 26170
John B. Sims * ................................ 13,807(4) 0.6% .2%
210 Second Street
St. Marys, WV 26170
Karla Spencer ................................. 148,944 7.0% 1.8%
P.O. Box 24
Alma, WV 26320
Boulder Investments Capital, S.A .............. 236,312 11.1% 2.9%
c/o LaFirma deMarc M. Harris, S.A .............
25 De Mayo 530 Piso 7
1002 Buenos Aires Arg .........................
Corporate Relations Group ..................... 350,000 16.4% 4.3%
1947 Lee Road
Winterpark, FL 32789
All directors and executive ................... 230,728 10.82% 2.8%
officers as a group
(4 persons in group)
</TABLE>
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<PAGE>
- ------------------------------------
* Director and/or executive officer
Note: Unless otherwise indicated in the footnotes below, TSRG has been
advised that each person above has sole voting power over the shares
indicated above.
(1) Based upon 2,138,450 shares of common stock outstanding on August 1,
1997 as adjusted to reflect the one (1) share for four(4) shares
reverse stock split effected June 5, 1998, but does not include any
shares of Common Stock to be issued pursuant to the Merger.
(2) Includes 31,250 shares of common stock held in the name of Carolyn S.
Bagley, wife of Loren E. Bagley, over which Ms. Bagley retains voting
power.
(3) Includes 50,000 shares of common stock in the name of Janet L.
Woodburn, wife of William F. Woodburn, over which shares Ms. Woodburn
retains voting power. Does not include 25,000 shares of common stock
owned by Mark D. Woodburn, son of William F. Woodburn, over which
shares William F. Woodburn disclaims any voting control.
(4) Includes 13,807 shares of common stock held jointly with Virginia Sims,
wife of John B. Sims.
(5) Does not include options to purchase 12,500 shares of common stock each
in the name of Loren E. Bagley and William F. Woodburn.
CERTAIN TRANSACTIONS
During the last two fiscal years, there have been no transactions
between TSRG and any officer, director, nominee for election as director, or any
shareholder owning greater than five percent (5%) of TSRG's outstanding shares,
nor any member of the above referenced individuals' immediate family, except as
set forth below.
(a) As of December 31, 1997, TSRG had no related party loans
outstanding. Total loan payables as of December 31, 1996 were $605,190. Any loan
made to a related party is made at the discretion of and upon approval by the
Executive Committee of the Board of Directors. Of such amount, commencing
February 1995 through June 1996, members of TSRG's management extended an
aggregate of $448,583 in loans to TSRG for the purpose of providing TSRG with
working capital.
(b) Loren E. Bagley is President of Sancho, a principal purchaser of
TSRG's natural gas. Mr. Bagley's wife, Carolyn S. Bagley is a director and owner
of 66% of the outstanding capital stock of Sancho. Under its contract with
Sancho, TSRG has the right to sell natural gas subject to the terms and
conditions of a 20-year contract, as amended, that Sancho entered into with Hope
in 1988. This agreement is a flexible volume supply agreement whereby TSRG
receives the full price which Sancho receives less a $.05 per Mcf marketing fee
paid to Sancho. The price of the natural gas is based upon the greater of the
residential gas commodity index or the published Inside F.E.R.C. Index, at
TSRG's option, for the first 1,500 Mcf purchased per day by Hope and thereafter
the price is the Inside F.E.R.C. Index. The residential gas commodity index does
not directly fluctuate with the overall price of natural gas. The Inside
F.E.R.C. Index fluctuates monthly with the change in the price of natural gas.
While such option provides certain price protection for TSRG there can be no
assurance that prices paid by TSRG to suppliers will be lower than the price
which TSRG would receive under the Hope arrangement. During 1997, TSRG paid
Sancho an aggregate of approximately $5,600 pursuant to such 20-year contract.
(c) On May 7, 1996, TSRG 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 TSRG 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.
(d) A company owned by an officer of TSRG's former subsidiary, Vulcan
Energy Corporation ("Vulcan"), owns the remaining 20% of Vulcan's common stock.
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<PAGE>
The management company\ is entitled to a management fee of $252,000 per year and
20% of net profits before taxes less 20% of the principal paid to the seller of
Vulcan. This 20% net profits interest has had no effect on TSRG's consolidated
financial statements because the subsidiary generated net losses through
December 31, 1996. Because the operations of Vulcan have been discontinued (see
Note 9 to Financial Statements), management believes that TSRG has no obligation
related to this management agreement in future periods.
TSRG occupies approximately 4,000 square feet of office space in St.
Marys, West Virginia, which it shares with its subsidiaries Tyler Construction
Company, Inc. and Ritchie County Gathering Systems, Inc. Prior to 1997, the
office space was paid for by Sancho and TSRG used the office space rent free.
TSRG believes that the foregoing transactions with Sancho were made on terms no
less favorable to TSRG than those available from unaffiliated third parties.
It is TSRG's policy that any future material transactions between it
and members of its management or their affiliates shall be on terms no less
favorable than those available from unaffiliated third parties.
DESCRIPTION OF SECURITIES
Common Stock
TSRG is authorized to issue 30,000,000 shares of Common Stock, par
value $.001 per share, of which 2,384,450 shares are issued and outstanding
(post-split as per the TSRG Stock Split) as of the date hereof. All shares of
TSRG Common Stock have equal rights and privileges with respect to voting,
liquidation and dividend rights. Each share of Common Stock entitles the holder
thereof to (i) one non-cumulative vote for each share held of record on all
matters submitted to a vote of the shareholders; (ii) to participate equally and
to receive any and all such dividends as may be declared by the TSRG Board out
of funds legally available therefor; and (iii) to participate pro rata in any
distribution of assets available for distribution upon liquidation of TSRG.
Shareholders of TSRG have no preemptive rights to acquire additional shares of
Common Stock or any other securities. The Common Stock is not subject to
redemption and carries no subscription or conversion rights. All outstanding
shares of Common Stock are fully paid and non-assessable. Additional shares of
TSRG Common Stock may be issued without shareholder approval, except as that
right is limited as a result of TSRG's listing agreement with The Nasdaq
SmallCap Market.
TSRG Convertible Debentures
In connection with the Merger, TSRG has issued $4,625,400 face value of
8% Secured Convertible Debentures Due March 31, 1999 (the "Debentures").
Interest shall accrue upon the date of issuance until payment in full of the
principal sum has been made or duly provided for. Holders of the Debentures
shall have the option, at any time, until maturity, to convert the principal
amount of their Debenture, or any portion of the principal amount which is at
least $10,000, into shares of TSRG Common Stock at a conversion price for each
share equal to the lower of (a) seventy percent (70%) of the market price of
TSRG Common Stock averaged over the five trading days prior to the date of
conversion, or (b) the market price on the issuance date of the Debentures. Any
accrued and unpaid interest shall be payable, at the option of TSRG, in cash or
in shares of TSRG Common Stock valued at the then effective conversion price.
Pursuant to the terms of the Debentures, TSRG has agreed to file a
registration statement with the Commission to register the shares of TSRG Common
Stock into which the Debentures may be converted. Upon effectiveness of the
registration statement, the shares of TSRG 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 TSRG fails to file its
registration statement within forty-five (45) days from the closing of the
Debenture offering, TSRG may be obligated to increase by up to fifteen percent
(15%) the number of shares issuable upon conversion to each holder.
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<PAGE>
TSRG Redeemable Common Stock Purchase Warrants
In December 1996, TSRG completed the public offering of 146,342 shares
of TSRG Common Stock and 1,200,000 Redeemable Common Stock Purchase Warrants
(the "Stock Purchase Warrants"). Each Stock Purchase Warrant is exercisable at
any time into one share of TSRG Common Stock at the exercise price of $22.56 per
share, as adjusted by the reverse stock split effected June 5, 1998, until the
expiration date of December 17, 2002. The Stock Purchase Warrants are redeemable
by TSRG at a price of $.10 per Stock Purchase Warrant, if the closing bid price
of TSRG Common Stock on the Nasdaq SmallCap Market exceeds 140% of the public
offering price (or $28.672 as adjusted for the one share for four shares reverse
stock split) for the twenty (20) consecutive trading days preceding the notice
of redemption. No Stock Purchase Warrant may be exercised unless at the time of
exercise there is a current prospectus covering the shares of TSRG Common Stock
issuable upon exercise of the Stock Purchase Warrants under an effective
registration statement filed with the Commission, and such shares have been
qualified for sale or are exempt from qualification under the securities laws of
the state of residence of the holder of such Stock Purchase Warrant.
PLAN OF DISTRIBUTION
TSRG will receive none of the proceeds from the sale of Common Stock by
the Selling Securityholders. Upon conversion of the remaining balance of
Debentures, TSRG will have benefitted from the cessation of its indebtedness
represented by the Debentures in the amount of $4,625,400. TSRG will bear all
costs relating to the registration of the Common Stock, including legal and
filing fees. Such costs are estimated by TSRG to be approximately $50,000.
This Prospectus relates to not only the offer and sale by Selling
Securityholders, but also the issuance of the Common Stock upon the conversion
of Debentures by the Selling Securityholders. Selling Securityholders will be
able to sell their Common Stock from time to time in any of several ways
including, without limitation, one or more market transactions at the prevailing
market prices and terms, in negotiated transactions, block sales or individual
sales. Sales by Selling Securityholders will be without the payment of any
underwriting discounts or commissions, except for usual and customary selling
commissions paid to brokers or dealers. Selling Securityholders also may sell
such shares of Common Stock from time to time as permissible under Rule 144
promulgated under the Securities Act.
TSRG does not know for certain how or when Selling Securityholders will
choose to make such sales. However, each Selling Securityholder must represent
to the Company that he or she currently has no plans, proposals, arrangements or
understandings with any potential sales agent with respect to participating in
the distribution of the Common Stock. Each Selling Securityholder has further
represented that no securities selected dealer agreement or similar agreement is
intended to be used with respect to the offering and sale of the Common Stock.
Also, as currently contemplated, any sale of Common Stock will take place in an
ordinary brokerage transaction, without any placement or other agent and for
normal and customary brokerage fees and/or commissions.
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<PAGE>
This Prospectus also relates to the offer and sale of 1,000,000 shares
of Common Stock directly by TSRG. TSRG has not entered into any underwriting
agreement or other arrangement for the offer and sale of the 1,000,000 shares.
It is anticipated that TSRG will offer these shares to the public at such time
as the prevailing market conditions are considered favorable. There is no
assurance that any of the 1,000,000 shares will be sold or that TSRG will
realize any proceeds from the offering.
SELLING SECURITYHOLDERS
On September 10, 1998, TSRG completed the offering of $4,625,400 face
value 8% Secured Convertible Debentures Due March 31, 1999. Holders of the
Debentures have the option, at any time, until maturity, to convert the
principal amount of their Debenture, or any portion of the principal amount
which is at least $10,000, into shares of TSRG Common Stock. The conversion
price for each share shall be equal to the lower of (a) seventy percent (70%) of
the market price of TSRG Common Stock averaged over the five trading days prior
to the date of conversion, or (b) the market price on the issuance date of the
Debentures. The Debenture offering was not registered under the Securities Act,
and therefore the Debentures and underlying shares of Common Stock are deemed
"restricted securities."
As a provision of the offering of Debentures, TSRG agreed to file a
registration statement with the Commission for the purpose of registering the
shares of Common Stock into which the Debentures are convertible. This
Prospectus, which is part of TSRG's registration statement, relates to the offer
of Common Stock by the Selling Securityholders into the public market. All
expenses associated with the sale of shares of Common Stock by the Selling
Securityholders will be paid by the Selling Securityholders.
Upon conversion of the Debentures into Common Stock and registration
and resale of such Common Stock, Selling Securityholders' shares will be free of
the restrictions other than restrictions under the Securities Act with respect
to persons who may be deemed to be affiliates of TSRG.
The Selling Securityholders may sell their respective shares of Common
Stock directly through broker-dealers acting as agents for them, or to
broker-dealers who may purchase shares as principal and thereafter sell the
shares from time to time in negotiated transactions or otherwise. Such
broker-dealer, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers for whom such broker-dealers may act as agents or to whom they may
sell as principals or both. Compensation as to a particular broker-dealer may be
in excess of customary commissions.
The Selling Securityholders, broker-dealers and any other persons, if
any, acting in connection with such sale of the shares of Common Stock, might be
deemed "underwriters" within the meaning of Section 2(11) of the Securities Act.
Any commission received by them or discounts or concessions allowed to such
persons, and any profits received on the resale of the shares may be deemed to
be underwriting discounts and commissions under the Securities Act.
The securities covered by, this Prospectus with respect to the Selling
Securityholders may in the future also be sold under Rule 144 instead of under
this Prospectus. Rule 144 provides an exception from registration for the resale
of securities by persons other than the issuer after the securities have been
held by persons for at least one (1) year from original issuance, and such
securities are sold in strict compliance with Rule 144 requirements and maximum
number of shares requirements. TSRG will not receive any portion of the proceeds
of the securities sold by the Selling Securityholders. There is no assurance
that the Selling Securityholders will sell any or all or the securities offered
hereby.
The Selling Securityholders have been advised by TSRG that during the
time each is engaged in distribution of the securities covered by this
Prospectus, each must comply with Rule 10b-5 and Regulation M under the Exchange
Act, and pursuant thereto: (i) each must not engage in any stabilization
-45-
<PAGE>
activity in connection with TSRG's securities; (ii) each must furnish each
broker through which securities covered by this Prospectus may be offered the
number of copies of this Prospectus which are required by each broker; and (iii)
each must not bid for or purchase any securities of TSRG or attempt to induce
any person to purchase any of TSRG's securities other than as permitted under
the Exchange Act. Any Selling Securityholders who may be "affiliated purchasers"
of TSRG as defined in Regulation M, have been further advised that pursuant to
Securities Exchange Act Release 34-38067 (December 20, 1996), they must
coordinate their sales under this Prospectus with each other and TSRG for
purposes of Regulation M.
The following table sets forth as of the date hereof, certain
information regarding the beneficial ownership of TSRG's Common Stock, or the
right to convert Debentures into Common Stock, by each Selling Securityholder.
Except as otherwise noted, the persons shown in the table have sole voting and
investment power with respect to the securities. These Selling Securityholders
are presented together in this table for convenience of presentation only.
<TABLE>
<CAPTION>
Percent of
Common Stock
Dollar Amount Number of After
Name of Debenture Owned Common Shares(1) Offering(2)
- ----
<S> <C> <C> <C>
Robin J. & Bernadine F. Abel Trust $ 20,000 21,769 (3)
Arab Commerce Bank ............... 100,000 108,844 1.3%
Balmour Funds .................... 375,000 408,164 5.0%
CA Opportunidad S.A .............. 100,000 108,844 1.3%
Salvatore R. Cerruto ............. 15,000 16,327 (3)
Chesterfield Capital Resources ... 500,000 544,218 6.7%
Cile Investment Ltd. ............. 60,000 65,307 (3)
Congregation Beth Mordecai ....... 100,000 108,844 1.3%
James F. Cool .................... 150,000 163,266 2.0%
Dayan International Corp. ........ 50,000 54,422 (3)
George DeMakos ................... 7,000 7,620 (3)
Charles D. Devine, MD ............ 40,000 43,538 (3)
Jimmy Dean Dowda ................. 25,000 27,211 (3)
Edwards Capital .................. 24,000 26,123 (3)
Emil Investments Ltd. ............ 200,000 217,688 2.4%
Steve Guarino .................... 25,000 27,211 (3)
Robert D. Hall ................... 20,000 21,769 (3)
Bob A. Havemeister ............... 30,000 32,654 (3)
Hyett Capital .................... 20,000 21,769 (3)
Fern Kohn ........................ 50,000 54,422 (3)
David Lair & Barbara Frazier ..... 10,000 10,885 (3)
Lampton, Inc. .................... 150,000 163,266 2.0%
Jon Lane ......................... 50,000 54,422 (3)
Fred Lenz ........................ 35,000 38,096 (3)
Michael M. Louis ................. 25,000 27,211 (3)
James S. Lumberry ................ 20,000 21,769 (3)
Dave Mallen ...................... 20,000 21,769 (3)
Douglas Nagel .................... 400,000 435,375 4.9%
Nostradamus S.A .................. 200,000 217,688 2.4%
Olympus Capital, Inc. ............ 145,000 157,824 1.8%
Paril Holding .................... 200,000 217,688 2.4%
Phoenix Capital .................. 50,000 54,422 (3)
Roland Outar ..................... 10,000 10,885 (3)
Austost Anstalt Schaan ........... 375,000 408,164 4.6%
Barry Seidman .................... 500,000 544,218 6.7%
James Skaldo ..................... 144,500 157,279 1.9%
South County Investors ........... 60,000 65,307 (3)
Soverign Capital ................. 20,000 21,769 (3)
Roger Tichenor ................... 18,900 20,572 (3)
Dominick Vicari .................. 25,000 27,211 (3)
Roberto Veitia ................... 66,000 71,837 (3)
Visual Company ................... 100,000 108,844 1.3%
Ronnie Williams Jr ............... 15,000 16,327 (3)
Ronnie Williams Sr ............... 50,000 54,422 (3)
Fred Zaytoun ..................... 25,000 27,211 (3)
------- -------
Totals $ 4,625,400 5,034,471
</TABLE>
46
<PAGE>
(1) Based on conversion of Debentures at the conversion price of $.91875
per share which is 70% of the price of TSRG Common Stock of $3.125 on
September 28, 1998.
(2) Computations of percentages does not include approximately 6,415,350
shares of Common Stock issuable pursuant to the Merger, shares issuable
upon exercise of various warrants and stock options held by certain
individuals at various prices, additional shares of Common Stock that
may be issued upon conversion of certain other convertible securities
that are either presently outstanding or may be issued in the future,
but does include the additional 1,000,000 shares offered by the Company
which are the subject of this Prospectus. See "Description of
Securities", and "Risk Factors - Dilution."
(3) Percentage is less than 1%.
SHARES ELIGIBLE FOR FUTURE SALES
The 6,415,350 shares of TSRG Common Stock issued pursuant to the Merger
will be freely tradeable without restriction or further registration under the
Securities Act, except for any TSRG Common Stock held by an "affiliate" (as
defined under the Securities Act) of TSRG. As of the date hereof, 379,672 shares
of TSRG Common Stock held by TSRG's current shareholders constitute "restricted
securities" within the meaning of Rule 144 under the Securities Act and may be
sold only pursuant to an effective registration statement under the Securities
Act or an applicable exemption, including an exemption under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated in accordance with Rule 144) who has beneficially
owned "restricted securities" (defined generally as shares acquired from the
issuer or an affiliate in a non-public transaction) for at least one year, as
well as any person who purchases unrestricted shares in the open market who may
be deemed an "affiliate" of the issuer, is entitled to sell, within any
three-month period, a number of shares of TSRG Common Stock that does not exceed
the greater of (i) 1% of the then outstanding shares, or (ii) the average weekly
trading volume in the shares during the four calendar weeks preceding each such
sale. A person who is not deemed to be an "affiliate" of TSRG and has not been
an affiliate for at least three months, and who has held restricted shares for
at least two years would be entitled to sell such shares without regard to the
volume limitations described above. As defined in Rule 144, an "affiliate" of an
issuer is a person that directly or indirectly, through the use of one or more
intermediaries, controls, or is controlled by, or is under common control with,
such issuer. Sales of substantial amounts of restricted shares, or the
perception that such sales may occur, could adversely affect prevailing market
prices for TSRG Common Stock.
Beginning 90 days from the date of this Prospectus, in addition to the
6,415,350 shares issued pursuant to the Merger and 931,802 tradeable shares of
Common Stock outstanding prior to the Merger, approximately 496,506 shares of
TSRG Common Stock deemed restricted securities are eligible to be sold under
Rule 144 of the Securities Act, subject to the volume and other restrictions of
Rule 144. An additional 722,642 shares are deemed restricted securities and will
not be eligible for sale under Rule 144 for approximately ten months. Also,
shares issued upon conversion of the Debentures and subject to an effective
registration statement will immediately be tradeable in the public market,
unless held by an affiliate of TSRG. Based on the $4,625,400 value of Debentures
sold and based on the price of TSRG Common Stock of $1.3125 per share on
September 28, 1998 (Debentures are convertible at 70% of the then current market
price), approximately 5,034,471 additional shares may be issued upon the
conversion of the Convertible Debentures. If the price of TSRG Common Stock
-47-
<PAGE>
declines, additional shares may be issued upon the conversion of the Convertible
Debentures. It must be emphasized that holders of the Debentures are entitled to
convert their holdings into TSRG Common Stock at a conversion price for each
share equal to the lower of 70% of the market price of TSRG Common Stock
averaged over the five trading days prior to the date of conversion, or the
market price on the issuance date of the Debentures. Thus, upon conversion from
the Debentures, holders of TSRG Common Stock will have an acquisition price at a
discount from the prevailing market price and could immediately sell their
shares at a profit.
TSRG further intends to offer up to 1,000,000 shares of Common Stock
subject to this prospectus at a future time at the discretion of the TSRG Board.
These shares, if offered and sold pursuant to an effective registration
statement, will immediately be available for trading in the public market.
There can be no predictions of the effect, if any, that sales of TSRG
Common Stock under Rule 144, the issuance of shares upon conversion of the
Debentures, or the offering of additional TSRG Common Stock for sale will have
on the market price prevailing from time to time. Sales of substantial amounts
of TSRG Common Stock pursuant to Rule 144 or of shares acquired upon conversion
of Debentures could subsequently adversely affect the market price of TSRG
Common Stock.
The transfer agent and registrar for TSRG Common Stock is Interstate
Transfer Company, 874 East 5900 South, Suite 101, Salt Lake City, Utah 84107.
LEGAL MATTERS
Certain legal matters relating to the validity of the shares of TSRG
Common Stock to be issued in the Merger will be passed upon by Leonard E.
Neilson, Attorney at Law. Mr. Neilson is the beneficial owner of 750 shares of
TSRG Common Stock.
EXPERTS
The financial statements and schedule of TSRG for the years ended
December 31, 1997 and 1996 included in this Prospectus and in the Registration
Statement, have been audited by Jones, Jensen and Company, independent certified
public accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein and in the Registration Statement, and are
incorporated herein by reference, in reliance upon the authority of such firm as
experts in accounting and auditing in giving said reports. Financial statements
for the period ended March 31, 1998 included herewith have not been audited and
were prepared by TSRG.
The financial statements and schedule of NGT for the years ended
December 31, 1997 and 1996 included in this Prospectus and in the Registration
Statement, have been audited by Jones Jensen & Company, independent certified
public accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein and in the Registration Statement, in reliance upon
the authority of such firm as experts in accounting and auditing in giving said
reports.
SECURITIES AND EXCHANGE COMMISSION POSITION ON CERTAIN
INDEMNIFICATION
The Nevada Revised Statues provide for indemnification by a corporation
of costs incurred by directors, employees and agents in connection with an
action, suit or proceeding brought by reason of their position as a director,
employee or agent. The person being indemnified must have acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interest of the corporation.
TSRG's Articles of Incorporation obligate TSRG to indemnify its
directors and officers to the fullest extent permitted under Nevada law.
-48-
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling TSRG pursuant
to the foregoing provisions, TSRG has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
-49-
<PAGE>
TRANS ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Trans Energy, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheet of Trans Energy,
Inc. and subsidiaries as of December 31, 1997 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1997 and 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Trans
Energy, Inc. and subsidiaries as of December 31, 1997 and the consolidated
results of their operations and their cash flows for the years ended December
31, 1997 and 1996, in conformity with 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
financial statements, the Company has generated significant losses from
operations which 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.
Jones, Jensen & Company
Salt Lake City, Utah
March 25, 1998
1
<PAGE>
TRANS ENERGY, INC.
Consolidated Balance Sheet
ASSETS
------
December 31,
1997
-----------------
CURRENT ASSETS
Cash $ 185,881
Accounts receivable 175,161
Prepaid and other current assets 1,441
-----------------
Total Current Assets 362,483
-----------------
PROPERTY AND EQUIPMENT (Note 2)
Vehicles 94,589
Machinery and equipment 10,092
Pipelines 2,231,308
Well equipment 271,882
Wells 3,850,429
Leasehold acreage 597,221
Accumulated depreciation (1,742,136)
-----------------
Total Fixed Assets 5,313,385
-----------------
OTHER ASSETS
Loan acquisition costs 4,733
-----------------
Total Other Assets 4,733
-----------------
TOTAL ASSETS $ 5,680,601
=================
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
<TABLE>
TRANS ENERGY, INC.
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
December 31,
1997
<S> <C>
CURRENT LIABILITIES -----------------
Accounts payable - trade $ 1,250,017
Accrued expenses 72,195
Salaries payable 64,602
Notes payable - current portion (Note 3) 898,098
-----------------
Total Current Liabilities 2,284,912
-----------------
NET LIABILITIES IN EXCESS OF ASSETS OF
DISCONTINUED OPERATIONS (Note 9) 340,821
-----------------
LONG-TERM LIABILITIES
Notes payable (Note 3) 792,387
-----------------
Total Long-Term Liabilities 792,387
-----------------
Total Liabilities 3,418,120
-----------------
MINORITY INTERESTS 250,000
-----------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Note 6)
Common Stock: 30,000,000 shares authorized at $0.001 par value;
5,663,215 shares issued and outstanding 5,663
Capital in excess of par value 10,746,979
Accumulated deficit (8,740,161)
-----------------
Total Stockholders' Equity 2,012,481
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,680,601
=================
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
3
<PAGE>
TRANS ENERGY, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------------
1997 1996
-------------- ---------------
<S> <C> <C>
OIL AND GAS SALES $ 1,115,037 $ 1,236,740
-------------- ---------------
COSTS AND EXPENSES
Cost of oil and gas 748,757 787,136
Salaries and wages 203,940 104,078
Depreciation, depletion and amortization 325,206 165,830
Selling, general and administrative 1,453,954 803,810
-------------- ---------------
Total Costs and Expenses 2,731,857 1,860,854
-------------- ---------------
LOSS FROM CONTINUING OPERATIONS (1,616,820) (624,114)
-------------- ---------------
OTHER INCOME (EXPENSE)
Other income 10,229 73
Interest expense (281,867) (1,276,465)
Gain (loss) on disposition of assets 1,500 (50,000)
Bad debt expense (100,000) (16,000)
-------------- ---------------
Total Other Income (Expense) (370,138) (1,342,392)
-------------- ---------------
NET LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTERESTS (1,986,958) (1,966,506)
-------------- ---------------
INCOME TAXES (Note 1) - -
-------------- ---------------
NET LOSS FROM CONTINUING OPERATIONS BEFORE
MINORITY INTERESTS (1,986,958) (1,966,506)
NET LOSS FROM DISCONTINUED OPERATIONS (Note 9) (42,492) (1,711,877)
-------------- ---------------
NET LOSS BEFORE MINORITY INTERESTS (2,029,450) (3,678,383)
MINORITY INTERESTS - 39,393
-------------- ---------------
NET LOSS $ (2,029,450) $ (3,638,990)
============== ===============
NET LOSS PER SHARE
Continuing operations $ (0.44) $ (0.59)
Discontinued operations - (0.53)
-------------- ---------------
$ (0.44) $ (1.12)
============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
4
<PAGE>
TRANS ENERGY, INC.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Shares Capital in
------------------------- Excess of Accumulated
Shares Amount Par Value Deficit
------ ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 3,174,122 $ 3,174 $ 5,629,734 $ (3,071,721)
Common stock issued for
debenture at $0.90 per share .. 55,555 56 49,944 --
Common stock issued for
services at $2.67 per share 9,000 9 23,991 --
Common stock warrants
issued -- -- 774,000 --
Cancellation of common
stock options issued for
services -- -- (275,000) --
Shareholder loans contributed
to capital -- -- 250,000 --
Issuance of common stock for
cash at $5.36 per share 585,366 585 3,137,415 --
Common stock offering costs -- -- (663,451) --
Net loss for the year ended
December 31, 1996 -- -- -- (3,638,990)
------------ ------------ ------------ ------------
Balance, December 31, 1996 3,824,043 3,824 8,926,633 (6,710,711)
Common stock issued for services
at $1.41 per share 350,000 350 491,837 --
Common stock issued for cash
at $0.96 per share 1,489,172 1,489 1,428,511 --
Contribution of capital by
shareholders -- -- 49,998 --
Common stock offering costs -- -- (150,000) --
Net loss for the year ended
December 31, 1997 -- -- -- (2,029,450)
------------ ------------ ------------ ------------
Balance, December 31, 1997 5,663,215 $ 5,663 $ 10,746,979 $ (8,740,161)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
<TABLE>
TRANS ENERGY, INC.
Consolidated Statements of Cash Flows
<CAPTION>
For the Years Ended
December 31,
-------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(2,029,450) $(3,638,990)
Adjustments to Reconcile Net Loss to Cash
Provided by Operating Activities:
Depreciation and depletion 325,206 165,830
Minority interest 250,000 (39,393)
(Gain) loss on disposition of assets (1,500) 50,000
Bad debt expense 100,000 16,000
Common stock issued for services 492,837 24,000
Stock options canceled for services not performed -- (275,000)
Loss on discontinued operations (477,896) 1,190,800
Changes in Operating Assets and Liabilities:
Decrease (increase) in accounts receivable (39,404) (73,290)
Decrease (increase) in prepaid and other current assets 58,160 (59,601)
Decrease (increase) in deposits -- 355
Decrease (increase) in loan acquisition costs -- 876,065
Increase (decrease) in accounts payable and
accrued expenses 721,716 243,223
----------- -----------
Cash Provided (Used) by Operating Activities (600,331) (1,520,001)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (918,685) (152,206)
----------- -----------
Cash Provided (Used) by Investing Activities $ (918,685) $ (152,206)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
TRANS ENERGY, INC.
Consolidated Statements of Cash Flows (Continued)
For the Years Ended
December 31,
--------------------------
1997 1996
CASH FLOWS FROM FINANCING ACTIVITIES: ----------- -----------
Principal payments on related party advances $ (605,190) $ --
Proceeds from sale of common stock 1,429,350 3,138,000
Payment of deferred offering costs -- (388,451)
Proceeds from related party advances -- 204,110
Principal payments on notes payable (211,109) (899,606)
Proceeds from notes payable 610,000 100,000
----------- -----------
Cash Provided (Used) by Financing Activities 1,223,051 2,154,053
----------- -----------
NET INCREASE (DECREASE) IN CASH (295,965) 481,846
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 481,846 --
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 185,881 $ 481,846
=========== ===========
CASH PAID FOR:
Interest $ 279,525 $ 184,381
Income taxes $ -- $ --
NON-CASH FINANCING ACTIVITIES:
Common stock issued for services $ 492,837 $ 24,000
Stock options issued (cancelled) for services $ -- $ (275,000)
Conversion of debentures to equity $ -- $ 50,000
Common stock warrants $ -- $ 774,000
Shareholder loans contributed to capital $ 49,998 $ 250,000
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE>
TRANS ENERGY, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
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 iof 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.
On August 7, 1995, the Company purchased 80 percent of the issued
and outstanding stock of Vulcan Energy Corporation (Vulcan), a
Texas corporation, for $1,100,000 including the assumption of
$300,000 in debt for a customer of Vulcan. Vulcan was located in
the State of Texas and was engaged in the oil gathering and
marketing business. In March 1997, the Company decided to cease
the operations of Vulcan. Accordingly, the results of operations
along with the net liabilities of Vulcan have been reflected as
discontinued operations in the accompanying consolidated
financial statements. See Note 9 for further discussion.
b. Accounting Method
The Company's consolidated financial statements are prepared
using the accrual method of accounting. The successful efforts
method of accounting is used for oil and gas exploration and
production activities which states that total net capitalized
costs, as a minimum test, may not exceed future undiscounted net
cash flows. In any period that total net capitalized costs exceed
future undiscounted net cash flows, the excess will be charged to
current operations. The Company has elected a calendar year end.
c. Net Loss per Share of Common Stock
The net 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. Only primary net loss per
share of common stock is disclosed in the accompanying
consolidated statements of operations as fully diluted loss per
share is anti-dilutive.
d. Provision for Taxes
At December 31, 1997, the Company had net operating loss
carryforwards of approximately $8,740,000 that may be offset
against future taxable income through 2012. No tax benefit has
been reported in the consolidated financial statements, because
the potential tax benefits of the net operating loss
carryforwards is offset by a valuation allowance of the same
amount.
8
<PAGE>
TRANS ENERGY, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e. Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
f. Principles of Consolidation
The consolidated financial statements include the Company and its
wholly owned subsidiary, Ritchie County Gathering Systems, Inc.,
its 65% owned subsidiary, Tyler Construction Company, Inc. and
its 50% owned and now discontinued subsidiary, Sundance, LLC. All
significant intercompany accounts and transactions have been
eliminated.
g. Presentation
Certain 1996 balances have been reclassified to conform to the
presentation of the 1997 consolidated financial statements.
h. Depreciation
Fixed assets are stated at cost. Depreciation on vehicles,
pipelines, machinery, equipment and well equipment is provided
using the straight line method over expected useful lives of five
to fifteen years. Wells are being depreciated using the
units-of-production method on the basis of total estimated units
of proved reserves.
i. Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2 - PROPERTY AND EQUIPMENT
The Company acquired oil and gas leases from Ben's Run Oil
Company (a Virginia limited partnership) in 1988 along with other
assets and liabilities in exchange for shares of the Company's
common stock. The assets were recorded at predecessor cost since
the former owners of Ben's Run Oil Company became the controlling
shareholders of the Company. The assets acquired had been fully
amortized or depreciated. Therefore, they were recorded at a cost
of $0.
9
<PAGE>
TRANS ENERGY, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 2 - PROPERTY AND EQUIPMENT (Continued)
In January of 1989 the Company acquired interests in oil and gas
producing properties from Black Petroleum Corporation (Black). In
exchange for the interests acquired, the Company paid $100,000
cash, 160,790 shares of common stock and assumed certain
liabilities of Black. The value of the stock issued was based on
the estimated fair market value of the properties acquired less
cash paid and liabilities assumed. The purchase price for oil and
gas properties totaled $2,015,109.
On November 15, 1994, the Company acquired six oil and gas wells
at a cost of $1,082,222 and other equipment totaling $8,710 in
exchange for shares of the Company's common stock. All assets
were recorded at their market value (which was approximately the
same as book value) at the time of acquisition based on the
purchase method of accounting.
Based upon the reserve estimates, depletion and depreciation on
these properties and the related equipment is computed under the
units-of-production method as required by generally accepted
accounting principles. In 1994 and 1993, the Company refurbished
a number of wells. In 1995, the Company obtained a reserve study
which showed that the oil and gas reserves are higher than
originally reported because the fix-up work allowed the producing
wells to produce greater quantities and put some non-productive
wells into production.
During 1994, the Company purchased leasehold acreage in Ohio
known as Rose Run for $287,000. The acreage was purchased from
shareholders of the Company in part for forgiveness of
receivables from those shareholders.
10
<PAGE>
<TABLE>
TRANS ENERGY, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
<CAPTION>
NOTE 3 - LONG-TERM DEBT
The Company had the following debt obligations at December 31,
1997:
<S> <C>
Calhoun County Bank, secured by oil and gas well interests,
payable in monthly installments of $1,859 including interest at
variable rates, (lender's base rate of 9.75% as of December 31,
1997), matures April 12, 1999 $ 22,354
Calhoun County Bank, secured by oil and gas well interests,
payable in monthly installments of $269 including interest at
variable rates, (lender's base rate of 9.75% as of December 31,
1997), matures
April 12, 1999 4,072
Calhoun County Bank, secured by oil and gas well interests,
payable in monthly installments of $1,300 including interest at
variable rates, (lender's base rate of 9.75% as of December 31,
1997), matures
April 12, 1999 30,133
New York Life, secured by cash value in policy, interest payable
annually at 7.25% interest rate 21,800
First National Bank of St. Marys, $9,244 payable monthly, 12.5%
interest rate, secured by equipment 592,979
Union Bank of Tyler County, interest at 11.5% due quarterly,
renewable, due on demand, secured by equipment 19,756
Note due private company, principal and interest of $163 payable
monthly, interest rate of 10.75%, secured by vehicle 1,573
Bank of Paden City, interest payable quarterly, prime +2%, due
on demand, secured by officers personal assets 268,234
Note payable to an individual, due on demand, bearing interest at
9.75%, unsecured 292,078
Bank of Paden City, secured by vehicles, various maturity dates,
principal and interest due monthly at 9.25% to 10.25% 28,779
Note due to a private individual, due November 7, 1996 with interest
at 20%, unsecured 100,000
Note due to an individual, due August 1999 with interest at
7.50%, requiring monthly payments of $3,000, secured by personal
guarantee
of officer 250,232
Note due to an individual, due on demand with interest at 7.00%, unsecured 58,495
-----------
Total 1,690,485
Less Current Portion (898,098)
-----------
Total Long-Term Debt $ 792,387
===========
</TABLE>
11
<PAGE>
TRANS ENERGY, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 3 - LONG-TERM DEBT (Continued)
Future maturities of long-term debt are as follows:
1997 $ 898,098
1998 279,273
1999 53,167
2000 56,586
2001 62,346
2002 and thereafter 341,015
------------------
Total $ 1,690,485
==================
NOTE 4 - RELATED PARTY TRANSACTIONS
a. Management Agreement
A company owned by an officer of the Company's subsidiary, Vulcan
Energy Corporation (Vulcan), owns the remaining 20% of Vulcan's
common stock. The management company is entitled to a management
fee of $252,000 per year and 20% of net profits before taxes less
20% of the principal paid to the seller of Vulcan. This 20% net
profits interest has had no effect on the Company's consolidated
financial statements since the subsidiary has generated net
losses through December 31, 1996. Since the operations of Vulcan
Energy have been discontinued (see Note 9), management believes
that the Company has no obligation related to this management
agreement as of December 31, 1996 or in future periods.
NOTE 5 - ECONOMIC DEPENDENCE AND MAJOR CUSTOMERS
The Company's marketing arrangement with Sancho accounted for
approximately 47% of the Company's revenue for the year ended
December 31, 1997. This marketing agreement is in effect until
December 1, 2003. Another customer also generated sales in excess
of 10% of the Company's total sales. Sales to this customer made
up approximately 49% of net revenues in 1997.
NOTE 6 - COMMON STOCK, OPTIONS AND WARRANTS
On January 15, 1995, the Company issued 100,000 shares of its
common stock to a consultant for services rendered. The shares
were valued at $1.50 per share which was the average trading
price when issued.
On October 1, 1995, the Company issued an option to a consultant
to purchase 100,000 shares of its common stock at $0.001 per
share. The option was valued at the difference between the
exercise price and the trading price of the shares. Accordingly,
the Company incurred $275,000 of consulting fees in 1995. On
March 29, 1996, the consultant returned the option for
cancellation. The option was not exercised and was cancelled
without consideration, therefore the cancellation was accounted
for as a decrease of capital in excess of par value and the
related asset during 1996.
12
<PAGE>
TRANS ENERGY, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 6 - COMMON STOCK, OPTIONS AND WARRANTS (Continued)
During 1995, debentures having a total face value of $45,000 were
converted into 50,000 shares of the Company's common stock,
valued at $0.90 per share. Remaining debentures with a total face
value of $50,000 were converted into 55,555 shares of the
Company's common stock in 1996, also valued at $0.90 per share.
As an incentive to the debenture holders for extending the due
date of the debentures due on December 31, 1995, they were given
the right to receive the number of post-split shares they were to
have received pre-split. The value of the additional shares
issued, $202,032, has been recorded as loan costs and amortized
over the period until the debentures were converted in 1996.
The Company also received $5,000 during December of 1995 for the
purchase of 500,000 bridge warrants at $0.01 per warrant. The
bridge warrants were valued at the average trading price when
issued and expensed during the year ended December 31, 1995 in
the amount of $1,345,000. The bridge warrants are convertible
into 1 share of common stock at $0.50 per share for up to
eighteen months. With the completion of the public offering
discussed below, the $0.50 common stock conversion option of the
bridge warrants terminated and the bridge warrants automatically
converted into 2 redeemable warrants exercisable at 110% of the
offering price. The Company issued 48,750 additional stock
warrants as compensation for the sale of the bridge warrants
which were later surrendered to the Company for no consideration.
The Company issued an additional 300,000 bridge warrants in March
1996 in conjunction with the completion of a $600,000 bridge
financing. The Company issued 30,000 additional bridge warrants
in conjunction for the sale of bridge units containing the
unsecured notes and bridge warrants which were later returned to
the Company for no consideration. These bridge warrants were
exercisable for 18 months from the date of issuance and entitled
the holder thereof to purchase 1 share of common stock at $0.50
per share. The bridge warrants were valued at the average trading
price when issue and were being amortized to interest expense
over 12 months. With the completion of the public offering
discussed below, the $0.50 common stock conversion option of
these bridge warrants terminated and the bridge warrants
converted into 2 redeemable warrants exercisable at 110% of the
offering price. Accordingly, the remaining unamortized portion
was expensed at December 31, 1996.
The Company issued 9,000 shares of common stock during 1996 to an
individual as compensation for services rendered totaling $24,000
representing a per share price of $2.67 which approximated the
fair market value of the shares on the date they were authorized
to be issued.
In December 1996, the Company completed a public offering of its
common stock issuing 585,366 shares while receiving total
proceeds of $3,138,000 or $5.36 per share. Related costs
associated with this offering totalled $663,451 which has been
charged to capital in excess of par value in the accompanying
consolidated financial statements.
In September 1996, two officers, directors and shareholders of
the Company agreed to a reduction in amounts payable to them by
the Company totaling $250,000 which have previously been
accounted for as advances from related parties. This amount has
been contributed to capital in excess of par value in the
accompanying consolidated financial statements.
In 1997, the Company completed the sale of 8% cumulative
convertible debentures due March 25, 2000, netting cash proceeds
to the Company of $1,430,000. The terms of the convertible
debentures enable the holder to convert the debentures into
common stock of the Company at any time after 45 days at a price
based on a percentage of the quoted market price depending on
when the debentures are converted. The debentures were converted
to 1,489,172 shares of common stock in 1997.
13
<PAGE>
TRANS ENERGY, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Several vendors of Vulcan Energy, Inc., the discontinued
operation, have filed legal action against Vulcan Energy and the
Company alleging breach of contract and non-payment of
outstanding obligations. Those vendors are also seeking other
damages and assessments. The Company has included in the net
liabilities of the discontinued operations of Vulcan Energy,
amounts which they believe are owing to those vendors. These
actions are still in the discovery stage and the Company is
attempting to negotiate settlements with those vendors. The
Company believes that the amounts accrued in the accompanying
consolidated financial statements are adequate to satisfy these
claims.
A former officer of Vulcan Energy has filed suit against the
Company, its officers and directors and Vulcan Energy, asserting
a claim against these parties based upon a breach of contract and
fraud in connection with his employment with Vulcan Energy. The
parties to this action have filed response vigorously contesting
the allegations and have filed a countersuit to this action.
Management believes that the Company and the ultimate outcome of
these actions and their possible effects on the consolidated
financial statements cannot be readily determined.
The Company pays $1,400 per month for leased office space which
is on a month-to-month basis.
NOTE 8 - GOING CONCERN
The Company's consolidated financial statements are prepared
using generally accepted accounting principles applicable to a
going concern which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The
Company has incurred cumulative operating losses through December
31, 1997, and has a working capital deficit at December 31, 1997.
Revenues have not been sufficient to cover its operating costs
and to allow it to continue as a going concern. During 1995, the
Company purchased an 80% equity ownership of Vulcan Energy
Corporation, replaced management and recapitalized Vulcan Energy
with a $200,000 working capital infusion. However, the Company
discontinued the operations of Vulcan Energy during 1997,
incurring a substantial loss from discontinued operations.
Management believes that despite the discontinued operations of
Vulcan Energy and recurring operating losses, the potential
proceeds from the sale of common stock, other contemplated debt
and equity financing, and increases in operating revenues from
new development and the merger with Natural Gas Technologies will
enable the Company to continue as a going concern. (See also
Notes 10 and 11)
NOTE 9 - VULCAN ENERGY, INC. - DISCONTINUED OPERATIONS
In March 1997, the Company discontinued the operations of Vulcan
Energy, Inc., its 80% owned subsidiary. Accordingly, net
liabilities in excess of assets, totaling $340,821, have been
reflected separately in the accompanying consolidated balance
sheet as of December 31, 1997. The net operating loss of Vulcan
Energy, Inc. for the year ended December 31, 1996 amounting to
$1,711,877 has been reflected separately in the accompanying
consolidated statements of operations and include estimated
losses on disposition of Vulcan Energy, Inc.
NOTE 10 - JOINT VENTURE
The Company has entered into a joint venture with Natural Gas
Technologies, Inc. (NGT) to form Sundance Producers, LLC. This
joint venture will be engaged in oil and gas production
activities in Wyoming.
14
<PAGE>
TRANS ENERGY, INC.
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 11 - SUBSEQUENT EVENTS
Acquisition of Subsidiary
-------------------------
The Company has entered into a plan and agreement of merger with
Natural Gas Technologies, Inc. (NGT). It is expected that this
merger will qualify as a tax free reorganization within the
meaning of Section 368(9)(1)(A) of the Internal Revenue Code. The
merger is expected to be accomplished by way of exchanging 100%
of the issued and outstanding NGT common stock and NGT series
1994-B preferred stock for fully registered shares of common
stock of the Company at the exchange ratio. The exchange ratio
will be 2.785 shares of the Companys common stock for one share
of NGT common or preferred stock. It is intended that the
shareholders of NGT will own 75% of the issued and outstanding
shares of the Company immediately after the exchange.
Acquisition of Leasehold Interest
---------------------------------
The Company has entered into a purchase and sale agreement with
GCRL Energy Ltd. wherein the Company will pay $3,325,000 for
leasehold interests located in Wyoming and for Seismic data
associated with those leasehold interests.
15
<PAGE>
TRANS ENERGY, INC.
S.F.A.S. 69 Supplemental Disclosures
December 31, 1997 and 1996
(Unaudited)
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES
(1) Capitalized Costs Relating to
Oil and Gas Producing Activities
December 31,
-------------------------
1997 1996
----------- -----------
Proved oil and gas producing properties and related
lease and well equipment $ 4,122,311 $ 3,799,387
Accumulated depreciation and depletion (433,799) (407,934)
----------- -----------
Net Capitalized Costs $ 3,688,512 $ 3,391,453
=========== ===========
(2) Costs Incurred in Oil and Gas Property
Acquisition, Exploration, and Development Activities
For the Years Ended
December 31,
---------------------------
1997 1996
----------- -----------
Acquisition of Properties
Proved $ 65,000 $ --
Unproved 573,479 --
Exploration Costs 164,900 --
Development Costs 280,206 --
The Company does not have any investments accounted for by the
equity method.
(3) Results of Operations for
Producing Activities
For the Year Ended
December 31,
1997 1996
----------- -----------
Sales $ 390,922 $ 452,183
Production costs (120,190) (115,112)
Depreciation and depletion (25,865) (13,916)
--------- ---------
Results of operations for producing activities
(excluding corporate overhead and interest costs) $ 244,867 $ 323,155
========= =========
16
<PAGE>
TRANS ENERGY, INC.
S.F.A.S. 69 Supplemental Disclosures
December 31, 1997 and 1996
(Unaudited)
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES (CONTINUED)
(4) Reserve Quantity Information
Oil Gas
BBL MCF
---------- ----------
Balance, December 31, 1996 196,343 1,677,359
Production (1,343) (125,210)
Purchased and developed 15,870 229,167
---------- ----------
Balance, December 31, 1997 210,870 1,781,316
========== ==========
Proved developed reserves:
Oil Gas
BBL MCF
---------- ----------
Beginning of the year 1997 196,343 1,677,359
End of the year 1997 210,870 1,781,316
Beginning of the year 1996 199,070 1,789,654
End of the year 1996 196,343 1,677,359
During 1996, 1995, 1992, 1991 and 1990, the Company had reserve
studies and estimates prepared on its various properties. The
difficulties and uncertainties involved in estimating proved oil
and gas reserves makes comparisons between companies difficult.
Estimation of reserve quantities is subject to wide fluctuations
because it is dependent on judgmental interpretation of
geological and geophysical data.
17
<PAGE>
TRANS ENERGY, INC.
S.F.A.S. 69 Supplemental Disclosures
December 31, 1997 and 1996
(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, 1996
Trans Energy
and
Subsidiaries
-----------------
Future cash inflows $ 17,638,619
Future production and development costs (6,332,264)
------------
Future net inflows before income taxes 11,306,355
Future income tax expense (3,844,161)
------------
Future net cash flows 7,462,194
10% annual discount for estimated timing of cash flows (3,850,492)
------------
Standardized measure of discounted future net cash flows $ 3,611,702
============
Future income taxes were determined by applying the statutory
income tax rate to future pre-tax net cash flow relating to
proved reserves.
At December 31, 1997
Trans Energy
and
Subsidiaries
-----------------
Future cash inflows $ 17,407,048
Future production and development costs (6,249,130)
------------
Future net inflows before income taxes 11,157,918
Future income tax expense (3,793,693)
------------
Future net cash flows 7,364,225
10% annual discount for estimated timing of cash flows (3,829,397)
------------
Standardized measure of discounted future net cash flows $ 3,534,828
============
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,
---------------------------
1997 1996
----------- -----------
Standardized measure, beginning of year $ 3,611,702 $ 4,063,885
Oil and gas sales, net of production costs (390,922) (452,183)
Sales of mineral in place -- --
Quantity estimates made 314,048 --
----------- -----------
Standardized measure, end of year $ 3,534,828 $ 3,611,702
=========== ===========
18
<PAGE>
TRANS ENERGY, INC.
S.F.A.S. 69 Supplemental Disclosures
December 31, 1997 and 1996
(Unaudited)
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES (CONTINUED)
The above schedules relating to proved oil and gas reserves,
standardized measure of discounted future net cash flows and
changes in the standardized measure of discounted future net cash
flows have their foundation in engineering estimates of future
net revenues that are derived from proved reserves and with the
assumption of current pricing and current costs of production for
oil and gas produces in future periods. 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 date. 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.
19
<PAGE>
TRANS ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
June 30,1998
(Unaudited)
<PAGE>
TRANS ENERGY, INC.
Consolidated Balance Sheets
ASSETS
------
June 30, December 31,
1998 1997
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash $ - $ 185,881
Accounts receivable 64,686 175,161
Prepaid and other current assets - 1,441
----------- -----------
Total Current Assets 64,686 362,483
----------- -----------
PROPERTY AND EQUIPMENT
Vehicles 94,589 94,589
Machinery and equipment 10,092 10,092
Pipelines 2,231,308 2,231,308
Well equipment 271,895 271,882
Wells 6,941,955 3,850,429
Leasehold acreage 767,500 597,221
Accumulated depreciation (1,823,397) (1,742,136)
----------- -----------
Total Fixed Assets 8,493,942 5,313,385
----------- -----------
OTHER ASSETS
Note receivable - other 100,002 -
Deposits 1,508 -
Prepaid promotion expenses 1,061,628 -
Loan acquisition costs 2,706,898 4,733
----------- -----------
Total Other Assets 3,870,036 4,733
----------- -----------
TOTAL ASSETS $ 12,428,664 $ 5,680,601
= ========== = =========
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE>
TRANS ENERGY, INC.
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Cash overdraft $ 16,133 $ --
Accounts payable - trade 1,396,788 1,250,017
Accrued expenses 432,037 72,195
Salaries payable -- 64,602
Notes payable - current portion 25,313 898,098
Debentures payable 4,625,400 --
----------- -----------
Total Current Liabilities 6,495,671 2,284,912
----------- -----------
NET LIABILITIES IN EXCESS OF ASSETS OF
DISCONTINUED OPERATIONS 340,821 340,821
----------- -----------
LONG-TERM LIABILITIES
Notes payable 1,744,441 792,387
----------- -----------
Total Long-Term Liabilities 1,744,441 792,387
----------- -----------
Total Liabilities 8,580,933 3,418,120
----------- -----------
MINORITY INTERESTS -- 250,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock: 30,000,000 shares authorized at
$0.001 par value; 2,138,450 and 1,415,808 shares
issued and outstanding, respectively 2,139 1,416
Capital in excess of par value 12,867,963 10,751,226
Accumulated deficit (9,022,371) (8,740,161)
----------- -----------
Total Stockholders' Equity 3,847,731 2,012,481
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,428,664 $ 5,680,601
=========== ===========
</TABLE>
2
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
TRANS ENERGY, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months For the Three Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Oil and gas sales $ 473,006 $ 543,550 $ 266,768 $ 272,834
------------ ------------- ------------ ------------
Total Revenues 473,006 543,550 266,768 272,834
------------ ------------- ------------ ------------
COSTS AND EXPENSES
Cost of oil and gas 303,076 248,265 160,433 157,095
Salaries and wages 58,596 130,386 26,802 99,635
Depreciation and amortization 81,261 176,352 40,629 142,788
Selling, general and administrative 412,097 621,484 271,480 519,933
------------ ------------- ------------ ------------
Total Costs and Expenses 855,030 1,176,487 499,344 919,451
------------ ------------- ------------ ------------
Net Income (Loss) from
Operations (382,024) (632,937) (232,576) (646,617)
------------ ------------- ------------ ------------
OTHER INCOME (EXPENSE)
Gain on sale of assets 239,129 -- 239,129 --
Bad debt expense -- (100,000) -- (100,000)
Interest income 459 10,155 59 8,510
Interest expense (139,774) (181,167) (74,449) (144,852)
------------ ------------- ------------ ------------
Total Other Income (Expense) 99,814 (271,012) 164,739 (236,342)
------------ ------------- ------------ ------------
NET LOSS BEFORE INCOME TAXES
AND MINORITY INTERESTS (282,210) (903,949) (67,837) (882,959)
------------ ------------- ------------ ------------
INCOME TAXES -- -- -- --
------------ ------------- ------------ ------------
NET LOSS BEFORE MINORITY
INTERESTS (282,210) (903,949) (67,837) (882,959)
MINORITY INTERESTS -- -- -- --
------------ ------------- ------------ ------------
NET LOSS $ (282,210) $ (903,949) $ (67,837) $ (882,959)
============ ============= ============ ============
PRIMARY LOSS PER SHARE
NET LOSS $ (0.16) $ (0.88) $ (0.14) $ (0.84)
============ ============= ============ ============
FULLY DILUTED LOSS PER SHARE $ (0.16) $ (0.88) $ (0.14) $ (0.84)
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
TRANS ENERGY, INC.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Capital in
Common Shares Excess of Accumulated
Shares Amount Par Value Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 956,015 $ 956 $ 8,929,501 $ (6,710,711)
Common stock issued for services
at $5.64 per share 87,500 88 492,099 --
Common stock issued for cash
at $3.84 per share 372,293 372 1,429,628 --
Contribution of capital by
shareholders -- -- 49,998 --
Common stock offering costs -- -- (150,000) --
Net loss for the year ended
December 31, 1997 -- -- -- (2,029,450)
------------ ------------ ------------ ------------
Balance, December 31, 1997 1,415,808 1,416 10,751,226 (8,740,161)
Common stock issued for well costs
at $4.00 per share (unaudited) 12,500 13 49,987 --
Contribution of capital by
shareholders (unaudited) -- -- 208,210 --
Common stock issued for cash at
$1.31 per share (unaudited) 236,312 236 310,514 --
Common stock issued for services
at $3.61 per share (unaudited) 473,830 474 1,548,026 --
Net loss for the six months ended
June 30, 1998 (unaudited) -- -- -- (282,210)
------------ ------------ ------------ ------------
Balance, June 30, 1998 (unaudited) 2,138,450 $ 2,139 $ 12,867,963 $ (9,022,371)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
TRANS ENERGY, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months For the Three Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss $ (282,210) $ (903,949) $ (67,837) $ (882,959)
Adjustments to reconcile net loss to
cash provided by operating activities:
Depreciation, depletion and
amortization 81,261 176,352 40,629 142,788
Minority interest -- -- -- --
Common stock issued for services 1,548,500 171,875 1,548,500 171,875
Changes in operating assets and liabilities:
Decrease (increase) in accounts
receivable 10,473 61,237 (23,313) (16,676)
Decrease (increase) in prepaid
expenses (1,061,695) 59,601 (1,061,695) 59,601
Decrease (increase) in loan
acquisition costs (2,702,165) -- (2,702,165) --
Increase (decrease) in accounts
payable and accrued expenses 666,354 495,882 230,294 598,883
Increase (decrease) in interest
payable -- (9,154) -- --
------------ ------------ ------------ ------------
Cash Provided (Used) by
Operating Activities (1,739,482) 51,844 (2,035,587) 73,512
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property (259,129) -- (259,129) --
Expenditures for property and
equipment (3,202,689) (798,336) (2,281,280) (727,816)
------------ ------------ ------------ ------------
Cash Provided (Used) by
Investing Activities (3,461,818) (798,336) (2,540,409) (727,816)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debentures 4,625,400 -- 4,096,525 --
Borrowings of long-term debt 259,208 1,312,700 259,208 100,000
Repayment to related parties -- (410,541) -- (101,962)
Common stock issued for cash 310,750 -- 310,750 --
Principal payments on long-term debt (179,939) (154,064) (90,487) (47,323)
------------ ------------ ------------ ------------
Cash Provided (Used) by
Investing Activities 5,015,419 748,095 4,575,996 (49,285)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (185,881) 1,603 -- (703,589)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 185,881 481,846 -- 1,187,038
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ -- $ 483,449 $ -- $ 483,449
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
TRANS ENERGY, INC.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months For the Three Months
Ended June 30, Ended June 30,
------------------------ ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
CASH PAID FOR:
<S> <C> <C> <C> <C>
Interest $ 139,774 $ 181,167 $ 74,449 $ 144,852
Income taxes $ -- $ -- $ -- $ --
NON-CASH FINANCING ACTIVITIES:
Common stock issued for services $1,548,500 $ 171,875 $1,548,500 $ 171,875
Conversion of debentures to equity $ -- $ 500,000 $ -- $ 500,000
Common stock issued for well costs $ 50,000 $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
TRANS ENERGY, INC.
Notes to the Consolidated Financial Statements
June 30, 1998 and December 31, 1997
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been
prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows at June 30, 1998 and for all
periods presented have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
general accepted accounting principles have been condensed or
omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December
31, 1997 audited consolidated financial statements. The results of
operations for the periods ended June 30, 1998 and 1997 are not
necessarily indicative of the operating results for the full year.
7
<PAGE>
NATURAL GAS TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and April 30, 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Natural Gas Technologies, Inc. and Subsidiary
Dallas, Texas
We have audited the accompanying consolidated balance sheet of Natural Gas
Technologies, Inc. and Subsidiary as of March 31, 1998 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the eleven months then ended. 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
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 audit provides 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 Natural Gas
Technologies, Inc. and Subsidiary as of March 31, 1998, and the results of their
operations and their cash flows for the eleven months then ended, in conformity
with generally accepted accounting principles.
Jones, Jensen & Company
Salt Lake City, Utah
July 21, 1998
1
<PAGE>
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARY
Consolidated Balance Sheet
ASSETS
------
March 31,
1998
----------
CURRENT ASSETS
Cash $ 14,261
Accounts receivable 17,712
Notes receivable - related parties (Note 4) 101,467
----------
Total Current Assets 133,440
----------
FIXED ASSETS
Oil and gas properties (full cost method) (Notes 1, 6 and 7) 4,675,193
Other fixed assets 65,466
Accumulated depreciation and depletion (330,623)
----------
Total Fixed Assets 4,410,036
----------
OTHER ASSETS
Investments in joint ventures 190,500
Investment in stock (Note 2) 14,464
Other assets 3,113
----------
Total Other Assets 208,077
----------
TOTAL ASSETS $4,751,553
==========
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARY
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31,
1998
------------
CURRENT LIABILITIES
Accounts payable (Note 4) $ 278,295
Accrued interest 68,081
Current portion of note payable (Note 14) 5,746
------------
Total Current Liabilities 352,122
------------
NOTE PAYABLE (Note 14) 19,934
------------
TOTAL LIABILITIES 372,056
------------
REDEEMABLE PREFERRED STOCK, SERIES 1994-A
$4.00 PAR VALUE (500,000 SHARES AUTHORIZED,
7,097 OUTSTANDING) (Note 9) 28,388
------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY --
------------
STOCKHOLDERS' EQUITY
Preferred stock, Series 1994-B $4.00 par value
(500,000 shares authorized, 66,360 outstanding) 265,440
Common stock, $0.001 par value (10,000,000
shares authorized, 5,878,200 outstanding) 5,878
Additional paid-in capital 10,261,358
Deferred services (net of amortization of $17,500) (160,000)
Receivable for stock issued to officers (9,000)
Accumulated deficit (6,012,567)
------------
Total Stockholders' Equity 4,351,109
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,751,553
============
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
<TABLE>
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARY
Consolidated Statements of Operations
<CAPTION>
For the
Eleven Months For the
Ended Year Ended
March 31, April 30,
1998 1997
----------- -----------
<S> <C> <C>
REVENUES
Oil and gas revenues $ 287,833 $ 100,987
Other Income 68,208 5
----------- -----------
Total Revenues 356,041 100,992
----------- -----------
EXPENSES
Production expenses and taxes 442,963 103,646
Depreciation, depletion and amortization 245,266 43,176
Professional fees 229,799 44,816
Consulting fees 125,000 115,000
Personnel costs 220,753 --
Rent 27,646 7,249
Business promotion 6,551 1,015
Director fees -- 20,833
Taxes 22,803 3,658
Travel 39,866 7,610
Other expenses 48,098 9,896
Write-down of oil and gas for ceiling test 3,076,790 --
Minority interest in loss of consolidated subsidiary -- (6,573)
----------- -----------
Total Expenses 4,485,535 350,326
----------- -----------
LOSS FROM OPERATIONS (4,129,494) (249,334)
----------- -----------
OTHER INCOME (EXPENSES)
Interest income 7,929 715
Interest expense (405,049) (58,486)
Loss on impairment of assets (386,800) --
Loss on debt extinguishment (222,780) --
----------- -----------
Total Other Income (Expense) (1,006,700) (57,771)
----------- -----------
NET LOSS (5,136,194) (307,105)
Less unpaid preferred stock dividend claims for the year (9,199) (9,604)
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(5,145,393) $ (316,709)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARY
Consolidated Statements of Operations (Continued)
For the
Eleven Months For the
Ended Year Ended
March 31, April 30,
1998 1997
---- ----
LOSS PER SHARE
Primary $ (1.18) $ (0.11)
Primary, attributable to common shares $ (1.18) $ (0.11)
Fully diluted $ (1.16) $ (0.10)
Fully diluted, attributable to common shares $ (1.16) $ (0.11)
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
<TABLE>
NATURAL GAS TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of
Stockholders' Equity For the Eleven Months and
the Year Ended March 31, 1998 and April 30,
1997
<CAPTION>
Preferred Stock
---------------
Series 1994-A Series 1994-B Common Stock Additional Deferred
------------- ------------- ------------ Paid-In Services & Accumulated
Shares Amount Shares Amount Shares Amount Capital Other Deficit
------ ------ ------ ------ ------ ------ ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1996 9,597 $ 38,388 210,736 $ 842,944 2,805,014 $ 2,806 $ 940,139 $ -- $ (569,268)
Stock issued for:
Cash -- -- -- -- 225,000 225 1,574,775 (159,000) --
Deferred promotional
services -- -- -- -- 200,000 200 159,800 (160,000) --
Oil and gas interests -- -- -- -- 120,000 120 628,862 -- --
Stock of Interior Energy, Inc. -- -- -- -- 370,000 370 272,217 -- --
Patent license -- -- 50,000 200,000 100,000 100 199,900 -- --
Conversion of preferred to
common -- -- (194,376) (777,504) 194,376 193 777,311 --
Net (loss) -- -- -- -- -- -- -- -- (307,105)
------ -------- -------- --------- ---------- ------- ----------- ----------- -----------
Balances, April 30, 1997 9,597 38,388 66,360 265,440 4,014,390 4,014 4,553,004 (319,000) (876,373)
Stock issued for:
Cash -- -- -- -- 239,524 240 1,484,760 -- --
Related party liabilities -- -- -- -- 1,614,286 1,614 3,728,578 150,000 --
Options issued to related
party for properties -- -- -- -- -- -- 425,026 -- --
Management services -- -- -- -- 10,000 10 69,990 -- --
Repurchase of shares (2,500) (10,000) -- -- -- -- -- -- --
Net (loss) -- -- -- -- -- -- -- -- (5,136,194)
------ -------- -------- --------- ---------- ------- ----------- ----------- -----------
Balances, March 31, 1998 7,097 $ 28,388 66,360 $ 265,440 5,878,200 $ 5,878 $10,261,358 $ (169,000) $(6,012,567)
====== ======== ======== ========= ========== ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
<TABLE>
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARY
Consolidated Statements of Cash Flows
<CAPTION>
For the
Eleven Months For the
Ended Year Ended
March 31, April 30,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,136,194) $ (307,105)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation, depletion and amortization 245,266 43,176
Stock issued for services 70,000 100,833
Stock issued for payables and accrued interest 692,120 --
Amortization of note payable discount -- 14,838
Loss on impairment and sales of assets 691,373 --
Write-down of oil and gas for ceiling test 1,472,313 --
(Increase) decrease in:
Accounts receivable (14,305) (3,407)
Other assets -- (3,049)
Increase (decrease) in:
Accounts payable (12,740) 252,826
Accrued interest 27,972 40,029
Minority interests -- 28,427
----------- -----------
Net Cash Provided (Used) by Operating Activities (1,964,195) 166,568
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for oil and gas assets (1,697,558) (726,286)
Purchase of furniture and equipment (65,466) --
Investment in joint venture (190,500) --
Proceeds from sale of oil and gas interest 1,500,000 --
Goodwill acquired in Lyric Energy acquisition -- (100,000)
----------- -----------
Net Cash (Used) by Investing Activities (453,524) (826,286)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 1,485,000 1,416,000
Repurchase of preferred shares (10,000) --
Loans and advances from related party 320,000 80,203
Note receivable from related party (101,467) --
Note payable proceeds 25,684 --
Note payments (103,962) (20,266)
----------- -----------
Net Cash Provided by Financing Activities $ 1,615,255 $ 1,475,937
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
<TABLE>
NATURAL GAS TECHNOLOGIES, INC. & SUBSIDIARY
Statements of Cash Flows (Continued)
<CAPTION>
For the
Eleven Months For the
Ended Year Ended
March 31, April 30,
1998 1997
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH FOR PERIOD $ (802,464) $ 816,219
CASH AT BEGINNING OF PERIOD 816,725 506
----------- -----------
CASH AT END OF PERIOD $ 14,261 $ 816,725
=========== ===========
CASH PAID FOR:
Interest $ 188,653 $ 2,525
Income taxes $ -- $ --
NON-CASH FINANCING ACTIVITIES:
Professional services $ 70,000 $ --
Prepaid professional services $ -- $ 160,000
Oil and gas properties $ -- $ 628,982
Reduction of accounts, notes and interest payable
net of transfer price for Lyric Energy, Inc. $ 3,630,192 $ --
Acquisition if Interior Energy, Inc. $ -- $ 49,997
Acquisition of patent license and related equipment $ -- $ 400,000
Options issued for oil and gas properties $ 425,026 $ --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
8
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and April 30, 1997
GENERAL Natural Gas Technologies, Inc. (NGT or "the Company) was
incorporated on April 26, 1993 and began operations in June
1993. NGT acquired interests in various oil and gas properties
in February and June 1994 and has been active in this industry
since then. The nature of the oil and gas industry lends itself
to uncertainties and risks. During the year ended April 1997,
the Company acquired oil and gas properties with significant
reserves. (See Note 6.)
In April 1997, NGT acquired 100% ownership of Interior Energy,
Inc. (IEI) and ownership of 81% of Lyric Energy, Inc. (Lyric).
During February 1998, the Company sold its interest in Lyric to
an officer and director for $150,000. IEI is consolidated with
the Company in the presentation of its financial statements.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of NGT conform with
generally accepted accounting principles and to general
practices within the oil and gas industry. Policies that
materially affect the determination of financial position,
changes in financial position, and results of operations are
summarized as follows:
Consolidation
-------------
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiary, IEI. Intercompany
transactions and balances have been eliminated in consolidation.
Federal Income Taxes
--------------------
For Federal income tax purposes, NGT reports its operations on
the accrual basis of accounting. Depreciation is calculated
using the MACRS percentages. First year expensing under Section
179 is utilized when it is available and has been determined to
be advantageous. NGT files a consolidated tax return with IEI.
Statement No. 109 (SFAS 109) "Accounting for Income Taxes"
requires that a liability approach to providing for deferred
taxes be used. That is, deferred taxes must be recorded for all
temporary differences between the book and tax bases of assets
and liabilities. (See Note 11.)
Oil and Gas Properties
----------------------
The Company records its oil and gas producing activities under
the full cost method of accounting, and accordingly, capitalizes
all costs incurred in the acquisition, exploration, and
development of proved oil and gas properties, including the
costs of abandoned properties, dry holes, geophysical costs, and
annual lease rentals. In general, sales or other dispositions of
oil and gas properties are accounted for as adjustments to
capitalized costs, with no gain or loss recorded until the
proceeds from dispositions exceed the company's basis in the
full cost pool.
9
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and April 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Oil and Gas Properties (continued)
----------------------------------
Depletion and amortization are computed on a composite
units-of-production method based on estimated proved reserves. All
leasehold, equipment, and intangible costs associated with oil and
gas properties are currently included in the base for computation
and amortization unless the property has not been evaluated and no
estimated reserves have been included for the property in the
Company's total reserves. The Company's reserves were reviewed and
estimated by a registered petroleum engineer. Included in these
properties reviewed by the engineer were significant acquisitions
during the current year. All of the Company's reserves are located
within the United States.
Loss per Share
--------------
Primary loss per share is computed on the basis of weighted
average number of common shares actually outstanding. Fully
diluted loss per share are computed based on the increased number
of shares that would be outstanding assuming that preferred shares
outstanding at the first of the year were converted at the first
of the year. Preferred shares issued during the year are assumed
to be converted on the date of issuance.
The following table presents a reconciliation of the weighted
average number of shares actually outstanding with the number of
shares used in the computation of fully diluted loss per share:
<TABLE>
<CAPTION>
March 31, April 30,
1998 1997
---------------- ---------------
<S> <C> <C>
Primary
Weighted average number of shares actually
outstanding 4,356,055 2,860,393
================ ===============
Fully diluted
Weighted average number of shares actually
outstanding 4,356,055 2,860,393
Preferred shares 74,167 76,917
---------------- ---------------
4,430,222 2,937,310
================ ===============
</TABLE>
At the end of each of the years presented, the Company had
contractually or otherwise committed to issue common and/or
preferred shares but the stock certificates had not actually been
issued. These shares have been included as issued in the
outstanding shares presented in the balance sheet and the
statement of changes in stockholders' equity. They have also been
included in weighted average earnings per share as of the
effective date of the agreement rather than the date certificates
were ultimately issued.
10
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and April 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Flows
-------------------
The Company considers cash to be its only cash equivalent for
purposes of presenting its Statement of Cash Flows. The Company
had cash at two banks at April 30, 1997. Accounts at each
institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. On occasion throughout the year, the
Company's cash balances exceeded the insured amount.
Amortization
------------
The Company is also amortizing organization costs on the
straight-line method over five years and through September 1997
was amortizing the cost of a patent license (discussed further at
Note 8.)
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the 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.
Environmental Issues
--------------------
The oil and gas industry is regulated in Texas by the Texas
Railroad Commission (RRC) and Texas Natural Resources Conservation
Commission. Leases are operated under permits from the RRC.
Failure to comply with regulations could result in interruption or
termination of the operations. Additionally, upon cessation of
use, the wells require plugging and sit cleanup. Costs of
voluntary termination and remediation have been estimated to be
insignificant on a well by well basis and are expected to be
recorded as incurred.
Advertising Costs
-----------------
All advertising costs are expensed as incurred.
Fiscal Year End
---------------
The Company has changed its fiscal year end to March 31,
accordingly, the financial statements reflect the operations and
cash flows for the eleven months then ended.
11
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and April 30, 1997
NOTE 2 - INVESTMENTS IN STOCK AND ACQUISITIONS OF SUBSIDIARIES
In 1994, NGT acquired approximately 2% of the outstanding shares
of Wagman Petroleum, Inc. (WPI) from urelated parties in exchange
for NGT common shares. As discussed at Note 4, WPI is considered a
related party. WPI is not a subsidiary. There is no market for
these shares. Their value has been determined based on an estimate
of the future value of WPI at the time of acquisition. The Company
intends to hold this investment for the foreseeable future.
In April 1997, the Company acquired 81.25% of the outstanding
shares of Lyric Energy, Inc. This entity was a consolidated
subsidiary at April 30, 1997. During February 1998, the Company
sold its interest in Lyric to Brent Wagman (the Company's
president) for $150,000.
On April 1, 1997, NGT acquired 100% of the outstanding shares of
Interior Energy, Inc. (IEI). NGT acquired IEI subject to a note
payable to third parties for $3,000,000 that arose from the
purchase of interests in certain oil and gas leases. As part of
the purchase, NGT assumed full liability for the balance of the
note.
NOTE 3 - STOCK TRANSACTIONS
During the year ended April 1995, NGT authorized 1,000,000
preferred shares and designated it as Series 1994-A (Preferred )
and Series 1994-B (Preferred B). Both of these series have a 9.25%
cumulative annual dividend. Preferred A shares are convertible to
common shares on a 1.1 for 1 basis and may be called by the
Company at five cents per share if the trading price of the common
shares exceeds $7 for twenty consecutive trading days. They are
also subject to a mandatory redemption at par five years from the
effective date of issuance. Preferred B shares automatically
convert to common on a one-for-one basis if the trading price of
the common shares exceeds $5 per share for ten consecutive trading
days. All of the outstanding preferred shares became convertible
at the option of the holder at May 1, 1996. (See Note 15 for
subsequent events.)
In February 1996, NGT entered into an agreement for the provision
of public relations, identification of funding sources, merger
candidates, etc. services with a third party. These services were
to be rendered over a primary period ending in December 1996 with
provisions for extensions as approved by both parties. The shares
were to be issued on a milestone basis with 200,000 shares issued
at the commencement of the agreement. One-half of the original
shares were for services to be rendered after April 30, 1996, were
recorded as Deferred Services at that date, and have been included
in expenses during the year ended April 1997. An additional
200,000 shares were issued during April 1997 in anticipation of
meeting additional milestones after the fiscal year end and were
reported as Deferred Services at April 30, 1997. Per mutual
agreement, these services have been deferred to an undetermined
future date and the deferred services remain on the books pending
utilization of the services. The remaining 100,000 shares called
for under this agreement are to be issued after the achievement of
specified events. The agreement calls for all of these shares to
be registered in any registration pursued by NGT.
12
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and April 30, 1997
NOTE 3 - STOCK TRANSACTIONS (Continued)
During the year ended April 1997, the Company issued 225,000
common shares to its directors on the basis of $7 per share. Of
the total $1,575,000 to be received, the directors did not pay
$150,000 until June 1997, after the year end. Due to the
relationship of this receivable to stock issuance, it was
presented as an offset in Stockholders' Equity collected. In 1998,
$9,000 was similarly receivable for shares which the Company had
agreed to issued to a director.
During the period ended March 31, 1998, the Company has issued
239,524 shares for $1,485,000. The Company also issued 10,000
shares to an individual for management services and 50,000 shares
to its president for debt forgiveness. The Company has agreed to
issue 50,000 shares to a director for debt forgiveness and a
payment of $9,000 and cleared up other related party liabilities
totaling $3,630,192 by agreeing to issue 1,600,000 shares.
NOTE 4 - TRANSACTIONS WITH RELATED PARTIES
WPI operates essentially all of the properties in which the
Company has interests. As operator, WPI incurs expenses for
drilling, reworking, and normal lease operating expenses; and then
charges them out to the respective interest owners. The Company's
president owns approximately 45% of the outstanding stock of WPI
and also serves as its president. At March 31, 1998 and April 30,
1997, the Company owed WPI $259,587 and $134,982, respectively,
for accounts payable.
During the year ended April 1997, the Company's directors acquired
stock (as discussed at Note 3), loaned funds to the Company, and
were reimbursed for business expenses.
In April 1997, the Company acquired 81.25% of the outstanding
shares of Lyric Energy, Inc. This entity was a consolidated
subsidiary at April 30, 1997. During February 1998, the Company
sold its interest in Lyric to Brent Wagman (the Company's
president) for $150,000.
During the eleven months ended March 31, 1998, the Company loaned
$101,467 to Trans Energy, Inc. The Company is presently in the
process of completing a merger with Trans Energy, Inc. The notes
bear interest at 8%, are due upon demand and are unsecured.
At March 31, 1998, the Company owed WPI $259,687 which is recorded
in accounts payable.
NOTE 5 - NOTES PAYABLE
During February 1996, the Company borrowed $35,000 from a bank in
order to finance certain reworking expenses. This note bears
interest at 10.5% and is due in twenty-four installments of $1,625
per month including interest. The Company gave its interest in the
wells being reworked as collateral for this note. This note was
paid off during February 1998.
13
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and April 30, 1997
NOTE 5 - NOTES PAYABLE (Continued)
In April 1997, as part of its acquisition of IEI, the Company
assumed liability for a note payable to EXP, Inc. (EXP) with an
original face amount of $3,475,000. The note was due March 1, 1998
with no specified payments due prior to maturity although
prepayment was allowed. Subsequent to April 1997, EXP assigned the
note to Ameritech Petroleum, Inc. (Ameritech). In February 1998,
the Company negotiated a deal to issue 1,452,250 common shares to
Ameritech as payment in full of this note and certain other
liabilities and accrued interest which Ameritech had obtained from
EXP. Due to its terms, this note was recorded at its fair value at
the time of the acquisition of IEI. This discount was being
amortized to interest over the term of the note. Due to early
extinguishment of this debt, a loss of $222,780 has been
recognized in the current period.
NOTE 6 - OIL AND GAS PROPERTIES
The Company's oil and gas interests are all located in Texas. They
consist primarily of two leases in Wilbarger County, a field in
Runnels County, various small leases mostly in Runnels County, and
an undeveloped lease in Crockett County. The bulk of these
properties were acquired during the year ended April 1997. During
the period ended March 31, 1998, the Company has expanded its
interest in the field in Runnels County by paying $200,000 and
issuing options to acquire 100,000 shares of common stock,
purchased and drilled a lease in Shackleford County, drilled
additional wells on the Runnels County field, and reworked the
Wilbarger and Runnels County leases. The Company also invested in
a joint venture to drill two wells in the Powder River Basin of
Wyoming. The first of these wells was a dry hole. The Company and
its joint venture partner have delayed drilling the second well
and are seeking a buyer for the prospect.
In December 1997, the Company sold one half of its interest in the
Crockett County lease for $1,500,000. In accordance with the full
cost accounting method, these proceeds were charged against the
full cost pool rather than showing them as a gain on sale of
assets.
The Company hired a petroleum engineer to estimate its reserves as
of March 31, 1998. The Crockett County lease was excluded from
this analysis. Based on these estimates, the value of the
Company's oil and gas assets was written down to the amount
supported by a ceiling test calculation. The write-down amounted
to $3,076,790.
14
<PAGE>
<TABLE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and April 30, 1997
<CAPTION>
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31,
1998 and April 30, 1997:
March 31, April 30,
1997 1997
---------------- ---------------
<S> <C> <C>
Oil and gas properties:
Leasehold and capitalized IDC $ 3,307,392 $ 4,662,651
Lease and well equipment 1,367,801 862,270
Office furniture and equipment 65,466 -
Blending tower - 40,000
---------------- ---------------
4,470,659 5,564,921
Less accumulated depreciation and depletion (330,623) (97,706)
---------------- ---------------
$ 4,410,036 $ 5,467,215
================ ===============
</TABLE>
Depletion totaled $226,959 and $39,127 for the periods ended March
1998 and April 1997, respectively. Depreciation was $5,957 during
the period ended March 1998 with none during the year ended April
1997. In addition, due to the decline in oil prices and revisions
to estimated reserves, the Company charged off $3,076,790 of oil
and gas costs which exceed a ceiling test based on the discounted
present value of estimated reserves.
NOTE 8 - PATENT LICENSE
During October 1996, the Company acquired a license to a patented
blending process for the blending of automobile fuel. The
acquisition of the license included $40,000 of tanks and
equipment.
During September 1997, it was determined that the vendor did not
have clear title to these assets and that the Company would be
unable to utilize these assets the future due to circumstances
beyond its control. As a result of this determination, these
assets were abandoned and a loss was recognized of $386,800. The
Company entered into a lawsuit against the vendor to retrieve the
shares it had issued for these patent assets.
(See Note 15 for subsequent events.)
NOTE 9 - REDEEMABLE PREFERRED STOCK
As discussed at Note 3, the Company's Preferred A shares carry a
mandatory redemption requirement. They must be redeemed at par at
the end of five years. Effectively, both preferred stock series
may be converted to common stock by the Company upon the
attainment of specific circumstances as described at Note 3. In
accordance with generally accepted accounting principles, the
shares carrying the mandatory redemption feature have been
reported separately from stockholders' equity. The redemption date
for these shares is July 1, 1999. During the period ended March
31, 1998, the Company repurchased 2,500 Preferred A shares at par
plus accumulated dividends. (See Note 15 for subsequent events.)
15
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and April 30, 1997
NOTE 10 - ACCUMULATED DIVIDENDS ON PREFERRED STOCK
As discussed in Note 3, the Company has issued preferred stock
that contains a provision for cumulative dividends at the rate of
9.25%. These dividends have remained undeclared and unpaid since
issuance. The amounts accumulated during the periods ended March
31, 1998 and April 30, 1997 totaled $9,199 and $9,604,
respectively. Total accumulated unpaid dividends at April 30, 1997
was $32,140. The statement of operations presents net loss
available to common shareholders after increasing the actual net
loss for the unpaid dividends for the periods.
NOTE 11 - INCOME TAXES
Operating loss carryforwards for income tax purposes vary from
retained deficit amounts due to differences in the tax treatment
of various items. These loss carryforwards which may provide
future benefits, expire as shown in the following table:
Amount of
Year of Operating Loss
Expiration Carryforward
---------- -----------------
2009 $ 301,283
2010 241,814
2011 220,831
2012 410,280
2013 2,280,631
--------------------
$ 3,454,839
====================
The provision for income tax is as follows:
March 31, April 30,
1998 1997
----------------- -----------------
Current
Federal $ - $ -
State - -
Deferred
Federal (2,009,757) (222,455)
State (265,997) (29,433)
Less allowance 2,275,754 251,888
----------------- -----------------
Total $ - $ -
================= =================
A reconciliation of income tax at the statutory rate to the
Company's effective rate at March 31, 1998 and April 30, 1997
indicates that the expected statutory rate for each of these
years is 0%. The effective tax rate is also 0%.
16
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and April 30, 1997
NOTE 11 - INCOME TAXES (Continued)
The following temporary differences gave rise to the deferred tax
assets and liabilities at March 31, 1998 and April 30, 1997:
<TABLE>
<CAPTION>
March 31, April 30,
1998 1997
---------------- -----------------
<S> <C> <C>
Depletion $ 31,267 $ 66,228
Depreciation (256,481) 1,370
Amortization of goodwill on subsidiary
acquisition - 1,667
Write-down of oil and gas values 3,076,790 -
The deferred tax asset and liabilities are comprised of the
following at March 31, 1998 and April 30, 1997:
March 31, April 30,
1998 1997
------------------------------------------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Depreciation and depletion $ - $ 76,573 $ 25,137 $ -
Goodwill 1,046,109 - 614 -
Net operating losses
carried forward 1,174,645 - 226,137 -
Less valuation allowance (2,144,181) - (251,888) -
------------ ------------- ------------- ---------
Gross deferred tax assets
and liabilities $ 76,573 $ 76,573 $ 769 $ 769
============ ============= ============= ==============
Net deferred tax liability $ - $ -
============= ==============
</TABLE>
Due to the manner in which future utilization of tax benefits is
analyzed under SFAS 109, an allowance for the full amount of the
benefits that may arise from operating loss carryforwards has
been made and no asset has been recorded as a result at March 31,
1998 and April 30, 1997.
NOTE 12 - OPERATING LEASE
On April 1, 1997, the Company leased office space in Addison,
Texas and relocated its offices. This lease had an initial term
of seventeen months beginning on that date. The lease called for
a security deposit of $3,049 and monthly lease payments in
advance. Under this lease, rent of $27,646 and $3,049 was
included in expenses for the periods ended March 31, 1998 and
April 30, 1997, respectively. Minimum future rental payments
total $12,197 during the year ended March 31, 1999.
NOTE 13 - MERGER AGREEMENTS
During the period ended March 31, 1998, the Company terminated
its plans to merge with Lyric.
17
<PAGE>
<TABLE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1998 and April 30, 1997
<CAPTION>
NOTE 14 - NOTE PAYABLE
March 31,
1998
-----------------
<S> <C>
Note payable to bank bearing interest at 8.5%, requiring monthly
principal and interest payments of $679.
Secured by a vehicle, due November 3, 2001. $ 25,680
Less current portion
(5,746)
-----------------
$ 19,934
=================
Maturities of the note payable are as follows:
1999 $ 5,746
2000 6,881
2001 7,449
2002 5,604
-----------------
$ 25,680
=================
</TABLE>
NOTE 15 - SUBSEQUENT EVENTS
Subsequent to March 31, 1998, the Company finished drilling a
well on one of the leases in the field in Runnels County. The
Company also borrowed $150,000 from a related entity and loaned
$153,475 to Trans Energy.
The Company has redeemed all of its Preferred A shares subsequent
to March 31, 1998.
The Company has settled the lawsuits regarding the patent
licenses. The vendor has withdrawn his action and has agreed to
return all of the shares issued by the Company with regard to
these assets and a related management agreement.
18
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Supplementary Information Relating
To Oil and Gas Producing Activities
For the periods ended March 31, 1998 and April 30, 1997
(Unaudited)
The following tables identify the Company's estimated quantities of proved
developed reserves of crude oil and natural gas related to its oil and gas
interests. These supplemental disclosures of oil and gas producing activities
are unaudited due to the nature of reserve estimates and their computation.
Amounts presented are the activity for the periods ended April 30, 1997 and
balances as of March 31, 1998 and April 30, 1997. During both periods, some
properties were reevaluated resulting in revisions to their reserve estimates.
As is generally well known, there are risks involved in exploration for and
production of oil and gas reserves. Reserves represent quantitative estimates of
the recoverable amounts of oil and gas that exist in the ground and of the
timing and costs of producing them. There are many ways in which reserve
estimates can be over or under the actual amounts of oil and gas that are
recovered. The estimated proved oil and gas reserves included are located
entirely within the United States.
Quantities of Reserves
Oil Gas
Proved and Developed Reserves (Barrels) (MCF)
----------------------------- --------- -----
Balances, April 30, 1996 190,213 118,980
Acquisitions 887,876 38,081
Revisions of estimates (81,082) (60,434)
Production (3,833) (10,316)
-------- --------
Balances, April 30, 1997 993,174 86,311
Revisions of estimates (291,250) (54,339)
Production (14,521) (17,058)
-------- --------
Balances, March 31, 1998 687,403 14,914
======== ========
The Company has net estimated reserve amounts for its interest in a lease in
Crockett County.
<TABLE>
<CAPTION>
Capitalized Costs Relating to Oil and Gas Producing Activities
March 31, April 30,
1998 1997
---------------- ---------------
<S> <C> <C>
Unproved properties (not being amortized) $ - $ 432,966
Proved properties (being amortized)
Evaluated proved properties 4,675,193 5,091,455
---------------- ---------------
Total Capitalized Costs 4,675,193 5,524,421
Accumulated Depletion (324,665) (97,706)
---------------- ---------------
Net Capitalized Costs $ 4,350,528 $ 5,426,715
================ ===============
</TABLE>
19
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Supplementary Information Relating
To Oil and Gas Producing Activities
For the periods ended March 31, 1998 and April 30, 1997
(Unaudited)
Costs incurred in Acquisition, Exploration and Development of Properties
<TABLE>
<CAPTION>
March 31, April 30,
1998 1997
----------- -----------
<S> <C> <C>
Property acquisition
Purchase of reserves in place $ -- $ 3,675,913
Unevaluated properties -- 432,966
Development 3,727,061 148,847
----------- -----------
$ 3,727,061 $ 4,257,726
=========== ===========
Results of Operations for Oil and Gas Producing Activities
Sales of oil and gas $ 287,833 $ 100,987
Production costs (including severance taxes) (442,963) (103,646)
Depletion (226,959) (36,235)
Income taxes -- --
----------- -----------
Results of operations from producing activities
(excluding corporate overhead) $ (382,089) $ (38,894)
=========== ===========
</TABLE>
All sales were to unaffiliated enterprises. Depletion is calculated based on
equivalent barrels of oil assuming that gas reserves and production are
converted to oil on the basis of 6 mcf per equivalent barrel of oil. During the
periods ended March 31, 1998 and April 30, 1997, depletion cost was $13.07 and
$7.03 per equivalent barrel, respectively. The significant difference between
the two years is primarily due to the addition of significant properties toward
the end of the year at costs that were materially higher, on a per barrel basis.
Standardized Measure of Discounted Future Net Cash Flows
Future cash inflows $ 11,753,843 $ 16,538,415
Future production and development costs (4,237,519) (6,856,457)
Future income taxes -- (1,572,429)
------------ ------------
Future net cash flows 7,516,324 8,109,529
10% annual discount for estimated timing
of cash flows (3,165,796) (3,236,864)
------------ ------------
Standardized measure of discounted
future net cash flows $ 4,350,528 $ 4,872,665
============ ============
20
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Supplementary Information Relating
To Oil and Gas Producing Activities
For the Periods ended March 31, 1998 and April 30, 1997
(Unaudited)
Principal Sources of Changes in the Standardized Measure
of Discounted Future Net Cash Flows
March 31, April 30,
1998 1997
----------- -----------
Standardized measure - beginning of year $ 4,872,665 $ 1,658,314
Acquisition of reserves in place -- 4,705,628
Sales, net of production costs 144,077 (25,540)
Changes in estimated future development costs 245,455 2,265,846
Revisions of quantity estimates (3,110,941) (1,139,362)
Accretion of discount 570,125 203,283
Net change in income taxes 828,581 (454,068)
Changes in production timing and other (547,725) (2,245,393)
Changes in sales prices 1,348,291 (96,043)
----------- -----------
Standardized measure - end of year $ 4,350,528 $ 4,872,665
=========== ===========
21
<PAGE>
NATURAL GAS TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
<PAGE>
NATURAL GAS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
------
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
--------- ---------
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash $ 4,808 $ 14,261
Accounts receivable 14,022 17,712
--------- ---------
Total Current Assets 18,830 31,973
--------- ---------
FIXED ASSETS
Oil and gas properties (full cost method) 4,779,761 4,675,193
Furniture and equipment 65,466 65,466
Accumulated depreciation and depletion (367,866) (330,623)
--------- ---------
Total Fixed Assets 4,477,361 4,410,036
--------- ---------
OTHER ASSETS
Accounts and notes receivable - related parties 132,198 -
Note receivable - Trans Energy, Inc. 158,497 101,467
Investment in joint ventures 190,500 190,500
Investment in stock 14,464 14,464
Other 3,769 3,113
--------- ---------
Total Other Assets 499,428 309,544
--------- ---------
TOTAL ASSETS $ 4,995,619 $ 4,751,553
========= =========
</TABLE>
1
<PAGE>
NATURAL GAS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
------------ ------------
(Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable (Note 2) $ 609,554 $ 278,291
Accrued interest - 68,081
Advances and amounts due related parties 206,958 -
Current portion of note payable 5,746 5,746
------------ ------------
Total Current Liabilities 822,258 352,118
------------ ------------
NOTE PAYABLE 18,400 19,938
------------ ------------
Total Liabilities 840,658 372,056
------------ ------------
Redeemable preferred stock, Series 1994A $4.00
par value, (500,000 shares authorized; 7,097 outstanding) 28,388 28,388
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock Series 1994-B, $4.00 par value, 500,000
shares authorized and 66,360 outstanding 265,440 265,440
Common stock, $0.001 par value, 10,000,000 shares
authorized, 5,888,700 and 5,878,200 outstanding 5,889 5,878
Additional paid-in capital 10,277,098 10,261,358
Deferred services (160,000) (160,000)
Receivable for stock issued to officers (50,000) (9,000)
Accumulated deficit (6,211,854) (6,012,567)
------------ ------------
Total Stockholders' Equity 4,126,573 4,351,109
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,995,619 $ 4,751,553
============ ============
</TABLE>
2
<PAGE>
NATURAL GAS TECHNOLOGIES AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
June 30,
-------------------------------
1998 1997
--------- ---------
REVENUES
<S> <C> <C>
Oil and gas revenues $ 46,094 $ 58,916
Other income 16,644 203
--------- ---------
Total Revenues 62,738 59,119
--------- ---------
EXPENSES
Production expenses and taxes 61,634 128,617
Depreciation, depletion and amortization 37,308 32,798
Professional fees 41,293 36,866
Consulting fees - 13,750
Personnel costs 84,165 29,793
Rent 4,716 4,802
Business promotion 2,845 -
Taxes 4,799 2,131
Travel 6,295 9,469
Other expenses 11,102 15,301
--------- ---------
Total Expenses 254,157 273,527
--------- ---------
LOSS FROM OPERATIONS (191,419) (214,408 )
--------- ---------
OTHER INCOME (EXPENSE)
Interest income 2,556 3,049
Interest expense (10,424) (107,286)
--------- ---------
Total Other Income (Expense) (7,868) (104,237)
--------- ---------
NET LOSS (199,287) (318,645)
Less unpaid preferred stock dividend claims for the year (5,877) (6,282)
--------- ---------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (205,164) $ (324,927)
========= =========
LOSS PER SHARE DATA:
Basic $ (0.03) $ (0.07)
Basic, attributable to common shares $ (0.04) $ (0.07)
Diluted $ (0.03) $ (0.07)
Diluted, attributable to common shares $ (0.04) $ (0.07)
</TABLE>
3
<PAGE>
NATURAL GAS TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the Year Ended March 31, 1998 and the Three Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock
---------------
Series 1994-A Series 1994-B
------------- -------------
Shares Amount Shares Amount
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balances, April 30, 1997 9,597 $ 38,388 66,360 $ 265,440
Stock issued for:
Cash - - - -
Related party liabilities - - - -
Options issued to related
party for properties - - - -
Management services - - - -
Repurchase of shares (2,500) (10,000) - -
Net loss - - - -
----------- ---------- ----------- ----------
Balances, March 31, 1998 7,097 28,388 66,360 265,440
Stock issued for:
Services at $1.50 per share - - - -
Cash at $1.50 per share - - - -
Management services - - - -
Net loss - - - -
----------- ---------- ----------- ----------
Balances, June 30, 1998 7,097 $ 28,388 66,360 $ 265,440
=========== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Additional Deferred
Common Stock Paid-In Services & Accumulated
Shares Amount Capital Other Deficit
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances, April 30, 1997 4,014,390 $ 4,014 $ 4,553,004 $ (319,000) $ (876,373)
Stock issued for:
Cash 239,524 240 1,484,760 - -
Related party liabilities 1,614,286 1,614 3,728,578 150,000 -
Options issued to related
party for properties - - 425,026 - -
Management services 10,000 10 69,990 - -
Repurchase of shares - - - - -
Net loss - - - - (5,136,194)
------------- ------------- ------------- ------------- -------------
Balances, March 31, 1998 5,878,200 5,878 10,261,358 (169,000) (6,012,567)
Stock issued for:
Services at $1.50 per share 500 1 750 - -
Cash at $1.50 per share 10,000 10 14,990 - -
Management services - - - (41,000) -
Net loss - - - - (199,287)
------------- ------------- ------------- ------------- -------------
Balances, June 30, 1998 5,888,700 $ 5,889 $ 10,277,098 $ (210,000) $ (6,211,854)
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial Statements.
4
<PAGE>
NATURAL GAS TECHNOLOGIES AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
June 30,
--------------------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (199,287) $ (318,645)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation, depletion and amortization 37,308 32,798
Amortization of note payable discount - 50,698
Stock issued for services 751 -
(Increase) decrease in:
Accounts receivable 3,690 (9,887)
Other assets (721) (3,049)
Increase (decrease) in:
Accounts payable 331,263 207,032
Accrued interest (68,081) 152,873
---------- ----------
Net Cash Provided by Operating Activities 104,923 111,820
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of oil and gas assets (104,568) (1,254,697)
Purchase of furniture and equipment - (8,572)
---------- ----------
Net Cash (Used) by Investing Activities (104,568) (1,263,269)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 15,000 1,575,000
Loans and advances from related party 33,760 152,689
Repayments to related party (57,030) -
Note payments (1,538) (95,564)
---------- ----------
Net Cash (Used) Provided by Financing Activities (9,808) 1,632,125
---------- ----------
INCREASE (DECREASE) IN CASH FOR PERIOD (9,453) 480,676
CASH AT BEGINNING OF PERIOD 14,261 (575)
---------- ----------
CASH AT END OF PERIOD $ 4,808 $ 480,101
========== ==========
</TABLE>
5
<PAGE>
NATURAL GAS TECHNOLOGIES AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
For the
Three Months Ended
June 30,
----------------------------------------
1998 1997
--------------- -------------
CASH PAID FOR:
<S> <C> <C>
Interest $ 534 $ 1,133
Income taxes $ - $ -
NON-CASH FINANCING ACTIVITIES:
Stock issued for:
Acquisition of Interior Energy, Inc. $ - $ 2,590,000
Oil and gas assets $ - $ 840,000
Prepaid professional services $ - $ 70,000
Patent rights $ - $ 400,000
Business promotion $ 751 $ -
Acquisition of oil and gas assets for note payable $ - $ 250,000
Acquisition of oil and gas assets from related party for
note payable and options:
Note payable $ - $ 200,000
Contributed capital $ - $ 438,982
</TABLE>
6
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with instructions of Regulation
SB of the Securities and Exchange Commission. They do not include
all information and footnotes required by generally accepted
accounting principles for complete financial statements. However,
except as disclosed herein, there has been no material change in
the information included in the audited financial statements for
the eleven months ended March 31, 1998. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three month periods ended June
30, 1998 and 1997, are not necessarily indicative of the results
that may be expected for the year ending March 31, 1999.
NOTE 2 - RELATED PARTY PAYABLES
The accounts payable balance has significantly increased during
the quarter ended June 30, 1998. This is primarily due to
operations and drilling activity in excess of revenues. The total
accounts payable is owed primarily to Wagman Petroleum, Inc. for
lease operating and drilling costs. Other operating expenses and
loans to Trans Energy, Inc. were funded by loans from related
parties or entities controlled by related parties.
NOTE 3 - PLANNED MERGER ACTIVITY
On March 24, 1998, the Company entered into a Plan and Agreement
of Merger with Trans Energy, Inc. ("Trans Energy"), a Salt Lake
City, Utah based exploration Company, pursuant to which the
Company will be merged with and into Trans Energy which will be
the surviving corporate entity. The merger will be accomplished by
way of the exchange of 100% of the issued and outstanding shares
of the Company's common stock and preferred stock for shares of
Trans Energy's common stock. The exchange ratio will result in the
Company's present shareholders owning at lease 75% of the total
number of issued and outstanding shares of Trans Energy's common
stock immediately after the completion of the merger. The merger
is subject to shareholder approval of both corporations and the
effectiveness of Trans Energy's registration statement on Form
S-4.
Upon completion of the merger, the plan calls for the Company's
Vice President, Michael Stewart, to serve as President, Chief
Operating Officer and a director of Trans Energy. The Board of
Directors shall consist of five directors after completion of the
merger. Trans Energy's current President, Loren E. Bagley, shall
continue to serve as Chairman of the Board. In addition to Mr.
Bagley and Mr. Stewart, Trans Energy will appoint two additional
directors and the Company will appoint two additional directors.
The seventh director has not yet been determined, however, such
director will be appointed prior to completion of the merger by
the mutual agreement of directors appointed by Trans Energy and
the Company. Until the merger is completed, both corporations are
bing managed pursuant to a joint committee consisting of Mr.
Bagley and Mr. Stewart.
7
<PAGE>
NATURAL GAS TECHNOLOGIES, INC & SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1998
NOTE 4 - SUBSEQUENT EVENTS
During July 1998, the Company has entered into an agreement with
its Vice President, Michael Stewart, whereby he received 50,000
shares of common stock and is entitled to receive 150,000
additional shares upon the earlier of completion of the merger
with Trans Energy (or any other publicly traded entity) or the
Company becoming a fully reporting entity with the Securities
Exchange Commission.
Also during July 1998, the Company extended to the holders of its
preferred shares an offer to exchange their preferred shares for
common shares on a basis of two common shares for each preferred
share held. As part of the offer, the Company offered to pay an
amount equal to the accumulated dividends in cash or in common
shares at the rate of $2.75 per share. The Company has been
successful in converting all of the outstanding Series A preferred
shares and nearly all of the outstanding Series B preferred shares
into common. As a result of the conversion offer and the offer
regarding the cumulative dividend amounts, the Company has issued
47,179 common shares. The Company has also paid cash of $29,136 to
preferred shareholders electing that option.
8
<PAGE>
TRANS ENERGY, INC.
Consolidated Proforma Financial Statements
June 30, 1998
(Unaudited)
<PAGE>
TRANS ENERGY, INC.
Consolidated Proforma Balance Sheets
June 30, 1998
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
Proforma
Natural Gas Adjustments
Trans Technologies Increase Proforma
Energy, Inc. Inc. (Decrease) Consolidated
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ - $ 4,808 $ - $ 4,808
Accounts receivable 64,686 14,022 - 78,708
---------------- ---------------- ---------------- ----------------
Total Current Assets 64,686 18,830 - 83,516
---------------- ---------------- ---------------- ----------------
PROPERTY AND
EQUIPMENT - NET
OF ACCUMULATED
DEPRECIATION 8,493,942 4,477,361 - 12,971,303
---------------- ---------------- ---------------- ----------------
OTHER ASSETS
Loan receivable - related - 290,695 (158,497) 132,198
Prepaid promotion costs 1,061,628 - - 1,061,628
Loan acquisition costs 2,706,898 - - 2,706,898
Investments - 204,964 - 204,964
Other 101,510 3,769 - 105,279
---------------- ---------------- ---------------- ----------------
Total Other Assets 3,870,036 499,428 (158,497) 4,210,967
---------------- ---------------- ---------------- ----------------
TOTAL ASSETS $ 12,428,664 $ 4,995,619 $ (158,497) $ 17,265,786
================ ================ ================ ================
</TABLE>
See Summary of Assumptions and Disclosures
-1-
<PAGE>
TRANS ENERGY, INC.
Consolidated Proforma Balance Sheets (Continued)
June 30, 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
<TABLE>
<CAPTION>
Proforma
Natural Gas Adjustments
Trans Technologies Increase Proforma
Energy, Inc. Inc. (Decrease) Consolidated
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Bank indebtedness $ 16,133 $ - $ - $ 16,133
Accounts payable 1,396,788 609,554 25,000 2,031,342
Accrued expenses 432,037 - - 432,037
Notes payable - current 25,313 5,746 - 31,059
Advances due related parties - 206,958 - 206,958
Debentures payable 4,625,400 - - 4,625,400
---------------- ---------------- ---------------- ----------------
Total Current Liabilities 6,495,671 822,258 25,000 7,342,929
---------------- ---------------- ---------------- ----------------
NET LIABILITIES IN EXCESS
OF ASSETS OF DISCONTINUED
OPERATIONS 340,821 - - 340,821
---------------- ---------------- ---------------- ----------------
LONG-TERM LIABILITIES
Notes payable 1,744,441 18,400 (158,497) 1,604,344
---------------- ---------------- ---------------- ----------------
Total Long-Term Liabilities 1,744,441 18,400 (158,497) 1,604,344
---------------- ---------------- ---------------- ----------------
MINORITY INTEREST - - 28,388 28,388
---------------- ---------------- ---------------- ----------------
REDEEMABLE PREFERRED
STOCK, SERIES 1994-A, $4.00
PAR VALUE, 500,000 SHARES
AUTHORIZED, 7,097
OUTSTANDING $ - $ 28,388 $ (28,388) $ -
---------------- ---------------- ---------------- ----------------
</TABLE>
See Summary of Assumptions and Disclosures
-2-
<PAGE>
TRANS ENERGY, INC.
Consolidated Proforma Balance Sheets (Continued)
June 30, 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS EQUITY (Continued)
-----------------------------------------------
<TABLE>
<CAPTION>
Proforma
Natural Gas Adjustments
Trans Technologies Increase Proforma
Energy, Inc. Inc. (Decrease) Consolidated
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
STOCKHOLDERS EQUITY
Preferred stock: Series 1994-B,
$4.00 par value; authorized
500,000 shares; 66,360 shares
issued and outstanding $ - $ 265,440 $ - $ 265,440
Common stock, $0.001 par
value; authorized 30,000,000
shares; 8,553,800 shares
issued and outstanding,
respectively 2,139 5,889 526 8,554
Additional paid-in capital 12,867,963 10,067,098 (9,047,897) 13,887,164
Accumulated deficit (9,022,371) (6,211,854) 9,022,371 (6,211,854)
---------------- ---------------- ---------------- ----------------
Total Stockholders Equity 3,847,731 4,126,573 (25,000) 7,949,304
---------------- ---------------- ---------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 12,428,664 $ 4,995,619 $ (158,497) $ 17,265,786
================ ================ ================ ================
</TABLE>
See Summary of Assumptions and Disclosures
-3-
<PAGE>
TRANS ENERGY, INC.
Consolidated Statement of Operations
June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Proforma
Natural Gas Adjustments
Trans Technologies Increase Proforma
Energy, Inc. Inc. (Decrease) Consolidated
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
SALES $ 473,006 $ 356,041 $ - $ 829,047
---------------- ---------------- ---------------- ----------------
TOTAL REVENUES 473,006 356,041 - 829,047
---------------- ---------------- ---------------- ----------------
EXPENSES
General and administrative 773,769 1,146,351 - 1,920,120
Depreciation and amortization 81,261 245,266 - 326,527
---------------- ---------------- ---------------- ----------------
Total Expenses 855,030 1,391,617 - 2,246,647
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) FROM
OPERATIONS (382,024) (1,035,576) - (1,417,600)
---------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSE)
Gain on sale of assets 239,129 - - 239,129
Write-down oil and gas - (3,076,790) - (3,076,790)
Interest expense (139,315) (405,049) - (544,364)
Other expense - (618,779) - (618,779)
---------------- ---------------- ---------------- ----------------
Total Other Income
(Expense) 99,814 (4,100,618) - (4,000,804)
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ (282,210) $ (5,136,194) $ - $ (5,418,404)
================ ================ ================ ================
</TABLE>
See Summary of Assumptions and Disclosures
-4-
<PAGE>
TRANS ENERGY, INC.
Statements of Assumptions and Disclosures for the
Consolidated Proforma Financial Statements
June 30, 1998
(Unaudited)
BACKGROUND AND HISTORICAL INFORMATION
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. Trans Energy, Inc. is the parent company of Tyler
Construction Company, Inc. and Ritchie County Gathering Systems, Inc.
Natural Gas Technologies, Inc. (NGT) was incorporated on April 26, 1993
and began operations in June 1993. NGT acquired interests in various
oil and gas properties in February and June 1994 and has been active in
this industry since then. NGT is the parent company of Interior Energy,
Inc.
PROFORMA TRANSACTIONS
The historical financial information contained herein has been
consolidated assuming the issuance of common stock of Trans Energy,
Inc. for 100% of the outstanding common stock of NGT as of June 30,
1998. The purchase is not effective yet, but has been retroactively
applied to the historical information of these companies.
Trans Energy, Inc. issued 6,415,350 shares of common stock in exchange
for 100% of the outstanding shares of NGT. The proforma adjustments
have been prepared under the purchase method of accounting for business
combinations and all significant intercompany transactions have been
eliminated. The proforma adjustments to record the merger of the
companies under the purchase method of accounting for business
combinations are:
1. Record the purchase of NGT through the issuance of 6,415,350 shares
of common stock:
Common stock $ 6,415
Additional paid-in capital (6,415)
------------------
Total $ -
==================
-5-
<PAGE>
TRANS ENERGY, INC.
Statements of Assumptions and Disclosures for the
Consolidated Proforma Financial Statements
June 30, 1998
(Unaudited)
PROFORMA TRANSACTIONS (Continued)
2) Eliminate the common stock of NGT:
Common stock $ (5,889)
Additional paid-in capital 5,889
-------------
Total $ -
=============
3) Eliminate the deficit of Trans Energy, Inc.:
Accumulated deficit $ (9,022,371)
Additional paid-in capital 9,022,371
-------------
Total $ -
=============
4) Stock issuance costs:
Additional paid-in capital $ 25,000
Accounts payable (25,000)
-------------
Total $ -
=============
5) Record minority interest:
Redeemable preferred stock $ 28,388
Minority interest (28,388)
-------------
Total $ -
=============
-6-
<PAGE>
========================================
No dealer, salesman or any other TRANS ENERGY, INC.
person has been authorized to give any
information or to make any
representations other than those
contained in this Prospectus, and, if
given or made, such information or
representation must not be relied upon
as having been authorized by TSRG.
Neither the delivery of this Prospectus
nor any sale made hereunder shall under 6,034,471 Shares of
any circumstances create any implication Common Stock
that there has been no change in the
affairs of TSRG since the date hereof.
This Prospectus does not constitute an
offer to sell or a solicitation of an
offer to buy any securities offered
hereby by anyone in any jurisdiction in
which such offer or solicitation is not
authorized or in which the person making
such offer or solicitation is not
qualified to do so or to anyone to whom
it is unlawful to make such offer or
solicitation.
-----------------
TABLE OF CONTENTS
Page
Additional Information..................
Prospectus Summary......................
Risk Factors............................
Use of Proceeds.........................
Market Prices and Dividends.............
Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Business of TSRG........................
The Merger.............................. ------------------
Business of NGT......................... PROSPECTUS
Management of TSRG...................... ------------------
Certain Transactions....................
Description of Securities...............
Plan of Distribution....................
Selling Securityholders.................
Shares Eligible for Future Sale.........
Legal Matters...........................
Experts.................................
Securities and Exchange Commission
Position on Certain Indemnification..
Consolidated Financial Statements......F-1 October ____,, 1998
========================================
========================================
<PAGE>
TRANS ENERGY, INC.
Part II
Item 24. Indemnification of Directors and Officers
As permitted by the provisions of the Nevada Revised Statutes (the
"NRS"), TSRG has the power to indemnify any person made a party to an action,
suit or proceeding by reason of the fact that they are or were a director,
officer, employee or agent of TSRG, against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by them in
connection with any such action, suit or proceeding if they acted in good faith
and in a manner which they reasonably believed to be in, or not opposed to, the
best interest of TSRG and, in any criminal action or proceeding, they had no
reasonable cause to believe their conduct was unlawful. Termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which they
reasonably believed to be in or not opposed to the best interests of TSRG, and,
in any criminal action or proceeding, they had no reasonable cause to believe
their conduct was unlawful.
TSRG must indemnify a director, officer, employee or agent of TSRG who
is successful, on the merits or otherwise, in the defense of any action, suit or
proceeding, or in defense of any claim, issue, or matter in the proceeding, to
which they are a party because they are or were a director, officer employee or
agent of TSRG, against expenses actually and reasonably incurred by them in
connection with the defense.
TSRG may provide to pay the expenses of officers and directors incurred
in defending a civil or criminal action, suit or proceeding as the expenses are
incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that they are not entitled to be indemnified by TSRG.
The NRS also permits a corporation to purchase and maintain liability
insurance or make other financial arrangements on behalf of any person who is or
was a director, officer, employee or agent of TSRG, or is or was serving at the
request of the corporation as a director, officer, employee or agent, of another
corporation, partnership, joint venture, trust or other enterprise for any
liability asserted against them and liability and expenses incurred by them in
their capacity as a director, officer, employee or agent, or arising out of
their status as such, whether or not TSRG has the authority to indemnify them
against such liability and expenses. Presently, TSRG does not carry such
insurance.
Item 25. Other Expenses of Issuance and Distribution
Filing fee under the Securities Act of 1933..............$ 2,500
Accountants' fees and expenses........................... 2,500
Legal fees and expenses.................................. 30,000
Printing ................................................ 12,000
Transfer agent and registrar fees and expenses(1)........ 2,000
Miscellaneous............................................ 1,000
-----------
Total....................................... $ 50,000
===========
S-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
The following table sets forth information relating to all previous
sales of securities by the Registrant within the past three years that were not
registered under the Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
Date of Sale Name of Purchaser Type Number Consideration
- ------------ ----------------- ---- ------ -------------
<S> <C> <C> <C> <C>
10/20/95 MD Financial Services (a) 5,556 Converted debenture
valued at $20,000
11/13/95 MD Financial Services (a) 4,167 Converted debenture
valued at $15,000
12/13/95 MD Financial Services (a) 2,778 Converted debenture
valued at $5,000
2/21/976 MD Financial Services (a) 13,889 Converted debenture
valued at $50,000
5/20/97 Taipan Holdings (a) 18,750 Services rendered valued
at 5.64 per share
6/18/97 Baybridge Trust (a) 113,900 Converted debenture
valued at $500,000
7/11/98 Continental Capital
& Equity Corporation (a) 62,500 Services rendered valued
at $5.64 per share
9/8/97 Baybridge International Ltd
& Blue Chip Securities (a) 258,333 Converted debenture
valued at 930,000
6/30/98 Brent Wagman (a) 12,500 Services rendered valued at
$4.00 per share
6/30/98 Boulder Investment
Capital, S.A. (a) 236,312 Conversion of debt valued at
$1.31 per share
6/30/98 Roberto Veitia (a) 73,833 Services rendered valued
at $3.61 per share
6/30/98 Corporate Relations Group (a) 200,000 Services rendered valued
at $3.61 per share
6/30/98 Corporate Relations Group (a) 150,000 Services rendered valued
at $3.61 per share
6/30/98 Roger Tichener (a) 25,000 Consulting services
rendered valued at $3.61
per share
6/30/98 James Skalko (a) 25,000 Consulting services
rendered valued at $3.61
Per share
9/10/98 Group of 45 persons (a) - Received cash of
$4,625,400 for sale of
Debentures
- -----------------
</TABLE>
(a) Common Stock.
(b) 8% Secured Convertible Debentures Due March 31, 1999 (the "Debentures")
in the face amount of $4,625,400 which can ultimately be converted into
shares of Common Stock.
With respect to the issuance and/or sale of the aforementioned
securities, the Registrant relied on the exemption from registration provided by
Section 4(2) of the Securities Act for the issuance of shares for services
rendered and for cash, and on the exemption from registration provided by
Section 3(a)(9) for the conversion of debentures. All securities issued to the
aforementioned persons bore restrictive legends preventing their transfer except
in accordance with the Securities Act and the regulations promulgated
thereunder. In addition, stop transfer instructions pertaining to these shares
have been or will be lodged with the Registrant's transfer agent.
S-2
<PAGE>
Item 27. Exhibits
(a) The following exhibits are filed with this Registration Statement:
Exhibit No. Exhibit Name
- ----------- ------------
2.1** Plan and Agreement of Merger
3.1* Articles of Incorporation and Amendments
3.2* By-Laws
4.1* Specimen Common Stock Certificates of Registrant
5 Opinion of Leonard E. Neilson, P.C.
10.1* Marketing Agreement with Sancho Oil and Gas Corporation
10.2* Gas Purchase Agreement with Central Trading Company
10.3* Price Agreement with Key Oil Company
21* Subsidiaries of Registrant
23.1 Consent of Jones Jensen & Company, Independent Certified Public
Accountants, related to financial statements for Trans Energy, Inc.
23.2 Consent of Jones Jensen & Company, Independent Certified Public
Accountants, related to financial statements for Natural Gas
Technologies, Inc.
23.3 Consent of Leonard E. Neilson, P.C. (included in Exhibit 5)
99.1* Reserve Estimate and Evaluation of oil and gas properties
99.2* Reserve Estimate and Evaluation for Dennis L. Spencer wells
- ------------------
* Previously filed as Exhibit to Form 10-SB.
** Previously filed as Exhibit to Form S-4 (S.E.C. file no. 333-63907)
(b) Financial Statement Schedules for Registrant.
Schedules other than those listed above are omitted for the reason that
they are not required or are not applicable, or the required
information is shown in the financial statements or notes therein.
Item 28. Undertakings
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together represent a fundamental change
in the information in the registration statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities as at that time
to be the initial bona fide offering.
(3) File a post effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
S-3
<PAGE>
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) If the issuer relies on Rule 430A under the Securities Act, the
small business issuer will:
(1) For determining any liability under the Securities Act
treat the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be a part of this registration statement as of the time the Commission
declared it effective.
(2) For determining any liability under the Securities Act,
that each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
S-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of St.
Marys, State of West Virginia, on this 30th day of September 1998.
TRANS ENERGY, INC.
(REGISTRANT)
By: /S/ LOREN E. BAGLEY
-------------------------------------
Loren E. Bagley, President and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ LOREN E. BAGLEY President, Chief Executive
- ---------------------------------- Officer and Director September 30, 1998
Loren E. Bagley (Principal Financial Officer)
/S/ WILLIAM F. WOODBURN Vice President and Director September 30, 1998
- ----------------------------------
William F. Woodburn (Chief Accounting Officer)
/S/ JOHN B. SIMS Director September 30, 1998
- ----------------------------------
John B. Sims
/S/ GARY F. LAWYER Director September 30, 1998
- ----------------------------------
Gary F. Lawyer
</TABLE>
S-5
Exhibit 5
Opinion
Leonard E. Neilson
Attorney at Law
1121 East 3900 South
Suite 200, Bldg. C
Salt Lake City, UT 84124
Phone: (801) 288-2855 Fax: (801) 288-2850
September 30, 1998
Trans Energy, Inc.
210 Second Street
P.O. Box 393
St. Marys, West Virginia 2170
Re: Form SB-2 Registration Statement of Trans Energy, Inc.
To the Board of Directors:
I have acted as counsel to Trans Energy, Inc., a Nevada corporation
(the "Company"), in connection with its Registration Statement on Form SB-2
related to the offer and issuance of 6,034,750 of the Company's authorized but
previously unissued common stock, par value One Tenth of a Cent ($.001) per
share (the "Common Stock"). The subject 6,034,750 shares of Common Stock (the
"Shares") are to offered as follows: (i) 5,034,471 shares issued pursuant to the
conversion of certain Debentures and the offer and sale of said shares by
Selling Securityholders; (ii) 279 shares for the possible issuance of fractional
shares due to rounding-up of conversions; and (iii) 1,000,000 shares to be
offered by the Registrant. The shares of Common Stock are to be offered and
issued pursuant to fulfillment of the terms and conditions set forth in the
Registration Statement filed on Form SB-2 in accordance with the registration
provisions of the Securities Act of 1933, as amended.
I have examined the Articles of Incorporation and all amendments
thereto, By-Laws, minutes of corporate proceedings and other corporate documents
with respect to the issuance of the Shares. I have been furnished with
originals, or copies certified to my satisfaction, of all such corporate or
other records of the Company (the "Corporate Records") and I have made such
other legal and factual examinations and inquiries as I have considered
necessary as a basis for the opinions expressed herein. In the examination of
the Corporate Records, I have presumed the authenticity of all signatures which
existed on the Corporate Records and have presumed the veracity and regularity
of all Corporate Records.
<PAGE>
Trans Energy, Inc.
September 30, 1998
Page 2
As to the question of fact material to this opinion letter, I have
relied upon the representations and warranties, certificates of and
conversations and correspondences with, officers and representatives of the
Company. Based upon the foregoing, I am of the opinion that:
1. The Company is a corporation duly organized and validly
existing under the laws of the State of Nevada.
2. The Shares have been legally and validly authorized under the
Articles of Incorporation and Board of Directors of the
Company and, when distributed and paid for in accordance with
the terms set forth in the Registration Statement, the Shares
will be duly and validly issued and outstanding, fully paid
and nonassessable.
I hereby consent to the reference to myself in the Registration
Statement covering the offering of the Shares and the use of my name beneath the
caption "Legal Matters" in the Prospectus forming a part thereof, and to the
filing of a copy of this opinion as Exhibit 5 thereof.
Yours truly,
/S/
Leonard E. Neilson
:ae
<PAGE>
Leonard E. Neilson
ATTORNEY AT LAW
1121 East 3900 South
Suite 200, Bldg. C
Salt Lake City, UT 84124
Phone: (801) 288-2855 Fax: (801) 288-2850
September 30, 1998
Securities and Exchange Commission
Attention Filing Desk: Stop 1-4
450 Fifth Street, N.W.
Washington, DC 20549
Filed Via EdgarLink
- -------------------
Re: Trans Energy, Inc.
Registration Statement on Form SB-2
CIK no. 0000919721
Commissioners:
On behalf of Trans Energy, Inc. (the "Registrant") in connection with
its Registration Statement on Form SB-2 (the "Registration Statement"), and
pursuant to the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the applicable rules and regulations thereunder, please
note the following:
1. Pursuant to Regulation S-T of the Securities Act, one copy of the
Registration Statement is attached hereto. The Exhibit Index is
contained in the Registration Statement; and
2. Funds in payment of the requisite filing fee, have been deposited by
wire transfer into the Registrant's account at the Mellon Bank. The
filing fee has been calculated in accordance with Rule 457 under the
Securities Act.
The Registration Statement covers the proposed offering of 6,034,750
shares of the Registrant's common stock (the "Shares") to be issued as follows:
(i) 5,034,471 shares issued pursuant to the conversion of certain Debentures and
the offer and sale of said shares by Selling Securityholders; (ii) 279 shares
for the possible issuance of fractional shares due to rounding-up of
conversions; and (iii) 1,000,000 shares to be offered by the Registrant. The
Registration Statement includes the Prospectus to be used for the offering.
The Registrant would like the Registration Statement declared effective
as soon as possible and accordingly, would appreciate the Commission Staff's
assistance in this regard.
Please direct your comments or questions with respect to the
Registration Statement and the enclosed materials to the undersigned by
telephone at (801) 288-2855, or by FAX at (801) 188-1850.
Yours truly,
/S/
Leonard E. Neilson
:ae
attachments
Exhibit 23.1
Consent of Jones Jensen & Company, Independent Certified Public Accountants,
related to financial statements for Trans Energy, Inc.
CONSENT OF INDEPENDENT AUDITORS'
--------------------------------
Board of Directors
Trans Energy, Inc.
St. Mary's, West Virginia
We hereby consent to the use in this Registration Statement of Trans Energy,
Inc. on Form SB-2, of our report dated March 25, 1998 of Trans Energy, Inc. for
the years ended December 31, 1997 and 1996, which are part of this Registration
Statement, and to all references to our firm included in this Registration
Statement.
Jones, Jensen & Company
Salt Lake City, Utah
September 30, 1998
Exhibit 23.2
Consent of Jones Jensen & Company, Independent Certified Public Accountants,
related to financial statements for Natural Gas Technologies, Inc.
CONSENT OF INDEPENDENT AUDITORS'
--------------------------------
Board of Directors
Natural Gas Technologies, Inc. and Subsidiary
Dallas, Texas
We hereby consent to the use in this Registration Statement Natural Gas
Technologies, Inc. on Form SB-2, of our report dated July 21, 1998 of Natural
Gas Technologies, Inc. for the period ended March 31, 1998, which is a part of
this Registration Statement, and to all references to our firm included in this
Registration Statement.
Jones, Jensen & Company
Salt Lake City, Utah
September 30, 1998
