SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended:

 

June 30, 2004

 

o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 000-50715

 

TRANSMERIDIAN EXPLORATION, INC.

(Exact name of registrant as specified in its charter)

 

 

Indicate by check mark whether the Registrant (i) has 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 (ii) has been subject to such filing requirements for the past 90 days.  Yes ý No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

 

As of August 2, 2004, there were 78,598,875 shares of common stock outstanding.  Such amount does not include 1,000,000 shares of redeemable common stock.

 

 

TRANSMERIDIAN EXPLORATION, INC.

 

TABLE OF CONTENTS

 

PART I.  FINANCIAL INFORMATION
Item 1.		Financial Statements (unaudited)
	Consolidated Balance Sheets – June 30, 2004 and December 31, 2003
	Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 2004 and 2003
	Consolidated Statements of Stockholders Equity for the Six Months Ended June 30, 2004
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
	Notes to Consolidated Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings
Item 2.		Changes in Securities and Use of Proceeds
Item 3.		Defaults upon Senior Securities
Item 4.		Submission of Matters to a Vote of Security Holders
Item 5.		Other Information
Item 6.		Exhibits and Reports on Form 8-K
SIGNATURES

 

2

 

Transmeridian Exploration, Inc. and Subsidiaries
Consolidated Balance Sheets
As of June 30, 2004 and December 31, 2003

 

		June 30, 2004			December 31, 2003
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,286,494		$	1,321,514
Receivables		519,960			143,135
Crude oil inventory		166,226			509,156
Prepaid expenses		90,542			93,999
Total current assets		2,063,222			2,067,804
Property and equipment:
Oil and gas properties, successful efforts method		61,086,788			48,800,256
Drilling rig and equipment		6,484,983			6,484,983
Transportation equipment		239,821			239,821
Office and technology equipment		280,748			253,351
Total property and equipment		68,092,340			55,778,411
Less accumulated depreciation		2,083,665			1,217,836
Net property and equipment		66,008,675			54,560,575
Other assets		312,777			470,693
Total assets		$	68,384,674		$	57,099,072
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	6,418,904		$	3,268,552
Current maturities of long-term debt		8,201,122			20,176,205
Redeemable common stock		2,000,000			2,000,000
Deferred revenue		166,226			509,156
Interest payable		4,185,455			5,716,720
Notes payable to related parties		130,000			248,025
Total current liabilities		21,101,707			31,918,658
Long-term debt, net of current maturities		28,582,930			24,488,196
Other long term liabilities		186,000			186,000
Minority interest		8,657,715			—
Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized		—			—
Common stock, $0.0006 par value per share, 200,000,000 shares authorized		47,084			42,404
Additional paid-in capital		23,453,970			12,525,250
Accumulated deficit		(13,644,732		)	(12,061,436		)
Total stockholders’ equity		9,856,322			506,218
Total liabilities and stockholders’ equity		$	68,384,674		$	57,099,072

 

The accompanying notes are an integral part of these statements.

 

3

 

Transmeridian Exploration, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Month Periods Ended June 30, 2004 and 2003

(Unaudited)

 

		Three Month Periods Ended						Six Month Periods Ended
		June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Oil revenues		$	1,562,656		$	—		$	2,205,583		$	—
Operating costs and expenses:
Exploration expense		53,641			18,893			76,644			18,893
Depreciation, depletion and amortization		299,502			12,932			434,726			25,146
Transportation expense		(1,507		)	—			173,847			—
Operating and administrative expense – Kazakhstan		972,413			517,040			1,704,493			997,163
General and administrative expense – Houston		547,501			533,153			1,217,304			938,056
Total operating costs and expenses		1,871,550			1,082,018			3,607,014			1,979,258
Operating loss		(308,894		)	(1,082,018		)	(1,401,431		)	(1,979,258		)
Other income (expense):
Interest income		3,686			4			7,929			17
Interest expense, net of capitalized interest		(132,374		)	(211,650		)	(279,692		)	(397,846		)
Total other income (expense)		(128,688		)	(211,646		)	(271,763		)	(397,829		)
Minority interest		(117,481		)	—			89,898			—
Net loss		(555,063		)	(1,293,664		)	(1,583,296		)	(2,377,087		)
Preferred dividends		—			(9,352		)	—			(18,604		)
Net loss attributable to common stockholders		$	(555,063	)	$	(1,303,016	)	$	(1,583,296	)	$	(2,395,691	)
Basic and diluted loss per share		$	(0.01	)	$	(0.02	)	$	(0.02	)	$	(0.04	)
Weighted average common shares outstanding		78,208,663			63,296,923			77,837,642			61,730,233

 

The accompanying notes are an integral part of these statements.

 

4

 

Transmeridian Exploration, Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
For the Six Months Ended June 30, 2004

 

		Common shares		Common stock			Additional paid-in capital			Accumulated deficit			Total
		(in 000’s)
Balances at December 31, 2003		70,673		$	42,404		$	12,525,250		$	(12,061,436	)	$	506,218
Proceeds from the sale of common stock, net of offering costs		7,268		4,361			4,377,689			—			4,382,050
Exercise of stock options		175		105			41,895			—			42,000
Stock based compensation		—		—			90,816			—			90,816
Cashless exercise of warrants		358		214			(214		)	—			—
Capital contribution to Caspi Neft TME		—		—			15,000,000			—			15,000,000
Private placement termination fee		—		—			200,000			—			200,000
Elimination of minority interest		—		—			(8,781,466		)	—			(8,781,466		)
Net loss		—		—			—			(1,583,296		)	(1,583,296		)
Balances at June 30, 2004		78,474		$	47,084		$	23,453,970		$	(13,644,732	)	$	9,856,322

 

The accompanying notes are an integral part of these statements.

 

5

 

Transmeridian Exploration, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2004 and 2003

(Unaudited)

 

		Six Months Ended June 30,
		2004			2003
Cash flows from operating activities:
Net loss		$	(1,583,296	)	$	(2,377,087	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		434,727			25,146
Amortization of debt financing costs		96,666			87,500
Amortization of prepaid contracts		61,250			227,605
Stock based compensation expense		90,816			15,950
Exploration expense		76,644			125,184
Stock issued for products or services		—			120,070
Minority interest in net income (loss) of consolidated subsidiaries		(89,898		)	—
Increase (decrease) in interest payable		(4,209,826		)	194,007
(Increase) decrease in receivables		(376,825		)	(39,835		)
(Increase) decrease in prepaid expenses		3,457			112,661
Increase (decrease) in accounts payable and accrued liabilities		(249,648		)	111,836
Net cash used in operating activities		(5,745,933		)	(1,396,963		)
Cash flows from investing activities:
Capital expenditures		(12,313,927		)	(12,378,038		)
Non-cash portion of capital expenditures		5,968,064			2,759,322
Advances to operators		—			(163,143		)
Capitalized depreciation		431,101			359,970
Net cash used in investing activities		(5,914,762		)	(9,421,889		)
Cash flows from financing activities:
Proceeds from long-term debt		6,391,972			12,558,919
Repayments of long-term debt		(14,272,322		)	(797,109		)
Repayments of notes payable to related parties		(118,025		)	—
Proceeds from sale of stock by Caspi Neft		15,000,000			—
Proceeds from sale of common stock, net		4,582,050			—
Payment of deferred financing costs		—			(300,000		)
Proceeds from stock option exercise		42,000			—
Net cash provided by financing activities		11,625,675			11,461,810
Net increase (decrease) in cash and cash equivalents		(35,020		)	642,958
Cash and cash equivalents, beginning of period		1,321,514			624,807
Cash and cash equivalents, end of period		$	1,286,494		$	1,267,765

 

The accompanying notes are an integral part of these statements.

 

6

 

Transmeridian Exploration, Inc. and Subsidiaries
Consolidated Statements of Cash Flows – Supplemental Information
For the Six Months Ended June 30, 2004 and 2003

 

		Six Months Ended June 30,
		2004			2003
Amounts paid for:
Interest		$	4,392,170		$	116,339
Interest capitalized (non-cash)		(2,678,563		)	(1,449,883		)
Income taxes		—			—
Non-cash transactions:
Common stock issued for services and products		—			446,057
Convertible debentures converted to common stock		—			15,000
Asset retirement obligation		—			62,000
Accrued and unpaid dividends on convertible preferred stock		—			18,604

 

The accompanying notes are an integral part of these financial statements

 

7

 

Transmeridian Exploration, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2004

(Unaudited)

 

Note 1 – Basis of Presentation and Significant Accounting Policies

 

The consolidated financial statements of Transmeridian Exploration, Inc. and subsidiaries (the “Company”) included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  They reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods, on a basis consistent with the annual audited financial statements.  All such adjustments are of a normal recurring nature.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  However, the Company believes that the disclosures contained herein are adequate to make the information presented not misleading.  The consolidated balance sheet at December 31, 2003 is derived from the December 31, 2003 audited consolidated financial statements.  These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2003 annual report on Form 10-K.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

 

Consolidation Policy

 

During February 2004, Bramex Management, Inc., successor in interest to Kazstroiproekt, Ltd. (“Bramex”), exercised its option to acquire 50% of the common stock of OJSC Caspi Neft TME (“Caspi Neft”), the Company’s primary operating subsidiary in Kazakhstan and the entity which holds the license and exploration contract covering the South Alibek Field.  Accordingly, as of June 30, 2004, the Company owns a 50% equity interest in this subsidiary.  Based on the highly integrated relationship between the Company and Caspi Neft, the Company believes that the proper accounting treatment is to fully consolidate this entity, with the 50% share of Bramex reflected as a minority interest.  The Company and its auditors have been consulting with the SEC to verify that this treatment is consistent with the latest interpretations of professional standards.

 

To exercise its option to acquire 50% of Caspi Neft, Bramex contributed $15 million in cash to Caspi Neft, the proceeds of which were used by Caspi Neft to retire debt.  The difference between the $15 million of capital contributed to Caspi Neft and 50% of the book equity of Caspi Neft after such capital contribution represents an excess purchase price by Bramex of $6,218,534.  Under the principle of full consolidation of Caspi Neft, this amount has been included in additional paid-in capital on the accompanying consolidated balance sheet.

 

Note 2 – Going Concern

 

The Company is in the early stages of establishing production and revenues from the development of its primary property in Kazakhstan and was a Development Stage Company in prior periods.  The ability of the Company to realize the carrying value of its assets in the ordinary course of business is dependent on being able to produce and sell significant quantities of oil from the South Alibek Field (the “Field”).  The Company’s primary emphasis since inception has been the exploration and development of the Field and the Company had total capitalized costs of approximately $68.1 million in property and equipment as of June 30, 2004.  This amount includes the initial costs of acquiring the Field, workover and drilling costs and the costs of support facilities, including a drilling rig dedicated to the Field.  The Field has four wells which have proved reserves, two of which are currently producing and two of which are being completed and tested.  One additional well is currently being drilled.  These wells and subsequent wells will delineate the extent and reserve potential of the Field.  The economic success of the Field is dependent on finding and developing sufficient reserves and rates of production to generate positive cash flow and provide an

 

8

 

economic rate of return on the investment in the Field.  In order to sell significant quantities of oil from the Field over the long term, the Company must obtain a production contract from the government of Kazakhstan.

 

The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  The Company has accumulated losses totaling $13.6 million and has incurred a significant amount of debt in the development phase of its operations.  As of June 30, 2004, current liabilities exceeded current assets by $19.0 million.  Additionally, to fully develop the area covered by the Field, the Company will require additional funding and such amounts may be substantial.  Recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company.  Continued operations are dependent upon the Company’s ability to meet its financial obligations and to secure additional funding.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities which might be necessary should the Company be unable to continue as a going concern.

 

Management has taken steps which it believes will be sufficient to enable the Company to continue in existence. In January 2004, the Company made a private placement of common stock in the amount of $4.4 million.  The primary use of proceeds for this placement was the retirement of $3.0 million in debt owed to the bank in Kazakhstan. The remaining proceeds were used for general operating purposes.

 

The Company is dependent on additional funding to continue development of the South Alibek Field in accordance with its current development plans, which envision the continuous use of two drilling rigs.  The Company currently estimates the funding requirements for 2004 related to its 50% interest in Caspi Neft to be approximately $10.0 million.  To meet this funding objective, the Company may seek to obtain bridge financing, restructure its existing debt, raise equity capital or some combination thereof.  It may also seek to raise equity capital in excess of this amount to allow it to fund new initiatives, further accelerate development of the Field and provide greater assurance of its ability to meet its future financial commitments.  The minimum amount of funding required is highly dependent on the amount and timing of cash flows from the existing and future wells drilled on the property.  The Company’s near-term goal is to develop sufficient revenues and cash flow from production to fund continuing capital expenditures and meet its minimum debt service requirements.

 

Note 3 – Kazakhstan Properties

 

The Company owns 50% of Caspi Neft, which is an Open Joint Stock Company organized under the laws of the Republic of Kazakhstan.  The primary assets of Caspi Neft are License 1557 covering the South Alibek Field and related oil and gas property and equipment.  The License covers 14,111 acres.  The Exploration Contract associated with the License has a six-year initial term which expires in April 2005 and may be extended by mutual agreement for two additional two-year periods.  The Company has been granted the first of these two-year extensions through April 2007.  The Exploration Contract required capital expenditures during the initial period of approximately $18.0 million, which has now been satisfied.  In connection with the recent two-year extension, the Company has committed to an additional work program of $30.5 million.  During the primary term and the extended term, the Company can produce wells under a test program and pay a royalty of 2%. The Exploration Contract also contains a provision which will allow the government to recover, from future revenues, approximately $4.9 million of exploration costs incurred by the government prior to the Company’s acquisition of the Field.  The final terms for recovery of these costs will be contained in the production contract, when executed.

 

The Company’s interest in South Alibek will be reduced in the future by a 10% carried working interest conveyed to Kornerstone Investment Group Ltd. (Kornerstone) in connection with the acquisition of the Field.  Under the terms of this carried interest, the Company is required to pay all acquisition, exploration, development and operating costs attributable to the 10% carried interest and is entitled to receive all revenues attributable to the 10% carried interest until the Company’s costs are recovered.  Thereafter, Kornerstone will participate as a 10% working interest owner in the Field.

 

9

 

Note 4 – Drilling Rig

 

In December 2001, the Company purchased a drilling rig for $5.3 million in total consideration, including a note payable for $3.3 million and $2.0 million in common stock, which is redeemable for cash at the option of the seller of the rig.  See Notes 5 and 6 for further discussion of the terms of the note payable and redeemable common stock.

 

The rig was acquired for drilling operations in the South Alibek Field.  At the time the Company purchased the drilling rig, it was in storage in South America.  In early 2002, the Company arranged to have the rig transported to Kazakhstan via marine cargo vessel.  In addition, the Company undertook various refurbishments and modifications to the rig to make it suitable for use in Caspi Neft’s operations.  The Company contracted with a firm experienced in international drilling to operate the rig and provide expatriate drilling personnel.  The rig began drilling operations in October 2002 and has been used continuously in the South Alibek Field since that time.

 

As more fully discussed in Note 8, there is a legal dispute between the Company, the seller of the rig and the holder of an apparent first lien on the drilling rig.

 

Note 5 – Long-Term Debt

 

Long-term debt consists of the following:

 

		June 30, 2004			December 31, 2003
$20 million credit facility with a Kazakhstan bank		$	5,727,679		$	20,000,000
$30 million credit facility with a Kazakhstan bank		29,399,585			23,007,613
Note payable secured by drilling rig		1,656,788			1,656,788
Total debt		36,784,052			44,664,401
Less current maturities		8,201,122			20,176,205
Long-term debt		$	28,582,930		$	24,488,196

 

Management believes the book value of debt at June 30, 2004 and December 31, 2003 approximates its fair value.

 

$20 Million Credit Facility

 

In February 2002, Caspi Neft entered into a credit facility with a Kazakhstan bank (the “$20 Million Facility”).  The $20 Million Facility provided for borrowings totaling $20.0 million through July 1, 2003 for development of the South Alibek Field and is secured by the Field, the stock of certain subsidiaries and the stock and other assets of Caspi Neft.  The $20 Million Facility carries an interest rate of 15% and a fee of 0.5% on the unutilized portion of the commitment.

 

In connection with this financing, the Company granted an option to Bramex to acquire 50% of the common stock of Caspi Neft.  In order to exercise the option, Bramex was required to (1) arrange an additional $30.0 million of financing for Caspi Neft at market rates and (2) make a cash contribution to Caspi Neft of $15.0 million, the proceeds of which would be used to repay part of the $20 Million Facility.

 

In February 2004, Bramex exercised its option and paid Caspi Neft $15.0 million, of which $11.7 million was applied to principal and $3.3 million was applied to accrued interest. Also in February 2004, the Company repaid Caspi Neft $3.0 million, which it had been required to pay under the original terms of the $20 Million Credit Facility. Of such amount, $2.3 million was applied to principal and $0.7 million was applied to accrued interest.

 

The remaining balance under the $20 Million Facility of approximately $6.0 million is payable in 12 monthly installments from March 2004 through February 2005.

 

10

 

$30 Million Credit Facility

 

In June 2003, Caspi Neft entered into a new $30.0 million credit facility with the same Kazakhstan Bank (the “$30 Million Facility”).  This facility provides for borrowings up to $30.0 million through May 31, 2005.  The amount outstanding as of May 31, 2005 is scheduled to be repaid over 36 equal monthly installments beginning June 2005 through the final maturity date of May 31, 2008.  The $30 Million Facility carries an interest rate of 15% and a commitment fee of 0.5% per annum on the unutilized portion.  Interest accrued during the first 24 months is payable on May 31, 2005; thereafter, interest is payable monthly.  Upon execution of the $30 Million Facility, Caspi Neft incurred an arrangement fee of $300,000, which has been capitalized as a deferred financing cost and will be amortized over the five-year life of the facility.

 

Both the $20 Million and the $30 Million credit facilities contain covenants, including restrictions on the disposition of assets, payment of dividends, use of proceeds from crude oil sales and the incurrance of additional indebtedness. Both credit facilities are secured by substantially all of the assets of Caspi Neft, including the South Alibek License and the stock of Caspi Neft.  The Company’s wholly owned British Virgin Islands subsidiary has also guaranteed the loan.

 

Note Payable Secured by Drilling Rig

 

In December 2001, the Company purchased a drilling rig for $5.3 million by the issuance, to the Seller, of a note payable for $3.3 million and redeemable common stock of $2.0 million.  In July 2003, the Company was notified by the holder of an apparent first lien on the rig (the “First Lien Holder”) that the Seller was in default under its note payable obligation to the First Lien Holder.  The Company was not informed of the existence of the First Lien Holder in the Asset Purchase Agreement related to the acquisition of the drilling rig.  The note payable is now in dispute as a result of the Seller’s apparent default to the First Lien Holder.  The Company has held discussions with the First Lien Holder with the intent to resolve the Seller’s default by making certain payments directly to the First Lien Holder. The Company made installment payments to the First Lien Holder totaling $688,400 in 2003. However, in December 2003 the Company ceased installment payments to the First Lien Holder as it had not been able to reach a settlement agreement with both the seller and the First Lien Holder.  See further discussion of this matter in Note 6 and 8.

 

Note 6 – Stockholders’ Equity

 

Private Placement Termination Fee

 

In May 2004, the Company received $200,000 as a termination fee from an investor who had committed to a private placement of common stock in October 2003.  Such amount was recorded as additional paid-in capital.

 

Redeemable Common Stock

 

During December 2001, the Company purchased a drilling rig for use in its Kazakhstan operations.  Part of the consideration for the purchase was 1.0 million shares of common stock.  Under the terms of the purchase agreement, these shares were redeemable, at the option of the seller, for $2.00 per share, or $2.0 million in the aggregate, by the end of 2002.  This obligation was renegotiated on December 28, 2002 to require the redemption of the stock, at the option of the holder, on February 1, 2004.  The revised agreement also provides interest at 10% on the unpaid balance of the redemption amount.  As more fully discussed in Note 8, there is a legal dispute between the Company, the seller of the rig and the holder of an apparent first lien on the drilling rig. The Company has ceased all payments pending the outcome of the lawsuit.

 

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Note 7 – Loss per Common Share

 

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period.

 

Diluted net loss per common share is computed based upon the weighted-average number of common shares outstanding plus the common shares which would be issuable upon the conversion or exercise of all potentially dilutive securities.  Diluted net loss per share equals basic net loss per share for the periods presented because the effects of potentially dilutive securities are antidilutive.

 

Net loss attributable to common stockholders is calculated as the net loss after deductions for cumulative preferred stock dividends, whether paid or accrued.

 

Note 8 – Commitments and Contingencies

 

Drilling Rig Dispute

 

In December 2001, the Company purchased a drilling rig for $5.3 million by the issuance, to the seller, of a note payable for $3.3 million and redeemable common stock of $2.0 million.  Further discussion of this transaction can be found in Notes 4, 5 and 6.  In July 2003, the Company was notified by the holder of an apparent first lien on the drilling rig (the “First Lien Holder”) that the seller of the rig was in default under its note payable obligation to the First Lien Holder.  The Company was not informed of the existence of the First Lien Holder in the Asset Purchase Agreement related to the acquisition of the drilling rig.  The note payable and the redeemable common stock are now in dispute as a result of the Seller’s default to the First Lien Holder.  During 2003, the Company held discussions with the First Lien Holder with the intent to resolve the Seller’s default by making certain payments directly to the First Lien Holder.  During the year ended December 31, 2003, the Company made installment payments to the First Lien Holder totaling $688,400.

 

Discussions with the seller of the rig became increasing adversarial during late 2003 and on December 15, 2003, the seller filed suit in District Court, Harris County, Texas, 334^th Judicial District relating to the Company’s alleged default under the note payable and redeemable common stock agreements with the seller.  At this time, the Company ceased installment payments to the First Lien Holder as it had not been able to successfully negotiate a settlement agreement with both the seller and the First Lien Holder.  On February 27, 2004, the First Lien Holder filed suit in United States District Court, Southern District of Texas, against the seller and named the Company and two of its affiliates as additional defendants.  This action seeks payment of debts owed to the First Lien Holder by the seller related to the drilling rig.

 

On April 14, 2004, the Company filed a Counterclaim and Third-Party Claim against the seller and certain of its affiliates.  This action seeks recovery of repair costs incurred by the Company in connection with undisclosed latent defects in the drilling rig, recovery of payments made to the seller, including the redeemable common stock, and recovery of additional costs associated with the drilling rig.

 

Former Chief Financial Officer

 

On May 28, 2003, Jim W. Tucker (the “Plaintiff”), the former Chief Financial Officer of the Company, filed suit in the 359th District Court, Montgomery County, Texas, against Transmeridian Exploration, Inc., in connection with his separation from service with the Company on January 3, 2003.  The suit alleges breach of an oral employment agreement.  The Company was never served with notice and had no knowledge of this suit.  Counsel for the Plaintiff claimed they were unable to serve the Company’s registered agent with notice of this suit.  Based on these representations, the Court awarded the Plaintiff a Default Judgment on November 25, 2003, in the amount of $922,275.61.  The Company was notified of a Writ of Garnishment and Writ of Execution on March 29, 2004 and April 6, 2004, respectively.

 

On April 5, 2004, the Company filed a Petition for Bill of Review and a Motion to Vacate the Writ of Garnishment.  A hearing was held on the Motion to Vacate the Writ of Garnishment on April 8, 2004. On

 

12

 

May 11, 2004, the court granted the Motion to Vacate the Writ of Garnishment, but has not issued a ruling on the Petition for Bill of Review.  The Company believes it has valid legal arguments to have the Default Judgment overturned and also believes it has meritorious defenses to the allegations in the underlying suit.  If the Company is successful in reversing the Default Judgment, the case would be reinstated and would begin as if the Company had just been served notice.  The Company intends to vigorously contest this matter and pursue all legal remedies available to it.

 

International Commitments

 

The Company, through Caspi Neft, is subject to the terms of License 1557 and the related Exploration Contract covering 14,111 acres in the South Alibek field in Kazakhstan.  The Company previously met its capital spending commitment in connection with the original term of the Exploration Contract.  In connection with the extension of the Exploration Contract, the Company has committed to spend an additional $30.5 million on development of the Field through April 2007.

 

In June 2004, Caspi Neft entered into a contract to sell approximately 157,500 barrels of crude oil to a local purchaser for approximately $11.75 per barrel.  The crude will be sold at the Field and no transportation costs will be incurred by Caspi Neft.  In July 2004, Caspi Neft received prepayments totaling approximately $2.2 million for the volumes under the contract, including the prepayment of value added tax.

 

Purchase commitments are made in the ordinary course of business in connection with ongoing operations in the South Alibek Field.

 

Environmental

 

The Company, as an owner and operator of oil and gas properties, is subject to various federal, state, local and foreign country laws and regulations relating to discharge of materials into, and protection of, the environment.  These laws and regulations may impose liability on the lessee under an oil and gas lease or concession for the cost of pollution cleanup resulting from operations and also may subject the lessee to liability for pollution damages.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Introduction

 

The following discussion and analysis addresses changes in Transmeridian’s financial condition and results of operations during the three month and six month periods ended June 30, 2004 and 2003.

 

There is limited or no comparability for revenue and operating expense to the comparable periods in 2003, as sales and production did not commence until the third quarter of that year.

 

Management’s primary goals for 2004 are:

 

•                  Continue the development of the Field by operating two drilling rigs;

•                  Secure additional financing for our 50% share of the 2004 budget;

•                  Complete Phase I of the production facilities;

•                  Position the Company for pipeline sales in 2005.

 

Current Activities

 

In the second quarter of 2004, the Company continued its drilling operations with two new wells, the SA-5 and the SA-17.  These two wells are being drilled on locations that currently have proved undeveloped reserves.  The results of the SA-5 are discussed in detail below and the SA-17 was at a depth of approximately 9,000 feet on August 5, 2004.  The SA-17 well is planned for a total depth of approximately 12,800 feet.

 

The SA-2 well is currently cleaning up and tested at a continuous rate of 600-675 barrels per day on an 11 millimeter choke.  The well is producing from a small 50 foot interval in the Lower KTII section which has been washed with acid to clean up the perforations.  A full acid stimulation has not been performed on the well at this time.  The well will be flowed on a long term test basis for the next 60-90 days after which additional intervals will be added to place the major portion of the Upper KTII section on production as well.  Because of large differential pressures, the intervals will need to be completed and produced separately under a dual completion.  Ultimately, we anticipate a combined rate of 1,200 to 1,500 bopd from wells that flow from both intervals.

 

We have perforated a 60 foot section of the SA-5 well in the Lower KTII and it is currently being cleaned up with acid.  The well is initiating natural flow to the surface and we expect the well to stabilize at production rates similar to the SA-2.  This well also has a large section of the Upper KTII similar to SA-2 which we expect to dual complete after an initial period of test production from the Lower KTII.  This work will be timed in sequence with the other dual completions programmed to begin in the next 60-90 days.

 

The SA-4 well suffered significant formation damage during drilling and attempts to complete in the KTII zone were not successful.  We have perforated a small section of the KTI and intend to perforate additional KTI intervals during the testing phase.  The KTI has not yet been produced in any of the wells in the South Alibek or Alibekmola fields, so additional testing will be necessary to determine its productive capacity.

 

The locations for the SA-3 and SA-14, the 6^th and 7^th wells in the field, have been completed and are ready for the drilling rigs as soon as they are released from the SA-5 and SA-17.

 

The construction of our permanent production facility has been continuing and is approximately 85% complete.  One of the oil storage tanks has been commissioned and is being used for crude oil storage.  We expect the facility to become fully operational during the third quarter of 2004.  The demarcaptane project has been redesigned to encompass a gas plant for the sweetening and extraction of liquids.  The contractors are estimating completion of that project during 2005.

 

In early July 2004, we established an office in Baku, Azerbaijan to evaluate prospects in that country. We

 

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will be allowed to view data from the national oil company’s archives to evaluate the available properties. We are not obligated to purchase or participate in a property and have an indefinite time to review the data.  We seek properties which meet our objectives of 1) low up-front acquisition costs, 2) identified reserves, 3) significant upside reserve potential, 4) reasonably short payback period and 5) lower than average international finding costs.

 

Oil production and revenue

 

Below is a chart that shows the average daily oil production from South Alibek Field from July 2003 to June 30, 2004.

 

 

In the second quarter of 2004 the Company produced 76,532 Bbls of crude oil or an average of 841 Bopd. Total production for the six month period ended June 30, 2004, was 161,518 Bbls or an average of 887 Bopd. Substantially all this production is from the SA-1, as the SA-2 and SA-4 were in the testing phase during the quarter. This production was sold on a month to month contract basis. Each contract is prepaid by the purchaser within three days of signing the contract. We recognize revenue on the sale of oil only when the purchaser takes delivery of the oil. As of June 30, 2004, the Company had 14,285 Bbls in inventory for which it had received payment, but had not recorded the revenue because delivery had not yet been taken by the purchaser. The average price received for these Bbls was $11.64, which will be recorded as revenue in future periods of 2004 upon delivery to the purchaser.

 

For the quarter ended June 30, 2004, we sold (by physical delivery to the purchaser) 133,646 Bbls at an average price of $11.82 per Bbl, for net revenues of $1,562,656.  For the six month period ended June 30, 2004, we sold 186,945 Bbls at an average price of $11.80 per Bbl, for net revenues of $2,205,652.  Our crude oil sales in the second quarter of 2004 occurred at the Field and were not subject to transportation costs.  Consequently, our net realization improved by approximately $2.00 per Bbl compared to year end 2003.  (For additional discussion on transportation, see Transportation Expense, below).  We expect our pricing to continue to improve in the future as we develop new marketing arrangements, improve the quality of our crude with treatment and processing facilities, are able to sell larger volumes and gain direct pipeline access in 2005.

 

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Exploration expense

 

Exploration expense, which includes geological and geophysical expense and the cost of unsuccessful exploratory wells, is recorded as an expense in the period incurred under the successful efforts method of accounting.  In the second quarter of 2004, we recorded $53,641 as exploration expense primarily associated with geological interpretations of the Field.  For the six month period ended June 30, 2004 we recorded $76,644 as exploration expense, which includes both geological interpretations and investigation of new international opportunities, as well as the expensing of the remaining book value of non-producing lease cost associated with our South Texas properties.  In the three and six month periods ended June 30, 2003 we recorded $18,893 as exploration expense primarily associated with geological studies of the Field.

 

Depreciation, depletion and amortization

 

Depreciation, depletion and amortization (“DD&A”) of oil and gas properties is calculated under the units of production method, following the successful efforts method of accounting.  For the three month period ended June 30, 2004, the Company recorded as revenue 133,646 Bbls of oil resulting in DD&A of $279,614, or an average of $2.09 per barrel.  For the six month period ended June 30, 2004, DD&A was $396,144 or $2.12 per barrel. The volumes which have been produced but were in inventory at June 30, 2004 are not included in the calculation of DD&A expense. These volumes will be included in the calculation when sold.

 

Non-oil and gas property DD&A for the three and six month periods ended June 30, 2004 was $19,888 and $38,582, respectively, as compared to $12,932 and $25,146, for the comparable periods in 2003. This increase is primarily due to additions to transportation and office equipment.

 

Transportation expense

 

During the second quarter of 2004, one of the storage tanks at our permanent production facility was commissioned for use.  This allowed us to begin oil sales in the field, resulting in a cost savings of approximately $160,000.  For the six month period ended June 30, 2004, transportation and storage costs were $173,847, or $2.12 per Bbl produced and transported to the rail terminal.  Since the Field was not producing at June 30, 2003 there are no comparable amounts for the three and six month periods then ended.  During the second quarter of 2004, we signed contracts for the sale of an additional 202,000 Bbls that will not be subject to transportation and storage.  These volumes will be picked up by the purchaser at our production facility on a daily basis.  We are currently negotiating to get a railroad spur built from our production facility to the main rail line.  This will allow for direct shipment of the crude oil to the export terminals located on the railroad.  Additionally, when the treating facilities and pipeline pump station is operational, expected during 2005, crude oil production should be able to be delivered directly into the Kenkiyak/Atyrau pipeline, which should result in a significant improvement in sales pricing for our crude oil.  The prices received for pipeline sales should be much closer to prevailing world oil prices than our current sales arrangements.

 

Operating and administrative expense - Kazakhstan

 

For the three and six month periods ended June 30, 2004 operating and administrative expense in Kazakhstan was $972,413 and $1,704,492, respectively, compared to $517,040 and $997,163, for the comparable periods in 2003. This increase is primarily due to increased personnel costs at Caspi Neft, which is a result of the increased activity in our exploration and development program for the South Alibek Field.

 

General and administrative expense - Houston

 

General and administrative expenses in Houston for the three and six month periods ended June 30, 2004 was $547,501 and $1,217,304, respectively, compared to $533,153 and $938,056, for the comparable periods in 2003.  This increase is primarily due to increased legal cost associated with the

 

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drilling rig dispute, increased investor relations activities and the addition of two new employees.

 

Interest expense

 

Interest expense, net of the capitalized portion, for the three and six month periods ended June 30, 2004 was $132,374 and $279,692, respectively, and $211,650 and $397,846, for the comparable periods in 2003.  The decrease in interest expense when comparing 2004 to 2003 is primarily attributable to payments made on the drilling rig.  During the three and six month periods ended June 30, 2004, we capitalized $1.2 million and $2.7 million, respectively, of interest costs and for the comparable periods in 2003 we capitalized $.8 million and $1.4, of interest costs.  The increase in capitalized interest is due to the increase in capital additions and debt levels in 2004.

 

Property and Equipment

 

The following schedule reflects the property and equipment as of each of the dates shown.

 

		June 30, 2004			December 31, 2003
Drilling and completion costs (a)		$	32,967,357		$	25,506,735
Production facility (b)		12,316,783			10,083,732
Emba terminal		1,518,852			1,465,310
License cost		5,706,402			5,706,402
Drilling rig (c)		6,484,983			6,484,983
Other equipment		446,506			558,355
Capitalized interest		8,651,457			5,972,894
Total property and equipment		$	68,092,340		$	55,778,411

 

(a)          These amounts include costs incurred to construct future well locations, inventory of equipment and supplies for the drilling of future wells and rig mobilization costs.

(b)         This project is under construction and has not been placed in service.

(c)          These amounts include the initial purchase price and capital improvements and refurbishments.

 

Capital Expenditures, Capital Resources and Liquidity

 

For the three and six month periods ended June 30, 2004, capital expenditures excluding capitalized interest, were $6.7 million and $12.3 million, respectively, and $7.3 and $12.4 for the comparable periods in 2003.  The primary sources of funding have been additional borrowings under the credit facilities with a Kazakhstan bank, supplemented by oil sales and private placements of common stock.  From inception through June 30, 2004 cumulative proceeds from all borrowings, net of repayments, have amounted to $35.5 million, cumulative cash receipts from oil sales (including advance payments) have amounted to $3.9 million and net cash proceeds from sales of common stock have amounted to $12.0 million.

 

As of June 30, 2004, the amount utilized totaled $29.4 million on the $30 million credit facility.  The balance outstanding under the credit facility in May 2005 is payable in 36 monthly installments from June 2005 through May 2008.  The available borrowing capacity at June 30, 2004 was approximately $0.6 million.

 

Caspi Neft has a 2004 capital budget for the South Alibek Field of approximately $25.9 million, excluding capitalized interest.  This budget contemplates the continuous operation of two drilling rigs in the Field and also includes expenditures to complete construction of the central production facility and other support facilities for the Field.  The drilling budget includes the completion of the two wells in progress at the end of 2003, the SA-2 and SA-4, the drilling and completion of four additional wells during 2004 and the commencement of two additional wells before the end of 2004.  Accordingly, including the SA-1 which is currently producing, the 2004 budget envisions a cumulative total of seven wells drilled and completed

 

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in the Field by the end of 2004, assuming all of such wells are successful, and two wells in progress.

 

In order to execute the 2004 Budget, Caspi Neft will be dependent on additional funding.  The Company currently estimates the minimum funding requirements for 2004 related to its 50% interest in Caspi Neft to be approximately $10.0 million.  The other 50% owner of Caspi Neft, Bramex, has indicated that it has available funds to finance its proportionate share of the estimated capital required for the 2004 Budget.  To meet its funding objective, the Company may seek to obtain bridge financing, restructure its existing debt, raise equity capital or some combination thereof.  The Company may seek to raise capital in excess of this amount to allow it fund new initiatives, further accelerate development of the Field and provide greater assurance of its ability to meet its future financial commitments.  The minimum amount of funding required is highly dependent on the amount and timing of cash flows from the existing and future wells drilled on the property.  The Company’s near-term goal is to develop sufficient revenues from production to fund continuing capital expenditures and meet its minimum debt service requirements.  The amount of capital needed is also dependent on many factors outside the control of the Company, including the costs and results of drilling operations, the ability to effectively bring its future crude oil production to market and future world oil prices.  If the Company is not able to secure such additional funding, it may be necessary to delay certain capital expenditures, including drilling costs.  Such actions could result in delays in the timing of future cash flows and could adversely affect the financial position of the Company.  The Company believes that it will be able to secure the necessary funding to continue development of the Field in accordance with its current development plans.  However, the Company cannot provide assurance that it will be successful as many of the factors required to execute its plans are outside the control of the Company.

 

Critical Accounting Policies and Recent Accounting Pronouncements

 

We have identified the policies below as critical to our business operations and the understanding of our financial statements.  The impact of these policies and associated risks is discussed throughout Management’s Discussion and Analysis where such policies affect our reported and expected financial results.  A complete discussion of our accounting policies is included in Note 1 of the December 31, 2003 Notes to Consolidated Financial Statements.

 

Going Concern

 

We are in the early stages of establishing production and revenues from the development of our primary property in Kazakhstan and were considered a Development Stage Company in prior periods.  Our ability to realize the carrying value of our assets is dependent on being able to produce and sell significant quantities of oil from the South Alibek Field.  Our financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  We have accumulated losses of approximately $13.6 million and have incurred a significant amount of debt in the development phase of our operations.  To fully develop the Field and achieve positive cash flow, we will require additional funding.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities which might be necessary should the Company be unable to continue in existence.

 

Principles of Consolidation

 

Our consolidated financial statements include all of our subsidiaries.  Our most significant subsidiary is Caspi Neft, which holds License 1557 and the related Exploration Contract for the South Alibek Field.  Except for the drilling rig, which is owned by the parent company, the assets and results of operations of Caspi Neft represent substantially all of our consolidated assets and operations at June 30, 2004.

 

During February 2004, Bramex Management, Inc., successor in interest to Kazstroiproekt, Ltd. (“Bramex”), exercised its option to acquire 50% of the common stock of OJSC Caspi Neft TME (“Caspi Neft”), the Company’s primary operating subsidiary in Kazakhstan and the entity which holds

 

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the license and exploration contract covering the South Alibek Field.  Accordingly, as of June 30, 2004, the Company owns a 50% equity interest in this subsidiary.  Based on the highly integrated relationship between the Company and Caspi Neft, the Company believes that the proper accounting treatment is to fully consolidate this entity, with the 50% share of Bramex reflected as a minority interest.  The Company and its auditors have been consulting with the SEC to verify that this treatment is consistent with the latest interpretations of professional standards.

 

To exercise its option to acquire 50% of Caspi Neft, Bramex contributed $15 million in cash to Caspi Neft, the proceeds of which were used by Caspi Neft to retire debt.  The difference between the $15 million of capital contributed to Caspi Neft and 50% of the book equity of Caspi Neft after such capital contribution represents an excess purchase price by Bramex of $6,218,534.  Under the principle of full consolidation of Caspi Neft, this amount has been included in additional paid-in capital on the accompanying consolidated balance sheet.

 

Oil and Gas Reserve Information

 

The information regarding our oil and gas reserves, the changes thereto and the estimated future net cash flows are dependent upon reservoir evaluation, price and other assumptions used in preparing our annual reserve study.  A qualified independent petroleum engineer was engaged to prepare the estimates of our oil and gas reserves in accordance with applicable reservoir engineering standards and in accordance with Securities and Exchange Commission guidelines.  However, there are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures.  These uncertainties are greater for properties which are undeveloped or have a limited production history, such as the South Alibek Field.  Changes in prices and cost levels, as well as the timing of future development costs, may cause actual results to vary significantly from the data presented.  Our oil and gas reserve data represent estimates only and are not intended to be a forecast or fair market value of our assets.

 

Our oil and gas reserve data and estimated future net cash flows have been prepared assuming we are successful in negotiating a commercial production contract which will allow production for the expected 25-year term of the contract.  The current maximum statutory royalty rate of 6%, as provided by new legislation which came into effect in 2004, has been used to calculate the government royalty.  Production contracts are customarily awarded upon determination that the field is capable of commercial rates of production and that the applicant has complied with the other terms of its license and exploration contract.  However, we are not guaranteed the right to a production contract.  If we were not successful in negotiating a production contract on acceptable terms, it would materially change our oil and gas reserve data and estimated future net cash flows.

 

Successful Efforts Method of Accounting

 

We follow the successful efforts method of accounting for our investments in oil and gas properties, as more fully described in Note 1 of the December 31, 2003 Notes to Consolidated Financial Statements.  This accounting method has a pervasive effect on our reported financial position and results of operations.

 

Revenue Recognition

 

The Company sells its Kazakhstan production in the domestic market on a contract basis.  Revenue is recorded when the purchaser takes delivery of the oil.  At the end of the period, oil that has been produced but not sold is recorded as inventory which is offset by deferred revenue.  Such oil inventory and deferred revenues are valued at the price of the last oil sold.

 

Capitalized Interest Costs

 

We capitalize interest costs on oil and gas projects under development, including the costs of unproved leasehold and property acquisition costs, wells in progress and related facilities.  We also

 

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capitalized interest on our drilling rig during the time it was being prepared for its intended use.  During the six month period ended June 30, 2004 and 2003, we capitalized $2.7 million and $1.5 million, respectively, of interest costs, which reduced our reported net interest expense to $279,692 and $397,846, respectively.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Oil Prices

 

Our future success is dependent on the Company being able to transport and market its production either within Kazakhstan or preferably through export to international markets.  Crude oil prices are subject to significant volatility in response to changes in supply, market uncertainty and a variety of other factors beyond our control.  The majority of our sales of crude oil have been based on prevailing current market prices at the time of sale.  In June 2004, Caspi Neft entered into a contract to sell approximately 157,500 barrels of crude oil to a local purchaser for approximately $11.75 per barrel.

 

Interest Rate Risk

 

At June 30, 2004, the Company had long-term debt outstanding of $28.6 million.  The total amount bears interest at a fixed rate of 15% per annum.

 

Foreign Currency Risk

 

The Company’s functional currency is the U.S. dollar.  The financial statements of the Company’s foreign subsidiaries are measured in U.S. dollars.  Accordingly, transaction costs for the conversion to various currencies for foreign operations are recognized in the consolidated financial statements at the time of each transaction.

 

Disclosure Regarding Forward-Looking Statements

 

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the Company’s future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements.  In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “believe,” or “continue” or the negative thereof or variations thereon or similar terminology.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.  Important factors that could cause actual results to differ materially from the Company’s expectations (“cautionary statements”) include, but are not limited to, the risks described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as well as the Company’s assumptions about energy markets, production levels, reserve levels, operating results, competitive conditions, technology, the availability of capital resources, capital expenditure obligations, the supply and demand for oil, natural gas and other products or services, the price of oil, natural gas and other products or services, currency exchange rates, the weather, inflation, the availability of goods and services, drilling risks, future processing volumes and pipeline throughput, general economic conditions, either internationally or nationally or in the jurisdictions in which Transmeridian or its subsidiaries are doing business, legislative or regulatory changes, including changes in environmental regulation, environmental risks and liability under federal, state and foreign environmental laws and regulations, the securities or capital markets and other factors disclosed under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 3. Quantitative and Qualitative Disclosure About Market Risk” and elsewhere in this report.  All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements.  The Company assumes no duty to update or revise its forward-looking

 

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statements based on changes in internal estimates or expectations or otherwise.

 

Item 4.  Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of the end of the period covered by this report, and under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of these disclosure controls and procedures. Based on this evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in reaching a reasonable level of assurance of achieving management’s desired controls and procedures objectives.

 

There have been no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

 

As part of a continuing effort to improve our business processes, we are evaluating our internal controls and may update certain controls to accommodate any modifications to our business processes or accounting procedures.

 

PART II

 

Item 1.  Legal Proceedings

 

See Note 8 to the Notes to Consolidated Financial Statements included in Part I, which is incorporated herein by reference.

 

Item 2.  Changes in Securities and Use of proceeds

 

Recent Issuance of Unregistered Securities

 

In June 2004, 270,000 warrants were exercised in a cashless exercise, resulting in the issuance of 191,791 shares of common stock.

 

The foregoing issuances of common stock were made in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering.  No underwriters were engaged in connection with the foregoing issuances of securities.  The sales were made without general solicitation or advertising.  Each purchaser was an “accredited investor” or a sophisticated investor with access to all relevant information necessary to evaluate the investment who represented to the Company that the sales were being acquired for investment.

 

Item 3. Defaults upon Senior Securities

 

As more fully discussed in Notes 5, 6 and 8 of the Notes to Consolidated Financial Statements, the Company is involved in legal proceedings and has ceased making payments related to the drilling rig, including the redemption of 1,000,000 shares of redeemable common stock.

 

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Item 4. Submission of Matters to a Vote of Security Holders

 

On May 21, 2004, the Company held its 2004 annual meeting of stockholders, pursuant to a proxy statement that it had filed with the Securities and Exchange Commission and had furnished to holders of record of the 79,132,084 outstanding shares of its common stock as of April 12, 2004. At the meeting, the following slate of director candidates were elected to serve as the slate of directors of the Company to serve until their respective successors are elected and qualified: Lorrie T. Olivier, Philip J. McCauley, Angus G.M.P. Simpson, James H. Dorman, George E. Reese, and Marvin R. Carter.  The stockholders also ratified the appointment of John A. Braden & Co., P.C. as the Company’s principal accountant for the year ending December 31, 2004.

 

Item 5. Other Information

 

On July 1, 2004, Mr. Earl W. McNiel was named as Chief Financial Officer of the Company.

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)          Exhibits

 

Exhibit Number		Description		Incorporation by Reference
31.1		Rule 13a-14(a) Certification of Chief Executive Officer		Filed Herewith
31.2		Rule 13a-14(a) Certification of Chief Financial Officer		Filed Herewith
32.1		Section 1350 Certification of Chief Executive Officer		Filed Herewith
32.2		Section 1350 Certification of Chief Financial Officer		Filed Herewith

 

(b)          Reports on Form 8-K

 

On April 7, 2004, Transmeridian filed a Current Report on Form 8-K to report the 2003 financial and operational results and year end proved reserves, which was issued in a press release on April 1, 2004.

 

On April 15, 2004, Transmeridian filed a Current Report on Form 8-K to report new developments in the legal matter between the Company and a former Chief Financial Officer.

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		Transmeridian Exploration, Inc.
		/s/ Lorrie T. Olivier
Date: August 13, 2004		Lorrie T. Olivier
		Chairman of the Board of Directors, President and Chief Executive Officer

 

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