UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934
Commission File Number 0-23530
TRANS ENERGY, INC.
(Name of small business issuer in its charter)
Nevada 93-0997412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
210 Second Street, P.O. Box 393, St. Marys, West Virginia 26170
(Address of principal executive offices) (Zip Code)
Issuer's telephone no.: (304) 684-7053
Securities registered pursuant to Section 12(b) of the Exchange
Act: None
Securities registered pursuant to Section 12(g) of the Exchange
Act: Common
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and
no disclosure will be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year.
$ 1,230,916.
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the
stock was sold, or the average bid and ask prices of such stock as
of a specified date within 60 days. $_189,821 (Based on price of
$.50 on April 14, 1999 and 404,642 shares held by non-affiliates)
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Class Outstanding as of December 31, 1998
Common Stock, Par Value
$.001 per share 2,174,817
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format. Yes [ ] No [X]
<PAGE>
TRANS ENERGY, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business . . . . . . . . . . . . . . . 1
Item 2. Description of Property. . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matter to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . 14
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . 14
Item 6. Management's Discussion and Analysis or
Plan of Operation. . . . . . . . . . . . . . . . . . . 16
Item 7. Financial Statements . . . . . . . . . . . . . . . . . 20
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . 43
PART III
Item 9. Directors, Executive Officers, Promoters and
Control persons; Compliance with Section 16(a)
of the Exchange Act. . . . . . . . . . . . . . . . . . 43
Item 10. Executive Compensation . . . . . . . . . . . . . . . . 45
Item 11. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . 45
Item 12. Certain Relationships and Related Transactions . . . . 47
PART IV
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . 49
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . 50
PART I
Item 1. Description of Business
History
Trans Energy, Inc. (the "Company" or "TSRG") is primarily
engaged in the transportation, marketing and production of natural
gas and oil, and also conducts exploration and development
activities. The Company owns 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. The
Company has approximately 2,200 leasehold acres in the
Sistersville, West Virginia field which forms part of the Keener
and Big Injun sands geological formations. The Company also has
800 acres in the Powder River Basin in Crook County, Wyoming, which
has not contributed to the revenues of the Company to date.
The Company was originally organized on January 16, 1964 under
the laws of the State of Idaho as Alter Creek Mining Company, Inc.
In 1993, the Company changed its State of domicile to Nevada and
changed its corporate name to Trans Energy, Inc. In May 1998, the
Company's Board of Directors declared a reverse stock split and,
accordingly, on June 5, 1998, the shares of the Company's common
stock then outstanding were reverse split on a one (1) share for
four (4) shares basis. All share of the Company's common stock
referred herein are stated on a post-split basis.
On March 6, 1998, the Company entered into an agreement to
purchase from GCRL Energy, Ltd. ("GCRL") all of GCRL's interest in
the Powder River Basin in Campbell and Crook Counties, Wyoming,
consisting of interests in five (5) wells, four (4) of which are
producing, interests in 30,000 leasehold acres, and interests in
approximately seventy-three miles of 3-D seismic data. The
properties include three producing fields from Minnelusa Sandstone
and were discovered on 3-D seismic. The Company made an initial
payment for the properties of $332,500 and the balance of
$2,987,962 was paid for with proceeds from the sale of Convertible
Debentures.
On March 24, 1998, the Company entered into a Plan and
Agreement of Merger with Natural Gas Technologies, Inc. ("NGT"), a
Dallas, Texas based exploration company, pursuant to which NGT was
to merge with and into the Company with the Company being the
surviving corporate entity. The merger was to be accomplished by
way of the exchange of 100% of the issued and outstanding shares of
NGT common stock and preferred stock for shares of the Company's
common stock.
On or about December 1, 1998, by mutual agreement of the
parties, the Company and NGT suspended their plans to merge and
terminated the Plan and Agreement of Merger. In anticipation of
the merger, the Company caused to be prepared and filed with the
Securities and Exchange Commission a joint proxy statement and
registration statement pursuant to Form S-4. Upon request by the
Company to the Commission, the registration statement was
withdrawn.
The Company's principal executive offices are located at 210
Second Street, P.O. Box 393, St. Marys, West Virginia 26170, and
its telephone number is (304) 684-7053.
Business Development
The Company 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, the
Company participated in two developmental drilling projects. One
well was drilled on the Big Injun formation underlying the
Company's Sistersville, West Virginia acreage and one well was
drilled on the Company's acreage in the Powder River Basin in
Wyoming.
The Company 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.
The Company 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.
The Company'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. The Company's
strategic location in West Virginia enables the Company to actively
pursue the acquisition and development of producing properties in
that area that will enhance the Company's revenue base without
proportional increases in overhead costs. The Company 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, the Company has focused on
increasing its gas and oil revenues through well recompletions,
property acquisitions and exploitation programs. Since 1992, the
Company's proved reserves of natural gas and oil have increased to
1,714 MMcf and to 1,705 MBbl, respectively. There can be no
assurance, however, that the Company will be able to continue to
expand its proved reserves of natural gas and oil.
In September 1993, the Company acquired certain oil and gas
assets including wells and pipelines, in exchange solely for shares
of the Company's authorized but previously unissued common stock.
These acquisitions are summarized below:
Tyler Construction Company, Inc.
In September 1993, the Company acquired an interest equal to
65% of the total outstanding shares of Tyler Construction Company
("Tyler Construction") from Loren E. Bagley, the Company's
President and a director, and William F. Woodburn, the Company'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, the Company has the right to sell natural
gas subject to the terms and conditions of a 20-year contract, as
amended, that Sancho entered into with Hope Gas, Inc. ("Hope") in
1988. This agreement is a flexible volume supply agreement whereby
the Company receives the full price which Sancho receives less a
$.05 per Mcf marketing fee paid to Sancho. The price of the
natural gas is based upon the residential gas index and the Inside
F.E.R.C. Index.
Spencer Wells
Also in September 1993, the Company acquired from Dennis L.
Spencer all rights, title and interest to six producing oil and gas
wells located in West Virginia, in exchange for the Company shares.
Five of the wells identified as "Fowler," "Goff," "Locke," "McGill"
and "Workman" are situated in Ritchie County in a proven reservoir
field. The remaining well identified as "Spencer," is located in
Tyler County. All six wells were completed in 1991 and have been
producing oil and gas through the date hereof.
The Pipeline, Ltd.
Also in September 1993, the Company acquired from Tyler
Pipeline, Inc. ("Tyler Pipeline") all rights, title and interest in
the natural gas gathering pipeline system known as The Pipeline,
Ltd. (the name of the pipeline, not a legal entity), a four-inch
pipeline that begins at Twiggs, West Virginia, nine miles east of
St. Marys, West Virginia where it intercepts Tyler Construction's
trunk line system and proceeds due south for a distance of six
miles. The Pipeline, Ltd. system is used for purchasing gas from
third party producers. Mr. Woodburn, Vice President and a director
of the Company, is also President and owns 50% of Tyler Pipeline.
Mr. Bagley, President and a director of the Company, also owns 50%
of Tyler Pipeline.
Ritchie County Gathering Systems, Inc.
In September 1993, the Company acquired all the issued and
outstanding capital stock of Ritchie County Gathering Systems,
Inc., a West Virginia corporation ("Ritchie County Gathering").
Ritchie County Gathering owns and operates a four-inch natural gas
gathering line which begins five miles south of Cairo, West
Virginia at Rutherford, and proceeds due south for 4.6 miles,
crossing Mellon Ridge and ending at Macfarlan Creek approximately
1/2 mile north of the South Fork of the Hughes River. The Ritchie
County Gathering pipeline is used for purchasing gas from third
party producers and delivering such gas to Hope.
Current Business Activities
On March 6, 1998, the Company entered into an agreement to
purchase from GCRL Energy, Ltd. ("GCRL") all of GCRL's interest in
the Powder River Basin in Campbell and Crook Counties, Wyoming,
consisting of interests in five (5) wells, four (4) of which are
producing, interests in 30,000 leasehold acres, and interests in
approximately seventy-three miles of 3-D seismic data. The
properties include three producing fields from Minnelusa Sandstone
and were discovered on 3-D seismic. The Company made an initial
payment for the properties of $50,000 and the balance of $2,987,962
was paid for with proceeds from the sale of The Company's
Debentures. The Company 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.
Gross Bbls.
Name of Well Oil Per Day Net % to TSRG Net Bbls. to TSRG
Sagebrush Fed #1 105 48.8% 51
Sagebrush Fed #2 77 47.5% 37
Pinon Fee #1 38 51.2% 20
Sandbar Boley 31-36 54 .22% 1
Sandbar State 1-36 0 14.2% 0
Sandbar State 2-36 31 33% 10
TOTAL 305 119
Current Business Activities
The Company 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 the Company will continue to transport and market
natural gas through its various pipelines, there are no current
plans to acquire or to lay any additional pipeline systems in 1999.
Apart from the two wells drilled in the Powder River Basin in
Wyoming and Sistersville, West Virginia, the Company has not
drilled any new wells in the last three years.
Powder River Basin Wyoming
On December 28, 1996, the Company purchased 420 acres in the
Powder River basin in the State of Wyoming for $50,000 from an
unaffiliated third party. Included in the purchase price was a
condition that the previous owners would provide all of the
geologic and geophysical work as part of the purchase price. On
February 3, 1997 the Company leased an additional 480 acres that
joined with its acreage position. The target formation is the
Minnelusa "B1" sand. There presently are no producing wells on
such acreage and no proved reserves located on the acreage owned by
the Company.
Five two-dimensional ("2-D") seismic lines and a 6-square mile
three-dimensional ("3-D") seismic program have been shot across the
acreage now held by the Company. Unlike 2-D seismic testing which
provides a cross-sectional view of the subsurface of the Earth, 3-D
testing provided a full, three-dimensional view of the subsurface.
Such views allow for greater precision in the location of potential
drilling sites. 3-D testing allows potential drillers to obtain
accurate estimates of the size of oil and gas bearing structures
and the profile of the structure. 2-D testing only informs the
driller that an oil and gas bearing structure is in a particular
area, without giving information as to size and shape. Without an
accurate estimate of the size of the oil and gas bearing
structures, it is difficult to accurately estimate the reserves in
the structure, and, thus, the economic viability of drilling into
a particular structure. Without an accurate profile of the
structure, a driller may not hit the most economic portion of the
structure.
Water pressure primarily is responsible for the movement of
oil within the area of The Company's acreage. Where water pressure
is the cause of oil movement, finding the apex of the oil bearing
structure is critical. Drilling into the apex of such a structure
usually assures that a maximum amount of oil, and a minimal amount
of water, will be recovered from a well. Hitting such a zone
elsewhere than at the apex will result in a lower proportion of oil
to water and reduced rates of recovery.
The Company completed the drilling of the Fowler 22-8 in
January 1998 and determined the well to be a dry hole and was
plugged. The Company did not drill additional wells on its acreage
during 1998.
Powder River Basin Wyoming Wolffe Prospect
On May 27, 1997, the Company purchased a 30% working interest
in the Wolffe Prospect in the Powder River Basin in Campbell
County, Wyoming for $65,000 from an unaffiliated third party.
Included in the purchase price was a 30% working interest in the
Wolffe #1-35 well and 30% interest in 240 acres. In October 1997,
the Company participated in its share of the drilling of the
Horizon 32-35 well. The target formation was the Minnelusa "B1"
sand. The well was determined to be a dry hole and plugged.
Sistersville
Effective June 1, 1995, the Company purchased approximately
2,200 acres in a known producing field located near Sistersville,
West Virginia for $100,000. The Sistersville field has been in
operation since the 1890's, although at a very low level for the
past ten years. To date the field has produced over 13 million
barrels of oil. The field contains portions of the Big Injun and
Keener sands formations, both well known oil and gas bearing
formations, which are the zones the Company intends to explore.
These formations are approximately 1,700 feet deep. Recoverable
reserves of oil in the field are estimated at several million
barrels.
The Company 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 the Company indicating substantial
reserves were included in the purchase price paid by the Company
for the Sistersville acreage. The Company drilled a well on its
Sistersville acreage in April 1997.
Vulcan Energy Corporation.
During March 1997, the Company ceased operations of Vulcan
Energy Corporation ("Vulcan"), its 80% owned subsidiary, engaged in
the lease crude oil gathering and marketing in Southeast Texas.
Financial information with respect to discontinued operations is
presented in Note 9 to The Company's consolidated financial
statements.
Research and Development
The Company has not allocated funds for conducting research
and development activities and, due to the nature of the Company's
business, it is not anticipated that funds will be allocated for
research and development in the immediate future.
Marketing
The Company operates exclusively in the oil and gas industry.
Natural gas production from wells owned by the Company is generally
sold to various intrastate and interstate pipeline companies and
natural gas marketing companies. Sales are generally made on the
spot market or under short-term contracts (one year or less)
providing for variable or market sensitive prices. These prices
often are tied to natural gas futures contracts as posted in
national publications.
Natural gas delivered through The Company's pipeline network
is sold 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, the Company has the right to sell natural gas subject to
the terms and conditions of a 20-year contract, as amended, that
Sancho entered into with Hope in 1988. This agreement is a
flexible volume supply agreement whereby the Company receives the
full price which Sancho charges the end user less a $.05 per Mcf
marketing fee paid to Sancho. The price of the natural gas is
based upon the greater of the residential gas commodity index and
published Inside F.E.R.C. Index, at The Company's option, for the
first 1,500 Mcf purchased per day by Hope and thereafter the price
is the Inside F.E.R.C. Index. The residential gas commodity index
does not directly fluctuate with the overall price of natural gas.
The Inside F.E.R.C. Index fluctuates monthly with the change in the
price of natural gas. While such option provides certain price
protection for the Company there can be no assurance that prices
paid by the Company to suppliers will be lower than the price which
the Company would receive under the Hope arrangement. Prior to
June 1, 1996, the price was the residential gas commodity index and
when the market price of gas rose above such index, The Company's
ability to purchase gas from third parties was adversely effected.
The Company sells its oil production to third party purchasers
under agreements at posted field prices. These third parties
purchase the oil at the various locations where the oil is
produced.
Although management believes that the Company is not dependent
upon any one customer, its marketing arrangement with Sancho Oil
and Gas Corporation accounted for approximately 47% of The
Company's revenue for the year ended December 31, 1998, and
approximately 47% for the year ended December 31, 1997. This
marketing agreement is in effect until September 1, 2003. The
majority of the balance of the gas sold by the Company 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 1998. No other single
customer accounts for more than 10% of The Company's business.
In addition to the natural gas produced by the Company's
wells, it also purchased approximately 400 Mcf of natural gas per
day in 1998.
Competition
The Company is in direct competition with numerous oil and
natural gas companies, drilling and income programs and
partnerships exploring various areas of the Appalachian and Powder
River Basins and elsewhere, and competing for customers. Many
competitors are large, well-known oil and gas and/or energy
companies, although no single entity dominates the industry. Many
of the Company's competitors possess greater financial and
personnel resources enabling them to identify and acquire more
economically desirable energy producing properties and drilling
prospects than the Company. 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, the Company has the right to
sell natural gas subject to the terms and conditions of a 20-year
contract, as amended, that Sancho entered into with Hope in 1988.
This agreement is a flexible volume supply agreement whereby the
Company receives the full price which Sancho receives less a $.05
per Mcf marketing fee paid to Sancho. The price of the natural gas
is based upon 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 the Company 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 The Company's capital expenditures, earnings or competitive
position.
Legislation and implementing regulations adopted or proposed
to be adopted by the Environmental Protection Agency ("EPA") and by
comparable state agencies, directly and indirectly affect The
Company's operations. The Company is required to operate in
compliance with certain air quality standards, water pollution
limitations, solid waste regulations and other controls related to
the discharging of materials into, and otherwise protecting the
environment. These regulations also relate to the rights of
adjoining property owners and to the drilling and production
operations and activities in connection with the storage and
transportation of natural gas and oil.
The Company may be required to prepare and present to federal,
state or local authorities data pertaining to the effect or impact
that any proposed operations may have upon the environment.
Requirements imposed by such authorities could be costly, time-
consuming and could delay continuation of production or exploration
activities. Further, the cooperation of other persons or entities
may be required for the Company to comply with all environmental
regulations. It is conceivable that future legislation or
regulations may significantly increase environmental protection
requirements and, as a consequence, The Company's activities may be
more closely regulated which could significantly increase operating
costs. However, management is unable to predict the cost of future
compliance with environmental legislation. As of the date hereof,
management believes that the Company is in compliance with all
present environmental regulations.
The Company's exploration and development operations are
subject to various types of regulation at the federal, state and
local levels. Such regulation includes the requirement of permits
for the drilling of wells, the regulation of the location and
density of wells, limitations on the methods of casing wells,
requirements for surface use and restoration of properties upon
which wells are drilled, and governing the abandonment and plugging
of wells. Exploration and production are also subject to property
rights and other laws governing the correlative rights of surface
and subsurface owners.
The Company is subject to the requirements of the Occupational
Safety and Health Act, as well as other state and local labor laws,
rules and regulations. The cost of compliance with the health and
safety requirements is not expected to have a material impact on
The Company's aggregate production expenses. Nevertheless, the
Company is unable to predict the ultimate cost of compliance.
Although past sales of natural gas and oil were subject to
maximum price controls, such controls are no longer in effect. In
any case, the 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 the Company, may have an indirect effect on
the cost of, or the demand for, natural gas and oil.
Employees
As of the date hereof the Company employs ten people full-
time, consisting of two executives, three marketing and clerical
persons, and five production persons. Management presently
anticipates hiring additional employees as the business warrants
and as funds are available.
Facilities
The Company's operations currently occupy approximately 4,000
square feet of office space in St. Marys, West Virginia, which it
shares with its subsidies Tyler Construction Company, Inc. and
Ritchie County Gathering Systems, Inc. The Company leases an
aggregate of approximately 4,000 square feet from an unaffiliated
third party under a verbal arrangement for $1,400 per month,
inclusive of utilities. Management believes that its present
office facilities are adequate for the Company's current business
operations.
Industry Segments
No information is presented as to industry segments. The
Company is presently engaged in the principal business of the
exploration, development, production, transportation and marketing
of natural gas and oil. Reference is made to the statements of
operations contained in the Company's financial statements included
herewith for a statement of the Company's revenues and operating
profit (loss) for the past two fiscal years.
Item 2. Description of Property
The Company's properties consist essentially of the working
and royalty interests owned by the Company in various oil and gas
wells and leases located in West Virginia. The Company's proved
reserves for the years ended December 31, 1997, 1996 and 1995 are
set forth below:
December 31,
1998 1997 1996
Natural Gas (MMcf)
Developed 912,428 979,662 875,705
Undeveloped 801,654 801,654 801,654
Total Proved 1,714,082 1,781,316 1,677,359
Crude Oil (MBbl)
Developed 1,504,813 30,870 16,343
Undeveloped 200,721 180,000 180,000
Total Proved 1,705,534 210,870 196,343
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 the Company.
Set forth in the following schedule is the average sales price
per unit of oil, expressed in barrels ("bbl"), and of natural gas,
expressed in thousand cubic feet ("mcf"), produced by the Company
for the past three fiscal years.
Years ended December 31,
Average sales price: 1998 1997 1996
Gas (per mcf) 2.70 $ 2.95 $ 3.56
Oil (per bbl) 10.04 16.44 19.22
Average cost of
production:
Gas (per mcf) 1.38 1.09 $ 1.02
Oil (per bbl) 8.28 6.54 6.12
The Company has not filed any estimates of total, proved net
oil and gas reserves with any federal authority or agency since the
beginning of The Company's last fiscal year.
The following schedule sets forth the capitalized costs
relating to oil and gas producing activities by the Company for the
past three fiscal years.
Years ended December 31,
1998 1997 1996
Proved oil and gas
producing properties
and related lease
and well equipment $7,553,880 $4,122,311 $3,799,387
Accumulated depreciation
and depletion (527,140) (433,799) (407,934)
Net Capitalized Costs $7,026,840 $3,688,512 $3,391,453
The following schedule summarizes changes in the standardized
measure of discounted future net cash flows relating to The
Company's proved oil and gas reserves.
Years ended December 31,
1998 1997 1996
Standardized measure,
beginning of year 3,534,828 $3,611,702 $4,063,885
Oil and gas sales, net
of production costs (589,705) (76,874) (452,183)
Sales of mineral in place - - -
Purchases 5,289,539 - -
Quantity estimates made 1,261,032 - -
Standardized measure,
end of year $9,495,694 $3,534,828 $3,611,702
The Company does not anticipate investing in or purchasing
assets and/or property for the purpose of capital gains. It is The
Company's intention to purchase assets and/or property for the
purpose of enhancing its primary business operations. The Company
is not limited as to the percentage amount of The Company's assets
it may use to purchase any additional assets or properties.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the
Company 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 the Company 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. The Company settled the suit for $15,000 in December
1998.
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 the Company
breached certain contracts related to Mr. Walker's employment with
Vulcan Energy Corporation, and seeks punitive and exemplary
damages. The Company 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 the Company. On February 17, 1998 the Company 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's
Securities Holders during the fourth quarter of the Company's
fiscal year ending December 31, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Prior to October 1994 the Company's common stock traded on a
limited basis in the over-the-counter market and quotations, when
available, were published on the OTC Bulletin Board under the
symbol "TSRG", and in the National Quotation Bureau, Inc. ("NQB")
"pink sheets" under Trans Energy, Inc. In October 1994, the
Company's common stock was accepted for trading on the Nasdaq
Small-Cap Market ("Nasdaq") and is currently listed under the
symbol "TSRG".
Nasdaq has notified the Company that it is not in full
compliance with the continued listing requirements of Nasdaq.
A hearing has been scheduled for April 15, 1999 whereby Nasdaq will
determine whether the Company can demonstrate its ability to
sustain long term compliance with all applicable maintenance
criteria. Nasdaq will make a final decision on the Company's
continued listing on Nasdaq following the hearing.
Set forth in the table below are the quarterly high and low
prices of the Company's common stock as obtained from the Nasdaq
Small-Cap Market for the past two fiscal years.
High Low
1997
First Quarter $ 6.56 $ 2.00
Second Quarter $ 3.28 $ 1.25
Third Quarter $ 2.00 $ .63
Fourth Quarter $ 2.00 $ .63
1998
First Quarter $ 1.67 $ .50
Second Quarter $ 1.25 $ 1.00
Third Quarter $ 2.38 $ .50
Fourth Quarter $ 1.37 $ .44
As of December 31, 1998, there were 197 holders of record of
the common stock, which figure does not take into account those
shareholders whose certificates are held in the name of
broker-dealers.
Dividend Policy
The Company has not declared or paid cash dividends or made
distributions in the past, and the Company does not anticipate that
it will pay cash dividends or make distributions in the foreseeable
future. The Company currently intends to retain and reinvest future
earnings to finance its operations.
Recent Sales of Unregistered Securities
A description of recent sales of unregistered securities can
be found in the Consolidated Statements of Stockholders' Equity and
Note 11 to the Consolidated Financial Statements which can be found
elsewhere within this Form 10-KSB.
On September 10, 1998, the Company closed an offering of
convertible debentures whereby the Company realized gross proceeds
of $4,625,400. The proceeds were used to acquire the GCRL
interests and related expenses. Shares issuable upon conversion of
the Debentures are subject to a registration statement that has
been filed with the Commission.
Issuances of securities by the Company were made in reliance
upon the exemption from registration under the Securities Act of
1933, as amended, provided by Section 4(2) thereunder.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with
the consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-KSB.
Results of Operations
The following table sets forth the percentage relationship to
total revenues of principal items contained in the Company's
Statements of Operations for the two most recent fiscal years ended
December 31, 1998, and 1997. It should be noted that percentages
discussed throughout this analysis are stated on an approximate
basis.
Fiscal Years Ended
December 31,
1998 1997
Total revenues . . . . . . . . . . . . . . . . . 100% 100%
Total costs and expenses . . . . . . . . . . . . 385 245
Total other income (expenses). . . . . . . . . . (22) (33)
Net income (loss) before taxes and
minority interest. . . . . . . . . . . . . . . (291) (178)
Income taxes . . . . . . . . . . . . . . . . . . - -
Net loss from discontinued operations. . . . . . 0 (4)
Minority interest. . . . . . . . . . . . . . . 0 0
Net income (loss). . . . . . . . . . . . . . . . (291) (182)
For the Year Ended December 31, 1998 Compared to the Year Ended
December 31, 1997.
Total revenues of $1,230,916 for the year ended December 31,
1998 ("1998") increased 10% compared to $1,115,037 for the year
ended December 31, 1997 ("1997"). In 1998, oil made up 13% of
total revenues as compared to only 3% in 1997. Accordingly, gas
sales decreased from 97% of sales in 1997 to 77% in 1998. This
increase was due to the purchase of the Gulf Canada interests in
Wyoming which produces oil and not natural gas.
The Company had a net loss of $3,583,200 for 1998. The
Company's total costs and expenses increased from 245% of sales in
1997 to 385% of sales in 1998. The cost of oil and gas decreased
from 69% of sales in 1997 to 65% of sales in 1998. Selling,
general and administrative expenses also decreased 62% due in part
to the issuance of stock by the Company for services rendered.
Salaries and wages increased 62% due to the Company's executives
receiving a salary which is being accrued by the Company.
Depreciation, depletion and amortization increased 1073% in 1998
from 1997 due to the amortization of offering costs in a capital
raising transaction and acquisition of Wyoming wells. Interest
expense in 1998 increased 151% over 1997 due to the issuance of
debentures.
Net Operating Losses
The Company has accumulated approximately $12,320,000 of net
operating loss carryforwards as of December 31, 1998, which may be
offset against future taxable income through the year 2013 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 the
Company, there will be an annual limitation on the amount of net
operating loss carryforwards which can be used. No tax benefit has
been reported in the financial statements for the year ended
December 31, 1998 because the potential tax benefits of the loss
carryforward is offset by valuation allowance of the same amount.
Liquidity and Capital Resources
Historically, the Company's working capital needs have been
satisfied through its operating revenues and from borrowed funds.
Working capital at December 31, 1998 was a negative $6,812,876
compared with a negative $1,922,427 at December 31, 199y. This
change was primarily attributed to increased expenditures by the
Company and its operating losses. The Company anticipates meeting
its working capital needs during the 1999 fiscal year with revenues
from operations.
As of December 31, 1998, the Company had total assets of
$10,353,838 and stockholders' equity of $2,321,706 compared to
total assets of $5,680,601 and total stockholders' equity of
$2,012,481 at December 31, 1997. For this same period, cash
decreased from $185,881 to $0 on December 31, 1998, and total
current assets decreased from $362,483 to $251,036 due to the
decrease in cash. Total current liabilities increased from
$2,284,912 to $5,063,912 on December 31, 1998 primarily due to an
increase in debentures payable of $4,246,744.
The Company's current portion of its long-term debt is
$990,427. The Company currently anticipates that it will be able
to provide for its debt obligations and repayments coming due
during fiscal 1999 from revenues generated by the Company.
In the opinion of management, inflation has not had a material
effect on the operations of the Company.
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.
The Company 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 the Company's financial position.
The Company believes that its existing accounting computer systems
and software will not need to be upgraded to mitigate the Year 2000
issues. The Company has not incurred any costs associated with its
assessment of the Year 2000 problem. In the event that Year 2000
issues impact the Company's accounting operations and other
operations aided by its computer system, the Company 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.
The Company 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 the Company
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 the Company, including loss of revenue and
substantial unanticipated costs. Accordingly, the Company plans to
devote all resources required to resolve any significant Year 2000
issues in a timely manner.
Risk Factors and Cautionary Statements
Forward-looking statements in this report are made pursuant to
the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The Company wishes to advise readers that
actual results may differ substantially from such forward-looking
statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially
from those expressed in or implied by the statements, including,
but not limited to, the following: the ability of the Company to
secure additional financing, the possibility of success in the
Company's drilling endeavors, competitive factors, and other risks
detailed in the Company's periodic report filings with the
Securities and Exchange Commission.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standard ("SFAS") No. 128,
"Earnings Per Share" and Statement of Financial Accounting
Standards No. 129 "Disclosures of Information About an Entity's
Capital Structure." SFAS No. 128 provides a different method of
calculating earnings per share than is currently used in accordance
with Accounting Principles Board Opinion No. 15, "Earnings Per
Share." SFAS No. 128 provides for the calculation of "Basic" and
"Dilutive" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share.
SFAS No. 129 establishes standards for disclosing information about
an entity's capital structure. SFAS No. 128 and SFAS No. 129 are
effective for financial statements issued for periods ending after
December 15, 1997. Their implementation is not expected to have a
material effect on the financial statements.
The FASB has also issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 130 establishes
standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting
from investments by owners and distributors to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that
displays with the same prominence as other financial statements.
SFAS No. 131 supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131 establishes
standards on the way that public companies report financial
information about operating segments in annual financial statements
and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It
also establishes standards for disclosure regarding products and
services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
SFAS 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and requires comparative
information for earlier years to be restated. Management believes
that the implementation of the new standards will not have a
material effect on the Company's financial statements.
The FASB has also issued SFAS No 132. "Employers' Disclosures
about Pensions and other Postretirement Benefits," which
standardizes the disclosure requirements for pensions and other
Postretirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires
comparative information for earlier years to be restated, unless
such information is not readily available. Management believes the
adoption of this statement will have no material impact on the
Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which requires
companies to record derivatives as assets or liabilities, measured
at fair market value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving
offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Management believes the adoption of this statement
will have no material impact on the Company's financial statements.
Item 7. Financial Statements
The Company's financial statements as of and for the fiscal
years ended December 31, 1998 and 1997 have all been examined to
the extent indicated in their report by Jones, Jensen & Company,
independent certified public accountants, and have been prepared in
accordance with generally accepted accounting principles and
pursuant to Regulation S-B as promulgated by the Securities and
Exchange Commission. The aforementioned financial statements are
included herein in response to Item 7 of this Form 10-KSB.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Trans Energy, Inc. and Subsidiaries
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheet of
Trans Energy, Inc. and Subsidiaries as of December 31, 1998 and the
related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1998 and
1997. 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, 1998 and the consolidated results of their operations
and their cash flows for the years ended December 31, 1998 and
1997, 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
February 24, 1999
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
December 31,
1998
CURRENT ASSETS
Cash $ -
Accounts receivable 249,528
Prepaid and other current assets 1,508
Total Current Assets 251,036
PROPERTY AND EQUIPMENT (Note 2)
Vehicles 94,589
Machinery and equipment 10,092
Pipelines 2,254,908
Well equipment 253,429
Wells 7,337,682
Leasehold acreage 541,625
Accumulated depreciation (1,777,079)
Total Fixed Assets 8,715,246
OTHER ASSETS
Prepaid closing costs (Note 1) 675,443
Prepaid advertising (Note 1) 687,173
Related party receivables (Note 4) 21,231
Loan acquisition costs 3,509
Total Other Assets 1,387,356
TOTAL ASSETS $ 10,353,638
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
1998
CURRENT LIABILITIES
Cash overdraft $ 5,013
Accounts payable - trade 1,029,461
Accrued expenses 566,469
Salaries payable 225,798
Notes payable - current portion (Note 3) 990,427
Debentures payable (Note 11) 4,246,744
Total Current Liabilities 7,063,912
NET LIABILITIES IN EXCESS OF THE ASSETS OF
DISCONTINUED OPERATIONS (Note 9) 104,911
LONG-TERM LIABILITIES
Notes payable (Note 3) 863,109
Total Long-Term Liabilities 863,109
Total Liabilities 8,031,932
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Note 6)
Common stock; 30,000,000 shares authorized at $0.001 par value;
2,174,817 shares issued and outstanding 2,174
Capital in excess of par value 14,642,893
Accumulated deficit (12,323,361)
Total Stockholders' Equity 2,321,706
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,353,638
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended
December 31,
1998 1997
OIL AND GAS SALES $ 1,230,916 $ 1,115,037
COSTS AND EXPENSES
Cost of oil and gas 797,504 748,757
Salaries and wages 331,514 203,940
Depreciation, depletion and amortization 3,031,132 325,206
Selling, general and administrative 584,191 1,453,954
Total Costs and Expenses 4,744,341 2,731,857
LOSS FROM CONTINUING OPERATIONS (3,513,425) (1,616,820)
OTHER INCOME (EXPENSE)
Other income 563 10,229
Interest expense (424,520) (281,867)
Gain on disposition of assets 150,860 1,500
Bad debt expense - (100,000)
Total Other Income (Expense) (273,097) (370,138)
NET LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTERESTS (3,786,522) (1,986,958)
INCOME TAXES (Note 1) - -
LOSS FROM CONTINUING OPERATIONS BEFORE
MINORITY INTERESTS AND DISCONTINUED OPERATIONS (3,786,522) (1,986,958)
NET GAIN (LOSS) FROM DISCONTINUED OPERATIONS
(Note 9) 203,322 (42,492)
LOSS BEFORE MINORITY INTERESTS AND OTHER
COMPREHENSIVE INCOME (3,583,200) (2,029,450)
MINORITY INTERESTS - -
OTHER COMPREHENSIVE INCOME - -
COMPREHENSIVE LOSS $ (3,583,200) $ (2,029,450)
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Continued)
For the Years Ended
December 31,
1998 1997
BASIC LOSS PER SHARE
Continuing operations $ (2.07) $ (0.44)
Discontinued operations 0.11 -
$ (1.96) $ (0.44)
FULLY DILUTED LOSS PER SHARE
Continuing operations $ (0.34) $ (0.44)
Discontinued operations 0.02 -
$ (0.32) $ (0.44)
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Capital in
Common Shares Excess of Accumulated
Shares Amount Par Value Deficit
Balance, December 31, 1996 956,015 $ 956 $ 8,929,501 $(6,710,711)
Common stock issued for services
at $1.41 per share 87,500 87 492,100 -
Common stock issued for cash
at $0.96 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 1,415 10,751,227 (8,740,161)
Contribution of capital by
shareholders - - 208,210 -
Common stock issued for services
at $1.45 per share 248,812 249 360,501 -
Common stock issued for debt
conversion at $1.65 per share 36,364 36 59,964 -
Common stock issued for prepaid
closing fees at $3.27 per share 473,833 474 1,548,427 -
Contributed capital from discount
on debentures - - 1,714,564 -
Net loss for the year ended
December 31, 1998 - - - (3,583,200)
Balance, December 31, 1998 2,174,817 $ 2,174 $14,642,893 $(12,323,361)
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,583,200) $ (2,029,450)
Adjustments to Reconcile Net Loss to Cash
Provided by Operating Activities:
Depreciation and depletion 3,031,132 325,206
Minority interest - 250,000
(Gain) loss on disposition of assets (150,860) (1,500)
Bad debt expense - 100,000
Common stock issued for services 360,750 492,837
(Gain) loss on discontinued operations (203,322) (477,896)
Changes in Operating Assets and Liabilities:
Decrease (increase) in accounts receivable (74,368) (39,404)
Decrease (increase) in prepaid and other
current assets (1,538,124) 58,160
Decrease (increase) in related party receivables (21,231) -
Increase (decrease) in accounts payable and
accrued expenses 648,138 721,716
Cash Provided (Used) by Operating Activities (1,531,085) (600,331)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 309,129 -
Expenditures for property and equipment (3,902,098) (918,685)
Cash Provided (Used) by Investing Activities (3,592,969) (918,685)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on related party advances - (605,190)
Proceeds from sale of common stock - 1,429,350
Principal payments on notes payable (625,070) (211,109)
Proceeds from notes payable 937,844 610,000
Proceeds from debentures 4,625,400 -
Cash Provided (Used) by Financing Activities $ 4,938,173 $ 1,223,051
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Years Ended
December 31,
1998 1997
NET INCREASE (DECREASE) IN CASH $ (185,881) $ (295,965)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 185,881 481,846
CASH AND CASH EQUIVALENTS, END OF YEAR $ - $ 185,881
CASH PAID FOR:
Interest $ 120,049 $ 279,525
Income taxes $ - $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued for services $ 360,750 $ 492,837
Shareholder loans contributed to capital $ - $ 49,998
Contribution of shareholder salaries $ 208,210 $ -
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The Company was originally incorporated in the State of
Idaho on January 16, 1964. On January 11, 1988, the
Company changed its name to Apple Corporation. In 1988,
the Company acquired oil and gas leases and other assets
from Ben's Run Oil Company (a Virginia limited partnership)
and has since engaged in the business of oil and gas
production.
On November 5, 1993, the Board of Directors caused to be
incorporated in the State of Nevada, a new corporation by
the name of Trans Energy, Inc., with the specific intent of
effecting a merger between Trans Energy, Inc. of Nevada and
Apple Corp. of Idaho, for the sole purpose of changing the
domicile of the Company to the State of Nevada. On
November 15, 1993, Apple Corp. and the newly formed Trans
Energy, Inc. executed a merger agreement whereby the
shareholders of Apple Corp. exchanged all of their issued
and outstanding shares of common stock for an equal number
of shares of Trans Energy, Inc. common stock. Trans
Energy, Inc. was the surviving corporation and Apple Corp.
was dissolved.
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. Basic Loss per Share of Common Stock
The basic loss per share of common stock is based on the
weighted average number of shares issued and outstanding at
the date of the consolidated financial statements. Fully
diluted loss per share of common stock as disclosed in the
accompanying consolidated statements of operations includes
all common stock equivalents.
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Provision for Taxes
At December 31, 1998, the Company had net operating loss
carryforwards of approximately $12,320,000 that may be
offset against future taxable income through 2013. No tax
benefit of the loss carryforward 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.
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. All significant intercompany accounts and
transactions have been eliminated.
g. Presentation
Certain 1997 balances have been reclassified to conform to
the presentation of the 1998 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.
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j. Prepaid Closing Costs
Prepaid closing costs consisted of the following at December 31, 1998:
473,833 shares issued, valued at $3.27 per share $ 1,548,901
Debentures issued for no cash consideration 195,400
Costs paid at the closing of the debenture financing 281,009
Less accumulated amortization (1,349,867)
Net Prepaid Closing Costs $ 675,443
The prepaid closing costs are associated with the
debentures which were issued in 1998 (Note 11) and are
being amortized over a 1 year life.
The remaining balance of $675,443 will be amortized in the
first quarter of 1999. Amortization expense for the year
ended December 31, 1998 was $1,349,867.
k. Prepaid Advertising
Prepaid advertising consisted of the following at December 31, 1998:
Costs paid out of the debenture closing $ 1,062,628
Less accumulated amortization (374,455)
Net Prepaid Advertising $ 687,173
These advertising costs are amortized over the term of the
contract which expires May 15, 2000 and are associated with
preparing Company press releases and providing them to the
public in various publications and trade journals.
Amortization expense for the year ended December 31, 1998
was $374,455.
l. Change in Accounting Principle
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of
comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general
purpose financial statements. This statement requires that
an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive
income separately from retained earnings and additional
paid-in capital in the equity section of a statement of
financial position. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. The Company has
retroactively applied the provisions of this new standard
by showing the other comprehensive income (loss) for all
years presented.
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
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.
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. In 1998, the Company
obtained an updated reserve report following the sale of 10
wells in West Virginia.
NOTE 3 - LONG-TERM DEBT
The Company had the following debt obligations at December 31, 1998:
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 9.00% as of December 31,
1998), matures April 12, 1999. $ 5,367
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 9.00% as of December 31, 1998), matures
April 12, 1999. 1,095
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 9.00% as of December 31, 1998), matures
April 12, 1999. 7,675
Balance forward $ 14,137
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 3 - LONG-TERM DEBT (Continued)
Balance forward $ 14,137
New York Life, secured by cash value in policy, interest payable
annually at 7.25% interest rate. 24,111
First National Bank of St. Marys, $9,244 payable monthly, 12.5%
interest rate, secured by equipment. 587,218
Union Bank of Tyler County, interest at 11.5% due quarterly,
renewable, due on demand, secured by equipment. 19,756
Union Bank of Tyler County, principal and interest due on March 14,
1999, interest rate of 14%, secured by vehicle. 31,122
Bank of Paden City, interest payable quarterly, prime +2%, due
on demand, secured by officers personal assets. 303,193
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%. 17,100
Note due to a private individual, due November 7, 1996 with interest
at 20%, unsecured. 135,460
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. 259,859
Note payable to RR Donnelley, payments of $3,244 of
principal and interest at 10.4% due monthly, unsecured. 114,573
Note due to an individual, due on demand with interest at 7.00%,
unsecured. 54,929
Total 1,853,536
Less Current Portion (990,427)
Total Long-Term Debt $ 863,109
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 3 - LONG-TERM DEBT (Continued)
Future maturities of long-term debt are as follows:
1999 $ 990,427
2000 316,582
2001 91,697
2002 81,257
2003 70,346
2004 and thereafter 303,227
Total $ 1,853,536
NOTE 4 - RELATED PARTY TRANSACTIONS
a. Marketing Agreement - Sancho
Natural gas delivered through the Company's pipeline
network is sold either to Sancho Oil and Gas Corporation
("Sancho"), a company owned by the President of the
Company, at the industrial facilities near Sistersville,
West Virginia, or to Hope, a local utility, on a year long
basis ending January 31, 1999 at a variable price per month
per Mcf. Under its contract with Sancho, the Company has
the right to sell natural gas subject to the terms and
conditions of a 20-year contract, as amended, that Sancho
entered into with Hope in 1988. This agreement is a
flexible volume supply agreement whereby the Company
receives the full price which Sancho charges the end user
less a $0.05 per Mcf marketing fee paid to Sancho.
b. Capital Contributions
During 1998, officers of the Company contributed $208,210
of their accrued salaries to additional paid-in capital.
c. Receivables
The Company has various receivables from and payables to
the officers and companies of the officers. These amounts
have been grouped together with a net receivable of
$21,231. These receivables and payables are non-interest
bearing, due on demand and unsecured.
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, 1998. 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 1998.
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 6 - STOCKHOLDERS' EQUITY
In 1998, the Company issued 248,812 shares of common stock
for $360,750 of services. The Company also issued 36,364
shares of common stock to reimburse a party for $60,000
which was advanced to the Company. The Company issued
473,833 shares of common stock for prepaid closing fees
related to the issuance of the convertible debentures (Note
11). In 1998, officers of the Company contributed accrued
salaries of $208,210 to the Company.
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.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Several vendors of Vulcan Energy, Inc., the discontinued
operation, have filed legal action against Vulcan Energy,
Inc. 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, Inc., 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, Inc. has filed suit
against the Company, its officers and directors and Vulcan
Energy, Inc., asserting a claim against these parties based
upon a breach of contract and fraud in connection with his
employment with Vulcan Energy, Inc.. 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 will not be material.
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, 1998, and
has a working capital deficit at December 31, 1998.
Revenues have not been sufficient to cover its operating
costs and to allow it to continue as a going concern. The
potential proceeds from the sale of common stock, other
contemplated debt and equity financing, and increases in
operating revenues from new development would enable the
Company to continue as a going concern. (See also Notes 10
and 11)
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 9 - VULCAN ENERGY, INC. - DISCONTINUED OPERATIONS
In March 1997, the Board of Directors of the Company
decided to discontinue the operations of Vulcan Energy,
Inc., its 80% owned subsidiary. The following is a summary
of income (loss) from operations of Vulcan Energy, Inc.
1998 1997
OIL AND GAS SALES $ - $ -
COST OF SALES - -
OPERATING EXPENSES - -
General and administrative - (42,492)
Total Operating Expenses - (42,492)
Loss from discontinued operations - (42,492)
Gain on release of debt 203,322 -
Net Gain (Loss) from
Discontinued Operations $ 203,322 $ (42,492)
The Company retains no assets which were attributable to
Vulcan. No income tax benefit has been attributed to the
gain (loss) from discontinued operations.
Net liabilities in excess of assets totaling $104,911 have
been reflected separately in the accompanying consolidated
balance sheet as of December 31, 1998.
NOTE 10 - JOINT VENTURE
The Company entered into a joint venture with Natural Gas
Technologies, Inc. (NGT) to form Sundance Producers, LLC.
This joint venture was engaged in oil and gas production
activities in Wyoming. The joint venture drilled a dry
hole and has been discontinued.
NOTE 11 - CONVERTIBLE DEBENTURES
The Company 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 the Company's Common Stock at a conversion
price for each share equal to the lower of (a) seventy
percent (70%) of the market price of the Company's Common
Stock averaged over the five trading days prior to the date
of conversion, or (b) the market price on the issuance date
of the Debentures. Any accrued and unpaid interest shall
be payable, at the option of the Company, in cash or in
shares of the Company's Common Stock valued at the then
effective conversion price.
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 11 - CONVERTIBLE DEBENTURES (Continued)
Pursuant to the terms of the Debentures, the Company has
agreed to file a registration statement with the Commission
to register the shares of the Company's Common Stock into
which the Debentures may be converted. Upon effectiveness
of the registration statement, the shares of the Company's
Common Stock underlying the Debentures, when issued, will
be deemed registered securities and will not be restricted
as to the resale of such securities. If the Company fails
to file its registration statement with forty-five (45)
days from the closing of the Debenture offering, the
Company may be obligated to increase by up to fifteen
percent (15%) the number of shares issuable upon conversion
to each holder.
The Company has accrued a discount on the Debentures of
$1,714,564 to compensate for the seventy percent (70%) bid
conversion from and for a five percent (5%) penalty
discount on the conversion of the Debentures and
contributed this amount to additional paid-in capital. The
Company amortized $1,143,043 of the discount to interest
expense. The balance of $571,521 will be recorded as
interest expense in the first quarter of 1999.
If the convertible debentures were converted at December 31
1998, the Company would have been obligated to issue up to
15,858,515 shares of common stock.
NOTE 12 - 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.
The Company 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 the Company's
financial position. The Company believes that its existing
computer systems and software will not need to be upgraded
to mitigate the Year 2000 issues. The Company has not
incurred any costs associated with its assessment of the
Year 2000 problem. In the event that Year 2000 issues
impact the Company's accounting operations and other
operations aided by its computer system, the Company
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.
The Company 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 the Company 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 the Company, including loss of revenue and
substantial unanticipated costs. Accordingly, the Company
plans to devote all resources required to resolve any
significant Year 2000 issues in a timely manner.
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 13 - GCRL ENERGY LTD. ACQUISITION
On April 1, 1998, the Company purchased the GCRL Energy
Ltd. Powder River Basin properties, located in Campbell and
Crook Counties, Wyoming. The properties consist of three
producing fields named Pinion, Sagebrush and Sandbar,
undeveloped acreage consisting of approximately 30,600
gross and 23,923 net acres and seventy-three miles of 3-D
seismic covering approximately 30 undrilled leads and
prospects on the undeveloped acreage.
Consolidated proforma combined statements of operations for
the year ended December 31, 1997 are presented as follows:
Trans Energy GCRL Combined
Oil and gas sales $ 1,115,037 $ 756,178 $ 1,871,215
Costs and expenses 2,731,857 99,069 2,830,926
Income (loss) from continuing
operations (1,616,820) 657,109 (959,711)
Other income (expense) (370,138) - (370,138)
Loss from discontinued
operations (42,492) - (42,492)
Net Income (Loss) $ (2,029,450) $ 657,109 $ (1,372,341)
Net Income (Loss) Per Share $ (0.44) $ 0.14 $ (0.30)
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
S.F.A.S. 69 SUPPLEMENTAL DISCLOSURES
(1) Capitalized Costs Relating to
Oil and Gas Producing Activities
December 31,
1998 1997
Proved oil and gas producing properties and related
lease and well equipment $ 7,553,980 $ 4,122,311
Accumulated depreciation and depletion (527,140) (433,799)
Net Capitalized Costs $ 7,026,840 $ 3,688,512
(2) Costs Incurred in Oil and Gas Property
Acquisition, Exploration, and Development Activities
For the Years Ended
December 31,
1998 1997
Acquisition of Properties
Proved $ 3,478,571 $ 65,000
Unproved 81,492 573,479
Exploration Costs - 164,900
Development Costs 283,129 280,206
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,
1998 1997
Sales $ 589,705 $ 390,922
Production costs (187,943) (128,190)
Depreciation and depletion (27,258) (25,865)
Results of operations for producing activities
(excluding corporate overhead and
interest costs) $ 374,504 $ 238,867
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 1998 and 1997
(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
Sales of properties (7,674) -
Production (2,475) (67,234)
Purchases and developed 1,504,813 -
Balance, December 31, 1998 1,705,534 1,714,082
Proved developed reserves:
Oil Gas
BBL MCF
Beginning of the year 1998 210,870 1,781,316
End of the year 1998 1,705,534 1,714,082
Beginning of the year 1997 196,343 1,677,359
End of the year 1997 210,870 1,781,316
During 1998, 1996, 1995, 1992, 1991 and 1990, the Company had
reserve studies and estimates prepared on its various
properties. The difficulties and uncertainties involved in
estimating proved oil and gas reserves makes comparisons
between companies difficult. Estimation of reserve quantities
is subject to wide fluctuations because it is dependent on
judgmental interpretation of geological and geophysical data.
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 1998 and 1997
(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, 1998
Trans Energy
and
Subsidiaries
Future cash inflows $ 46,761,608
Future production and development costs (16,787,417)
Future net inflows before income taxes 29,974,191
Future income tax expense (10,191,225)
Future net cash flows 19,782,966
10% annual discount for estimated timing of cash flows (10,287,002)
Standardized measure of discounted future net cash flows $ 9,495,694
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,
1998 1997
Standardized measure, beginning of year $ 3,534,828 $ 3,611,702
Oil and gas sales, net of production costs (589,705) (390,922)
Sales of mineral in place - -
Purchases 5,289,539 -
Quantity estimates made 1,261,032 314,048
Standardized measure, end of year $ 9,495,694 $ 3,534,828
<PAGE>
TRANS ENERGY, INC. AND SUBSIDIARIES
S.F.A.S. 69 Supplemental Disclosures
December 31, 1998 and 1997
(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.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
This Item is not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The following table sets forth the names, ages, and offices
held with the Company by it's directors and executive officers:
Name Position Director Since Age
Loren E. Bagley President, C.E.O. August 1991 56
and Director
William F. Woodburn Vice President August 1991 57
and Director
John B. Sims Director January 1988 73
Gary F. Lawyer Director December 1997 51
All directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and
qualified. There are no agreements with respect to the election of
directors. The Company has not compensated its directors for
service on the Board of Directors or any committee thereof, but
directors are reimbursed for expenses incurred for attendance at
meetings of the Board of Directors and any committee of the Board of
Directors. Executive officers are appointed annually by the Board
of Directors and each executive officer serves at the discretion of
the Board of Directors. The Executive Committee of the Board of
Directors, to the extent permitted under Nevada law, exercises all
of the power and authority of the Board of Directors in the
management of the business and affairs of the Company between
meetings of the Board of Directors.
The business experience of each of the persons listed above
during the past five years is as follows:
Loren E. Bagley has been Executive Vice President of the
Company 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.
William F. Woodburn has served as Vice President in charge of
Operations and a director of the Company 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 stockholder and
serves as President of Tyler Construction Company, Inc., and is also
a stockholder of Tyler Pipeline, Inc. which owns and operates oil
and gas wells in addition to natural gas pipelines, and Ohio Valley
Welding, Inc. which owns a fleet of heavy equipment that services
the oil and gas industry. Prior to his involvement in the oil and
gas industry, Mr. Woodburn was employed by the United States Army
Corps of Engineers for twenty four years and was Resident Engineer
on several construction projects. Mr. Woodburn graduated from West
Virginia University with a B.S. in civil engineering.
John B. Sims served as President, C.E.O. and a director of the
Company from 1988 to September, 1993 and currently is a director.
Prior to joining the Company and from 1984 to 1988, Mr. Sims was the
General Partner of Ben's Run Oil Company which was acquired by the
Company in January, 1988. Mr. Sims has also been the general
partner for fourteen limited partnerships from 1977 to 1984 drilling
a total of twenty eight wells. Prior to his involvement in the oil
and gas business, Mr. Sims was a real estate developer for twenty
years as well as an exclusive real estate broker for Ednam Forrest
in Charlottesville, Virginia. During 1994, Mr. Sims voluntarily
initiated a personal bankruptcy proceeding pursuant to Chapter 7 of
the United States Bankruptcy Code. Pursuant to the terms of such
proceeding, Mr. Sims was discharged of certain of his debts which
were incurred as a consequence of his personal guarantees of certain
business related debts, not related to the Company, upon which the
primary obligor defaulted.
Gary F. Lawyer became a director of the Company 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Each of the Company's officers and directors is required to
file a Form 5, Annual Statement of Changes in Beneficial Ownership,
on or before the 45th day after the end of the fiscal year. These
reports have not filed on a timely basis and will be submitted to
the Securities and Exchange Commission.
<PAGE>
Item 10. Executive Compensation
The Company does not have a bonus, profit sharing, or deferred
compensation plan for the benefit of its employees, officers or
directors, nor has the Company entered into employment contracts
with any of the aforementioned persons.
Cash Compensation
The following table sets forth all cash compensation paid by
the Company for services rendered to the Company for the years ended
December 31, 1996, 1997 and 1998, to the Company's Chief Executive
Officer. No executive officer of the Company has earned a salary
greater than $100,000 annually for any of the periods depicted.
Summary Compensation Table
Other All
Annual Other
Name and Compen- Compen-
Principal Position Yea Salary Bonus sation sation
Loren E. Bagley, 1998 $ -0- $ -0- $ -0- $ -0-
President, C.E.O. 1997 $ 18,000 $ -0- $ -0- $ -0-
1996 $ -0- $ -0- $ -0- $ -0-
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth information, to the best
knowledge of the Company as December 31, 1998, with respect to each
person known by the Company to own beneficially more than 5% of the
Company's outstanding common stock, each director and all directors
and officers as a group, and is adjusted to reflect the two shares
for five shares reverse stock split effected by the Company on
September 22, 1993, and the one share for four shares reverse stock
split effected June 5, 1998.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class(1)
Loren E. Bagley * 417,364(2) 16.8%
210 Second Street
St. Marys, WV 26170
William F. Woodburn * 424,527(3) 17.1%
210 Second Street
St. Marys, WV 26170
John B. Sims * 38,807(4) 1.8%
210 Second Street
St. Marys, WV 26170
Gary F. Lawyer * 25,000(5) 1.1%
21430 Timtam Circle
Parker, CO 80134
<PAGE>
Karla Spencer 148,944 6.8%
P.O. Box 24
Alma, WV 26320
All directors and executive 905,698(6) 31.8%
officers as a group
(4 persons in group)
* Director and/or executive officer
Note: Unless otherwise indicated in the footnotes below, the
Company has been advised that each person above has sole
voting power over the shares indicated above.
(1) As of December 31, 1998, there were 2,174,817 shares of common
stock outstanding, which figure does not take into
consideration stock owned by certain officers, directors and
shareholders, entitling the holders to purchase an aggregate of
675,000 shares of common stock and which are currently
exercisable. Therefore, for purposes of the table above,
2,849,817 shares of common stock are deemed to be issued and
outstanding in accordance with Rule 13d-3 adopted by the
Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended. Percentage ownership is
calculated separately for each person on the basis of the
actual number of outstanding shares as of December 31, 1998 and
assumes the exercise of stock options held by such person (but
not by anyone else) exercisable within sixty days.
(2) Includes 312,500 shares that may be acquired by Mr. Bagley
pursuant to stock options exercisable at $,50 per share and
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 312,500 shares that may be acquired by Mr. Woodburn
pursuant to stock options exercisable at $.50 per share and
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 25,000 shares that may be acquired by Mr. Sims
pursuant to stock options exercisable at $.50 per share and
13,807 shares of common stock held jointly with Virginia Sims,
wife of John B. Sims.
(5) Includes 25,000 shares that may be acquired by Mr. Lawyer
pursuant to stock options exercisable at $.50 per share.
(6) Includes 675,000 shares that may be acquired by certain
directors pursuant to stock options exercisable at $.50 per
share.
<PAGE>
Item 12. Certain Relationships and Related Transactions
During the last two fiscal years, there have been no
transactions between the Company and any officer, director, nominee
for election as director, or any shareholder owning greater than
five percent (5%) of The Company's outstanding shares, nor any
member of the above referenced individuals' immediate family, except
as set forth below.
(a) As of December 31, 1998, the Company 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 The Company's
management extended an aggregate of $448,583 in loans to the Company
for the purpose of providing the Company with working capital.
(b) Loren E. Bagley is President of Sancho, a principal
purchaser of The Company's natural gas. Mr. Bagley's wife, Carolyn
S. Bagley is a director and owner of 33% of the outstanding capital
stock of Sancho. Under its contract with Sancho, the Company has
the right to sell natural gas subject to the terms and conditions of
a 20-year contract, as amended, that Sancho entered into with Hope
in 1988. This agreement is a flexible volume supply agreement
whereby the Company receives the full price which Sancho receives
less a $.05 per Mcf marketing fee paid to Sancho. The price of the
natural gas is based upon the greater of the residential gas
commodity index or the published Inside F.E.R.C. Index, at The
Company's option, for the first 1,500 Mcf purchased per day by Hope
and thereafter the price is the Inside F.E.R.C. Index. The
residential gas commodity index does not directly fluctuate with the
overall price of natural gas. The Inside F.E.R.C. Index fluctuates
monthly with the change in the price of natural gas. While such
option provides certain price protection for the Company there can
be no assurance that prices paid by the Company to suppliers will be
lower than the price which the Company would receive under the Hope
arrangement. During 1998, the Company paid Sancho an aggregate of
approximately $3,700 pursuant to such 20-year contract.
(c) On May 7, 1996, the Company borrowed $100,000 from William
Stevenson. Such amount is repayable in one installment of principal
and interest of $110,000 on November 7, 1996. Messrs. Bagley,
William F. Woodburn and John B. Sims are jointly and severally
liable with the Company for the repayment of such obligation. Such
obligation is secured by the pledge of 50,000 shares of Common Stock
owned by Mr. Woodburn's wife, Janet L. Woodburn.
(d) A company owned by an officer of The Company's former
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 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 the Company has no obligation related to
this management agreement in future periods.
The Company occupies approximately 4,000 square feet of office
space in St. Marys, West Virginia, which it shares with its
subsidiaries Tyler Construction Company, Inc. and Ritchie County
Gathering Systems, Inc. Prior to 1997, the office space was paid
for by Sancho and the Company used the office space rent free. The
Company believes that the foregoing transactions with Sancho were
made on terms no less favorable to the Company than those available
from unaffiliated third parties.
It is The Company's policy that any future material
transactions between it and members of its management or their
affiliates shall be on terms no less favorable than those available
from unaffiliated third parties.
<PAGE>
PART V
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit Name
*2.1 Stock Acquisition Agreement between the Company and Loren E.
Bagley and William F. Woodburn
*2.2 Asset Acquisition Agreement between the Company and Dennis
L. Spencer
*2.3 Asset Acquisition Agreement between the Company and Tyler
Pipeline, Inc.
*2.4 Stock Exchange Agreement between the Company and Ritchie
County Gathering Systems, Inc.
*2.5 Plan and Agreement of Merger between Trans Energy, Inc.
(Nevada) and Apple Corp. (Idaho), to facilitate the change
of the Company's corporate domicile to Nevada
**2.6 Agreements related to acquisition of Vulcan Energy
Corporation
*3.1 Articles of Incorporation and all amendments pertaining
thereto, for Apple Corp., an Idaho corporation
*3.2 Articles of Incorporation for Trans Energy, Inc., a Nevada
corporation
*3.3 Articles of Merger for the States of Nevada and Idaho
*3.4 By-Laws
*4.1 Specimen Stock Certificate
*10.1 Marketing Agreement with Sancho Oil and Gas Corporation
*10.2 Gas Purchase Agreement with Central Trading Company
*10.3 Price Agreement with Key Oil Company
*21.1 Subsidiaries
27 Financial Data Schedule
*99.1 Reserve Estimate and Evaluation of oil and gas properties
*99.2 Reserve Estimate and Evaluation for Dennis L. Spencer wells
* Previously filed as Exhibit to Form 10-SB.
** Previously filed as Exhibit to Form 8-K dated August 7, 1995.
(b) On December 9, 1998, the Company filed a report on
Form 8-K reporting under Item 5 that the Company had
terminated its plans to merger with Natural Gas
Technologies, Inc.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANS ENERGY, INC.
BY: /S/ Loren E. Bagley
LOREN E. BAGLEY,
President and C.E.O.
Dated: April 15, 1999
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
President, C.E.O. and
Director April 15, 1999
/S/ Loren E. Bagley Principal Financial Officer
Loren E. Bagley
Vice President and
Director April 15, 1999
/S/ William F. Woodburn Chief Accounting Officer
William F. Woodburn
April 15, 1999
/S/ John B. Sims Director
John B. Sims
April 15, 1999
/S/ Gary F. Lawyer Director
Gary F. Lawyer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE TRANS ENERGY, INC. FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 249,528
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 251,036
<PP&E> 10,492,325
<DEPRECIATION> 1,777,079
<TOTAL-ASSETS> 10,353,638
<CURRENT-LIABILITIES> 7,063,912
<BONDS> 863,109
0
0
<COMMON> 2,174
<OTHER-SE> 14,642,893
<TOTAL-LIABILITY-AND-EQUITY> 10,353,638
<SALES> 1,230,916
<TOTAL-REVENUES> 1,230,916
<CGS> 797,504
<TOTAL-COSTS> 4,744,341
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 424,520
<INCOME-PRETAX> (3,786,522)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,786,522)
<DISCONTINUED> 203,322
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,583,200)
<EPS-PRIMARY> (1.96)
<EPS-DILUTED> (.32)
</TABLE>
