As filed with the Securities and Exchange Commission on February 12, 2004
An Exhibit List can be found on page II-3.
Registration No. 333-112229
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Amendment No. 1
FORM SB-2
REGISTATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
TETON PETROLEUM COMPANY
(Name of small business issuer in its charter)
Delaware 1381 84-1482290
(State or other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number)
-------------------------------------------------------------------------------
1600 Broadway, Suite 2400
Denver, Colorado 80202-4921
Tel 303-542-1878
(Address and telephone number of principal executive offices
and principal place of business)
Karl F. Arleth, CEO and President
TETON PETROLEUM COMPANY
1600 Broadway, Suite 2400
Denver, Colorado 80202-4921
Tel 303-542-1878
(Name, address and telephone number of agent for service)
Copies to:
Gregory Sichenzia, Esq.
Darrin M. Ocasio, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
Approximate date of proposed sale to the public: From time to time after this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. ________
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum Amount
Amount to Offering Aggregate of on
Title of Each Class of Securities be Price Per Offering Registration
to be Registered Registered Security(1) Price Fee
-------------------------------------- ----------- ------------- ---------------- ----------
Shares of common stock, $.001 par 4,825,651 $ 4.80 $ 23,163,126.07 $2,934.77
Value (3)
Total $2,934.77*
* Previously paid.
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on The American Stock
Exchange on January 23, 2004.
(2) No fee pursuant to Rule 457(g) under the Securities Act of 1933.
(3) Includes 2,197,561 shares of common stock issuable upon exercise of warrants
held by selling stockholders.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
2
The information in this prospectus is not complete and may be changed.
Teton Petroleum Company
4,825,651 Shares of Common Stock
This prospectus is included in the registration statement that was filed by
Teton Petroleum Company, with the Securities and Exchange Commission. The
Selling Stockholders may not sell these securities until the registration
statement becomes effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where there offer or sale is not permitted.
This prospectus relates to the resale by the selling stockholder of 4,771,151
shares of our. The selling stockholder may sell these securities from time to
time in the principal market on which the stock is traded at the prevailing
market price or in negotiated transactions.
We will pay the expenses of registering these securities.
Our common stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and is listed on The American Stock Exchange under the symbol "TPE."
The last reported sales price per share of our common stock as reported by The
American Stock Exchange on January 23, 2004, was $5.00. Our warrants do not
trade on any public market.
Investing in these securities involves significant risks.
See "Risk Factors" beginning on page _.
The Securities and Exchange Commission and state securities regulators hve not
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is February __, 2004.
3
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "Risk
Factors" section, the financial statements and the notes to the financial
statements.
Teton Petroleum Company
Teton Petroleum Company, through its consolidated subsidiaries, is engaged in
oil and gas exploration, development, and production in Western Siberia, Russia.
In 2001, four wells were drilled and completed on the license area. This brought
the total number of producing wells on the license area to 7. At the end of
2001, the field was producing approximately 2,500 barrels of oil per day, 625
barrels of oil per day net to Teton. The construction of a 40-kilometer
(25-mile) pipeline was also completed. The pipeline enables us to transport and
produce oil on a year-round basis.
In 2002, 6 additional wells were drilled and completed on the license area. This
brought the total number of producing wells on the license area to 13.
During 2003, Teton's Goloil affiliate drilled seven new wells, bringing the
total number of wells that are capable of producing to 21 and completing its
drilling program for the year. Of the 21 wells, one is awaiting completion, one
is awaiting electrification, and two are off-line pending upgrades to the
gathering system. Consequently, as of the end of October, there were 17
producing wells. During the month of October, the Goloil license produced an
average of 6,313 barrels of oil per day, of which 1,578 was net to Teton. Goloil
management expects to complete the above-mentioned pipeline upgrade during
January at which time it also expects to commence the operation of its
co-generation plant, which has been delayed by permitting issues.
Teton reorganized its structure in 2002. After MOT withdrew from Goltech
Petroleum, LLC, Teton became the sole owner of Goltech. Goltech owns 35.295% of
the shares of Goloil. Goloil holds the oil and gas license. In this report, "we"
or "Teton" may include activities conducted by Teton, Goltech, and/or Goloil.
In 2002, Teton raised net proceeds of $4,143,643 from the issuance of
convertible debt, which was converted into common stock and warrants on
September 1, 2002, and $3,333,460 from the sales of common stock under private
placement offerings. Thus, at the end of 2002, Teton had no outstanding debt
obligations, exclusive of our proportionate share of notes payable owed to
affiliate.
In 2003, Teton raised net proceeds of $9,845,486 from the issuance of preferred
stock. At the end of 2003, Teton had no outstanding debt obligations, exclusive
of our proportionate share of notes payable owed to affiliate, Goloil.
The Offering
Securities offered by the selling stockholders
Common stock ...............................Up to 4,825,651 shares
Securities to be outstanding after the offering
Common stock ...............................Up to 10,781,629 shares
Use of proceeds...................................We will not receive any
proceeds from the sale of the
common stock. However, we
will receive proceeds from
the exercise of our warrants
by the selling stockholders.
These proceeds will be used
for general working capital.
The American Stock Exchange .....................TPE
The above information is based on 8,584,068 shares of common stock outstanding
as of January 23, 2004.
4
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Related To Our Business:
We have incurred significant losses. We expect future losses and we may never
become profitable.
We have incurred significant losses. Net loss for the years ended December 31,
2002 and 2001 were $10,973,923 and $1,657,608, respectively. In addition, we had
an accumulated deficit of $22,022,734 at December 31, 2002. Net loss for the
nine months ending September 30, 2003 was $3,140,679. In addition, we had an
accumulated deficit of $25,163,412 at September 30, 2003. We expect to continue
to incur net losses until sales generate sufficient revenues to fund our
continuing operations. We may fail to achieve significant revenues from sales or
achieve or sustain profitability. There can be no assurance of when, if ever, we
will be profitable or be able to maintain profitability.
If we are unable to obtain additional funding our business operations will be
harmed.
We believe that our available short-term assets will be insufficient to meet our
operating expenses and capital expenditures through the end of fiscal year 2003.
We do not know if additional financing will be available when needed, or if it
is available, if it will be available on acceptable terms. Insufficient funds
may prevent us from implementing our business strategy or may require us to
delay, scale back or eliminate certain contracts for the provision of voice
interface software.
Our business depends on the level of activity in the oil industry, which is
significantly affected by volatile oil prices.
Our business depends on the level of activity in oil exploration, development
and production in markets worldwide. Oil prices, market expectations of
potential changes in these prices and a variety of political and economic
factors significantly affect this level of activity. Oil prices are extremely
volatile and are affected by numerous factors, including:
o worldwide demand for oil and gas;
o the ability of the Organization of Petroleum Exporting Countries, commonly
called "OPEC," tset and maintain production levels and pricing;
o the level of production in non-OPEC countries;
o the policies of the various governments regarding exploration and development
of their oil and gas reserves;
o advances in exploration and development technology; and
o the political environment of oil-producing regions.
Our business involves numerous operating hazards.
Our operations are subject to the usual hazards inherent in drilling for oil,
such as blowouts, reservoir damage, loss of production, loss of well control,
punchthroughs, craterings or fires. The occurrence of these events could result
in the suspension of drilling operations, damage to or destruction of the
equipment involved and injury or death to rig personnel. Operations also may be
suspended because of machinery breakdowns, abnormal drilling conditions, failure
of subcontractors to perform or supply goods or services or personnel shortages.
Damage to the environment could also result from our operations, particularly
through oil spillage or extensive uncontrolled fires. We may also be subject to
damage claims by oil and gas companies.
Although we maintain insurance in the areas in which we operate, pollution and
environmental risks generally are not fully insurable. Our insurance policies
and contractual rights to indemnity may not adequately cover our losses, and we
do not have insurance coverage or rights to indemnity for all risks. If a
significant accident or other event occurs and is not fully covered by insurance
or contractual indemnity, it could adversely affect our financial position and
results of operations.
If oil and natural gas prices decrease, we may be required to take write-dowms
of the carrying values of our oil and natural gas properties.
Accounting rules require that we review periodically the carrying value of our
oil and natural gas properties for possible impairment. Based on specific market
factors and circumstances at the time of the prospective impairment reviews, and
the continuing evaluation of development plans, production data, economics and
other factors, we may be required to write down the carrying value of our oil
and natural gass properties. A write-down constitutes a non-cash charge to
earnings. We may incur impairment charges in the future, which could have
material adverse effect on our results of operations in the periods taken. Our
international operations involve additional risks not associated with domestic
operations.
5
We operate in various regions throughout the world that may expose us to
political and other uncertainties, including risks of:
o war and civil disturbances;
o expropriation of property or equipment;
o the inability to repatriate income or capital; and
o changing taxation policies.
International contract drilling operations are subject to various laws and
regulations in countries in which we operate, including laws and regulations
relating to:
o the equipping and operation of drilling units;
o currency conversions and repatriation;
o oil and gas exploration and development;
o taxation of offshore earnings and earnings of expatriate personnel; and
o use of local employees and suppliers by foreign contractors.
Governments in some foreign countries have become increasingly active in
regulating and controlling the ownership of concessions and companies holding
concessions, the exploration for oil and gas and other aspects of the oil and
gas industries in their countries. In addition, government action, including
initiatives by OPEC, may continue to cause oil price volatility. In some areas
of the world, this governmental activity has adversely affected the amount of
exploration and development work done by major oil companies and may continue to
do so. In addition, some foreign governments favor or effectively require the
awarding of drilling contracts to local contractors or require foreign
contractors to employ citizens of, or purchase supplies from, a particular
jurisdiction. These practices may adversely affect our ability to compete.
Fluctuations in exchange rates could result in losses to us.
Another risk inherent in our international operations is the possibility of
currency exchange losses where revenues are received and expenses are paid in
nonconvertible currencies. We may also incur losses as a result of an inability
to collect revenues because of a shortage of convertible currency available to
the country of operation.
Governmental laws and regulations may add to our costs or limit our drilling
activity.
Our operations are affected from time to time in varying degrees by governmental
laws and regulations. The drilling industry is dependent on demand for services
from the oil exploration industry and, accordingly, is affected by changing tax
and other laws relating to the energy business generally. We may be required to
make significant capital expenditures to comply with governmental laws and
regulations. It is also possible that these laws and regulations may in the
future add significantly to our operating costs or may significantly limit
drilling activity.
There are risks associated with forward-looking statements made by us and actual
results may differ.
Some of the information in this Form SB-2 contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
- discuss our future expectations; - contain projections of our future results
of operations or of our financial condition; and - state other "forward-looking"
information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. The risk factors listed in this section, as well as any
cautionary language in this prospectus, provide examples of risks, uncertainties
and events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. You should be aware
that the occurrence of the events described in these risk factors could have an
adverse effect on our business, results of operations and financial condition.
6
Risks Relating To Our Current Financing Agreement:
There are a large number of shares underlying our warrants that may be available
for future sale and the sale of these shares may depress the market price of our
common stock.
As of January 23, 2004, we had 8,584,068 shares of common stock issued and
outstanding, outstanding options and warrants to purchase 7,389,980 shares of
common stock, and 733,173 shares of convertible preferred stock. This prospectus
relates to the resale of 4,825,651 shares of common stock, including 2,247,561
shares of common stock underlying our class B warrants. All of these shares and
warrants will be freely traded upon the effective date of this prospectus and
may be sold without restriction. The sale of these shares may adversely affect
the market price of our common stock.
Risks Relating To Our Common stock:
Our directors and executive officers beneficially own approximately 28.19% of
our stock; their interests could conflict with yours; significant sales of stock
held by them could have a negative effect on our stock price; stockholders may
be unable to exercise control.
As of January 23, 2004, our executive officers, directors and affiliated persons
beneficially own approximately 28.19% of our common stock. As a result, our
executive officers, directors and affiliated persons will have significant
influence to:
o elect or defeat the election of our directors;
o amend or prevent amendment of our articles of incorporation or bylaws;
o elect or defeat the election of our directors; amend or prevent amendment of
our articles of incorporation or bylaws; effect or prevent a merger, sale of
assets or other corporate transaction; and
o control the outcome of any other matter submitted to the stockholders for
vote.
As a result of their ownership and positions, our directors and executive
officers collectively are able to significantly influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, sales of significant amounts of
shares held by our directors and executive officers, or the prospect of these
sales, could adversely affect the market price of our common stock. Management's
stock ownership may discourage a potential acquirer from making a tender offer
or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
Our common stock is subject to "penny stock" rules.
The Securities and Exchange Commission (the "Commission") has adopted Rule 15g-9
which establishes the definition of a "penny stock," for the purposes relevant
to us, as any equity security that has a market price of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require: (i) that a broker or dealer approve a person's account for
transactions in penny stocks; and (ii) the broker or dealer receive from the
investor a written agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased. In order to approve a person's
account for transactions in penny stocks, the broker or dealer must (i) obtain
financial information and investment experience objectives of the person; and
(ii) make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks. The broker or dealer must also deliver, prior to any transaction
in a penny stock, a disclosure schedule prepared by the Commission relating to
the penny stock market, which, in highlight form, (i) sets forth the basis on
which the broker or dealer made the suitability determination; and (ii) that the
broker or dealer received a signed, written agreement from the investor prior to
the transaction. Disclosure also has to be made about the risks of investing in
penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. There will be no proceeds to
our company from the sale of shares of common stock in this offering. We may
realize up to $13,185,363 upon the exercise of warrants by the selling
stockholders, which will be used for general corporate purposes.
7
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Teton's common stock listed on The American Stock Exchange, under the symbol
"TPE," on May 6, 2003. Prior to listing on the AMEX, our common stock was quoted
on the OTC Bulletin Board under the symbol "TTPT" from November 27, 2001 to
April 25, 2003 and then under the symbol "TTPE" from April 28, 2003 to May 5,
2003 as a result of a 1 for 12 reverse stock split.
Prior to that and until our voluntary delisting in January 2002, our common
stock was also listed on the Canadian Venture Exchange under the symbol "YTY.U."
Beginning November 30, 2001, our common stock is also listed for trading on the
Frankfort Stock Exchange (Germany) under the symbol "TP9."
The following table sets forth, on a per share basis, the range of high and low
bid information for the common stock on the OTC Bulletin Board, and after May 5,
2003 on the American Stock Exchange:
OTC Bulletin Board
2001 Period High Low
Fourth quarter $ .50 $ .17
2002 Period
First quarter $ .67 $ .18
Second quarter $ .65 $ .36
Third quarter $ .60 $ .27
Fourth quarter $ .42 $ .21
2003 Period
First quarter $ .46 $ .28
Second quarter as of May 5, 2003 $ 5.00* $4.10*
The American Stock Exchange
Second quarter commencing May 6, 2003 $ 5.40 $4.10
Third quarter $ 4.58 $3.71
Fourth quarter $ 5.58 $3.80
* reflects a 12 for 1 reverse stock split effectuated on April 24, 2003.
The quotations reflect inter-dealer prices without retail markup, markdown, or a
commission, and may not necessarily represent actual transactions.
Holders. As of January 23, 2004, there were approximately 195 holders of record
of Teton's common stock.
Dividends. Teton has not paid any dividends on its common stock since inception.
Teton does not anticipate declaration or payment of any dividends at any time in
the foreseeable future.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of our plan of operation should be read in
conjunction with the financial statements and the related notes. This prospectus
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
which are based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Our actual results
and the timing of certain events could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors," "Business" and elsewhere in this
prospectus. See "Risk Factors."
Overview
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results.
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States. Actual results
could differ significantly from those estimates under different assumptions and
conditions. We believe that the following discussion addresses our most critical
accounting policies, which are those that are most important to the portrayal of
our financial condition and results of operations and require our most
difficult, subjective, and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Pro-Rata Consolidation.
The financial statements as is customary in the oil and gas industry, reflect a
pro-rata consolidation of the Company's interest in ZAO Goloil (a Russian
Company) through its wholly owned subsidiary Goltech. Management believes this
to be the most meaningful presentation as the Company's only significant asset
is its investment in ZAO Goloil.
Teton's agreement with its partners in Goloil is that together they will receive
all of their investment back plus interest from the profits of Goloil before a
third non-investing shareholder, InvestPetrol, can receive any distributions.
^Teton is required to provide 50% of the capital expenditure requirements and is
entitled to a 50% operating interest until repayment of its investment occurs.
Under the pro-rata consolidation method the Company includes its pro-rata share
of the assets (50%), liabilities (50%), revenues (50%) and expenses (50%) of the
accounts of Goloil until repayment (payout) of our current and any future loans
to Goloil occurs. Under the pro-rata consolidation method we include our share
of the assets, liabilities, revenues and expenses of the consolidated accounts
of Goltech. The intercompany balances of Goloil, Goltech and Teton do not fully
eliminate under the pro-rata consolidation method, and the remaining receivable
on Teton's accounts has been included as a component of oil and gas properties,
as this balance will only be repaid through net cash flow generated from oil and
gas properties.
Recoverability of Oil and Gas Properties
The recoverability of our investment in oil and gas properties is reviewed
quarterly and based on the net undiscounted cash flows to be obtained from our
share of the production of oil and gas by Goloil using assumptions similar to
those in the reserve study prepared by an independent petroleum engineer. The
reserve study is subject to inherent limitations and uncertainties and is
prepared using economics for the Company's 100% interest in Goltech, LLC, which
includes the Company's share of a 35.295% interest in Goloil. If the average
cost of oil production sold, the costs to produce and transport the oil for sale
or further development capital expenditures change adversely to the Company,
such changes could cause a material write down of our investment in such
properties or abandonment altogether of our continued efforts to develop and
produce those oil and gas reserves. Management believes that the economic
conditions will remain favorable to the Company for the oil and gas prices it
receives from production and the costs we incur for producing, transporting and
continued license development capital expenditures, and ^we will recover all
such investments in our oil and gas properties.
9
Asset Retirement Obligations
Effective January 1, 2003, the Company adopted the provisions of Financial
Accounting Standard No. 143 (SFAS 143) "Accounting for Asset Retirement
Obligations". SFAS 143 requires the fair value of a liability for an asset
retirement obligation to be recorded in the period in which it is incurred. Over
time this liability is accreted to its expected future value with accretion
being recorded as a charge to operations. The majority of the Company's asset
retirement obligations relate to the projected costs to plug and abandon oil and
gas wells, and closure of access roads on the license area in Russia.
The Company currently cannot make an assessment of the fair value for it's
proportionate share of asset retirement obligations, and accordingly no
liability for the fair value of these costs has been recorded in the
accompanying financial statements. Currently the fair value of
these costs is not able to be determined as a final plan of abandonment and
closure for these future obligations has not been finalized with the applicable
governmental bodies of the Russian government, and therefore the specific
actions required to satisfy the obligations under the license are not known with
a degree of certainty to enable reasonable estimation, although management
believes that any ultimate liability to plug and abandon wells and close access
roads will not be material to the financial condition or results of operations
of the Company.
Oil and Gas Reserves and Supplemental Information.
The information regarding the Company's share of oil and gas reserves, the
changes thereto and the resulting net cash flows are all dependent upon
assumptions used in preparing the Company's annual reserve study. A qualified
independent petroleum engineer in accordance with standards of applicable
regulatory agencies and the Securities and Exchange Commission definitions,
prepares the Company's reserve study. That reserve study is prepared using
economics for the Company's 100% interest in Goltech, LLC, which includes the
Company's 35.295% interest in Goloil. Such reserves and resultant net cash flows
are subject to the inherent limitations in those estimates that include the cost
of oil and gas production, costs related to future capital expenditures, the
price per barrel of oil sales, the Company's share of those reserves, the taxing
structure of the Russian Federation and other factors. Changes in one or all of
these items could cause a material change in the reserve estimates and the net
cash flows from the sale of production generated from those reserves. Management
believes that the current assumptions used in preparation of the reserve study
are reasonable.
Recent Events
During 2003, Teton's Goloil affiliate drilled seven new wells, bringing the
total number of wells that are capable of producing to 21 and completing its
drilling program for the year. Of the 21 wells, one is awaiting completion, one
is awaiting electrification, and two are off-line pending upgrades to the
gathering system. Consequently, as of the end of October, there were 17
producing wells. During the month of October, the Goloil license produced an
average of 6,313 barrels of oil per day, of which 1,578 was net to Teton. Goloil
management expects to complete the above-mentioned pipeline upgrade during
January at which time it also expects to commence the operation of its
co-generation plant, which has been delayed by permitting issues.
In September, OAO NK RussNeft, a Russian independent oil producer became Teton's
partner in Goloil. Russneft succeeds Mediterranean Overseas Trust as operator of
the Goloil license but as before, Teton and Russneft jointly develop the capital
budget for the license and share other key decision-making. The 50% production
payment made by Goloil continues as before, with all production for the payment
being sold into the domestic markets allowing about 90% of the remainder to be
sold into export markets. Teton and Russneft have held extensive discussions
since September and signed, as described below in "Subsequent Events" a
Memorandum of Understanding addressing issues including financing, loan
repayment obligations, the budget process, dividend policy and board
representation.
10
Results of Operations
Below is a brief analysis of the most important components of our revenues,
operating costs and net income (loss). Please note that since Teton absorbs its
share of the cost of producing the oil paid under the production payment
(included in the cost amounts), per barrel costs are effectively doubled.
Three Months Ended September 30, 2003 compared to September 30, 2002
Teton lost $1,477,534 or $0.22 per share during the third quarter, as compared
to $2,216,169 or $0.78 per share in the same period a year ago.
Operating Highlights for the Quarter ended September 30 (in U.S. Dollars, unless
otherwise noted)
2003 2002 Change %Change
====================================================================================================
Sales, Barrels 165,111 137,500 27,611 20.1%
=====================================================================================================
Average Daily Sales, Barrels 1,814 1,511 303 20.1%
====================================================================================================
Average Selling Price, $/barrel 16.46 16.03 0.43 2.7%
=====================================================================================================
Revenues 2,718,066 2,204,613 513,453 23.3%
=====================================================================================================
Costs of Sales and Expenses, excl. DD&A
Production Costs 618,141 664,241 (46,100) -6.9%
=====================================================================================================
Transportation & Marketing 199,446 189,115 10,332 5.5%
=====================================================================================================
Taxes other than Income taxes 1,486,250 1,172,574 313,677 26.8%
=====================================================================================================
Export Duties 334,789 295,356 39,434 13.4%
=====================================================================================================
=====================================================================================================
2,638,626 2,321,285 317,342 13.7%
=====================================================================================================
Results from Goloil Operations, before DD&A ... 79,440 (116,672) 196,112 --
====================================================================================================
Less General & Administrative Expense, Goloil 261,420 149,091 112,329 75.3%
=====================================================================================================
=====================================================================================================
(181,980) (265,763) 83,782 --
=====================================================================================================
Depreciation, Depletion & Amortization, Goloil 274,538 68,419 206,119 301.3%
=====================================================================================================
Operating Income, Goloil (456,518) (334,182) (122,337) --
=====================================================================================================
General & Administrative Expense, Teton 921,761 439,061 482,700 109.9%
=====================================================================================================
Operating Income, Teton (1,378,279) (773,243) (605,037) --
=====================================================================================================
Costs and Expenses during the Quarter ended September 30
(in U.S. $ per barrel)
Controllable Costs 2003 2002 Change %Change
=====================================================================================================
Production Costs 3.74 4.83 (1.09) -22.5%
=====================================================================================================
G&A - Goloil 1.58 1.08 0.50 46.0%
=====================================================================================================
G&A - Teton 5.58 3.19 2.39 74.8%
=====================================================================================================
------ ------ ------ ------
=====================================================================================================
10.91 9.11 1.80 19.8%
=====================================================================================================
11
Non-Controllable Costs
Transportation & Marketing 1.21 1.38 (0.17) -12.2%
=====================================================================================================
Taxes other than Income Taxes 9.00 8.53 0.47 5.6%
=====================================================================================================
Export Duties 2.03 2.15 (0.12) -5.6%
=====================================================================================================
------ ------ ------ ------
=====================================================================================================
12.24 12.05 0.19 1.5%
=====================================================================================================
The Company had revenues from oil and gas production of $2,718,066 for the three
months ended September 30, 2003 as compared to $2,204,613 for the three months
ended September 30, 2002, a 23% increase. The change in revenues is related to
the increase in sales from 137,500 barrels to 165,111 barrels net to Teton after
a 50% production payment, along with an increase in the average price per barrel
received from $16.03 to $16.46 from 2002 to 2003. The increase in average price
per barrel would have been greater had its Goloil affiliate sold its usual quota
of export oil in September. Because of transportation bottlenecks in the Russian
oil market, prices for crude oil sold domestically are normally much lower than
those for export sales.
Oil production costs declined to $618,141 for the three months ended September
30, 2003 from $664,241 for the three months ended September 30, 2002, and the
average cost per barrel of production, excluding taxes, decreased from $4.83 to
$3.74. The decline in production costs reflected a $190,375 decrease in
insurance charges, partly offset by increases of $50,307 in field employee
wages, $38,346 in workover and maintenance expenses, and $33,978 in natural
resource development fees.
Export duties rose from $295,356 to $334,789 due to an increase in the export
tariff rate from $3.68 to $4.69 per exported barrel. The export tariff rate is
based on a complex formula that results in progressively high tariff rates as
the price of exported crude rises. Transportation and marketing expenses rose
modestly year over year, falling slightly on a per barrel basis.
Taxes other than income, which include the Unified Natural Resources & Petroleum
Tax (UNPRT), value added tax (VAT), and property and other miscellaneous taxes
rose from $1,172,574 in the quarter ended September 30, 2002 to $1,486,250
during quarter ended September 30, 2003. The increase reflected both increased
sales volumes and, to a lesser extent, an increase in the average tax paid per
barrel of Russian taxes other than income increased from $8.53 per barrel to
$9.00 per barrel.
Teton's pro-rata share of Goloil's general and administrative expense ("G&A")
rose year over year, rising from $149,091 in the quarter ended September 30,
2002 to $261,420 in the quarter just ended. Factors accounting for the increase
included a $55,000 environmental fee, $35,329 in increased wages, and $38,832
for marketing expenses.
General and administrative (G&A) expenses for Teton itself of $921,761 were
incurred for the three months ended September 30, 2003 as compared to $439,061
for the three months ended September 30, 2002. The increase in G&A is in general
a reflection of Teton's increased employment and activity level, since the
Company's new management team was put in place early this year. Going forward,
Management anticipates a level of G&A consistent with recent quarters in 2003 as
the Company executes its plans to build its oil business in Russia. Major
factors accounting for the year-over-year increase in G&A included the
following: an increase in legal and accounting fees from $38,247 to $191,840; an
increase in marketing expenses (mainly associated with raising investor
awareness and Teton's Series A Convertible Preferred Stock issue, discussed
below) from $73,626 to $199,982; and an increase in payroll from $63,667 to
$172,638. Other factors included increases in insurance (mainly the Directors &
Officers policy), $32,880; office expense (including rent); $47,928, and
engineering, $40,837. Partly offsetting these increases was a decrease in fees
paid to financial consultants from $113,294 to $37,313.
Interest expense for the three months ended September 30, 2003 was $55,034 as
compared to $52,675 for the three months ended September 30, 2002. This interest
expense is principally from the pro-rata consolidation of Teton's ownership
portion of Goloil's loans in which the interest rate declined from 15% to 8%.
Financing charges in 2002 of $1,390,951 arose from the issuance of Convertible
Debt and warrants, with in the money conversion features associated with
convertible debt in 2002. During the quarter just ended the Company incurred
just $61,659 in financing costs associated with three small promissory notes.
12
Nine Months Ended September 30, 2003 compared to September 30, 2002
Teton's loss during the nine months ended September 30, 2003 was $3,140,679 or
$0.46 per share. During the same period last year, the Company net loss was
$7,927,782 or $0.26 per share.
Operating Highlights for the Nine Months ended September 30 (in U.S. Dollars,
unless otherwise noted)
2003 2002 Change %Change
=================================================================================================================
Sales, Barrels 480,688 290,725 189,963 65.3%
=================================================================================================================
Average Daily Sales, Barrels 1,767 1,069 698 65.3%
=================================================================================================================
Average Selling Price, $/barrel 18.94 14.81 4.13 27.9%
=================================================================================================================
Revenues 9,105,338 4,305,274 4,800,064 111.5%
=================================================================================================================
Costs of Sales and Expenses, excl. DD&A
Production Costs 1,456,857 882,202 574,655 65.1%
=================================================================================================================
Transportation & Marketing 801,245 398,389 402,856 101.1%
=================================================================================================================
Taxes other than Income taxes 4,163,956 2,249,313 1,914,644 85.1%
=================================================================================================================
Export Duties 1,492,999 448,338 1,044,661 233.0%
=================================================================================================================
------------ ------------- ------------ ------
=================================================================================================================
7,915,057 3,978,242 3,936,816 99.0%
=================================================================================================================
Results from Goloil Operations, before DD&A 1,190,281 327,033 863,249 264.0%
=================================================================================================================
Less General & Administrative Expense, Goloil 648,725 383,419 265,306 69.2%
=================================================================================================================
------------ ------------- ------------ ------
=================================================================================================================
541,556 (56,387) 597,943 -
=================================================================================================================
Depreciation, Depletion & Amortization, Goloil 662,769 149,806 512,963 342.4%
=================================================================================================================
Operating Income, Goloil (121,213) (206,193) 84,980 -
=================================================================================================================
General & Administrative Expense, Teton 2,675,683 1,950,258 725,425 37.2%
=================================================================================================================
Operating Income, Teton (2,796,896) (2,156,451) (640,445) -
=================================================================================================================
Costs and Expenses during the Nine Months ended September 30
====================================================================================
(in U.S. $ per barrel)
=================================================================
Controllable Costs 2003 2002 Change %Change
==================================================================================================================
Production Costs 3.03 3.03 (0.00) -0.1%
==================================================================================================================
G&A - Goloil 1.35 1.32 0.03 2.3%
==================================================================================================================
G&A - Teton 5.57 6.71 (1.14) -17.0%
==================================================================================================================
------ ------ ------ ------
==================================================================================================================
9.95 11.06 (1.11) -10.1%
==================================================================================================================
Non-Controllable Costs
Transportation & Marketing 1.67 1.37 0.30 21.6%
==================================================================================================================
Taxes other than Income Taxes 8.66 7.74 0.93 12.0%
==================================================================================================================
Export Duties 3.11 1.54 1.56 101.4%
==================================================================================================================
------ ------ ------ ------
==================================================================================================================
13.44 10.65 2.79 26.2%
==================================================================================================================
13
The Company had revenues from oil and gas production of $9,105,338 for the nine
months ended September 30, 2003 as compared to $4,305,274 for the nine months
ended September 30, 2002, an increase of 111%. The change in revenues is related
to the increase in sales from 290,725 barrels to 480,688 barrels, net to Teton
after a 50% production payment and an increase in the average price per barrel
received from $14.81 to $18.94 from 2002 to 2003.
The cost of oil production^ increased to $1,456,857 for the nine months ended
September 30, 2003 from $882,202, for the nine months ended September 30, 2002
due to the Company's increased production. The average cost per barrel of
production, excluding taxes, remains unchanged at $3.03. Export duties rose
sharply, from $448,338 to $1,492,999 as a consequence of both the increased
volumes sold for export and increases in the export tariff rate, which more than
doubled from $2.62 per barrel to $5.22 per exported barrel, year over year. As
discussed above the export tariff increases sharply when export prices exceed
$20 per barrel as they did most of this period.
Transportation and marketing expenses rose from $398,389 for the nine months
ended September 30, 2002 to $801,245 in the current nine months. The increase
was due mainly to the increased sales volume as well as increased transportation
rates, which rose on a per barrel basis from $1.37 per barrel to $1.67 per
barrel, year over year.
Taxes other than income, which include the Unified Natural Resources & Petroleum
Tax (UNPRT), value added tax (VAT), and property and other miscellaneous taxes
rose from $2,249,313 in the nine months ended September 30, 2002 to $4,163,956
during nine months ended September 30, 2003. The increase reflected both
increased sales volumes and an increase in the average tax paid per barrel of
Russian taxes other than income increased from $7.74 per barrel to $8.66 per
barrel This higher average was due principally to an increase in the UNPRT,
which is indexed to the world price of Urals Blend crude and applied to all
production, regardless of where sold.
Teton's pro-rata share of Goloil's general and administrative expense ("G&A")
rose from $383,419 in the nine months ended September 30, 2002 to $648,725 in
the nine months just ended. The increase was mainly attributable to increases in
three areas: marketing expenses which rose by $80,179, wages which increased by
$65,674, and environmental fees which increased by $54,063. On a per barrel
basis, Goloil G&A increased from $1.32 to $1.35.
General and administrative expenses for Teton itself of $2,675,683 were incurred
for the nine months ended September 30, 2003 as compared to $1,950,258 for the
nine months ended September 30, 2002. General and administrative Most of the
increase was due to the second quarter expenses for the Company's AMEX listing,
due diligence activities, and registration application along with the Company's
increased staffing and activity level as described above. Specific factors
leading to the increase included: an increase in accounting and legal expenses
from $298,403 to $504,561 (mainly in association with work on Teton's share
registration and its offering of convertible preferred shares); marketing
expenses rose $266,630 to $412,539; payroll rose from $195,661 to $485,110; and
travel and entertainment rose from $195,228 to $349,153.
As discussed in Teton's 10-Q filing for the previous quarter, it is now
anticipated Teton's General and Administrative expenses will exceed the
$2,000,000 budget disclosed in our previously filed 10-KSB for the year ended
December 31, 2002. The Company currently estimates that its 2003 G&A expense
will be $3,400,000.
Interest expense for the nine months ended September 30, 2003 was $178,139 as
compared to $328,938 for the nine months ended September 30, 2002. This interest
expense is principally from the pro-rata consolidation of Teton's ownership
portion of Goloil's loans, in which the interest rate declined from 15% to 8%,
and also included approximately $100,000 of interest on convertible debentures
of Teton that were outstanding in 2002. Financing charges of $5,444,901 in 2002
arose from the issuance of Convertible Debt and warrants, which were recorded at
"fair value" which did not take place in 2003.
Liquidity and Capital Resources
The Company had cash balances of $1,955,253 at September 30, 2003, and a working
capital deficit of $4,764,864. Net of the pro rata consolidation with Goloil,
Teton has a working capital surplus of $1,188,461. Teton is not liable for
Goloil's debts. Cash flow used from operations totaled $3,041,307, with non-cash
adjustments to cash flow from operations for depreciation, depletion and
amortization of $628,458.
The Company used $4,437,637 in investing activities, all of which was all
associated with oil and gas property and equipment expenditures. In particular,
the Company financed its half of a new gas-powered electrical generating plant
in the amount of $1,500,000 which will be operational in the first quarter of
next year. The plant will provide substantial increases in electricity
production at lower cost than the diesel generators that will be replaced. The
plant will be fueled by natural gas from our wells, reducing or eliminating the
need to "flare" the gas. The Company financed the expenditures with existing
cash and sale of Common Stock. The Company continues to expect significant
additional investments to be made in the future to drill and develop additional
producing wells.
14
The Company had cash provided by financing activities of $8,347,184, which
consisted of $1,939,610 from stock subscriptions received, $3,619,444 from the
sale of Common Stock, net $2,159,380 from advances under notes payable from an
affiliate, and $628,750 in proceeds from promissory notes.
The Company anticipates future operations and significant oil and gas property
expenditures will be able to be funded through a combination of note payable
advances from an affiliate, cash raised from raising debt and equity financing
and production of oil and gas reserves.
Although the Company has a $4,746,307 working capital deficit, $5,107,805 of
that deficit relates to our proportionate share of notes payable from
affiliates, which are expected to be extended if current cash flow does not
permit repayment. Additionally, as discussed below in Subsequent Events, we
successfully raised approximately $9.8 million through the placement of
convertible preferred stock in a transaction that closed on November 11. The
Company anticipates it share of capital expenditures through the end of the year
will be approximately $4.4 million, which will be also be funded through the
private placement proceeds along with expected cash flow from Goloil's
operations.
Other Matters:
The Company is currently exploring possibilities to acquire additional petroleum
licenses in Russia. On May 28, the company signed a purchase and sale agreement
to acquire the Anderman/Smith Overseas, Inc. interests in the LLC Chernogorskoye
located in Western Siberia, near its existing operations. The selling price was
not disclosed and the company is pursuing its due diligence for the acquisition.
If consummated this acquisition could potentially increase average daily
production by approximately 4,000 barrels. The company continues to pursue
additional equity and debt financing to fund the acquisition.
Subsequent Events:
On October 7, 2003, Teton announced the signing a binding and broad Memorandum
of Understanding ("MOU") with OAO NK RussNeft ("RussNeft"), its partner in
Goloil. The agreement covers all aspects of the two companies' joint operations
in their Goloil operations in Western Siberia and provides a framework for
future development of additional oil projects in Russia. The agreement confirms
the controlling documents of the joint stock company Goloil, including, but not
limited to, financing, loan repayment obligations, the budget process, dividend
policy and board representation.
On October 23, 2003, Teton announced it had completed the placement of
approximately $7.548 million of its series A convertible preferred stock. Teton
sold approximately 1.735 million unregistered series A convertible preferred
shares at a price of $4.35 per share. The private placement was priced on July
11, 2003, when Teton's common shares were trading at $4.30 per share and was
approximately 51% oversubscribed. The preferred shares carry an 8% dividend,
payable quarterly and are convertible into common stock at a price of $4.35 per
share. If converted within 60 days of the closing, the investors will be
entitled to receive (i) dividends payable in common stock for one year; and (ii)
100,000 Class B Warrants for each $500,000, exercisable at $6.00 per share. A
registration statement, covering the underlying common shares, will be filed
within 90 days of the close of the private placement.
On November 10, 2003, Teton announced that it closed an extended second round of
its privately placed series A convertible preferred stock. The initial offering
of convertible preferred shares, which closed on October 23, 2003, was extended
due to continued high investor demand. In the second round Teton raised
approximately $2.3 million and Teton sold approximately 526,000 restricted
series A convertible preferred shares at a price of $4.35 per share. Including
the second round the total funds raised in the convertible preferred private
placement equal approximately $9.8 million, a 96% oversubscription. The
preferred shares issued in the second round require shareholder approval in
order to be converted into common shares.
15
The Company offered an incentive to investors in its 8% Convertible Preferred
Share issue to convert their preferred shares into common stock that currently
pays no dividend.
The incentive consisted of an offer to exchange for a period of sixty days each
share of preferred into a share of common plus one year of common stock
dividends, plus 200 two-year warrants exerciseable at $6.00 per share for each
$1,000 invested. In December approximately 95% of the eligible preferred shares
were converted into common under these terms and as a consequence the Company
currently expects to incur non-cash preferred dividend charges of approximately
$2.8 million during the fourth quarter related to the inducement to convert the
preferred stock. The preferred dividend charges may differ from the initial
estimate pending final determination of all conversions and the related
inducement consideration.
Comparison of Year Ended December 31, 2002 to December 31, 2001.
We had revenues from oil and gas production of $6,923,320 for the twelve months
ended December 31, 2002 as compared to $1,625,352 for the twelve months ended
December 31, 2001. Revenues were increased by a significant increase in
production throughout 2002 as new wells came on line. "Net to Teton" production
at December 31, 2002 was approximately 1,750 barrels per day. This production
increase was partially offset by a reduction in the price per barrel received as
explained further below.
Under a production payment agreement entered into to finance the completion of 5
wells in 2001 and 2002, the completion of a pipeline to the Trans Neft pipeline,
and the construction of a DNS plant (which was completed in 2003), 50% of
the oil produced on the license through June 30, 2007 is paid to the financing
entity, which is an affiliate of MOT. The pipeline was completed in June 2001,
allowing Goloil to transport oil 12 months a year, rather than the previous 7 or
8 months per year, because of adverse weather conditions.
Effective December 1, 2002, as well as prior to April 1, 2002, all oil
transferred under the agreement is counted as Russian domestic sales, therefore
the full Goloil export quota can be used for the remaining production. This
results currently in approximately 90% of Teton's net production being exported.
Between April 1 and December 1, the production payment participated
proportionately in export as well as domestic sales.
The Production changes resulted in net barrels of approximately 450,000 to Teton
in 2002 compared to net barrels of approximately 95,000 in 2001. The average
price per barrel we received decreased in 2002 to approximately $15.38 from
$16.43 in 2001. Because the production payment was participating in export sales
for a portion of the year, the "net to Teton" sales in 2002 contained a larger
portion of Russian domestic sales than in 2001. In addition, Russian domestic
prices, particularly in the winter when ports are closed and tanker exports are
precluded, were lower than in 2001. Higher export prices partially offset this
difference. As a result of signing the MOU on December 1, 2002 and higher
current oil prices, the Company was receiving an average price per barrel at
year-end of approximately $22.84. The Company is optimistic that the oil prices
received in 2003 will continue to remain higher than in the prior year.
Cost of oil and gas production before Depreciation, Depletion and Amortization
increased to $2,741,303 for the twelve months ended December 31, 2002 from
$1,068,250 or the twelve months ended December 31, 2001. The increase of
$1,673,053 relates to substantial increases in volume produced to include oil
produced under the production payments to MOT made for leasing new wells and the
pipeline, offset by improved efficiencies from higher production and lower
transportation costs in 2002.
Taxes other than income taxes, which includes VAT, excise, mining and other
applicable taxes increased by $3,042,201 in 2002 to $3,537,990 from $495,789 in
2001. The increase is a result of a substantial increase in the mining
(extraction) tax, which is indexed to the World price of Oil regardless of where
the oil is actually sold. The increase in mining tax totaled approximately
$2,430,000. The remaining increase is due to increased sales resulting in
increased VAT in 2002.
The economics of the cost to produce an average barrel of oil, including taxes,
decreased in 2002 from approximately $10.18 to $9.96. However, as a result of
the production payment required with the Company covering all lifting costs and
extraction taxes, the cost per barrel net to the Company was approximately
$15.51 per barrel as the Company had fewer barrels net to cover these costs.
16
A breakdown of costs and expenses per bbl. is as follows:
Cost Category
2002 2001
---------- -----------
Controllable Costs:
Lifting Costs ................. $ 3.24 $ 5.50
==========================================================
Goloil General & Administrative 1.46 3.24
==========================================================
--------- -------
==========================================================
Total Controllable Costs ......... $ 4.70 $ 8.74
==========================================================
Non-Controllable Costs:
Mining & Misc. Taxes .......... 6.40 3.82
==========================================================
Value Added Tax (VAT) ......... 0.80 0.53
==========================================================
Transportation, Duties etc .... 3.61 3.37
==========================================================
--------- -------
TOTAL Costs ...................... $ 15.51 $ 16.46
==========================================================
Controllable costs, i.e. Lifting Costs and G&A Costs, have declined dramatically
on a "per barrel" basis as a result of the higher levels of production and the
efficiencies gained from that.
Taxes have risen, however, principally because of a new formula for the Mining
or Extraction tax, which is indexed to the World Price of Oil, regardless of
where the oil is sold. In December, this resulted in a per barrel mining tax
that exceeded the per barrel receipts of sales in the Russian domestic market.
The disparity between world prices and prices in the domestic market has been
unusually large in 2002.
Currently, because of the renegotiated production payment, Teton's share of
Goloil production may be sold 90% in the export market and 10% in the Russian
domestic market, under a government agency (TransNeft) allotment, which the
agency can change. Domestic oil sells at a lower price, but does not incur
transportation costs and other costs and taxes related to export. This resulted
in a December average selling price of $22.84 per barrel. Having the revised
Production Payment in force for the full year 2003 will have the effect of
raising the average price per barrel received without any increase in per barrel
costs.
General and administrative expenses of $5,333,726 were incurred for the twelve
months ended December 31, 2002 as compared to $1,521,970 for the twelve months
ended December 31, 2001. The increase in general and administrative expenses of
$3,811,756 reflects a significant increase in travel, consulting, legal, and
accounting expenses in 2002. Increased capital raising required additional "road
show" activities, public forum presentations, and increases in the number of
individuals participating in these activities. This was reflected in increases
in consulting fees, travel costs and legal fees. The addition of a COO, CFO, and
a Russian accounting consultant increased consulting fees and travel costs. The
restructuring of Goltech and the renegotiation of the production payment and
related agreements also increased legal fees and travel costs. Goloil general
and administrative expenses increased in 2002 by approximately $288,000 from
2001 due to the expanded operations. We expect that these expenses will return
to a level of under $2,000,000 annually in 2003.
Depreciation, depletion and amortization was $451,930 for the twelve months
ended December 31, 2002 as compared to $45,313 for the twelve months ended
December 31, 2001. The increase in 2002 represents increased capitalized costs
subject to depreciation and depletion, and an increase in amortization arising
from changes in estimated recoverable reserves.
The Company also incurred financing costs of $5,498,106 during the twelve months
ended December 31, 2002 for the amortization of discount related to warrants
issued in connection with certain related party notes payable of $354,000
(non-cash), amortization of the discount on warrants issued with the convertible
debentures and in-the-money conversion feature discounts of $4,558,000
(non-cash) immediately recognized, and $467,000 of expenses paid related to the
10% premium paid in common stock upon the conversion of the debentures on
September 1, 2002. The remainder of these costs were expenses paid related to a
debenture purchase agreement with a potential investor that was not consummated.
While the stock to which the conversion rights and warrants apply is restricted
stock, the valuation with respect to this stock in calculating the discount was
"as if" the stock was immediately salable. The effect of this is to make the
amount of discount and its related amortization higher than it would otherwise
have been. Management believes these costs will not be indicative of future
operations and will manage future capital raising programs to minimize or
eliminate these costs.
Other income increased for the twelve months ended December 31, 2002 by $42,370,
principally from interest on Goloil notes.
17
Interest expense for the twelve months ended December 31, 2002 was $385,939 as
compared to $161,019 for the twelve months ended December 31, 2001. The increase
of $224,920 reflects cash and non-cash interest costs on the convertible debt
outstanding for a portion of the year.
Of our net loss of $10.97 million, we incurred significant non-cash charges
totaling approximately $6.95 million, including 452,000 for depreciation,
depletion and amortization, $1.1 million in equity compensation charges issued
for services provided and $5.4 million for financing charges associated with our
convertible debentures issued. These charges accounted for $.18 per share of our
$.29 per share loss.
BUSINESS
Structure of Teton.
Through our wholly-owned subsidiary, Goltech Petroleum LLC, we own 35.295% of
Goloil. Mediterranean Overseas Trust (together with its affiliates, including
McGrady, Fenlex, Petromed, and Energosoyuz, ("MOT")) owns 35.295% of Goloil and
serves as Manager of Goloil. InvestPetrol, a Russian Joint Stock Company, owns
the remainder (29.41%) of Goloil. In September of this year, Goloil and its
affiliates, along with InvestPetrol were acquired by OAO NK RussNeft, a Russian
independent oil producer. Russneft succeeds Mediterranean Overseas Trust as
Manager of Goloil, but at this point continues to operate through MOT.
Consequently, our discussions pertaining to Teton's structure and operations of
the Goloil License will continue to refer to MOT (and affiliates) as Goloil's
Manager and the operator of the Goloil License.
Goloil holds the license to produce oil and gas in Western Siberia. MOT and
Teton (via Goltech) are obligated to each fund 50% of the Capital Expenditures
of Goloil under their Memorandum of Understanding. Invest Petrol is currently
not funding any of this development. Based on the current structuring of Goloil
and the development agreements with Teton and MOT, until Goltech and MOT each
has been repaid its investments in Goloil, each receives a proportion of the
production and revenues from Goloil (after the production payment to MOT) equal
to the proportion of its investment to the total investments in Goloil. Since it
is expected that this will continue for the foreseeable future, when we describe
"net" amounts to Teton, these calculations are based on Teton's right (through
its ownership of Goltech) to receive 50% of the production and revenues from
Goloil (after the production payment to MOT). The agreements affecting the
Goloil license are discussed below under "MOT Agreements."
Goltech Petroleum LLC is a limited liability company organized under the laws of
Texas. For tax purposes it is treated as a partnership. We are the sole manager
of Goltech and have complete authority to manage its business. Petromed (MOT)
withdrew as a member and manager of Goltech in 2002. In connection with its
withdrawal, Petromed received a distribution consisting of Goloil shares and
return of its original $1 million contribution.
Goloil is a closed joint stock company organized under the laws of Russia.
Russian joint stock companies are corporate entities with limited liability
similar to corporations formed under United States laws. Shareholders of Russian
joint stock companies generally are not liable for debts and obligations of the
company. However, shareholders of a bankrupt joint stock company may be held
liable for debts and obligations of the bankrupt company if they have exercised
their authority to undertake an action knowing that bankruptcy would be a
possible result of their actions. Any transfer of shares by a shareholder to a
third party is subject to a right of first refusal by the other shareholders.
Under Russian law, a simple majority of voting shares is sufficient to control
adoption of most resolutions. Resolutions concerning amendment of the company
charter, reorganizations (including mergers), liquidation, any increase in
authorized shares, or certain "large" transactions require the approval of the
shareholders holding 75% of the outstanding shares.
A Russian joint stock company has no obligation to pay dividends to the holders
of common shares. Any dividends paid to shareholders must be recommended by the
board of directors and then approved by a majority vote at the general meeting
of shareholders. The Memorandum of Understanding between MOT and Teton (the
controlling shareholders) provides that any excess cash will be used to pay back
investments on a quarterly basis.
On May 28, the Company signed a purchase and sale agreement to acquire the
Anderman/Smith Overseas, Inc. interests in the LLC Chernogorskoye located in
Western Siberia, near its existing operations. The selling price was not
disclosed and the Company is pursuing its due diligence for the acquisition. If
consummated this acquisition could potentially increase average daily production
by approximately 4,000 barrels.
Teton History.
Teton was formed by the November 1998 merger of EQ Resources Ltd. and American
Tyumen Exploration Company. EQ was incorporated in Ontario, Canada, on November
13, 1962, under the name Mangesite Mines Limited. Its name was changed to EQ
Resources Ltd. in August 1989. EQ was domesticated in Delaware immediately prior
to the merger. In the merger, EQ, the survivor corporation, was renamed Teton
Petroleum Company.
18
At the time of the merger, Teton's holdings consisted of licenses for the
exploration of gold in Ghana, licenses for oil and gas in Dagestan, Russia, and
the Goloil license. Following the merger, we decided to focus our efforts and
resources on development of the Goloil license. We disposed of our interest in
the Ghana gold licenses. We also wrote down the value of the Dagestan licenses
to zero on our financial statements in 1998, and disposed of our subsidiary
Teton Oil, Inc. which held the Dagestan licenses effective May 24, 2001. In our
opinion, political instability in the Dagestan region made operations in
Dagestan too risky. Due to inactivity most of our Dagestan licenses had
terminated prior to our disposition of Teton Oil, Inc.
MOT Agreements.
In June 2000, Teton, Goltech and Fenlex Nominee Services Limited, as sole
trustee of the Mediterranean Overseas Trust, a trust organized under the laws of
Malta entered into a Master Agreement. The Master Agreement contemplated the
following transactions:
(a) Purchase of 50% of the interest in Goltech in exchange for $1,000,000.
(b) Additional investment by MOT, of up to $5,600,000, through an oilfield
development and leasing arrangement, paid on an as needed basis to cover certain
costs related to the pipeline, processing facility, and drilling of five
additional wells.
(c) Payment of leasing fees and repayment of amounts advanced by MOT through a
production payment in the form of crude oil.
(d) Additional work, as agreed to by the parties.
The purchase of 50% of the interests in Goltech was completed in August 2000.
See, also " - Structure of Teton."
As contemplated in the Master Agreement, Goloil and MOT (through Energosoyuz)
entered into an oilfield development agreement and a lease agreement. These
agreements provided, among other things, for the drilling and operation of five
additional wells on the Goloil license lands and for Energosoyuz to fund up to
$5,600,000 to cover certain costs related to development of a pipeline and
processing facility and the drilling of five additional wells.
The wells and facilities constructed by Energosoyuz pursuant to the oilfield
development agreement are leased to Goloil for a seven-year production payment.
The production payment is equal to 50% of the crude oil produced by the new and
existing Goloil wells. The production payment period will be extended if the
production payment falls below an average of 80,000 tons (583,200 barrels) of
oil per year or if the market price of Ural Oil Blend falls below a weighted
average of $17 per barrel, for oil sold outside of Russia, over the seven year
period.
At March 2002, the full $5,600,000 contemplated in the MOT agreements was
invested by MOT. The pipeline and four of the wells were completed in 2001. The
fifth well was completed in early 2002. Construction of a processing plant was
completed in 2003.
After the production payment is paid in full, the MOT agreements provide that
one of the following shall occur:
1. Energosoyuz will merge into Goltech.
2. 100% of the capital stock of Energosoyuz will be transferred to Goltech.
3. The outstanding capital stock of Energosoyuz will be distributed equally
between Teton and MOT or its nominee.
4. Any other action agreed to by the parties resulting in a division of the
revenues of Energosoyuz between Teton and MOT or its nominees in proportion to
their respective ownership in Goltech.
In late 2002, MOT elected to withdraw from Goltech in exchange for its 50% of
the shares in Goloil held by Goltech. This has been accomplished under a
Memorandum of Understanding and withdrawal agreement. A new management agreement
for Goloil is the process of being completed and finalized consistent with the
intent of the MOU. As part of these negotiations, the production payment
agreement was clarified to state a fixed term of 7 years from inception (July 1,
2000) and that all oil received under the agreement would be sold as Russian
domestic oil, thus allowing about 90% of the remainder to be sold in the export
markets currently.
Production and Distribution.
A glossary of certain oil and gas terms used in this report is found at
"DESCRIPTION OF PROPERTY--Glossary of Geologic Terms."
As of March 25, 2003, the wells on our license area were producing approximately
7,200 barrels per day (1,800 barrels net to Teton). Completion of a 40-kilometer
(25-mile) pipeline on June 4, 2001 has enabled oil to be pumped from these wells
all year long. Prior to completion of the pipeline, no oil was produced during
certain times of the year because of transportation difficulties. At December
31, 2001, seven wells were completed on our license area. At December 31, 2002,
13 wells were completed on our license area.
19
During 2003, Teton's Goloil affiliate drilled seven new wells, bringing the
total number of wells that are capable of producing to 21 and completing its
drilling program for the year. Of the 21 wells, one is awaiting completion, one
is awaiting electrification, and two are off-line pending upgrades to the
gathering system. Consequently, as of the end of October, there were 17
producing wells. During the month of October, the Goloil license produced an
average of 6,313 barrels of oil per day, of which 1,578 was net to Teton. Goloil
management expects to complete the above-mentioned pipeline upgrade during
January at which time it also expects to commence the operation of its
co-generation plant, which has been delayed by permitting issues.
Pursuant to the MOT agreements, MOT is entitled to a production payment in kind.
See "MOT Agreements." The production payment is projected to be completed in
June, 2007, based on revised leases negotiated in late 2002.
Teton previously paid processing and transportation fees to a third party to
process and place its oil in the Trans-Siberia pipeline. Construction of a
processing facility on the license area was completed earlier this year.
Consequently wee no longer incur the third-party processing charge.
Teton's share of the oil production is sold in Poland, Germany, Belorussia,
Ukraine and Russia. Sales in Poland, Germany, Ukraine and Belorussia are in
United States dollars. Oil sold in Russia is in rubles. Pursuant to the terms of
the Goloil license and pipeline quotas issued by
Trans-Neft, the government owned pipeline monopoly, up to a maximum of 35% of
Goloil's oil production may be sold outside of the CIS and an additional 10% can
be sold to other CIS states. Currently, MOT is required to sell the oil it
receives as a production payment into the Russian domestic market. Thus, until
the production payment is paid in full, we are able to sell 90% of our share of
the production outside of Russia. Currently there are no long-term contracts for
the sale of our oil. We currently are not dependent on any principal customer.
The chart below sets forth certain production data for the last three fiscal
years. Additional oil and gas disclosure can be found in Note 12 of the
Financial Statements.
PRODUCTION DATA
Year Ended December 31 2003 (9 mos.) 2002 2001 2000
====================== ============= ============= ============= =============
Total Gross Oil Production, barrels 1,922,752 1,884,933 425,459 178,331
=================================== ============= ============= ============= =============
Total Gross Gas Production, MCF - - - -
=============================== ============= ============= ============= =============
Net Oil Production, barrel(1) 480,688 471,233 94,879 142,664
============================== ============= ============= ============= =============
Net Gas Production, MCF - - -
======================= ============= ============= ============= =============
Average Oil Sales Price, $/Bbl $18.94 $15.38 $16.43 $11.00
============================== ============= ============= ============= =============
Average Gas Sales Price, S/MCF - - - -
============================== ============= ============= ============= =============
Average Production Cost per Barrel (3) $13.12(4) $9.96(4) $11.22 $10.00
====================================== ============= ============= ============= =============
Gross Productive Wells
Oil 17.0 13.0 7.0 3.0
==== ============= ============= ============= =============
Gas - - - -
==== ============= ============= ============= =============
Total 17.0 13.0 7.0 3.0
====== ============= ============= ============= =============
Net Productive Wells(2)
Oil 8.5 6.5 3.5 1.5
==== ============= ============= ============= =============
Gas - - - -
==== ============= ============= ============= =============
Total 8.5 6.5 3.5 1.5
===== ============= ============= ============= =============
20
(1) Net production and net well count is based on Teton's effective net interest
as of the end of each year. Prior to August 2000 and after November, 2002, Teton
owned 100% of the interests in Goltech.
(2) Average oil sales prices is a combination of domestic (Russian) and export
price. As a result of the MOU signed December 1, 2002 and the increase in end of
period oil prices, the current average price received by the company is $22.84
as of December 31, 2002.
(3) Excludes production payment to MOT.
(4) If the cost of the production payment, which requires Teton to cover all
lifting and G&A costs, is included, the cost per barrel net to Teton would be
$15.51 per barrel in 2002 and $22.39 per barrel in the first nine months of
2003. See also "MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of Operations."
The following chart sets forth the number of productive wells and dry
exploratory and productive wells drilled and completed during the last three
fiscal years in the Goloil license area:
21
NET WELLS DRILLED
Year Ended December 31 2003 2002 2001 2000
====================== ==== ==== ==== ====
Gross Net(1) Gross Net(1) Gross Net(1) Gross Net(1)
===== ====== ===== ====== ===== ====== ===== ======
Number of Wells Drilled
Exploratory (Research)
Productive - - - - 1.0 0.5 - -
========== ===== ====== ===== ====== ===== ====== ===== ======
Dry - - - - - - - -
===== ====== ===== ====== ===== ====== ===== ======
Total - - - - 1.0 0.5 - -
===== ===== ====== ===== ====== ===== ====== ===== ======
Development
Productive 7.0 3.5 6.0 3.0 3.0 1.5 2.0 1.0
========== ===== ====== ===== ====== ===== ====== ===== ======
Dry - - - - - - - -
===== ====== ===== ====== ===== ====== ===== ======
Total
===== 7.0 3.5 6.0 3.0 3.0 1.5 2.0 1.0
===== ====== ===== ====== ===== ====== ===== ======
(1) Net well count is based on Teton's effective net interest as of the end of
each year. Prior to August 2000, Teton owned 100% of the interests in Goltech.
Subsequent to August 2000 our interest was reduced to 50%. In November, 2002, it
again became 100%.
United States Trade and Development Agency (TDA) Grants.
In October 2001, Teton finished its study of the feasibility of oil exploration
in the Novo-Aganskoye, Galinovaya and East Galinovaya license area of Siberia
pursuant to an agreement with Varioganneft JSC. The study was funded by a
$250,000 grant from the TDA. In 2001, we received a final payment of $37,500
from the TDA for the study. Currently, we do not expect to make any investments
in the Novo-Aganskoye, Galinovaya and East Galinovaya license area. Thus, we do
not expect to incur any obligation to repay the amounts paid by the TDA in
connection with this study.
Teton expects to complete its feasibility study of the Eguryak license area
pipeline project in 2003. This study is also funded through a $300,000 grant
from the TDA. Teton has received $255,000 of the grant amount. The balance of
the grant funds will be paid upon completion of the study. Teton may be required
to repay the TDA the grant amount if Teton makes certain investments in the
Eguryak license area prior to December 31, 2005.
Competition.
We compete in a highly competitive industry. We encounter competition in all of
our operations, including property acquisition, and equipment and labor required
to operate and to develop our properties. Teton competes with other major oil
companies, independent oil companies, and individual producers and operators.
Many competitors have financial and other resources substantially greater than
ours.
Regulations Governing Russian Joint Stock Companies.
Russian joint stock companies are corporate entities with limited liability
similar to corporations formed under United States laws. Shareholders of Russian
joint stock companies generally are not liable for debts and obligations of the
company. However, shareholders of a bankrupt joint stock company may be held
liable for debts and obligations of the bankrupt company if they have exercised
their authority to undertake an action knowing that bankruptcy would be the
result of their actions. In closed joint stock companies, i.e. companies with a
limited number of shareholders, such as Goloil, any transfer of shares by a
shareholder to a third party is subject to the pre-emptive right of the other
shareholders to acquire such shares at the price offered to a third party.
Under Russian law, a simple majority of voting shares is sufficient to control
adoption of most resolutions. Resolutions concerning amendment of the company
charter, reorganizations (including mergers), liquidation, any increase in
authorized shares, or certain "large" transactions require the approval of the
shareholders holding 75% of the outstanding shares.
A Russian joint stock company has no obligation to pay dividends to the holders
of common shares. Any dividends paid to shareholders must be recommended by the
board of directors and then approved by a majority vote at the general meeting
of shareholders. Dividends may be paid every quarter of a year. The Memorandum
of Understanding between MOT and Teton (the controlling shareholders) provides
that any excess cash will be used to pay back investments on a quarterly basis.
22
Environmental Regulation.
The government of the Russian Federations, Ministry of Natural Resources, and
other agencies establish special rules, restrictions and standards for
enterprises conducting activities affecting the environment. The general
principle of Russian environmental law is that any environmental damage must be
fully compensated. Under certain circumstances, top officers of the entity
causing substantial environmental damage may be subject to criminal liability.
The law of the Russian Federation on subsoil requires that all users of subsoil
ensure safety of works related to the use of subsoil and comply with existing
rules and standards of environment protection. Failure to comply with such rules
and standards may result in termination or withdrawal of the Goloil license.
Goloil Taxation.
As a Russian resident entity, Goloil is subject to all applicable Russian taxes,
many of which currently impose a significant burden on profits. The most
significant Russian taxes and duties affecting Goloil include:
(i) 20% value added tax (established pursuant to Chapter 21 of the Tax Code of
Russia), applicable only to domestic sale of goods in Russia and the Ukraine. No
value added tax is payable on goods exported to the West from Russia;
(ii) 20 to 24% profit tax which includes 6% federal profit tax, 12 to 16%
regional profit tax and 2% local tax (in accordance with Chapter 25 of the Tax
Code of Russia). Russian law allows the carry forward and use of losses, subject
to limitations;
(iii)Income tax on dividends payable to Goloil's shareholders. The tax must be
withheld by Goloil from the amount distributed to each shareholder. The current
rate of tax on dividends payable to corporate foreign shareholders is 15%.
However, dividends payable to Goltech, a United States resident company, are
subject to regulations contained in the United States - Russia tax treaty which
limits the tax on dividends payable to Goltech to 5% (as long as Goltech holds
more than a 10% interest in Goloil);
(iv) Tax on production of minerals applicable to all subsoil users producing
minerals, including crude oil. For the period ending on December 31, 2004, the
tax is temporarily established at 340 rubles (ca. USD 10.83) per metric ton
produced by the taxpayer multiplied by a factor (F) calculated pursuant to the
formula:
F = (U-8) x R/252 where:
U - means the average market price of Urals blend crude oil (in dollars per
barrel) during the relevant tax period;
R - means the average ruble for dollar exchange rate quoted by the Central Bank
of Russia for the relevant tax period.
After expiration of the temporary tax rate period, the tax will apply at the
rate of 16.5% of the value of the oil produced by the taxpayer;
(v) Unified social tax (established pursuant to Chapter 24 of the Tax Code of
Russia) at the rate of up to 35.6% of the payroll;
(vi) Transport tax (established pursuant to Chapter 28 of the Tax Code of
Russia) payable by owners of motor vehicles at the rate established by regional
authorities based on the type and capacity of the vehicle. The maximum amount of
tax payable by an owner of a motor car per year is RUR 150 (ca. USD 4.78) per
horsepower;
(vii)Oil export duty, currently in the amount of USD 25.9 per ton of crude oil
being exported;
(viii) Regional property tax payable annually at 2% of the value of assets of
the entity.
The Russian tax system currently is undergoing a major reorganization. New tax
laws including those setting forth rules for application of the value-added tax,
profit tax, and tax on the production of minerals were enacted within the last
four years. The cost of legal and accounting advice to keep up with changes in
the Russian tax laws may be significant and penalties for violations, even
inadvertent ones, may be steep. If revisions impose confiscatory taxes, our
profitability will be adversely affected.
Employees.
Teton currently has eight full time and two part time employee. We also utilize
the services of independent contractors on an as-needed basis. Teton also
employees three people in its Moscow representative office. Goloil currently
employs approximately 100 employees in Western Siberia and Moscow. Goloil also
uses independent contractors on as needed basis.
Properties
23
Glossary of Geological Terms.
Barrel: Equal to 42 U.S. gallons.
Basin: A depressed sediment-filled area, roughly circular or elliptical in
shape, sometimes very elongated. Regarded as good areas to explore for oil and
gas.
Field: A geographic region situated over one or more subsurface oil and gas
reservoirs encompassing at least the outermost boundaries of all oil and gas
accumulations known to be within those reservoirs vertically projected to the
land surface.
License: Formal or legal permission to explore for oil and gas in a specified
area.
Productive: Able to produce oil and/or gas.
Proved reserves: Estimated quantities of crude oil, condensate, natural gas, and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be commercially recoverable in the future from known
reservoirs under existing conditions using established operating procedures and
under current governmental regulations.
Proved undeveloped reserves: Economically recoverable reserves estimated to
exist in proved reservoirs, which will be recovered from wells, drilled in the
future.
Reserves: The estimated value of oil, gas and/or condensate, which is
economically recoverable.
Tons: A ton of oil is equal to 7.29 barrels of oil.
Goloil License
The Goloil license encompasses 187 square kilometers (78 square miles) in the
south central portion of the west Siberian basin. It is located approximately 10
miles to the north and west of Samotlor, Russia's largest oil field. Three
producing fields are located within the license area: Golevaya, Eguryak, and
South Eguryak. The Goloil license expires in 2022, and may be extended upon
compliance with the specified program of operations and undertaking of
additional operations after the end of its term. The Goloil license may be
terminated prior to its term if Goloil fails to comply with the requirements of
the license. We believe that we are currently in compliance with all material
terms of the Goloil license.
Proved Reserves and Present Value Information
Important Note on Reserve Calculations:
o Reserve calculations require estimation of future net recoverable reserves of
oil and gas and the timing and amount of future net revenues to be received
therefrom. Such estimates are based on numerous factors, many of which are
variable and uncertain. Accordingly, it is common for the actual production and
revenues later received to vary materially from earlier estimates. Estimates
made from the first few years of production from a property are not likely to be
as reliable as later estimates based on longer production history. Hence,
reserve estimates and estimates of future net revenues from production may vary
from year to year.
o There can be no assurance that the reserves described herein will ultimately
be produced or that the proved undeveloped reserves described herein will be
developed within the periods anticipated. Recovery of undeveloped reserves
requires significant capital expenditures and successful drilling operation. The
cash flows summarized herein should not be construed as representative of the
fair market value of the reserves. Actual results are likely to differ greatly
from the results estimated.
o The Company has not filed reserve estimates with any federal agency.
Our estimated proved oil reserves and present value of the estimated future net
revenues attributable to such reserves have been updated for this filing with an
effective date of January 1, 2004. They are based on a report issued by the
independent consulting firm of Gustavson Associates, Inc. ("Gustavson") located
in Boulder, Colorado. The report was updated to take into account production
data obtained during 2003 on some of our wells, particularly those producing
from the Jurassic formation.
As of January 1, 2004, our proved reserves are estimated at 8.05 million
barrels, net to Teton, after deducting quantities required to be delivered under
the production payment as summarized below:
24
Net
Reserves,
million
barrels Before Profits Tax After Profits Tax
------------------------------------------------------------------------------------------------------------
After Total Present Value Total Present Value
Deduction of Undiscounted Discounted Undiscounted Discounted @10%,
Production Cash Flow, @10%, million Cash Flow, million
Case Payment million US$ US$ million US$ US$
====== ============ ============= ============= ============ ================
Proved Developed 1.02 $5.57 $5.19 $4.53 $4.21
Producing ============ ============= ============= ============ ================
=========
Proved Developed
Non-Producing 0.88 $5.80 $4.75 $4.29 $3.51
============= ============ ============= ============= ============ ================
Total Proved Developed 1.90 $11.37 $9.93 $8.82 $7.71
====================== ============ ============= ============= ============ ================
Proved Undeveloped 6.15 $41.14 $25.48 $30.52 $18.45
================== ============ ============= ============= ============ ================
Total Proved 8.05 $52.51 $35.42 $39.34 $26.16
============ ============ ============= ============= ============ ================
The Securities and Exchange Commission requires that estimates of reserves,
estimates of future net revenues and the present value of estimated future net
revenues be based on the assumption that oil and gas prices will remain at
current levels (except for gas prices determined by fixed contracts), and that
production costs will not escalate in future periods. All such estimates have
been adjusted for the anticipated costs of developing proved undeveloped
reserves.
The prices used for this analysis were as of year-end 2003. Teton sells its oil
into three different markets: Europe, where the price is tied to the Urals Blend
benchmark which itself is closely related to the price for Brent Crude; the
domestic Russian market, and to non-Russian FSU markets such as the Ukraine and
Byelorussia, generally referred to as the "near abroad". Sales in the domestic
and near abroad markets are made in batches, when sufficient quantities of
produced oil are available to sell and there are no spot prices are published
that apply to these markets. The markets are established by individual
transactions, for which the buyers and sellers generally hold the prices
confidential.
Consequently, Teton used the Urals Blend benchmark with a -$2.43 basis
adjustment for its export sales, while polling Moscow based oil trading firms
for year-end prices for the domestic and near-abroad markets and using the
lowest price returned in the polls. The prices used were $25.00/barrel for
export, $18.00 per barrel for the near abroad, and $15.00/barrel for the
domestic market. Sales were allocated to the three markets at 35% European, 10%
FSU, and 55% Russia, which is approximately the historic allocation.
The results are net to Teton and include the impact of the production payments
due MOT, and financing and debt repayment. Cash flow amounts assume 50%
economics net to Teton without payout. Teton's net share is 50% before payout
and 35.295% after payout.
The present value of estimated future net revenues as of January 1, 2004, has
been adjusted for Russian profits taxes, but not U.S. income taxes. Teton is not
currently incurring any repatriation tax liability due to the structuring of
capital input as a loan. Management believes that future repatriation tax
liabilities will not be incurred if profits from this project are invested in
other projects within Russia. If Teton does not incur repatriation tax liability
for the life of this project, the undiscounted total before and after tax cash
flow, after production payments would be $52.51 and $39.34 million or,
discounted at 10%, $35.42 and $26.16 million, for total proved reserves.
25
Capital expenditures required to achieve the above cash flows are estimated at
$7.88 million net to Teton for development of proved reserves. Based on our
reserve analysis, we expect that cash flow from operations will fully cover both
operating expenses and capital investment starting in 2005.
Teton's current agreement with MOT requires ^the two companies each fund half of
the capital expenditures required for development. In the event we are unable to
fund our portion of the capital expenditures and MOT proceeds with the planned
development, our share of the oil production will be decreased. The reverse is
also true.
As discussed in the Business section of this filing, MOT and its affiliates were
sold in September 2003 to OAO NK RussNeft, a Russian independent oil producer.
Russneft succeeds Mediterranean Overseas Trust as operator of the Goloil license
but as before, Teton and Russneft jointly develop the capital budget for the
license and share other key decision-making. The 50% production payment made by
Goloil continues in effect and it is Teton's view that the agreements with MOT
governing Goloil's operations remain in effect until new agreements, now being
negotiated, are in place.
Until cash flow from operations is sufficient to fund operating expenses and
capital investment, Teton must raise additional capital or obtain debt financing
to fund its portion of capital expenditures or its interest in the oil
production will be reduced. There can be no assurance that Teton will be
successful in raising such additional funds.
Changes to the Reserve Report from Prior Period
The following table summarizes the changes that took place when the report was
updated:
Reserves and Production, millions of barrels, Net to Teton
For the Years Ended
December 31,
2003 2002
==== ====
-------------------------------------
Proved reserves (bbls), beginning of period 13,264,000 30,603,000
=========================================== =========== ===========
Production (704,024) (471,233)
========== =========== ===========
Deduction of minority interest share (802,097) -
==================================== =========== ===========
Revisions of previous estimates (3,707,835) (16,867,767)
=============================== =========== ============
Proved reserves (bbls), end of period 8,050,044 13,264,000
===================================== =========== ============
Proved Developed reserves (bbls), beginning of period 4,567,000 5,493,000
===================================================== =========== ============
Proved Developed reserves (bbls), end of period 1,898,368 4,567,000
=============================================== =========== ============
(1)The production payment oil and approximate 30% minority interest (after
payout) share of the reserves of Goloil have been deducted from all these
numbers.
(2)Proved developed reserves as of 12/31/03 have been reduced by 1,544,474 bbls
out of the total 3,123,779 bbls of Teton's share of the production payment. The
remaining production payment quantity of 1,579,305 bbls of Teton's share assumes
payment from proved undeveloped reserves to be developed in the future.
In the revised reserve report, Teton's proved reserves declined from 13.26
million barrels to 8.05 million barrels of which 704 thousand barrels reflected
production during 2003. Of remaining decline, the largest portion, 3.71 million
barrels, was due to a revision from the previous estimate. In particular, the
performance of several of the Company's Jurassic formation wells led its
engineers to reduce the anticipated primary (before waterflood) recovery of
reserves and revise their opinion concerning the necessity of waterflooding.
While the Company anticipates it will eventually recover most of the reduction
in reserves through waterflooding, SEC regulations do not permit the inclusion
of such reserves in the proven category in the absence of either a pilot program
or formal written commitment by the operator and non-operators in a project to
commence the waterflood project. The Company also removed several Jurassic
locations from the proved category, either because they were deemed uneconomic
for primary production alone, based on the performance of offsetting Jurassic
producing wells or in two cases because the operator and Company have not yet
formally agreed to drill them. The company expects to restore the reserves from
the two wells to the proven category when they are drilled.
26
A second factor for the decline in proven reserves in 2003 was the Company's
decision to deduct from its reserve estimate the 802 thousand barrels belonging
to certain minority interests in Goloil. These interests are not entitled to any
revenues from the project until such time as Teton and MOT have recovered their
investment in the Goloil license.
Finally, as previously reported in its Form 10-K for the year ended December 31,
2002, the Company recorded a decline in its reserves for the year 2002 of 16.87
million barrels. The majority of the reserve reduction in this period was
attributable to revision of the geologic maps of the license area based on new
and reprocessed seismic data and interpretations. The new interpretation led to
a reduction in the number of anticipated drilling locations and with them,
reserves.
Developed And Undeveloped Acreage
The following table sets forth the total gross and net developed acres and total
gross and net underdeveloped acres subject to the Goloil License as of December
31, 2003:
Eguryak License Area:
Total Developed Acres
Gross 1,049
Net 525
Total Proved Undeveloped Acres
Gross 1,494
Net 747
Total Other Undeveloped Acres
Gross 6,481
Net 3,241
Our offices are located in Denver, Colorado. We lease our offices from an
unaffiliated third party. This year we also opened a representative
office in Moscow, also leased from an unaffiliated third party.
Legal Proceedings
Teton currently is not a party to any material legal proceedings.
27
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Directors, executive officers, and significant employees of Teton, their
respective ages and positions with Teton are as follows:
Name Age Position
---- --- --------
H. Howard Cooper 46 Chairman and Founder
Karl F. Arleth 54 President, CEO, Secretary and Director
Igor Effimoff 57 Executive VP and COO
James J. Woodcock 65 Director
Thomas F. Conroy 64 Director
John Connor 62 Director
John Mahar 49 Chief Financial Officer
Ilia Gurevich 39 Controller
H. HOWARD COOPER, has been our chairman and founder since 1996. Mr. Cooper was
our president and CEO from 1996 until May 2003. Mr. Cooper founded American
Tyumen in November 1996. He served as a director and president of American
Tyumen until the merger with EQ. Since the merger, he has held these same
positions with Teton. From 1992 to 1994 Mr. Cooper served with AIG, an insurance
group. In 1994, he was a principal with Central Asian Petroleum, an oil and gas
company with its primary operations in Kazakhstan, located in Denver, Colorado.
Mr. Cooper has a bachelor's degree from the University of Colorado in business
and a master's degree from Columbia University, NYC in international affairs.
KARL F. ARLETH, has been our president and CEO since May 2003 and our director
since 2002. Mr. Arleth is the Chief Operating Officer and a Board member of
S9efton Resources, Inc. Ending in 1999, Mr. Arleth spent 21 years with Amoco and
BP-Amoco. In 1998 he chaired the Board of the Azerbaijan International Operating
Company (AIOC) for BP-Amoco in Baku, Azerbaijan. Concurrently in 1997-98, he was
also President of Amoco Caspian Sea Petroleum Ltd. in Azerbaijan and Director of
Strategic Planning for Amoco Corporations Worldwide Exploration and Production
Sector in Chicago. From 1992 to 1996 Mr. Arleth was President of Amoco Poland
Ltd. in Warsaw, Poland.
IGOR EFFIMOFF. Mr. Effimoff was most recently President of Pennzoil Caspian
Corporation, managing the company's interests in the Caspian Region. This
included the Azerbaijan International Oil Consortium (AIOC), formed to develop
the 4.5 BBO Azeri-Chirag-Guneshli (ACG) Fields. He started his career in 1972 as
a geologist with Shell and since 1981 has worked with several US domestic and
international oil and gas companies in a senior management capacity
THOMAS F. CONROY, has been our chief financial officer since March 2002,
secretary since April 2002, and director since 2002. Mr. Conroy is a Certified
Public Accountant with an MBA from the University of Chicago. Since 2002, Mr.
Conroy has been a principal member of Mann-Conroy-Eisenberg & Assoc. LLC, a life
insurance and reinsurance consulting firm. Since 2001, Mr. Conroy has been a
managing principal of Strategic Reinsurance Consultants International LLC, a
life reinsurance consulting and brokerage firm. Ending in 2001, Mr. Conroy,
spent 27 years with ING and its predecessor organizations, serving in various
financial positions and leading two of its strategic business units as
President. As President of ING Reinsurance, he established their international
presence, setting up facilities in The Netherlands, Bermuda, Ireland and Japan.
He also served as an Officer and Board Member of Security Life of Denver
Insurance Company and its subsidiaries.
JAMES J. WOODCOCK has been a director since 2002. Since 1981, Mr. Woodcock has
been the owner and CEO of Hy-Bon Engineering Company, based in Midland, Texas.
Hy-Bon is an engineering firm and manufacturer of vapor recovery, gas boosters,
and casing pressure reduction systems for the oil industry. Since 1996, Mr.
Woodcock has been a board member of Renovar Energy, a private firm located in
Midland Texas. From 1997 to 2002, Mr. Woodcock was the chairman of Transrepublic
Resources, a private firm located in Midland Texas.
JOHN CONNOR became a director in 2003 and chairs the Board's audit committee. He
is the Founder and Portfolio Manager of the Third Millennium Russia Fund, a US
based mutual fund specializing in the equities of Russian public companies. A
former attorney at Cravath, Swaine & Moore in New York City, he has been a
partner in leading law firms in New York, Washington and New Jersey. Mr. Connor
is a member of the Council on Foreign Relations and the American Law Institute.
JOHN MAHAR. Since 1995, Mr. Mahar has been a Managing Director of Gladstone
Capital, LLC, an oil-and-gas financial advisory firm based in New York he
28
co-founded. Prior to forming Gladstone Capital, Mr. Mahar worked in the New York
office of Schroder Capital Management International, Inc. where he was
responsible for the firm's domestic U.S. investment operations. He started his
career at the Federal Reserve Bank of New York, where he served as an analyst
and foreign exchange trader. He has a B.A. from Union College ('76) and an MBA
from the Simon School of Business at the University of Rochester ('78)
ILIA GUREVICH. Mr. Gurevich attended both University of Saratov and University
Colorado graduating with Masters in Science and Economy of the Machine
Construction Industry and a Masters of Science in Finance respectively. His
US-Russia business relations date back to his work at Technoforce Saratov where
he was responsible for database of oil fields, budgeting, and financial support
for the projects. Most recently, Mr. Gurevich performed security analysis for
mid and large-cap publicly traded companies until he became full time Controller
of Teton.
All directors serve as directors for a term of one year or until his successor
is elected and qualified. All officers hold office until the first meeting of
the board of directors after the annual meeting of stockholders next following
his election or until his successor is elected and qualified. A director or
officer may also resign at any time.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee and an Audit Committee. The
Compensation Committee and Audit Committee currently consists of one director
James J. Woodcock. Mr Woodcock is an independent director based on Rule
4200(a)(15) of the NASD's listing standards. We are currently seeking another
independent director to join Mr. Woodcock.
The purpose of the Compensation Committee is to review the Company's
compensation of its executives, to make determinations relative thereto and to
submit recommendations to the Board of Directors with respect thereto in order
to ensure that such officers and directors receive adequate and fair
compensation. The Compensation Committee did not meet during the last fiscal
year.
During the fiscal year ending 2003, the Audit Committee will be responsible for
the general oversight of audit, legal compliance and potential conflict of
interest matters, including (a) recommending the engagement and termination of
the independent public accountants to audit the financial statements of the
Company, (b) overseeing the scope of the external audit services, (c) reviewing
adjustments recommended by the independent public accountant and addressing
disagreements between the independent public accountants and management, (d)
reviewing the adequacy of internal controls and management's handling of
identified material inadequacies and reportable conditions in the internal
controls over financial reporting and compliance with laws and regulations, and
(e) supervising the internal audit function, which may include approving the
selection, compensation and termination of internal auditors.
The Audit Committee did not meet during the last fiscal year because it was
approved late in the 2002 year by the Board of Directors and was not formally in
place to perform its functions. However, the responsibilities of the Audit
Committee during 2002 were conducted by the board of directors. Effective as of
February 17, 2003, the Board of Directors adopted a charter for the Audit
Committee detailing its duties and powers. A copy of the Audit Committee charter
is included as Exhibit A to this Form 10KSB.
For the fiscal year ended 2002, the Board of Directors conducted discussions
with management and the independent auditor regarding the acceptability and the
quality of the accounting principles used in the reports in accordance with
Statements on Accounting Standards (SAS) No. 61,. These discussions included the
clarity of the disclosures made therein, the underlying estimates and
assumptions used in the financial reporting and the reasonableness of the
significant judgments and management decisions made in developing the financial
statements. In addition, the board of directors discussed with the independent
auditor the matters in the written disclosures required by Independence
Standards Board Standard No. 1.
For the fiscal year ended 2002, the Board of Directors have also discussed with
management and its independent auditors issues related to the overall scope and
objectives of the audits conducted, the internal controls used by the Company,
and the selection of the Company's independent auditor. Additional meetings were
held with the independent auditor, with financial management present, to discuss
the specific results of audit investigations and examinations and the auditor's
judgments regarding any and all of the above issues.
Pursuant to the reviews and discussions described above, the Board of Directors
recommended that the audited financial statements be included in the Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2001 and 2000 for
filing with the Securities and Exchange Commission.
Code of Ethics
The Company has adopted its Code of Ethics and Business Conduct for Officers,
Directors and Employees that applies to all of the officers, directors and
employees of the Company.
29
EXECUTIVE COMPENSATION.
The following table sets forth information concerning the compensation received
by Mr. Howard Cooper, the President of Teton, who serves as its chief executive
officer for the last three fiscal years:
Summary Compensation Table
Other
Annual
Name & Compen- Restricted LTIP All Other
Principal Salary Bonus sation Stock Options Payouts Compensation
Position Year ($) ($) ($) Awards SARs ($)(1) ($)
---------------------------------------------------------------------------------------------------------------
H. Howard 2002 160,000 50,000 0 0 4,500,000 0 0
Cooper, 2001 210,000 0 0 0 0 0 0
President 2000 17,000 0 0 0 1,000,000 0 0
1. In consideration of services rendered, Mr. Cooper received 4,500,000 warrants
to purchase shares of our common stock at an exercise price of $.27 which was
the market price of our common stock on the date of the grant.
Stock Options.
During the year ended December 31, 2002, Mr. Cooper did not have any options.
Employee Pension, Profit Sharing or Other Retirement Plans.
The Company does not have a defined benefit, pension plan, profit sharing, or
other retirement plan.
Compensation of Directors.
The Company pays a quarterly fee of $6,000 to its outside directors and
reimburses them for their travel and other related expenses incurred in the
exercise of their duties.. In the Company's sole discretion, the Company may
issue stock options or warrants to its directors.
Employment Contracts.
Teton and Mr. Cooper entered into a new employment agreement, effective May 1,
2002. The employment agreement is for a three year term. Mr. Cooper's initial
salary under the agreement is $13,333 per month. In the board's discretion, he
may receive additional bonus compensation. Mr. Cooper's employment is terminated
immediately upon his death or permanent disability. Teton may also terminate Mr.
Cooper's employment immediately for cause, as defined in the agreement. Mr.
Cooper may terminate his employment immediately for good reason, as defined in
the agreement. Additionally, either Teton or Mr. Cooper may terminate Mr.
Cooper's employment upon 60 days prior written notice to the other. Upon
termination of Mr. Cooper's employment without cause by Teton or for good reason
by Mr. Cooper, Mr. Cooper is entitled to severance pay. The severance pay is
equal to Mr. Cooper's salary for the preceding 24 months. Such severance may be
paid in monthly installments over 24 months from the date of termination. Teton
may discontinue the severance payments if Mr. Cooper violates the
confidentiality, ^non-competition, or ^non-solicitation provisions of his
employment agreement. After the third year, the agreement is automatically
renewed from year to year, unless it is terminated as provided above.
Mr. Cooper's new agreement replaced the employment agreement dated effective
December 1, 2000 (the "2000 Employment Agreement"). The 2000 Employment
Agreement provided for an initial term of two years and an initial salary of
$17,500 per month. The 2000 Employment Agreement also provided that upon the
termination of Mr. Cooper without his consent, except for terminations related
to a criminal conviction, death, disability, incapacity, bankruptcy, insolvency,
gross negligence, gross dereliction of duty, or gross misconduct, that Mr.
Cooper was entitled to a lump sum payment equal to three months salary, based on
the salary being paid to Mr. Cooper at the date of termination.
30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 2001, Mr. Cooper loaned $137,000 to Teton. Such loan, together with interest
at 8.28% per annum was due on February 1, 2002. The due date was subsequent
extended to April 15, 2002, and was paid in full in April 2002.
Management believes that the terms of these transactions with its management
were at least as favorable to the Company as those terms which the Company could
have obtained from unrelated third parties through arms-length negotiations.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth, as of January 23, 2004, the number of and
percent of our common stock beneficially owned by (a) all directors and
nominees, naming them, (b) our executive officers, (c) our directors and
executive officers as a group, without naming them, and (d) persons or groups
known by us to own beneficially 5% or more of our common stock:
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
H. Howard Cooper 1,214,667 (1) 12.6%
1600 Broadway, Suite 2400
Denver, Colorado 80202-4921
Karl Arleth 608,334 (3) 7.3%
P.O. Box 23507
0467 Lariat Loop
Silverthorne, CO 80498
James J. Woodcock 608,334 (2) 6.7%
2404 Commerce Drive
Midland, TX 79702
John Connor 467,108 (8) 5.3%
1600 Broadway, Suite 2400
Denver, Colorado 80202-4921
Igor Effimoff 92,101 (4) 1.1%
13134 Hermitage Lane
Houston, TX 77079
John Mahar 83,334 (5) 1.0%
7 West 73rd St.
New York, NY 10023
Thomas F. Conroy 83,334 (6) 1.0%
3825 S. Colorado Blvd.
Denver, CO 80110
Ilia Gurevich 34,770 (7) 0.4%
1804 South Ironton Street
Aurora, CO 80012
^
All executive officers and
Directors as a group (7 persons) 3,193,982 28.19%
(1) Includes (i) 145,857 shares of common stock, (ii) 465,521 shares underlying
warrants and (iii) 603,289 shares underlying warrants exercisable at $3.48 per
share.
(2) Includes (i) 100,963 shares of common stock, (ii) 297,223 shares underlying
warrants and (iii) 210,148 shares underlying warrants exercisable at $3.48 per
share.
(3) Includes (i) 75,772 shares of common stock, (ii) 197,995 shares underlying
warrants and (iii) 410,339 shares underlying warrants exercisable at $3.48 per
share.
(4) Includes (i) 89,815 shares underlying warrants exercisable at $3.48 per
share, (ii) 1,905 shares underlying Series A Convertible Preferred Stock, and
(iii) 381 shares underlying Class B Common Stock Purchase Warrants.
(5) Represents 83,334 shares of underlying warrants exercisable at $3.48 per
share.
31
(6) Includes (i) 15,972 shares of common stock, (ii) 38,704 shares underlying
warrants and (iii) 28,658 shares underlying warrants exercisable at $3.48 per
share.
(7) Represents 24,456 shares of underlying warrants exercisable at $3.48 per
(8) Includes (i) 183,554 shares of common stock owned indirectly, (ii) 183,554
shares shares of common stock underlying warrants, which owned indirectly, and
(iii)100,000 shares of common stock underlying options exercisable at $3.40 per
share share.
DESCRIPTION OF SECURITIES BEING REGISTERED
The following description of our capital stock is a summary and is qualified in
its entirety by the provisions of our Articles of Incorporation, with
amendments, all of which have been filed as exhibits to our registration
statement of which this prospectus is a part.
Our Amended Articles of Incorporation authorize the issuance of 250,000,000
shares of common stock, $.001 par value per share. Holders of shares of common
stock are entitled to one vote for each share on all matters to be voted on by
the stockholders. Holders of common stock have cumulative voting rights. Holders
of shares of common stock are entitled to share ratably in dividends, if any, as
may be declared, from time to time by the Board of Directors in its discretion,
from funds legally available therefor. In the event of a liquidation,
dissolution, or winding up of the Company, the holders of shares of common stock
are entitled to share pro rata all assets remaining after payment in full of all
liabilities. Holders of common stock have no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares. The Board of Directors, from time to
time in its sole discretion, has the authority to fix the powers, rights,
qualifications, limitations, and restrictions pertaining to the preferred stock.
PLAN OF DISTRIBUTION
The selling stockholder and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholder may use any one or more of the
following methods when selling shares:
-- ordinary brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
-- block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
-- purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;
-- an exchange distribution in accordance with the rules of the applicable
exchange;
-- privately-negotiated transactions; -- short sales; -- broker-dealers may
agree with the selling stockholder to sell a specified number of such shares at
a stipulated price per share; and -- a combination of any such methods of sale.
In the event sales are made to broker-dealers as principals, we would be
required to file a post-effective amendment to the registration statement of
which the prospectus forms a part. In such post-effective amendment, we would be
required to disclose the names of any participating broker-dealers and the
compensation arrangements relating to such sales. In addition, if any shares of
common stock or warrants offered for sale pursuant to this prospectus are
transferred, subsequent holders could not use this prospectus until a
post-effective amendment is filed, naming such holders.
The selling stockholder may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
The selling stockholder may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares.
The selling stockholder may also engage in short sales against the box, puts and
calls and other transactions in our securities or derivatives of our securities
and may sell or deliver shares in connection with these trades. The selling
stockholder may pledge their shares of common stock to their brokers under the
margin provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares.
Broker-dealers engaged by the selling stockholder may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholder (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholder do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
32
The selling stockholder shall be deemed to be an "underwriter" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholder,
but excluding brokerage commissions or underwriter discounts. We and the selling
stockholder have agreed to indemnify each other against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act.
Penny Stock
The Securities and Exchange Commission (the "Commission") has adopted Rule 15g-9
which establishes the definition of a "penny stock," for the purposes relevant
to us, as any equity security that has a market price of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require: (i) that a broker or dealer approve a person's account for
transactions in penny stocks; and (ii) the broker or dealer receive from the
investor a written agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased. In order to approve a person's
account for transactions in penny stocks, the broker or dealer must (i) obtain
financial information and investment experience objectives of the person; and
(ii) make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks. The broker or dealer must also deliver, prior to any transaction
in a penny stock, a disclosure schedule prepared by the Commission relating to
the penny stock market, which, in highlight form, (i) sets forth the basis on
which the broker or dealer made the suitability determination; and (ii) that the
broker or dealer received a signed, written agreement from the investor prior to
the transaction. Disclosure also has to be made about the risks of investing in
penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
33
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
Shares Beneficially Owned Shares Beneficially Owned
Prior to the Offering After the Offering
------------------------- --------------------------
Total
Shares
Name Number Percent Registered Number Percent
------------------------------------- -------- -------- ------------ -------- ---------
The Leopard-Alliance Company Limited 448,276 5.1% 448,276 (1) 0 0
Mr. Lawrence C. McQuade 22,989 0.3% 22,989 (2) 0 0
TPR Investment Associates Inc. 23,000 0.3% 23,000 (3) 0 0
Tradewinds Russia Value Fund LLC 98,471 0.7% 44,828 (4) 0 0
Tradewinds Offshore Fund 167,857 0.6% 44,828 (5) 0 0
Tradewinds Debt Strategies Fund, LP 119,775 1.1% 67,242 (6) 0 0
Thomas B. Akin 195,000 2.2% 195,000 (7) 0 0
Talkot Crossover Fund, LP 346,500 3.4% 292,500 (8) 0 0
Global Undervalued Securities Master
Fund, LP 879,842 5.7% 179,400 (9) 0 0
Tradewinds Offshore Fund 85,000 2.2% 190,517 (10) 0 0
Tradewinds Russia Value Fund, LLC 15,000 0.4% 33,620 (11) 0 0
Elm City Industrial Properties, Inc. 22,414 0.3% 22,414 (12) 0 0
Steven J. DiCapua 22,414 0.3% 22,414 (13) 0 0
Joseph E. Luzzi 22,414 0.3% 22,414 (14) 0 0
Fred Ehrman 112,069 1.3% 112,069 (15) 0 0
RFJM Partners LLC 112,067 1.3% 112,067 (16) 0 0
Millennium Global High Yield Fund Limited 448,276 5.1% 448,276 (17) 0 0
Igor Effimoff 38,900 0.5% 3,715 (18) 0 0
Dan Yergin 58,621 0.7% 33,620 (19) 0 0
Pictet Private Equity Investors SA 112,071 1.3% 112,070 (20) 0 0
Volga Fund LP 117,019 0.9% 45,977 (21) 0 0
Mahler & Emerson, Inc. 25,759 0.3% 22,425 (22) 0 0
Talkot Crossover Fund, LP 43,500 1.1% 97,500 (23) 0 0
Bank of America Securities FBO Thomas B.
Akin 97,500 1.1% 97,500 (24) 0 0
Porter Partners, LP 112,125 1.3% 112,125 (25) 0 0
EDJ Limited 44,850 0.5% 44,850 (26) 0 0
Baystar Capital II, LP 224,138 2.6% 224,139 (27) 0 0
North Sound Legacy International Limited 125,517 1.5% 125,518 (28) 0 0
North Sound Legacy Institutional Fund LLC 88,534 1.0% 88,534 (29) 0 0
North Sound Legacy Fund LLC 10,086 0.1% 10,085 (30) 0 0
Goldman Sachs Securities Nominees 67,242 0.8% 67,242 (31) 0 0
Crestview Capital Fund II, LP 269,100 3.1% 269,100 (32) 0 0
34
Nebann Group 8,966 0.1% 8,966 (33) 0 0
Adams Market Neutral Fund 89,655 1.0% 89,655 (34) 0 0
Conestoga Partners Holdings LP 17,931 0.2% 17,931 (35) 0 0
CM Market Neutral Fund, LP 89,655 1.0% 89,655 (36) 0 0
Adams Select Fund LP 71,724 0.8% 71,724 (37) 0 0
Edward and Edna Elbaor 8,966 0.1% 8,966 (38) 0 0
Enza Vitiello 90,417 1.0% 48,750 (39) 0 0
MRB Investor Relations 18,829 0.2% 18,829 (40) 0 0
Wyatt Haskell 301,723 2.4% 78,000 (41) 0 0
EPM Holding AG 97,500 1.1% 97,500 (42) 0 0
EPM AG 39,000 0.5% 39,000 (43) 0 0
Kurt Freimann 19,500 0.2% 19,500 (44) 0 0
Gudrun Eiz 19,500 0.2% 19,500 (45) 0 0
Berkin Business SA 48,750 0.6% 48,750 (46) 0 0
4P Management Partners AG 9,750 0.1% 9,750 (47) 0 0
Columbia Marketing Ltd. 23,400 0.3% 23,400 (48) 0 0
Amaranth LLC 224,137 2.6% 224,137 (49) 0 0
C.R. Bailey 26,584 0.2% 11,207 (50) 0 0
R.F. Bailey 52,672 0.4% 11,207 (51) 0 0
EuroFinance, Inc. 434,076 4.0% 2,300 (52) 0 0
The Shemano Group 85,214 1.0% 85,214 (53) 0 0
Linvar Enterprises Limited 60,959 0.7% 60,959 (54) 0 0
Brill Securties, Inc 53,750 0.6% 50,000 (55) 0 0
Shimmerlik 55,628 0.6% 55,628 (56) 0 0
The number and percentage of shares beneficially owned is determined in
accordance with Rule13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the convertible preferred stock is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
1. Includes 200,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
Tarek Obeid has voting and investment power of the securities owned by
such entity.
2. Represents shares of common stock underlying series A convertible
preferred stock that are currently exercisable on a 1 for 1 basis.
3. Represents shares of common stock underlying series A convertible
preferred stock that are currently exercisable on a 1 for 1 basis.
4. Includes 20,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
5. Includes 20,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
6. Includes 30,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
7. Includes 87,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
8. Includes 130,500 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
9. Includes 80,040 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
John Klienheinz has voting and investment power of the securities
owned by such entity.
10. Includes 85,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
11. Includes 15,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
12. Includes 10,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
13. Includes 10,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
14. Includes 10,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
35
15. Includes 50,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
16. Includes 49,999 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
17. Includes 200,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
Joseph Strubel has voting and investment power of the securities owned
by such entity.
18. Includes 1,657 shares of common stock underlying class B warrants that
are currently exercisable an exercise price of $6.00 per share.
19. Includes 15,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
20. Includes 50,001 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
21. Represents shares of common stock underlying series A convertible
preferred stock that are currently exercisable on a 1 for 1 basis.
22. Includes 10,005 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
23. Includes 43,500 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
24. Includes 43,500 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
25. Includes 50,025 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
26. Includes 20,010 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
27. Includes 100,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
28. Includes 56,000 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
29. Includes 39,500 shares of common stock underlying class B warrants
that are currently exercisable an exercise price of $6.00 per share.
30. Includes 4,500 shares of common stock underlying class B warrants that
are currently exercisable an exercise price of $6.00 per share.
31. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 30,000 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
32. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 120,060 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
36
33. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 4,000 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
34. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 40,000 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
35. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 8,000 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
36. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 40,000 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
37. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 32,000 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
38. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 4,000 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
39. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 21,750 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
40. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 8,401 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
41. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 34,800 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
42. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 43,500 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
43. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 17,400 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
44. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 8,700 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
45. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 8,700 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
46. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 21,750 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
37
47. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 4,350 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
48. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 10,440 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
49. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 100,000 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
50. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 5,000 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
51. Represents (i) shares of common stock underlying series A convertible
preferred stock; and (ii) 5,000 shares of common stock underlying
class B warrants that are currently exercisable an exercise price of
$6.00 per share.
52. Represents 2,300 of common stock underlying class B warrants that are
currently exercisable an exercise price of $6.00 per share.
53. Represents 85,214 of common stock underlying class B warrants that are
currently exercisable an exercise price of $6.00 per share.
54. Represents 60,959 of common stock underlying class B warrants that are
currently exercisable an exercise price of $6.00 per share.
55. Represents 50,000 of common stock underlying class B warrants that are
currently exercisable an exercise price of $6.00 per share.
56. Includes 50,000 shares of common stock underlying options currently
exercisable at an exercise price of $5.00.
38
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be passed
upon for us by Sichenzia Ross Friedman Ference LLP, New York, New York.
EXPERTS
Our consolidated financial statements at December 31, 2001 and 2002 appearing in
this prospectus and registration statement have been audited by Ehrhardt Keefe
Steiner & Hottman PC, independent auditors, as set forth on their report
thereon appearing elsewhere in this prospectus, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Teton Petroleum Company, filed as part
of the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission ("SEC").
We are subject to the informational requirements of the Securities Exchange Act
of 1934 (the "Exchange Act") which requires us to file reports, proxy statements
and other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549; Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 5670 Wilshire Boulevard, Los Angeles, California 90036.
Copies of such material can be obtained from the Public Reference Section of the
SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
HTTP://WWW.SEC.GOV. ------------------
We furnish our stockholders with annual reports containing audited financial
statements.
39
Index to Financial Statements
Teton Petroleum Company
Unaudited Consolidated Financial Statements September 30, 2003
Financial Statements...........................................................F-1
CONSOLIDATED BALANCE SHEETS....................................................F-2
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS.................F-3 - F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS..........................................F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-6 - F-10
Audited Consolidated Financial Statements December 31, 2002
INDEPENDENT AUDITORS' REPORT...................................................F-11
Financial Statements........................................................F-12 - F-31
CONSOLIDATED BALANCE SHEET.....................................................F-12
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS...................F-13
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY......................F-14
CONSOLIDATED STATEMENTS OF CASH FLOWS..........................................F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-16 - F-31
F-1
TETON PETROLEUM COMPANY
Consolidated Balance Sheets
September 30, December 31,
2003 2002
(Unaudited)
Assets ------------ ------------
Current assets
Cash ....................................................................... $ 1,955,253 $ 712,013
Proportionate share of Goloil accounts receivable .......................... 19,121 642,525
Proportionate share of Goloil VAT and other accounts receivable ............ 1,857,283 913,583
Stock subscriptions receivable ............................................. -- 1,939,610
Proportionate share of Goloil inventory .................................... 979,360 502,989
Prepaid expenses and other assets .......................................... 90,992 91,446
------------ ------------
Total current assets .................................................. 4,902,009 4,802,166
------------ ------------
Non-current assets
Oil and gas properties, net (successful efforts) ........................... 10,488,152 4,896,308
Fixed assets, net .......................................................... 419,256 313,921
------------ ------------
Total non-current assets ............................................. 10,907,408 5,210,229
------------ ------------
Total assets .................................................................. $15,809,417 $10,012,395
============ ============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable and accrued liabilities ................................... $ 233,104 $ 650,356
Proportionate share of Goloil accounts payable and accrued liabilities (Note
2) 3,745,121 1,534,344
Current portion of proportionate share of notes payable owed to affiliate
(Note 2) ................................................................ 5,107,805 2,441,424
Notes payable, net of discount of $47,907 .................................. 580,843 --
------------ ------------
Total current liabilities ............................................ 9,666,873 4,626,124
------------ ------------
Non-current liabilities
Proportionate share of notes payable advances owed to affiliate ............ -- 507,001
------------ ------------
Total non-current liabilities ........................................ -- 507,001
------------ ------------
Total liabilities .................................................... 9,666,873 5,133,125
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock, $0.001 par value, 250,000,000 and 100,000,000 shares
authorized, 6,807,360 and 6,289,520 shares issued and outstanding at
September 30, 2003 and December 31, 2002 ................................ 6,807 6,290
Preferred stock, $0.001 par value, 25,000,000 shares authorized, 606,335
shares issued and outstanding ........................................... 606 --
Additional paid-in capital ................................................. 30,193,042 26,165,214
Accumulated deficit ........................................................ (25,163,412) (22,022,734)
Foreign currency translation adjustment .................................... 1,105,500 730,500
------------ ------------
Total stockholders' equity ........................................... 6,142,545 4,879,270
------------ ------------
Total liabilities and stockholders' equity .................................... $15,809,417 $10,012,395
============ ============
See notes to unaudited consolidated financial statements
F-2
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Operations and Comprehensive Loss
For the Three Months Ended
September 30,
--------------------------
2003 2002
----------- -----------
Sales ...................................................... $ 2,718,066 $ 2,204,613
Cost of sales and expenses
Oil and gas production .................................. 618,141 664,241
Transportation and marketing ............................ 199,446 189,115
Taxes other than income taxes ........................... 1,486,250 1,172,574
Export duties ............................................ 334,789 295,356
General and administrative - Goloil ..................... 261,420 149,091
General and administrative - Teton Petroleum ............ 921,761 439,061
Depreciation, depletion and amortization ................ 274,538 68,419
------------ ------------
Total cost of sales and expenses .................. 4,096,346 2,977,856
------------ ------------
(Loss) income from operations .............................. (1,378,279) (773,243)
------------ ------------
Other income (expense)
Other income ............................................. (1,522) 700
Financing charges ....................................... (61,569) (1,390,951)
Interest expense ........................................ (55,034) (52,675)
------------ ------------
Total other income (expense) ...................... (118,125) (1,442,926)
------------ ------------
Net loss before taxes ...................................... (1,496,404) (2,216,169)
------------ ------------
Foreign income tax ......................................... 18,870 --
Net loss ................................................... (1,477,534) (2,216,169)
------------ ------------
Preferred stock dividend ................................... (18,556) --
Net loss applicable to common stock ........................ (1,496,090) (2,216,169)
Other comprehensive (loss) income, net of tax
Effect of exchange rates ................................ (80,590) 20,000
------------ ------------
Other comprehensive (loss) income ................. (80,590) 20,000
------------ ------------
Comprehensive loss ......................................... $(1,576,590) $(2,196,169)
============ ============
Basic and diluted weighted average common shares outstanding 6,807,360 2,803,934
============ ============
Basic and diluted (loss) income per common share ........... $ (0.22) $ (0.78)
============ ============
See notes to unaudited consolidated financial statements.
F-3
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Operations and Comprehensive Loss
For the Nine Months Ended
September 30,
----------------------------
2003 2002
------------- -------------
Sales ...................................................... $ 9,105,338 $ 4,305,274
Cost of sales and expenses
Oil and gas production .................................. 1,456,857 882,202
Transportation and marketing ............................ 801,245 398,389
Taxes other than income taxes ........................... 4,163,956 2,249,313
Export Duties ........................................... 1,492,999 448,338
General and administrative - Goloil ..................... 648,905 383,419
General and administrative - Teton Petroleum ............ 2,675,683 1,950,258
Depreciation, depletion and amortization ................ 662,769 149,806
------------- -------------
Total cost of sales and expenses .................. 11,902,415 6,461,725
------------- -------------
Loss from operations ....................................... (2,797,076) (2,156,451)
------------- -------------
Other income (expense)
Other income ............................................ 0 2,508
Financing charges ....................................... (61,916) (5,444,901)
Interest expense ........................................ (178,139) (328,938)
------------- -------------
Total other income (expense) ...................... (240,055) (5,771,331)
------------- -------------
Net loss before taxes ...................................... (3,037,131) (7,927,782)
Foreign income tax ......................................... (103,548) --
Net loss ................................................... (3,140,679) (7,927,782)
------------- -------------
Preferred stock dividend ................................... (18,556) --
Net loss applicable to common stock ........................ (3,159,235) (7,927,782)
Other comprehensive (loss) income, net of tax
Effect of exchange rates ................................ 375,000 (112,000)
------------- -------------
Other comprehensive (loss) income ................. 375,000 (112,000)
------------- -------------
Comprehensive loss ......................................... $ (2,784,235) $(8,039,782)
============= =============
Basic and diluted weighted average common shares outstanding 6,614,638 2,500,058
============= =============
Basic and diluted (loss) income per common share ........... $ (0.48) $ (3.17)
============= =============
See notes to unaudited consolidated financial statements.
F-4
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30,
---------------------------
2003 2002
------------ ------------
Cash flows from operating activities
Net loss ................................................................. $(3,140,679) $(7,927,782)
------------ ------------
Adjustments to reconcile net (loss) income to net cash used in operating
activities
Depreciation, depletion, and amortization .............................. 628,458 149,806
Stock and stock options issued for services and interest ............... 97,901 14,227
Debentures issued for services ......................................... -- 211,313
Amortization of note payable discount .................................. 62,257 5,327,989
Changes in assets and liabilities
Accounts receivable .................................................. (320,296) (787,856)
Prepaid expenses and other assets .................................... 454 (259,001)
Inventory ............................................................ (476,371) (187,846)
Accounts payable and accrued liabilities ............................. 106,968 121,328
------------ ------------
99,371 4,589,960
------------ ------------
Net cash used in operating activities .............................. (3,041,307) (3,337,822)
------------ ------------
Cash flows from investing activities
Oil and gas properties and equipment expenditures ........................ (4,437,637) (2,593,207)
------------ ------------
Net cash used in investing activities ............ (4,437,637) (2,593,207)
------------ ------------
Cash flows from financing activities
Net (repayments) proceeds from advances under notes payable from affiliate 2,159,380 1,740,155
Proceeds from stock subscriptions ......................................... 1,939,610 --
Proceeds from deposits on convertible debentures ......................... -- --
Proceeds from convertible debentures ..................................... -- 4,143,643
Proceeds from issuance of stock, net of issue costs of $208,100 (2003).... 3,619,444 692,505
Proceeds from notes payable ............................................... 628,750 300,000
Payments on notes payable ................................................ -- (594,210)
------------ ------------
Net cash provided by financing activities .......................... 8,347,184 6,282,093
------------ ------------
Effect of exchange rates .................................................... 375,000 (112,000)
------------ ------------
Net (decrease) increase in cash ............................................. 1,243,240 239,064
Cash - beginning of year .................................................... 712,013 182,502
------------ ------------
Cash - end of period ........................................................ $ 1,955,253 $ 421,566
============ ============
See notes to unaudited consolidated financial statements.
F-5
TETON PETROLEUM COMPANY
Unaudited Consolidated Statements of Cash Flows
Supplemental disclosure of non-cash activity:
During the nine months ended September 30, 2003, the Company had the following
transactions:
o 7,408 shares of stock were issued to a consultant for services valued at
$20,000 provided in 2001 and accrued in accounts payable.
o 73,422 shares of stock and 66,667 warrants exercisable at $6.00 were issued to
a consultant for services provided in 2002 valued at $200,000 and accrued in
accounts payable.
o 3,700 warrants issued with debt and valued at $10,592 were initially recorded
as a discount on the note payable. At September 30, 2003, $5,672 of the discount
had been amortized and recorded as financing costs.
o 87,500 warrants issued with debt and valued at $69,072 were initially recorded
as a discount on the debentures. At September 30, 2003, $39,254 of the discount
had been amortized and recorded as financing costs.
o 37,500 warrants issued with debt and valued at $30,500 were initially recorded
as a discount on the debentures. At September 30, 2003, $17,337 of the discount
had been amortized and recorded as financing costs
o Approximately $1,888,000 of capital expenditures for oil and gas properties
was included in accounts payable at September 30, 2003.
o Dividends of $18,556 were accrued on preferred stock.
During the nine months ended September 30, 2002, the Company had the following
transactions:
o In exchange for the extension of principal payments on four notes payable, the
Company modified expiration dates of certain warrants previously held by the
note holders and issued an additional 10,417 such warrants. The fair value of
the modification of the warrants totaled $46,582 and has been recorded as
financing costs.
o A note payable of $250,000 was converted into a convertible debenture with
83,333 warrants also being issued under the same terms of the Company's private
placement offering of convertible debentures.
o 1,647,881 of warrants issued with convertible debentures valued at $811,559
were initially recorded as a discount on the debentures. At September 30, 2002,
the full amount of the discount had been amortized and recorded as financing
costs.
o In-the money conversion features on convertible debt valued at $3,880,035 were
recognized as financing costs ($3,746,285) and consulting expenses ($133,750).
o The Company issued warrants in connection with related party notes payable of
$450,000 and $50,000. The warrants were valued at $156,781 and recorded as
financing costs.
o The Company issued $267,500 of convertible debentures with 89,167warrants
valued at $14,250 for a total amount of $281,750. Prepaid consulting services of
$70,437 remained at September 30, 2002.
o 33,333 warrants were issued to a consultant for services valued at $84,532.
Prepaid consulting of $80,305 related to future quarters in 2003 and 2004.
o 20,000 shares of stock were issued to a consultant for services valued at
$10,000.
o 41,667 warrants issued with a note payable valued at $150,616 were initially
recorded as a discount on the debentures. At September 30,
See notes to unaudited consolidated financial statements
F-6
TETON PETROLEUM COMPANY
2002, $100,011 of the discount had been amortized and recorded as financing
costs.
o $4,661,143 of debentures and accrued interest of $227,075 were converted into
21,101,929 shares of stock with $466,771 being paid as a premium at conversion
and recorded as financing costs.
o Approximately $515,000 of capital expenditures for oil and gas properties was
included in accounts payable at September 30, 2002.
See notes to unaudited consolidated financial statements
F-7
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation and Significant Accounting Policies
The September 30, 2003 financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments), which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The unaudited financial
statements as of September 30, 2003, as is customary in the oil and gas
industry, reflect a pro-rata consolidation of the Company's 50% interest in ZAO
Goloil, a Russian closed joint-stock company. The unaudited financial statements
contained herein should be read in conjunction with the financial statements and
notes thereto contained in the Company's financial statements for the year ended
December 31, 2002, as reported in the Company's Form 10-KSB filed March 31,
2003. The results of operations for the period ended September 30, 2003 are not
necessarily indicative of the results for the entire fiscal year.
Foreign Currency Exchange Rates
The conversion of the functional currency of Goloil (a Russian Company) in
rubles to the reporting currency of U.S. dollars is based upon the exchange
rates in effect. The exchange rates in effect at September 30, 2003 and 2002
were 30.61 and 31.64 rubles to the U.S. dollar, respectively. The average rates
in effect during the three and nine-month periods ended September 30, 2003 and
2002, were 30.44 and 31.00, and 31.60 and 31.25 rubles to the U.S. dollar,
respectively.
Earnings Per Share
At the March 19, 2003 meeting, the Company's shareholders approved a reverse 1
for 12 stock split. All share amounts and earnings per share have been adjusted
to reflect the split.
All potential dilutive securities have an antidilutive effect on earnings (loss)
per share and accordingly, basic and dilutive weighted average shares are the
same.
Note 2 - Proportionate Share of Liabilities
The proportionate share of accounts payable and accrued liabilities of
$3,745,121 at September 30, 2003 are obligations of Goloil and not Teton
Petroleum nor have they been guaranteed by Teton Petroleum.
The following notes reflect the Company's 50% pro-rata share of notes payable
advances made of Goloil owed to an affiliate. These advances are also
obligations of Goloil at September 30, 2003 and not Teton Petroleum nor have
they been guaranteed by Teton Petroleum.
Pro-rata share of Goloil notes payable owed to an affiliate. The proceeds were
used to pay certain operating expenses and capital expenditures of Goloil. These
notes provide for interest rates of 8%, with quarterly interest payments,
maturing through April 2004. These notes are secured by substantially all Goloil
assets. The notes payable will be repaid from cash flow from ZAO Goloil as
available, or extended to future periods.
$5,107,805
-----------
Less current portion (5,107,805)
-----------
$ -
===========
Note 3 - Notes Payable
During the second quarter, the Company received proceeds of $478,750 from notes
payable to stockholders. In connection with the notes, 91,200 warrants valued at
$79,664 were issued. At September 30, 2003, $44,920 of the discount had been
amortized and recorded as financing costs. The Company has recorded the value of
these warrants using the Black-Scholes option-pricing model using the following
assumptions: volatility of 73%, a risk-free rate of 3.5%, zero dividend
payments, and a life of one year.
In July 2003, the Company received proceeds of $150,000 from a stockholder. In
connection with the notes, 37,500 warrants valued at $30,506 were issued . At
September 30, 2003, $17,337 of the discount had been amortized and recorded
F-8
as financing costs. The Company valued the warrants using the Black-Scholes
option-pricing model using the following assumptions: volatility of $73%, a
risk-free rate of 3.5%, zero dividend payments, and a life of one year.
Note 4 - Stockholder's Equity
In March 2003, the stockholder's approved an increase in the amount of
authorized common shares from 100,000,000 to 250,000,000 and also approved
25,000,000 of preferred stock authorized for future issuances.
During the nine months ended September 30, 2003, the Company received $1,091,900
of proceeds (net of costs of $98,100) from the issuance of 437,010 shares of
common stock plus $2,527,538 of proceeds (net of costs of$110,000 from the
issuance of 606,335 shares of convertible preferred stock. The Company received
$1,939,610 during the nine months related to outstanding stock subscriptions
receivable at December 31, 2002.
The Company issued 1,043,204 warrants during the nine months ended September 30,
2003 in connection with the private placements to investors. The Company also
issued 346,165 warrants to entities for their services directly related to
raising capital under private placements during the quarter.
F-9
Note 5 - Stock Options
At the annual meeting on March 19, 2003, the Company's shareholders approved an
employee stock option plan and authorized 2,083,333 shares of Common Stock for
issuance thereunder. Under the plan, incentive and non-qualified options may be
granted. During the second quarter of 2003, the Company issued 30,000
non-qualified options to outside advisory board members which has been recorded
as compensation expense during the three-months ended June 30, 2003 valued at
$94,701, using the Black-Scholes option-pricing model with the following
assumptions: volatility of $100%, a risk-free rate of 4%, zero dividend
payments, and a life of ten years. The Company also issued 1,448,037 incentive
options to employees, officers and directors valued at $4,571,026 using the
Black-Scholes option-pricing model under the same assumptions described above.
In the third quarter, additional options valued at $308,414 were issued to a
director under the Company Plan.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for stock options issued
to employees, officers and directors under the stock option plan. Had
compensation cost for the Company's options issued to employees, officers and
directors been determined based on the fair value at the grant date for awards
consistent with the provisions of SFAS No. 123, as amended by SFAS No. 148, the
Company's net loss and basic loss per common share would have been changed to
the pro forma amounts indicated below:
For the nine Months Ended
September 30,
-------------------------
2003 2002
------------ ------------
Net loss - as reported ($3,140,679) $ 7,927,782
Less previously recorded compensation expense -- --
Add fair value of employee compensation expense (4,879,440) --
------------ ------------
Net loss per common share - pro forma ($8,020,119) $ 7,927,782
============ ============
Basic loss per common share - as reported $ (0.48) $ (3.17)
============ ============
Basic loss per common share - pro forma $ (1.21) $ (3.17)
============ ============
For the Three Months Ended
September 30,
-------------------------
2003 2002
------------ ------------
Net loss - as reported ($1,477,534) ($2,216,169)
Less previously recorded compensation expense -- --
Add fair value of employee compensation expense (308,414) --
------------ ------------
Net loss per common share - pro forma ($1,785,948) ($2,216,169)
============ ============
Basic loss per common share - as reported ($___.22) ($0.78_)
============ ============
Basic loss per common share - pro forma ($___.26) ($0.78_)
============ ============
F-10
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Teton Petroleum Company
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Teton Petroleum
Company as of December 31, 2002, and the related consolidated statements of
operations and comprehensive loss, changes in stockholders' (deficit) equity and
cash flows for the years ended December 31, 2002 and 2001. 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 auditing standards generally accepted
in the United States of America. 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 financial position of Teton Petroleum
Company as of December 31, 2002, and the results of their operations and their
cash flows for the years ended December 31, 2002 and 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
March 28, 2003
Denver, Colorado
F-11
TETON PETROLEUM COMPANY
Consolidated Balance Sheet
December 31, 2002
Assets
Current assets
Cash ........................................................ $ 712,013
Proportionate share of accounts receivable .................. 642,525
Proportionate share of accounts receivable (other) .......... 913,583
Stock subscriptions receivable (paid in 2003) ............... 1,939,610
Proportionate share of inventory ............................ 502,989
Prepaid expenses and other assets ........................... 91,446
-------------
Total current assets ...................................... 4,802,166
-------------
Non-current assets
Oil and gas properties, net (successful efforts) ............ 4,896,308
Fixed assets, net ........................................... 313,921
-------------
Total non-current assets .................................. 5,210,229
-------------
Total assets ................................................... $ 10,012,395
=============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities .................... $ 650,356
Proportionate share of accounts payable and accrued
liabilities ................................................ 1,534,344
Current portion of proportionate share of notes
payable owed to affiliate .................................. 2,441,424
-------------
Total current liabilities ................................. 4,626,124
-------------
Non-current liabilities
Proportionate share of notes payable advances owed
to affiliate ............................................... 507,001
-------------
Total non-current liabilities ............................. 507,001
-------------
Total liabilities ......................................... 5,133,125
-------------
Commitments and contingencies
Stockholders' equity
Common stock, $.001 par value, 100,000,000 shares
authorized, 75,474,241 and 28,488,557 shares issued
and outstanding at December 31, 2002 and 2001 .............. 75,474
Additional paid-in capital .................................. 26,096,030
Accumulated deficit ......................................... (22,022,734)
Foreign currency translation adjustment ..................... 730,500
-------------
Total stockholders' equity ................................ 4,879,270
-------------
Total liabilities and stockholders' equity ..................... $ 10,012,395
=============
See notes to consolidated financial statements.
F-12
TETON PETROLEUM COMPANY
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended
December 31,
----------------------------
2002 2001
------------- ------------
Sales .......................................... $ 6,923,320 $ 1,625,352
Cost of sales and expenses
Oil and gas production ...................... 2,741,303 1,068,250
Taxes other than income taxes ............... 3,537,990 495,789
General and administrative .................. 5,333,726 1,521,970
Depreciation, depletion and amortization .... 451,930 45,313
------------- -------------
Total cost of sales and expenses .......... 12,064,949 3,131,322
------------- -------------
Loss from operations ........................... (5,141,629) (1,505,970)
------------- -------------
Other income (expense)
Other income ................................ 51,751 9,381
Interest expense ............................ (385,939) (161,019)
Financing charges ........................... (5,498,106) --
------------- -------------
Total other income (expense) ............. (5,832,294) (151,638)
------------- -------------
Net loss ....................................... (10,973,923) (1,657,608)
Other comprehensive loss, net of tax
Effect of exchange rates .................... (140,773) (84,041)
============= =============
Comprehensive loss ............................. $(11,114,696) $ (1,741,649)
============ =============
Basic and diluted weighted average common shares
outstanding .................................. 37,262,817 26,927,259
============= =============
Basic and diluted loss per common share ........ $ (0.29) $ (0.06)
============= =============
See notes to consolidated financial statements.
F-13
TETON PETROLEUM COMPANY
Consolidated Statements of Changes in Stockholders' (Deficit) Equity For the
Years Ended December 31, 2002 and 2001
Common Stock Foreign Total
Additional Currency Stockholders'
------------------------- Paid-in Translation Accumulated Equity
Shares Amount Capital Adjustment Deficit (Deficit)
------------- ------------- ------------- ------------- ------------- -------------
Balance - December 31, 2000 ................. 24,977,341 $ 24,977 $ 8,469,221 $ 955,314 $ (9,391,203) $ 58,309
Common stock issued for cash ................ 3,466,772 3,467 1,294,806 -- -- 1,298,273
Common stock and warrants issued
for services ............................... 44,444 44 32,581 -- -- 32,625
Compensation for variable plan warrants ..... -- -- (30,000) -- -- (30,000)
Net loss .................................... -- -- -- -- (1,657,608) (1,657,608)
Foreign currency translation adjustment ..... -- -- -- (84,041) -- (84,041)
------------- ------------- ------------- ------------- ------------- -------------
Balance - December 31, 2001 ................. 28,488,557 28,488 9,766,608 871,273 (11,048,811) (382,442)
Common stock issued for cash ................ 14,684,845 14,685 3,318,775 -- -- 3,333,460
Common stock subscriptions paid in 2003 ..... 8,544,534 8,545 1,931,065 -- -- 1,939,610
Common stock and warrants issued
for services ............................... 2,654,376 2,654 834,472 -- -- 837,126
Common stock issued for conversion of
convertible debentures ..................... 21,101,929 21,102 5,333,887 -- -- 5,354,989
Warrants issued and in-the-money conversion
feature on convertible debentures .......... -- -- 4,557,845 -- -- 4,557,845
Warrants issued with notes payable .......... -- -- 150,016 -- -- 150,016
Warrants issued in connection with extensions
on notes payable ........................... -- -- 203,362 -- -- 203,362
Net loss .................................... -- -- -- -- (10,973,923) (10,973,923)
Foreign currency translation adjustment ..... -- -- -- (140,773) -- (140,773)
------------- ------------- ------------- ------------- ------------- ------------
Balance - December 31, 2002 ................. 75,474,241 $ 75,474 $ 26,096,030 $ 730,500 $(22,022,734) $ 4,879,270
============= ============= ============== ============ ============= ============
See notes to consolidated financial statements.
F-14
TETON PETROLEUM COMPANY
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
----------------------------
2002 2001
------------ ------------
Cash flows from operating activities
Net loss ............................................ $(10,973,923) $ (1,657,608)
------------- -------------
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation, depletion, and amortization ........... 451,930 45,313
Stock based compensation for variable plan warrants -- (30,000)
Stock and stock options issued for services
and interest ...................................... -- 32,625
Warrants issued for notes payable extensions ....... 46,582 --
Stock and warrants issued for services ............. 837,126 --
Debentures issued for services ..................... 267,500 --
Amortization of debenture and note payable
discounts ......................................... 5,331,412 --
Changes in assets and liabilities
Accounts receivable .............................. (1,048,608) (331,225)
Prepaid expenses and other assets ................ (57,446) (18,063)
Inventory ........................................ (313,489) (134,456)
Accounts payable and accrued liabilities ......... 290,131 540,854
------------- -------------
5,805,138 105,048
------------- -------------
Net cash used in operating activities ........... (5,168,785) (1,552,560)
------------- -------------
Cash flows from investing activities
Oil and gas properties and equipment expenditures ... (3,222,349) (322,398)
------------- -------------
Net cash used in investing activities ........... (3,222,349) (322,398)
------------- -------------
Cash flows from financing activities
Net proceeds from (payments on) advances owed to
affiliates under notes payable ..................... 2,178,525 (150,100)
Proceeds from issuance of convertible debentures .... 4,143,643 --
Issuance of common stock ............................ -- 1,298,273
Proceeds from notes payable ......................... 300,000 637,000
Payments on notes payable ........................... (894,210) (167,790)
Issuance of common stock ............................ 3,333,460 --
------------- -------------
Net cash provided by financing activities ....... 9,061,418 1,617,383
------------- -------------
Effect of exchange rates .............................. (140,773) (31,806)
Net increase (decrease) in cash ....................... 529,511 (289,381)
------------- -------------
Cash - beginning of year .............................. $ 182,502 $ 471,883
============= =============
Cash - end of year .................................... $ 712,013 $ 182,502
F-15
Supplemental disclosure of cash flow information
Cash paid for: Interest
----------
2002 $ 120,008
2001 $ 28,123
Supplemental disclosure of non-cash activity:
During 2002, the Company had the following transactions:
In exchange for the extension of principal payments on four notes payable, the
Company modified expiration dates of certainwarrants previously held by the note
holders and issued an additional 125,000 such warrants. The fair value of the
modification of the warrants totaled $46,582 and has been recorded as financing
costs.
A note payable of $250,000 was converted into a convertible debenture with
1,000,000 warrants also being issued under the same terms of the Company's
private placement offering of convertible debentures.
19,774,572 warrants were issued with convertible debentures valued at $811,559
were initially recorded as a discount on the debentures. At December 31, 2002,
the full amount of the discount had been amortized as financing costs.
In-the-money conversion features on convertible debt valued at $3,746,285 were
recognized as financing costs.
The Company issued 1,724,138 warrants in connection with related party notes
payable of $450,000 and $50,000. The warrants were valued at $156,781 and
recorded as financing costs.
$267,500 of convertible debentures with 1,070,000 warrants valued at $14,250 for
a total amount of $281,750 were issued for consulting services.
500,000 warrants issued with a note payable valued at $150,016 were initially
recorded as a discount on the note payable. At December 31, 2002 the full
discount had been amortized and recorded as financing costs.
$4,661,143 of debentures and accrued interest of $227,075 were converted into
21,101,929 shares of stock with $466,771 being paid as a premium at conversion
and recorded as financing costs.
2,654,376 shares of stock were issued to consultants for services valued at
$607,790.
1,600,000 warrants were issued to consultants for services valued at $215,086.
Approximately $1,142,000 of capital expenditures for oil and gas properties were
included in accounts payable at December 31, 2002.
During the fourth quarter of 2002, the Company received $1,939,610 of stock
subscriptions receivable for 8,544,534 shares of stock. The cash for these
subscriptions were paid during the first quarter of 2003.
During 2001, the Company had the following transactions:
44,444 shares of common stock valued at $16,667 were issued in exchange for
consulting services.
100,000 stock warrants valued at $15,958 were issued in exchange for consulting
services.
F-16
The Company assigned a $1,050,000 note payable to Goloil, which was then repaid
from advances received under notes payable owed to affiliate. The Company
recorded the net reduction of debt of $525,000 ($1,050,000 note payable less 50%
share of the $1,050,000 advances from affiliate) as a reduction to oil and gas
properties.
See notes to consolidated financial statements.
F-17
TETON PETROLEUM COMPANY
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
Teton Petroleum Company (the Company) is an oil and gas exploration and
production company whose current focus is on the Russian Federation. Since the
Company's operations are solely focused in the Russian Federation it is subject
to certain risks not typically associated with companies in North America,
including, but not limited to, fluctuations in currency exchange rates, the
imposition of exchange control regulations, the possibility of expropriation
decree, undeveloped business practices and laws, and less liquid capital
markets.
The exploration and development of oil and gas reserves involves significant
financial risks. The ability of the Company to meet its obligations and
commitments under the terms and conditions of its licensing agreements and carry
out its planned exploration activities is dependent upon continued financial
support from its stockholders, the ability to develop economically recoverable
reserves, and its ability to obtain necessary financing to complete development
of the reserves.
Should the Company's licenses be revoked as a result of changes in legislation,
title disputes or failure to comply with license agreements, there would be a
material write-down of the oil and gas properties. The accompanying consolidated
financial statements do not reflect any adjustments that may be required due to
these uncertainties.
The United States dollar is the principal currency of the Company's business
and, accordingly, these consolidated financial statements are expressed in
United States dollars.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Teton
Petroleum Company and its wholly owned subsidiary, Goltech Petroleum, LLC
("Goltech"). All intercompany accounts and transactions have been eliminated in
consolidation.
Previously the Company owned a 50% interest in Goltech which had a 70.59%
interest in ZAO Goloil. Accordingly ZAO Goloil was consolidated into Goltech and
we reflected our 50% share of Goltech. As of December 31, 2002, the other 50%
member of Goltech relinquished their ownership interest in exchange for a
35.295% direct ownership interest in ZAO Goloil. The audited financial
statements as of December 31, 2002 and 2001, as is customary in the oil and gas
industry, reflect a pro-rata consolidation of the Company's interest in ZAO
Goloil (a Russian Company) through its wholly owned subsidiary Goltech.
Management believes this to be the most meaningful presentation as the Company's
only significant asset is its investment in Goltech Petroleum, LLC. The Company
is required to provide 50% of the capital expenditure requirements and is
entitled to a 50% operating interest until repayment of its investment occurs.
Under the pro-rata consolidation method the Company includes its pro-rata share
of the assets (50%), liabilities (50%), revenues (50%) and expenses (50%) of the
accounts of Goloil until repayment (payout) of our current and any future loans
to Goloil occurs. The intercompany balances of Goltech and Teton do not fully
eliminate under the pro-rata consolidation method, and the remaining receivable
on Teton's accounts has been included as a component of oil and gas properties,
as this balance will only be repaid through net cash flow generated from oil and
gas properties.
F-18
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures 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.
Oil and Gas Properties
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and geophysical costs, and
costs of carrying and retaining unproved properties are expensed. The Company
also evaluates costs capitalized for exploratory wells, and if proved reserves
cannot be determined within one year from drilling exploration wells, those
costs are written-off and recorded as an expense.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the unit-of-production
method. Support equipment and other property and equipment are depreciated over
their estimated useful lives. Currently the Company holds no unproved
properties.
On the sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resulting gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income based on the amount of proceeds.
On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
All of the Company's oil and gas assets are held in one cost center located in
Siberia, Russia. The Russian Federation (RF) has performed substantial
exploration efforts on properties on which the Company has received successful
tenders for future exploration and development. As a result, those areas
accepted under tender by the RF are known to contain proved reserves and the
Company's efforts are focused on further development of such reserves.
Capitalized oil and gas property costs are depleted and depreciated using the
units of production method based on estimated proved gross oil reserves as
determined by an independent engineer. Significant development projects are
excluded from the depletion calculation prior to assessment of the existence of
proven reserves that are ready for commercial production. The Company did not
have any significant development projects which have been excluded from
depletion at Decemb er 31, 2002.
The net carrying value of the Company's oil and gas properties is limited to an
estimated net recoverable amount. The net recoverable amount is based on
undiscounted future net revenues and is determined by applying factors based on
historical experience and other data such as primary lease terms of properties
and average holding periods. If it is determined that the net recoverable value
is less than the net carrying value of the oil and gas properties, any
impairment is charged to operations.
F-19
Inventories
Inventory includes extracted oil physically in the pipeline prior to delivery
for sale and oil held by third parties valued at the cost of development.
Inventory also includes various supplies and spare parts and is valued at cost
using the weighted average method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 5 to 27 years.
Feasibility Study TDA Grants
Grants that are received for use on oil and gas properties are recorded as an
offset to expenditures incurred under the grants.
One such study was completed in 2001. In the event that the project is
implemented and a substantial economic benefit is reaped, funds previously
advanced by the TDA may be required to be reimbursed. GNG may be required to
reimburse the TDA in the form of a success fee if certain events occur by
December 31, 2003, which include: taking an equity position in the project,
financing development of the license area, or obtaining external financing for
development of the license area.
The Company has also received a $300,000 grant from the TDA for a feasibility
study for field development and pipeline construction. The Company expects
completion of the study in 2003 and has received $255,000 as of December 31,
2002 under the grant. In the event that the project is implemented and a
substantial economic benefit is reaped, funds previously advanced by the TDA may
be required to be reimbursed. The Company may be required to reimburse the TDA
in the form of a success fee if certain events occur based substantially on the
results of the study by December 31, 2005, which include: taking an equity
position in the project, financing development of the license area or obtaining
external financing for development of the license area.
For the years ended December 31, 2002 and 2001 the Company received $0 and
$37,500 under TDA grants, respectively.
Minority Interest
As the share of minority interest losses exceeds the minority's investment, the
Company has recorded 100% of current losses.
Foreign Currency Translation
All assets and liabilities of the Company's subsidiary are translated into U.S.
dollars using the prevailing exchange rates as of the balance sheet date. Income
and expenses are translated using the weighted average exchange rates for the
period. Stockholders' investments are translated at the historical exchange
rates prevailing at the time of such investments. Any gains or losses from
foreign currency translation are included as a separate component of
stockholders' equity. The prevailing exchange rates at December 31, 2002 and
2001 were approximately 1 U.S. dollar to 31.78 and 30.52, Russian rubles,
respectively.
Basic Loss Per Share
The Company applies the provisions of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share" (FAS 128). All dilutive potential common shares
have an antidilutive effect on diluted per share amounts and therefore have been
excluded in determining net loss per share. The Company's basic and diluted loss
per share are equivalent and accordingly only basic loss per share has been
presented.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash, accounts
receivable, sundry receivables, accounts payable and accrued liabilities, and
notes payable and convertible debentures approximated fair value as of December
31, 2002 because of the relatively short maturity of these instruments.
F-20
The carrying amounts of notes payable and debt issued approximate fair value as
of December 31, 2002 because interest rates on these instruments approximate
market interest rates. The Company has no derivative financial instruments.
The Company is exposed to foreign currency risks to the extent that transactions
and balances are denominated in currencies other than the United States dollar.
This risk could be significant for those transactions and balances denominated
in rubles, as the ruble has experienced significant devaluation in the past.
Reclassifications
Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform to the 2002 presentation.
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for years beginning after June 15,2002. The Company
has not yet determined the impact on its consolidated financial statements and
is addressing whether it will be able to make a reasonable estimate of the fair
value of such costs.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 requires that those long-lived assets
be measured at the lower of carrying amount or fair value, less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively. The
Company believes that the adoption of this statement will have no material
impact on its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company believes the
adoption of this statement will have no material impact on its consolidated
financial statements.
In November 2002, the FASB published interpretation No, 45 "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The Interpretation expands on the
accounting guidance of Statements No. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superseded.
The Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, that company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company believes the adoption of this statement will have no material
impact on its consolidated financial statements.
F-21
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based compensation. In addition, SFAS 148 amends the
disclosure provision of SFAS 123 to require more prominent disclosure about the
effects of an entity's accounting policy decisions with respect to stock-based
employee compensation on reported net income. The effective date for this
Statement is for fiscal years ended after December 15, 2002. The Company
believes the adoption of this statement will have no material impact on its
consolidated financial statements.
Note 2 - Investments in Goltech Petroleum, LLC
Effective in August 2000, the Company entered into a transaction agreement
selling a 50% equity interest in Goltech in exchange for $1,000,000 cash and a
$5.6 million investment in the license area for drilling additional wells on the
license area, completion of a pipeline and the construction of a processing
facility (the oilfield development program). The $1,000,000 received was also
invested in the license area to complete the oilfield development program. The
party to the agreement obtained the right to name 50% of the board of managers
and became the general manager of Goltech. No gain or loss was recognized on the
transaction as the proceeds were immediately reinvested into the field
development and pipeline completion project. ZAO Goloil was also required to
make a production payment to compensate the other party for its investment in
the license area. The production payment requires ZAO Goloil to deliver 50% of
the production from existing and future wells through July 2007. The other party
is obligated under an agreement to only sell their share of the production in
the Russian domestic market. Effective December 31, 2002, the other party
withdrew as a member of Goltech and in exchange for relinquishment of 50% of its
membership interests in Goltech, it received 35.295% of the ZAO Goloil shares
and the return of its $1,000,000 initial contribution. ZAO Goloil is still
obligated under the production payment.
The other membership holder (affiliate) to Goltech Petroleum, LLC (Goltech) had
invested approximately $ 7,000,000 under the oilfield development agreement
outside of Goltech and Goloil as of December 31, 2002. These costs are reflected
in the accounts of another entity controlled by the affiliate and are not
reflected anywhere in the financial statements of the Company. These
expenditures were used to drill and complete four additional wells and complete
a pipeline on the Company's license area that provides the ability to transport
oil directly through this pipeline year-round to other larger pipelines for
ultimate sale. The Company has compensated the affiliate in the form of a
production payment of approximately 154,000 tons of oil through December 31,
2002. The Company also has the obligation to compensate the affiliate for a
minimum of 560,000 tons averaged of oil over a seven-year period for its
investments under the oilfield development agreement.
Additionally, the affiliate has net direct loans to Goloil of approximately
$6,000,000, which have been used to help fund capital expenditures for
completion of a processing facility and to help fund other related expenses. The
Company has reflected a 50% of these loans in its financial statements under the
pro-rata consolidation method (Note 6).
Note 3 - Property and Equipment
Property and equipment consist of the following at December 31, 2002:
Building ..................... $ 31,627
Vehicles ..................... 154,015
Computers and equipment ...... 57,572
Well and production equipment 83,644
Furniture and fixtures ....... 33,617
---------
360,475
Less: Accumulated depreciation (46,554)
---------
$ 313,921
=========
F-22
Note 4 - Oil and Gas Properties
Goloil License
The Company holds a license for the Eguryak license area for exploration and
production of oil and gas through its investment in Goloil (which is held
through its 100% owned subsidiary, Goltech). This license grants Goloil the
exclusive right to explore and develop an area in Siberia covering 187 square
kilometers and includes the Eguriakhskoe, South Eguriakhskoe and Golevoye oil
fields situated in the Nizhnevartovsk Region. The license expires on May 21,
2022, subject to additional extensions as approved by applicable bodies of the
Russian Federation. The license may also be canceled by the Company with a
90-day written notice.
The license requires Goloil to drill a minimum of five wells over four years,
conduct an additional seismic survey aggregating 30 square kilometers and
evaluate geological data from an area covering 187 square kilometers. Goloil was
also required to conduct production tests on six wells between 1997 and 2000. In
addition to performing its duties under the license, Goloil must give preference
to Russian environmental and archeological laws. Currently, the Company has
fulfilled its requirements under the license. Management is continuing to pursue
completion of future required performance criteria and believes that there will
be no adverse effects on the Company's license for failure to comply with the
license rerquirements.
The license requires Goloil to pay all taxes including mining tax, property tax
and certain ecological taxes All geological information obtained at Goloil's
expense will be the property of Goloil, while all geological information
obtained at the expense of the Russian government may be used by Goloil. Oil and
gas produced from the licensed property, subject to certain royalty payments,
will be the property of Goloil.
Capital expenditures for continued development of the license area are estimated
at approximately $20 million net to Teton, with 6.5 million budgeted for 2003 as
Teton's net share. Teton must raise additional equity or debt financing to fund
their portion of these capital expenditures. There can be no assurance that
Teton will be able to raise such financing on terms favorable to the Company or
at all.
DCD Dagestan
In the second quarter of 2001, the Company divested itself of its subsidiary
Teton Oil, Inc., which holds the remaining DCD Dagestan Licenses. The shares of
Teton Oil, Inc. were distributed to two of the Company's stockholders and the
stockholders also assumed any related obligations associated with the licenses.
No gain or loss was recorded on the distribution as the net assets of Teton Oil,
Inc. were written down to zero in 1998.
Note 5 - Notes Payable
During 2002, the March 1, 2002 principal payments on two notes payable totaling
$250,000 to stockholders were extended to April 15, 2002. In exchange for this
extension, the holders were issued 125,000 stock purchase warrants, with an
exercise price of $0.50 that expire February 2004, which have been valued at $
14,469 using the Black Scholes option pricing model with assumptions of
volatility of 100%, risk free rate of 5.5 and no dividend yield. These
extensions were recorded in the first quarter of 2002 as financing costs. These
notes were fully paid off in 2002.
The Company issued 1,724,138 warrants in connection with related party notes
payable of $450,000 and $50,000. The warrants were valued at $156,781 and
recorded as financing costs. Additionally, in the first quarter of 2002, the due
dates of the two notes payable totaling $500,000 were extended by the holders to
April 15, 2002. As consideration for this extension the Company agreed to modify
the expiration dates of certain warrants previously held by the note holders
from October 31, 2002 to January 31, 2003. These extensions were valued based
upon the incremental fair value of the warrants on the date of modification
which totaled approximately $32,000. The values were calculated using the Black
Scholes option-pricing model under the assumptions described in the previous
paragraph, and were recorded in the first quarter of 2002, the quarter the
modifications occurred.
F-23
During 2002, the Company paid $200,000 of a $450,000 note payable outstanding at
December 31, 2001. The remaining $250,000 was converted into a convertible
debenture with 1,000,000 warrants also being issued in connection with the
Company's private placement offering of convertible debentures.
The Company also paid off a $50,000 note payable to a stockholder and the
$94,210 note payable to an officer during 2002, which were outstanding at
December 31, 2001.
During 2002, the Company received proceeds of $300,000 on a note payable from a
stockholder. In connection with the note, 500,000 warrants valued at $150,016
were issued and recorded as financing charges. The Company paid off this note in
November 2002. The Company has recorded the value of these warrants using the
Black Scholes option-pricing model using the following assumptions: volatility
of 138%, a risk-free rate of 4.5%, zero dividend payments, and a life of 2
years.
Total expense recorded associated with the above warrant issuances and
modifcations totaled $353, 379 and have been recorded as financing costs during
the year ended December 31, 2002.
Note 6 - Proportionate Share of Liabilities
The proportionate share of accounts payable and accrued liabilities of
$1,534,344 at December 31, 2002 are obligations of Goloil and not Teton
Petroleum nor have they been guaranteed by Teton Petroleum.
The following notes reflect the Company's 50% pro-rata share of notes payable
advances made of Goloil owed to an affiliate. These advances are also
obligations of Goloil at December 31, 2002 and not Teton Petroleum nor have they
been guaranteed by Teton Petroleum.
Pro-rata share of Goloil notes payable owed to an affiliate. The proceeds were
used to pay certain operating expenses and capital expenditures of Goloil. These
notes provide for interest rates of 8%, with quarterly interest payments,
maturing through February 2004. These notes are secured by substantially all
Goloil assets. The notes payable will be repaid from cash flow from ZAO Goloil
as available, or entended to future periods .................... $2,948,425
Less: current portion ....................................... (2,441,424)
-----------
$ 507,001
===========
Note 7 - Stockholders' Equity
On January 3, 2001, the Stockholders of the Company approved an increase in the
number of authorized shares of common stock from 50,000,000 to 100,000,000.
On March 19, 2003, the stockholders, increased the authorized common shares from
100,000,000 to 250,000,000 and authorized 25,000,000 of preferred stock
available for future issuance.
Common Shares Issued for Service
During the years ended December 31, 2002 and 2001, 2,654,376 and 44,444 common
shares were issued for consulting services which have been valued at $605,136
and $32,625, respectively.
In connection with a consulting agreement, the Company agreed to issue 88,888
shares of stock during the second quarter of 2002 for services provided in 2001
valued at $23,200. The Company has accrued a liability for this amount at
December 31, 2002.
F-24
Convertible Debentures
During 2002, the Company received proceeds of $4,163,143 from the private
placement of convertible debentures. The debentures had a term of three years
from April 1, 2002 and provided for interest at 10% per annum payable annually.
The debentures provided that the holder may convert the debenture and accrued
interest into shares of common stock (a $.25 conversion rate).
The debentures also included warrants to purchase common stock and have an
exercise price of $.50 and a term of two years. Each debenture holder received
one warrant for each $.25 of investment made in debentures.
On September 1, 2002, the Company redeemed all debentures outstanding for shares
of its common stock. The debentures were redeemed at 110% of their face value by
issuing one share of common stock for each $.25 of redemption value, which also
incorporates any accrued interest through September 1, 2002. Financing charges
were recorded for the difference between the cumulative 10% contractual interest
accrued through September 1, 2002 and the 10% premium paid upon redemption,
which totaled $466,771.
As a result of the warrants issued with the debentures and in-the-money
conversion features present at issuance, non-cash financing charges of
$4,714,625 were expensed. While the stock to which the conversion rights and
warrants apply is restricted stock, the valuation with respect to this stock in
calculating the discount was "as if" the stock was immediately salable. The
effect of this is to make the amount of discount and its related amortization
higher than it would otherwise have been. Management believes these costs are
non-recurring and will manage future capital raising programs to minimize or
eliminate these costs.
2002 Private Placement
During 2002, the Company issued 14,684,845 shares of common stock under private
placement offerings receiving proceeds of $3,333,460. In connection with the
private placement offerings, the Company also issued a warrant for each $.25
stock investment. The warrants have a term of two years and an exercise price of
$.50.
At December 31, 2002 the Company had $1,939,610 of subscriptions receivable for
8,544,534 shares of common stock for which the cash was paid in 2003 and has
been included in common stock in the accompanying financial statements.
Common Share Purchase Warrants
During 2002, the Company issued 1,600,000 warrants to consultants for services
valued at $215,086. The Company also issued 7,401,480 to employees and directors
for services performed.
During 2001, the Company issued 3,466,772 warrants in connection with private
placement offerings with an exercise price of $0.41 and expire between May 15,
2006 and August 15, 2006. Also, the Company issued 100,000 warrants to a third
party for consulting services. The warrants have an exercise price of $0.41 and
expire September 9, 2006. The warrants were valued at $15,958 using the Black
Scholes option pricing model with assumption of volatility of 100%, risk free
rate of 5.5 and no dividend yield.
The following table presents the activity for warrants outstanding:
Weighted
Average
Exercise
Shares Price
------------- -------
Outstanding - December 31, 2000 ...................... 3,237,613 $ 0.61
Granted ........................................ 3,566,772 0.22
Forfeited/canceled ............................. (275,213) 0.17
------------- -------
Outstanding - December 31, 2001 ...................... 6,529,172 0.44
Granted ........................................ 48,824,189 0.46
Forfeited/canceled ............................. (300,000) 0.40
------------- -------
Outstanding - December 31, 2002 ...................... 55,053,361 $ 0.46
============= =======
F-25
The following table presents the composition of warrants outstanding and
exercisable:
Shares Outstanding
--------------------------
Range of Exercise Prices Number Price* Life*
----------------------------------------- ------------ ------------ ---------
$0.227 - 0.50 54,553,361 $ 0.45 1.67
$0.75 - 1.00 500,000 0.01 0.02
------------ ------------ ---------
Total - December 31, 2002 55,053,361 $ 0.46 1.69
============ ============ =========
* Price and Life reflect the weighted average exercise price and weighted
average remaining contractual life, respectively.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's option plan been determined based
on the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Corporation's net loss and basic loss per common share would
have been changed to the pro forma amounts indicated below:
For the Years Ended
December 31,
--------------------------
2002 2001
------------ ------------
Net loss - as reported ...................... $(10,973,923) $(1,657,608)
Net loss - pro forma ...................... (11,945,964) (1,657,608)
Basic loss per common
share - as reported ...................... (0.29) (0.06)
Basic loss per common
share - pro forma ...................... (0.32) (0.06)
The fair value of each warrant grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:
For the Years Ended
December 31,
--------------------------
2002 2001
------------ ------------
Approximate risk free rate ................... 4.50% -%
Average expected life ........................ 2 years - years
Dividend yield ............................... -% -%
Volatility ................................... 87.20% -%
Estimated fair value of total options granted. $972,041 $ -
Stock Options
The Company maintains a stock option plan for the issuance of options to
directors, officers, employees and consultants to the Company. The Company has
reserved 1,950,000 shares for issuance under the plan.
F-26
The following table presents the activity for stock option's outstanding:
Weighted
Average
Exercise
Shares Price
------------ ------------
Outstanding - December 31, 2000 450,000 $ 0.40
Forfeited/canceled (450,000) (0.40)
------------ ------------
Outstanding - December 31, 2001 and 2002 - -
============ ============
Note 8 - Income and Other Taxes
The Company has incurred losses since inception and, as a result of uncertainty
surrounding the use of those net operating loss carryforwards, no provision for
income taxes has been recorded.
The Company has net operating loss carry forwards for U.S. tax purposes of
approximately $8,950,000, which expire between 2012 and 2022, if unused, and
have been fully reserved by a valuation allowance.
Taxes payable are tax liabilities of its Russian subsidiary, Goloil (held
through its wholly owned subsidiary Goltech). Tax payments made by Goloil to the
Russian government include profits tax, value-added tax ("VAT"), payroll taxes
and property taxes.
The Company had no income tax liabilities or expense for the years ended
December 31, 2002 or 2001. ZAO Goloil has net operating loss carryforwards which
are available to offset future taxable income which will expire in 2012. The
foreign income tax carryforwards for Russian tax purposes are limited to a
maximum of 30% of taxable income in any year.
Management believes that it will not be subject to future repatriation tax if
profits from the project are invested in other projects within Russia.
Note 9 - Commitments and Contingencies
Contingencies
There is currently a high level of political and economic instability and
uncertainty in the Russian Federation. As a result of the financial crisis in
August 1998, all financial markets were subject to significant downward
adjustments. The national currency was severely devalued during the crisis and
continued to deteriorate through the end of 1998. The Russian banking system
suffered significant liquidity problems and several large Russian banking
institutions stopped operations and/or experienced significant losses. The
Russian Government defaulted on, and announced a restructuring of, its internal
debt due to a lack of funds and is likely to seek forgiveness and/or
restructuring of its external debt.
The taxation system in Russia is evolving as the central government transforms
itself from a command to a market-oriented economy. There were many new Russian
Federation and Republic taxes and royalty laws and related regulations
introduced over the last few years. Many of these were not clearly written and
their application is subject to the interpretation of the local tax inspectors,
Central Bank officials and the Ministry of Finance. Instances of inconsistent
interpretation between local, regional and federal tax authorities and between
the Central Bank and Ministry of Finance are not unusual. The current regime of
penalties and interest related to reported and discovered violations of Russian
laws, decrees and related regulations are severe. Penalties include confiscation
of the amounts at issue (for tax law violations), as well as fines of up to 40%
of the unpaid taxes. Interest is assessable at rates of up to 0.1% per day. As a
result, penalties and interest can result in amounts that are multiples of any
unreported taxes.
The Company's policy is to accrue contingencies in the accounting period in
which a loss is deemed probable and the amount is reasonably determinable. In
this regard, because of the uncertainties associated with the Russian tax and
legal systems, the ultimate taxes as well as penalties and interest, if any,
assessed may be in excess of the amounts paid to date as of December 31, 2002.
F-27
Management believes based upon its best estimates, that the Company has paid or
accrued all taxes that are applicable for the current and prior years, and
compiled with all essential provisions of laws and regulations of the Russian
Federation.
The Company may be subject to loss contingencies pursuant to Russian national
and regional environmental claims that may arise for the past operations of the
related fields, which it operates. As Russian laws and regulations evolve
concerning environmental assessments and cleanups, the Company may incur future
costs, the amount of which is currently indeterminable due to such factors as
the current state of the Russian regulatory process, the ultimate determination
of responsible parties associated with these costs and the Russian government's
assessment of respective parties' ability to pay for those costs related to
environmental reclamation.
The Company's operations and financial position will continue to be affected by
Russian political developments including the application of existing and future
legislation, regulations and claims pertaining to production, imports, exports,
oil and gas regulations and tax regulations. The likelihood of such occurrences
and their effect on the Company could have a significant impact on the Company's
current activity and its overall ability to continue operations. Management does
not believe that these contingencies, as related to its operations, are any more
significant than those of similar enterprises in Russia.
Commitments
The Company has employment agreements with its president and secretary through
May 31, 2005 and December 1, 2002, respectively, which provide for certain
salaries as specified and other related matters and may be terminated by the
written consent of the employees prior to expiration.
Note 10 - Supplemental Oil and Gas Disclosures
The following is a summary of costs incurred in oil and gas producing
activities^, as drawn from the reserve data from our January 1, 2003 reserve
report prepared by the independent engineering firm, Gustavason Associates,
Inc.:
Included below is the Company's investment and activity in oil and gas producing
activities which includes a proportionate share of ZAO Goloil's oil and gas
properties, revenues, and costs.
For the Years Ended
December 31,
--------------------------
2002 2001
------------ ------------
Property acquisition costs ..................... $ - $ -
Development costs .............................. 4,150,742 322,398
------------ ------------
Total ................................... $4,150,742 $ 322,398
============ ============
The following reflects the Company's capitalized costs associated with oil and
gas producing activities:
For the Years Ended
December 31,
--------------------------
2002 2001
------------ ------------
Property acquisition costs ..................... $ 595,558 $ 595,558
Development costs (1) .......................... 4,830,421 679,679
------------ ------------
5,425,979 1,275,237
Accumulated depreciation, depletion,
amortization and valuation allowances ......... (529,671) (106,137)
------------ ------------
Net capitalized costs .......................... $4,896,308 $ 1,169,100
============ ============
F-28
(1) 2001 development costs reflect a net reduction of $525,000 to oil and gas
properties for the repayment of debt by an affiliate which has been treated as a
recovery on investment in the property.
Results of Operations from Oil and Gas Producing Activities
Results of operations from oil and gas producing activities (excluding general
and administrative expense, and interest expense) are presented as follows:
For the Years Ended
December 31,
--------------------------
2002 2001
------------ ------------
Oil and gas sales .............................. $6,923,320 $ 1,625,352
Production costs ............................... (2,741,303) (1,068,250)
Taxes other than income taxes .................. (3,537,990) (495,789)
Depletion, depreciation and amortization ....... (451,930) (45,313)
------------ ------------
Results of operations from oil and
gas producing activities ...................... $ 192,097 $ 16,000
============ ============
Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas, and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved development
oil and gas reserves are those reserves expected to be recovered through
existing wells with existing equipment and operating methods. The reserve data
is based on studies prepared by an independent engineer. All proved reserves of
oil and gas are located in Russia.
The following table presents estimates of the Company's net proved oil and gas
reserves:
For the Years Ended
December 31,
--------------------------
2002 2001(1)(2)
------------ ------------
Proved reserves (bbls), beginning of period .... 40,174,000 8,500,000
Production ..................................... (471,000) (95,000)
Extension of reservoir.. .......................... 2,000,000 8,800,000
Revisions of previous estimates ................ (28,439,000) 22,969,000
------------ ------------
Proved reserves (bbls), end of period .......... 13,264,000 40,174,000
============ ============
Proved developed reserves (bbls, beginning
of period ..................................... 5,493,000 1,300,000
============ ============
Proved developed reserves (bbls), end
of period ..................................... 4,567,000 5,493,000
============ ============
(1) Includes approximately a 30% minority interest share of the reserves in
Goloil.
F-29
(2) Proved developed reserves have been reduced by 650,000 bbls out of the total
1,950,000 bbls of Teton's share of the production payment. The remaining
production payment quantity of 1,300,000 barrels of Teton's share assumes
payment from proved undeveloped properties to be developed in the future.
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
SFAS No. 69 prescribes guidelines for computing a standardized measure of future
net cash flows and changes therein relating to estimated proved reserves. The
Company has followed these guidelines, which are briefly discussed below.
Future cash inflows and future production and development costs are determined
by applying year-end prices and costs to the estimated quantities of oil and gas
to be produced. Estimated future income taxes are computed using current
statutory income tax rates for those countries where production occurs. The
resulting future net cash flows are reduced to present value amounts by applying
a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such, do not necessarily
reflect the Company's expectations for actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process, as discussed previously, are equally applicable to
the standardized measure computations since these estimates are the basis for
the valuation process.
The following summary sets forth the Company's future net cash flows relating to
proved oil and gas reserves based on the standardized measure prescribed in
Statement of Financial Accounting Standards No. 69.
For the Years Ended
December 31,
------------------------------
2002 2001 (1)
-------------- --------------
Future cash inflows ................ $ 230,581,000 $ 483,405,000
Future production costs ............ (151,167,000) (272,150,000)
Future development costs ........... (18,556,000) (45,600,000)
Future income tax expense .......... (16,365,000) (57,394,000)
-------------- --------------
Future net cash flows (undiscounted) 44,493,000 108,261,000
Annual discount of 10% for estimated
timing of cash flows .............. (19,069,000) (67,899,000)
-------------- --------------
Standardized measure of future net
discounted cash flows ............. $ 25,424,000 $ 40,362,000
============== ==============
(1) Includes approximately a 30% minority interest share of the reserves in
Goloil.
F-30
Changes in Standardized Measure (Unaudited)
The following are the principal sources of change in the standardized measure of
discounted future net cash flows:
For the Years Ended
December 31,
------------------------------
2002 2001 (1)
------------- -------------
Standardized measure, beginning of period,
December 31, 2001 and 2000 ............... $ 40,362,000 $ 41,600,000
Net changes in prices and production costs 189,975,000 (33,421,000)
Future development costs .................. 22,344,000 (109,233,000)
Revisions of previous quantity estimates .. (274,605,000) 102,592,000
Extension of reservoir .................... 19,867,000 39,707,000
Sale of reserves in place ................. -- --
Accretion of discount ..................... 4,036,000 4,160,000
Changes in income taxes, net .............. 23,445,000 (5,043,000)
-------------- --------------
Standardized measure, end of period,
2002 and 2001 ............................ $ 25,424,000 $ 40,362,000
============== ==============
(1) Includes approximately a 30% minority interest share of the reserves in
Goloil.
F-31
You should rely only on the
information contained in this
prospectus. We have not authorized
anyone to provide you with information
different from the information
contained in this prospectus. This
document may only be used where it is 4,771,151
SHARES legal to sell the securities. The OF OUR
information in this document may only
OF COMMON STOCK be accurate on the date of this
AND document. 4,215,937 WARRANTS
TABLE OF CONTENTS
Page
----
Prospectus Summary
Risk Factors Teton Petroleum Company
Use Of Proceeds
Market For Common Equity And
Related Stockholder Matters
Management's Discussion And
Analysis Or Plan Of Operation
Business
Management
Certain Relationships And PROSPECTUS
Related Transactions
Security Ownership Of Certain
Beneficial Owners And
Management
Description Of Securities
Plan Of Distribution
Selling Stockholders
Legal Matters January __, 2004
Experts
Available Information
Index To Financial Statements
---------------------------------------- -----------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The corporation shall, to the fullest extent permitted by Section 145 of the
General Corporation Law of the state of Delaware, as the same may be amended and
supplemented, indemnify any and all persons whom it shall have the power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-Law, agreement,
vote of the stockholders or disinterested Directors or otherwise, both as to
action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
Director, Officer, Employee or Agent and shall inure to the benefit of the
heirs, executors and administrators of such person.
The Board of Directors of the Company may also authorize the Company to
indemnify employees or agents of the Company, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to directors and officers of the Company. As of the date
of this Registration Statement, the Board of Directors has not extended
indemnification rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Securities Act of 1933, as amended (the "Securities Act") and is therefore
unenforceable.
II-1
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
Nature of Expense Amount
----------------- -----------
SEC Registration fee $3,316.00
Accounting fees and expenses 10,000.00*
Legal fees and expenses 20,000.00*
TOTAL
$33,316.00*
===========
* Estimated.
Item 26. Recent Sales of Unregistered Securities.
RECENT SALES OF UNREGISTERED SECURITIES
Since July 3, 1998, the Company has made sales of its securities to the
following persons for the cash or other consideration indicated, which sales
were not registered under the Securities Act of 1933, as amended (the
"Securities Act"):
Date Number of
Name of Shareholder Acquired(1) Consideration(2) Shares/Amount(3)
------------------------------------------------------------------------------------------------
John P. Eagleton 08/01/98 $ 150,000(4) $150,000
(convertible debenture)
Anthony Eagleton 08/01/98 $ 40,000(5) $ 40,000
(convertible debenture)
Teton Oil (USA) Limited 11/12/98 $ 975,018(6) 2,925,054
(exchange transaction)
Anthony Eagleton 06/02/99 $ 10,000(7) 22,222
Francis D. Hopkins 06/25/99 $ 10,000(8) 22,222
Conroy & Co. 06/25/99 $ 10,000(9) 22,222
John C. Hunzinger 06/25/99 $ 10,000(10) 22,222
Garry Neuschwanger 06/25/99 $ 5,000(11) 11,111
Dan Neuschwanger 06/25/99 $ 5,000(12) 11,111
Triumph Resources 03/07/00 $ 14,000 (services)(13) 70,000
James J. Woodcock 05/05/00 $ 25,000(14) $25,000
(convertible debenture)
John Robinson 05/17/00 $ 40,500 (services)(15) 135,000
Frank Calandra in Trust 05/17/00 $ 400,000(16) 1,333,333
Current Capital Corporation 05/24/00 $ 72,000 (services)(17) 144,000
Bendure Investments Ltd. 07/20/00 $ 81,730 (services)(18) 272,435
John H. Haskell 07/20/00 $ 140,865 (services; loan
repayment)(19) 469,551
Arden Grover 07/21/00 $ 40,069 (loan repayment)(20) 133,562
John Dorn 07/21/00 $ 40,069 (loan repayment)(20) 133,562
William Kennedy 07/21/00 $ 40,069 (loan repayment)(20) 133,562
Perm Corporation 07/21/00 $ 31,050 (loan repayment)(20) 103,500
Perm Corporation 07/27/00 $ 150,000 (loan amendment)(21) 500,000
Haskell Investment
Company 07/31/00 $ 39,665 (services)(22) 136,218
James J. Woodcock 07/31/00 $ 25,000(23) 83,333
Hy-Bon Engineering 07/31/00 $ 10,000 (services)(24) 33,334
Bendure Investments Ltd. 08/03/00 $ 100,000(25) 333,333
EuroGas Inc. 08/24/00 $ 300,000 (loan repayment)(26) 1,000,000
Haskell Investment
Company 08/25/00 $ 100,000 (loan repayment)(27) 333,333
John H. Haskell 08/25/00 $ 100,000(28) 333,333
II-2
Date Number of
Name of Shareholder Acquired(1) Consideration(2) Shares/Amount(3)
------------------------------------------------------------------------------------------------
Bendure Investment Ltd. 08/25/00 $ 200,000 (loan repayment)(29) 666,666
Louis A. Oswald, III 09/12/00 $ 8,000(30) 26,600
Margot Eicher 09/12/00 $ 1,200(31) 4,000
Michael Francis Hopkins 09/12/00 $ 1,800(32) 6,000
Francis D. Hopkins 09/12/00 $ 6,000(33) 20,000
Peter Petrouk 10/02/00 $ 100,000(34) 333,333
Peter Petrouk 10/02/00 $ 5,000 (services)(35) 16,667
Phillip Laughlin 10/02/00 $ 3,000(36) 10,000
Alex Campbell 10/03/00 $ 10,000(37) 33,333
Tom Lawson 10/17/00 $ 12,500(38) 41,666
EuroGas, Inc. 10/20/00 $ 500,000(39) $500,000
(convertible debenture)
Current Capital Corporation 10/20/00 $ 120,000 (services)(40) 400,000
Gary Laughlin 10/25/00 $ 3,000(41) 10,000
Serge de Pahlen 11/03/00 $ 300,000(42) 1,000,000
Louis A. Oswald III 11/03/00 $ 3,000(43) 15,000
Patrick R. Laughlin 11/03/00 $ 3,000(44) 10,000
Phillip E. Laughlin 11/03/00 $ 2,000(45) 6,667
Lynn M. and Mark Baalman 11/03/00 $ 2,000(46) 6,667
Jonathan S. Roderick 11/03/00 $ 5,000(47) 16,667
Alexei Yermolenko 12/01/00 $ 3,000 (services)(48) 10,000
Valery Bergulev 12/01/00 $ 3,000 (services)(48) 10,000
Alexei Labovsky 12/01/00 $ 3,000 (services)(48) 10,000
Dennis & Margot Eicher 05/15/01 $ 2,063(49) 5,500
Henry D. Haskell 05/15/01 $ 50,625(49) 135,000
Francis D. and Mary J.
Hopkins 05/15/01 $ 2,917(49) 7,778
Thomas D. and Sheila K.
Lawson 05/15/01 $ 15,000(49) 40,000
Brownstone Resources 05/16/01 $ 187,000(50) 499,968
Robert F. Bailey 05/17/01 $ 37,500(49) 100,000
Alex B. Campbell 05/18/01 $ 7,500(49) 20,000
George W. and Dana D.
Clay IV 05/18/01 $ 10,000(49) 26,667
George W. and Margaret E.
Clay III 05/18/01 $ 6,000(49) 16,000
Samuel David Clay 05/18/01 $ 5,000(49) 13,333
William A. and Magan S.
Flynn 05/18/01 $ 15,000(49) 40,000
Cathy Cornell Clay 05/18/01 $ 1,000(49) 2,667
Tim and Lindsay Lambert 05/18/01 $ 5,000(49) 13,333
Mike Hopkins 05/23/01 $ 2,063(49) 5,500
Wyatt Haskell 05/25/01 $ 50,000(49) 133,333
James J. Woodcock 05/31/01 $ 25,000(49) 66,667
Historic Charleston
Apartments 05/31/01 $ 5,000(49) 13,333
Gresham Sarl 05/31/01 $ 16,666 (services)(51) 44,444
Margaret Ann and James
Dale McFall 06/02/01 $ 10,000(49) 26,666
Keith and Mary Axelson 06/02/01 $ 5,000(49) 13,333
Bendure Investments 06/04/01 $ 40,000(49) 106,667
William and Nancy Axelson 06/05/01 $ 5,000(49) 13,333
C.R. Bailey 06/06/01 $ 18,750(49) 50,000
Duke Edwards 06/06/01 $ 18,750(49) 50,000
John Hunzinger 06/06/01 $ 5,000(49) 13,333
John Haskell 06/15/01 $ 35,000(49) 93,333
Louis Oswald, III, IRA 06/20/01 $ 27,000(49) 72,000
Conroy & Co. 06/20/01 $ 5,000(49) 13,333
Ken Welshimer 06/22/01 $ 20,000(49) 53,333
Louis A. Oswald, Jr. 06/22/01 $ 2,000(49) 5,333
Richard L. Gelb 06/22/01 $ 50,000(49) 133,333
Dale H. and Jean F. Dorn 06/22/01 $ 50,000(49) 133,333
McLean Bowman 06/22/01 $ 50,000(49) 133,333
Tongue River Royalties 06/23/01 $ 11,250(49) 30,000
Salomon Smith Barney,
custodian for the IRA of
Karl F. Arleth 06/27/01 $ 100,000(49) 266,667
Jerry W. Taylor 06/28/01 $ 5,000(49) 13,333
Daniel J. Hartmann 06/28/01 $ 10,000(49) 26,667
Donald B. Stott 06/28/01 $ 75,000(49) 200,000
The de Compiegne Property
Company No. 20, Ltd 06/28/01 $ 50,000(49) 133,333
Brian B. Dorn 06/28/01 $ 25,000(49) 66,667
Bruce E. Gelb 06/28/01 $ 50,000(49) 133,333
Robert David &
Julie L. Annear 06/28/01 $ 5,000(49) 13,333
II-3
Lynn A. & Robert T.J.
McBride 06/28/01 $ 1,500(49) 4,000
Adel H. Hindi 07/01/01 $ 13,500(52) 36,000
Kelly and Stacy Oswald 07/03/01 $ 5,000(49) 13,333
Louis Oswald, III, IRA 07/03/01 $ 16,125(49) 43,000
Bendure Investments 07/03/01 $ 60,000(49) 160,000
John Haskell 07/03/01 $ 35,000(49) 93,333
John R. Farina 07/03/01 $ 2,000(49) 5,333
John B. Thomas 07/03/01 $ 2,000(49) 5,333
Gresham Sarl 07/03/01 $ 50,000(51) 133,333
Christian Weyer 08/07/01 $ 50,000(52) 133,333
(1) The date of the transaction is the date reflected by the Company's books and
records as the issue date, not necessarily the date on which consideration was
received or the contract for the transaction was executed.
(2) Unless otherwise noted, consideration was paid in cash. With respect to
consideration other than for cash, the stock was valued based on the issue price
of the stock at the date closest to the transaction.
(3) Unless otherwise noted, all references are to shares of common stock of the
Company.
(4) Mr. John Eagleton purchased a convertible debenture in the principal amount
of $150,000, which together with interest at the rate of 7% per annum was due
August 1, 2001. Such debenture was convertible, at the holder's option, into
shares of common stock of the Company at the rate of $.50 per share. On March
18, 1999, such debenture was converted into 300,000 shares of the Company's
common stock. The Company relied on the exemption from registration provided in
Regulation S promulgated under the Securities Act. Mr. Eagleton was not a "US
person" as such term is defined in Rule 902 of the Securities Act. Transfer of
the shares was also restricted according to the terms of Regulation S. In
addition, Mr. Eagleton was an accredited investor, within the exemption provided
by Section 4(6) of the Act.
(5) Mr. Anthony Eagleton purchased a convertible debenture in the principal
amount of $40,000, which together with interest at the rate of 7% per annum was
due June 2, 1999. Such debenture was convertible, at the holder's option, into
shares of common stock of the Company at the rate of $.50 per share. On March
18, 1999, such debenture was converted into 80,000 shares of the Company's
common stock. The Company relied on the exemption from registration provided in
Regulation S promulgated under the Securities Act. Mr. Eagleton was not a "US
person" as such term is defined in Rule 902 of the Securities Act. Transfer of
the shares was also restricted according to the terms of Regulation S. In
addition, Mr. Eagleton was an accredited investor, within the exemption provided
by Section 4(6) of the Act.
(6) Effective November 12, 1998, the shareholders of Teton Oil (USA) Limited
exchanged all of their shares of Teton Oil (USA) Limited for 25% of the shares
of ATCO (the predecessor to the Company). Teton Oil (USA) Limited owned 100% of
the stock of Teton Oil, Inc., which held the licenses in DCD Dagestan.
(7) The Company relied on the exemption from registration provided in Regulation
S promulgated under the Securities Act. Mr. Eagleton was not a "US person" as
such term is defined in Rule 902 of the Securities Act. Transfer of the shares
was also restricted according to the terms of Regulation S. In addition, Mr.
Eagleton was an accredited investor, within the exemption provided by Section
4(6) of the Act.
(8) The Company relied on Section 4(2) of the Securities Act, inasmuch as Mr.
Hopkins was known to management through prior business transactions, and had
experience with and knowledge of the Company as a shareholder, and the offer and
sale of the securities was not related to any other offer or sale. The Company
and the investor entered into a purchase agreement with respect to the purchase.
The agreement included representations concerning the investor's intent to
acquire the securities for investment only and not with a view towards
distribution. The future disposition of the securities was restricted by
agreement.
(9) The Company relied on Section 4(2) of the Securities Act, since the
purchaser was known to management through prior business transactions, the offer
and sale of the securities was related only to the sale of securities to four
other related individuals and to no other offer and sale, and the future
disposition of the securities was restricted by agreement. The Company and the
investor entered into a purchase agreement with respect to the purchase. The
agreement included representations concerning the investor's intent to acquire
the securities for investment only and not with a view towards distribution.
II-4
(10)The Company relied on Section 4(2) of the Securities Act, since Mr.
Hunzinger was known to management through prior business transactions, the offer
and sale of the securities was related only to the sale of securities to four
other related individuals and to no other offer and sale, and the future
disposition of the securities was restricted by agreement. The Company and the
investor entered into a purchase agreement with respect to the purchase. The
agreement included representations concerning the investor's intent to acquire
the securities for investment only and not with a view towards distribution.
(11)The Company relied on Section 4(2) of the Securities Act, since Mr.
Neuschwanger was known to management through prior business transactions, the
offer and sale of the securities was related only to the sale of securities to
four other related individuals and to no other offer and sale, and the future
disposition of the securities was restricted by agreement. The Company and the
investor entered into a purchase agreement with respect to the purchase. The
agreement included representations concerning the investor's intent to acquire
the securities for investment only and not with a view towards distribution.
(12)The Company relied on Section 4(2) of the Securities Act, since Mr.
euschwanger was known to management through prior business transactions, the
offer and sale of the securities was related only to the sale of securities to
four other related individuals and to no other offer and sale, and the future
disposition of the securities was restricted by agreement. The Company and the
investor entered into a purchase agreement with respect to the purchase. The
agreement included representations concerning the investor's intent to acquire
the securities for investment only and not with a view towards distribution.
(13)Triumph Resources was issued shares in connection with services rendered as
an advisor in connection with corporate matters. The Company relied on Section
4(2) of the Securities Act, since Triumph was known to management through prior
business transactions, the offer and sale of the securities was unrelated to any
other sale of securities, compensation for the sale was unrelated to the type of
property provided for other sales in the same time period, and the future
disposition of the securities was restricted.
(14)The principal amount of the debenture, together with interest at 20% per
annum, matures on March 1, 2005. The Company, at its option, may redeem the
shares. The debenture was redeemable at the option of the holder, in increments
of $1,000 principal amount, at a conversion rate of $1.60 per share. The
conversion rate was subsequently reduced to $.30 per share and the debenture
converted into 83,333 shares of the Company's common stock. The Company relied
on Section 4(2) of the Securities Act, since Mr. Woodcock was known to
management through prior business transactions and his provision of services to
Teton, the offer and sale of the securities was unrelated to any other sale of
securities, the security sold was unrelated to the securities sold in the same
time period, and the future disposition of the securities was restricted by
agreement. The Company and the investor entered into a purchase agreement with
respect to the purchase. The agreement included representations concerning the
investor's intent to acquire the securities for investment only and not with a
view towards distribution.
(15)Mr. Robinson was issued 135,000 shares of common stock in connection with
services relating to the Company's financing activities related to the
investment by Mr. Frank Calandra in Trust. The Company relied on the exemption
from registration provided in Regulation S promulgated under the Securities Act.
Mr. Robinson was not a "US person" as such term is defined in Rule 902 of the
Securities Act. Transfer of the shares was also restricted according to the
terms of Regulation S. In addition, Mr. Robinson was an accredited investor,
within the exemption provided by Section 4(6) of the Act. Mr. Robinson had been
providing consulting services to the Company and knew intimately the Company and
its operations.
(16)The Company relied on the exemption from registration provided in Regulation
S promulgated under the Securities Act. Mr. Calandra was not a "US person" as
such term is defined in Rule 902 of the Securities Act. Transfer of the shares
was also restricted according to the terms of Regulation S. The exemption
afforded by Section 4(2) of the Securities Act also applied, inasmuch as the
sale was isolated from other sales and made to a discrete individual known to
the Company and introduced and investigated by its representative.
(17)Current Capital was issued shares of common stock in connection with
consulting services related to investor relations. The Company relied on the
exemption from registration provided in Regulation S promulgated under the
Securities Act. Current Capital, an entity related to John Robinson and
qualified for the same reasons as Mr. Robinson, was not a "US person" as such
term is defined in Rule 902 of the Securities Act. Transfer of the shares was
also restricted according to the terms of Regulation S.
II-5
(18)Such shares were issued as compensation pursuant to a Consulting Agreement
entered into between Bendure Investments, Ltd. and the Company relating to the
Company's activities in Russia. The Company relied on the exemption from
registration provided in Regulation S promulgated under the Securities Act.
Bendure Investments was not a "US person" as such term is defined in Rule 902 of
the Securities Act. Transfer of the shares was also restricted according to the
terms of Regulation S. Bendure Investments had been providing consulting
services to the Company and knew intimately the Company and its operations.
(19)136,218 shares were issued as compensation pursuant to a Consulting
Agreement between Mr. Haskell and the Company with respect to the Company's
activities in Russia. 333,333 shares were issued in satisfaction of the
Company's obligations under a loan agreement, in the principal amount of
$100,000. The Company relied on the exemption from registration provided in
Section 4(2) under the Securities Act. Transfer of the shares was restricted. He
had been providing consulting services to the Company and knew intimately the
Company and its operations.
(20)A total of 504,186 shares of common stock of the Company were issued to
Messrs. Dorn, Grover and Kennedy and Perm Corporation in full payment of (a) all
interest due Perm Corporation through August 31, 2000, under the promissory note
in the principal amount of $200,000, dated November 12, 1998, (b) all interest
due Messrs. Dorn, Grover, and Kennedy through August 31, 2000, under the
promissory note in the principal amount of $300,000, dated April 20, 1999, and
(c) all principal and interest due Messrs. Dorn, Grover, and Kennedy under the
promissory note in the principal amount of $76,999.99, dated December 23, 1999.
Mr. Kennedy is a director of the Company. All such transactions are subject to
the exemption from registration provided by Section 4(6) of the Act, inasmuch as
each individual is an accredited investor.
(21)The board of directors authorized the issuance of 500,000 shares of common
stock to Perm Corporation in connection with modification of the Perm Note. The
individuals in control of Perm Corporation, identified in note 34, all had been
involved intimately in the operations of the Company since its inception. As
such, the exemption provided by Section 4(2) of the Securities Act is
applicable.
(22)136,218 shares of common stock of the Company were issued as compensation
pursuant to a Consulting Agreement with respect to the Company's activities in
Russia between Haskell Investment Company and the Company. The Company relied on
the exemption provided by Section 4(2) of the Securities Act. Transfer of the
shares was also restricted. Through its principal, the purchaser had been
providing consulting services to the Company and knew intimately the Company and
its operations.
(23) The Company relied on Section 4(2) of the Securities Act, since Mr.
Woodcock was a shareholder of the Company, was known to management through prior
business transactions and the prior sale of stock, the offer and sale of the
securities was related only to the offer and sale to Mr. Woodcock. The Company
and the investor entered into a purchase agreement with respect to the purchase.
The agreement included representations concerning the investor's intent to
acquire the securities for investment only and not with a view towards
distribution. The future disposition of the securities was restricted by
agreement.
(24)Such shares were issued in connection with consulting services relating to
the Company's activities in Russia. The principal owner of the purchaser is
James J. Woodcock. As such, the Company relied on Section 4(2) of the Securities
Act, since Mr. Woodcock was a shareholder of the Company, was known to
management through prior business transactions and the prior sale of stock, the
offer and sale of the securities was related only to the offer and sale to his
company. The consideration differed from that paid in recent issuances. The
Company and the investor entered into a purchase agreement with respect to the
purchase. The agreement included representations concerning the investor's
intent to acquire the securities for investment only and not with a view towards
distribution. The future disposition of the securities was restricted.
(25)The purchaser had previously purchased stock from the Company, and the
Company relied on the same exemptions as the initial purchase. See note 32.
(26)The Company issued 1,000,000 shares of its common stock as full satisfaction
of all of its obligations to Eurogas, Inc. under a Line of Credit Promissory
Note dated April 5, 2000, the principal balance of which was $300,000. The
discrete nature of this transaction, consideration paid and circumstances of the
issuance satisfied the requirements of Section 4(2) of the Securities Act.
II-6
(27)The Company issued 333,333 shares of its common stock in full satisfaction
of its Loan Agreement, in the principal amount of $100,000, with Haskell
Investment Company. The same exemptions applicable to earlier issuances to this
purchaser applied to this transaction. See notes 33 and 36.
(28)The same exemptions applicable to earlier issuances to this purchaser
applied to this transaction. See notes 33, 36 and 41.
(29)The Company issued 666,666 shares of its common stock in full satisfaction
of its Loan Agreement, in the principal amount of $200,000 with Bendure
Investments Ltd. The same exemptions applicable to earlier issuances to this
purchaser applied to this transaction. See notes 32 and 39.
(30)The Company relied on Section 4(2) of the Securities Act, since the
purchaser was known to management through prior business transactions, the offer
and sale of the securities was related only to the sale of securities to three
other related individuals and to no other offer and sale, and the future
disposition of the securities was restricted by agreement. The Company and the
investor entered into a purchase agreement with respect to the purchase. The
agreement included representations concerning the investor's intent to acquire
the securities for investment only and not with a view towards distribution.
(31)The Company relied on Section 4(2) of the Securities Act, since the
purchaser was known to management through prior business transactions, the offer
and sale of the securities was related only to the sale of securities to three
other related individuals and to no other offer and sale, and the future
disposition of the securities was restricted by agreement. The Company and the
investor entered into a purchase agreement with respect to the purchase. The
agreement included representations concerning the investor's intent to acquire
the securities for investment only and not with a view towards distribution.
(32)The Company relied on Section 4(2) of the Securities Act, inasmuch as Mr.
Hopkins was known to management through prior business transactions, and had
experience with and knowledge of the Company as a shareholder, and the offer and
sale of the securities was not related to any other offer or sale. The Company
and the investor entered into a purchase agreement with respect to the purchase.
The agreement included representations concerning the investor's intent to
acquire the securities for investment only and not with a view towards
distribution. The future disposition of the securities was restricted by
agreement.
(33)The same exemptions applicable to earlier issuances to this purchaser
applied to this transaction. See note 8.
(34)The Company relied on the exemption from registration provided in Regulation
S promulgated under the Securities Act. Mr. Petrouk was not a "US person" as
such term is defined in Rule 902 of the Securities Act. Transfer of the shares
was also restricted according to the terms of Regulation S. In addition, Mr.
Petrouk was an accredited investor, within the exemption provided by Section
4(6) of the Act.
(35)The Company issued 16,667 shares of its common stock to Mr. Petrouk as
compensation for consulting services in connection with the Company's activities
in Russia. The same exemption applicable to the earlier issuance to Mr. Petrouk
applies to this issuance. See note 48.
(36)The Company relied on Section 4(2) of the Securities Act, since Mr. Laughlin
was known to management through prior business transactions, the offer and sale
of the securities was not related to any other offer and sale of those
securities and the future disposition of the securities was restricted by
agreement.
(37)The Company relied on Section 4(2) of the Securities Act, since Mr.Campbell
was known to management through prior business transactions, the offer and sale
of the securities was not related to any other offer and sale of those
securities and the future disposition of the securities was restricted by
agreement.
(38)The Company relied on Section 4(2) of the Securities Act, since Mr. Lawson
was known to management through prior business transactions, the offer and sale
of the securities was not related to any other offer and sale of those
securities and the future disposition of the securities was restricted by
agreement.
(39)On October 16, 2000, the Company issued a convertible debenture ($500,000
principal amount) to EuroGas, Inc. The principal sum, together with interest at
the rate of 20% per annum was due on October 16, 2001. Eurogas was entitled to
convert the principal balance of the debenture and all accrued interest at any
time, at a conversion price of $.30 per share. Unless Eurogas, Inc. consented to
payment in cash, the principal balance and all accrued interest was required to
be paid in shares of common stock valued at the conversion price. The conversion
price was subject to adjustment based upon the occurrence of certain events
specified in the debenture. On December 11, 2000, such shares were converted
into 1,714,156 shares of common stock. The offer and sale were made in reliance
on Section 4(2) of the Securities Act.
II-7
(40)Current Capital was issued shares of common stock in connection with
consulting services related to investor relations. The Company relied on the
exemption from registration provided in Regulation S promulgated under the
Securities Act. Current Capital, an entity related to John Robinson and
qualified for the same reasons as Mr. Robinson, was not a "US person" as such
term is defined in Rule 902 of the Securities Act. Transfer of the shares was
also restricted according to the terms of Regulation S.
(41)The Company relied on Section 4(2) of the Securities Act, since Mr. Laughlin
was known to management through prior business transactions, the offer and sale
of the securities was not related to any other offer and sale of those
securities and the future disposition of the securities was restricted by
agreement. The Company and the investor entered into a purchase agreement with
respect to the purchase. The agreement included representations concerning the
investor's intent to acquire the securities for investment only and not with a
view towards distribution.
(42)The Company relied on the exemption from registration provided in Regulation
S promulgated under the Securities Act. Mr. DePahlen was not a "US person" as
such term is defined in Rule 902 of the Securities Act. Transfer of the shares
was also restricted according to the terms of Regulation S. Mr. DePahlen also
was an accredited investor under the exemption provided by Section 4(6) of the
Act.
(43)The Company relied on Section 4(2) of the Securities Act, since Mr. Oswald
was known to management through prior business transactions, a prior issuance of
stock, and his shareholder status, and the offer and sale of the securities was
not related to any other offer and sale of those securities and the future
disposition of the securities was restricted by agreement. The Company and the
investor entered into a purchase agreement with respect to the purchase. The
agreement included representations concerning the investor's intent to acquire
the securities for investment only and not with a view towards distribution.
(44)The Company relied on Section 4(2) of the Securities Act, since Mr. Laughlin
was known to management through prior business transactions, a prior issuance of
stock to his brother,, and the offer and sale of the securities was not related
to any other offer and sale of those securities and the future disposition of
the securities was restricted by agreement. The Company and the investor entered
into a purchase agreement with respect to the purchase. The agreement included
representations concerning the investor's intent to acquire the securities for
investment only and not with a view towards distribution. 45)The Company relied
on Section 4(2) of the Securities Act, since Mr. Laughlin was known to
management through prior business transactions, a prior issuance of stock, and
his shareholder status, and the offer and sale of the securities was not related
to any other offer and sale of those securities and the future disposition of
the securities was restricted by agreement. The Company and the investor entered
into a purchase agreement with respect to the purchase. The agreement included
representations concerning the investor's intent to acquire the securities for
investment only and not with a view towards distribution.
(46)The Company relied on Section 4(2) of the Securities Act, since the Baalmans
were known to management through prior business transactions, and the offer and
sale of the securities was not related to any other offer and sale of those
securities and the future disposition of the securities was restricted by
agreement. The Company and the investor entered into a purchase agreement with
respect to the purchase. The agreement included representations concerning the
investor's intent to acquire the securities for investment only and not with a
view towards distribution.
(47)The Company relied on Section 4(2) of the Securities Act, since Mr. Roderick
was known to management through prior business transactions, and the offer and
sale of the securities was not related to any other offer and sale of those
securities and the future disposition of the securities was restricted by
agreement. The Company and the investor entered into a purchase agreement with
respect to the purchase. The agreement included representations concerning the
investor's intent to acquire the securities for investment only and not with a
view towards distribution.
(48)Such shares were issued in connection with consulting services related to
the Company's activities in Russia. The Company relied on the exemption from
registration provided in Regulation S promulgated under the Securities Act.
Messrs. Yermolenko, Bergulev and Labovsky were not "US persons" as such term is
defined in Rule 902 of the Securities Act. Transfer of the shares was also
restricted according to the terms of Regulation S.
II-8
(49) The Company relied on Section 4(2) of the Securities Act and the exemption
provided under Regulation D, Rule 504 of the Securities Act. Generally, the
Company and the investor entered into a purchase agreement with respect to the
purchase. The agreement included representations concerning the investor's
intent to acquire the securities for investment only and not with a view towards
distribution. Additionally, future disposition of the securities was restricted
pursuant to legends set forth on the stock certificate. The Company filed a Form
D, Notice of Sale of Securities pursuant to Regulation D, Section 4(6) and/or
Uniform Limited Offering Exemption with the Securities and Exchange Commission
with respect to the offering.
(50) The Company relied on the exemption from registration provided in
Regulation S promulgated under the Securities Act. Brownstein Resources is not a
"US Person" as such term is defined in Rule 902 of the Securities Act. Transfer
of the shares was also restricted according to the terms of Regulation S.
(51) The Company relied on the exemption from registration provided in
Regulation S promulgated under the Securities Act. Gresham Sarl is not a "US
Person" as such term is defined in Rule 902 of the Securities Act. Transfer of
the shares was also restricted according to the terms of Regulation S.
(52) The Company relied on the exemption from registration provided in
Regulation S promulgated under the Securities Act. Adel H. Hindi is not a "US
Person" as such term is defined in Rule 902 of the Securities Act. Transfer of
the shares was also restricted according to the terms of Regulation S.
From March 8 2002 to August 19, 2002, Teton Petroleum Company sold to accredited
investors a total of $4,143,643 principal amount of its subordinated convertible
debentures ("Debentures"). Such sales were not registered under the Securities
Act of 1933, as amended (the "Act"). The Debentures were sold to current
shareholders of Teton, officers of Teton, and other persons known to Teton's
management through prior business transactions or personal relationships. The
Debentures mature three years from the date of issuance. The Debentures bear
interest at the rate of 10% per annum payable annually on the anniversary dates
of the Debentures. At the election of the holder, interest is payable in cash or
shares of Teton's common stock, valued at the conversion price. The Debentures
are convertible into shares of common stock of Teton, at any time prior to
maturity. The conversion price of the Debentures is 25 cents per share. The
conversion price will be adjusted in the event of a stock split or certain other
corporate actions described in the Debentures. The Debentures are subject to
redemption by Teton at a redemption price equal to 110% of the principal amount,
at any time prior to the one-year anniversary of issuance. After the one-year
anniversary, Teton may redeem the Debentures without penalty or premium. At
Teton's option, the redemption price may be paid in cash or in shares of common
stock of Teton, valued at the conversion price. Additionally, purchasers of the
Debentures received a stock purchase warrant to purchase four additional shares
of common stock of Teton for each $1.00 of principal amount of Debentures
purchased. The exercise price of the warrants is 50 cents per share. The
warrants expire two years from the date of issuance. Teton did not use any
public solicitation or advertisements in connection with the sales of the
Debentures. Teton did not use the services of an underwriter in connection with
the sale of the Debentures. In connection with sales made to U.S. Persons as
such term is defined in Rule 902 of the Act ("US Investors"), Teton relied on
exemptions from registration set forth in Section (4)(2) of the Act and
Regulation D, Rule 505 of the Act. Teton and each US Investor entered into a
purchase agreement with respect to the acquisition of the Debentures. The
agreement included representation concerning the investor's intent to acquire
the securities for investment only and not with a view toward the distribution.
The agreement also disclosed that the securities being acquired had not been
registered under the Act. The purchase agreement, Debenture, and warrant provide
that future disposition of the securities is restricted except in compliance
with the Act and state securities laws. In connection with sales made to non-US
Investors, Teton relied on an exemption from registration provided under
Regulation S promulgated under the Act. Teton and each non-US Investor entered
into a purchase agreement with respect to the purchase of the securities. The
agreement included representation concerning the investor's intent to acquire
the securities for investment only and not with a view toward the distribution.
Transfers of the Debentures and warrants held by non-US Investors are also
restricted in accordance with Regulation S.
The offering that began in March 2002 was amended in September 2002 to sell
shares of common stock in lieu of debentures. From September 13, 2002 to
December 31, 2002, Teton Petroleum Company sold to accredited investors a total
of 2,365,343 shares of common stock for a total of $6,386,990. The purchase
price per share was $2.72 per share. Such amounts include the issuance of a
$250,000 debenture in consideration of the purchaser's cancellation of Teton's
$250,000 promissory note.
II-9
The total amount of securities sold in this offering was $10,530,633. Of that
amount $4,143,643 was sold to US persons, as such term is defined in Rule 902 of
the Act and $6,386,990 was sold to non-US Investors.
The securities were sold to current shareholders of Teton, officers of Teton,
other persons known to our management through prior business transactions or
personal relationships, and to certain institutional purchasers. We did not use
any public solicitation or advertisements in connection with the sale of the
securities. Furthermore, we did not use the services of an underwriter in
connection with the sale of the securities. In connection with sales of
securities made to US Investors, Teton relied on exemptions from registration
set forth in Section 4(2) of the Act and Regulation D, Rule 505 of the Act.
Teton and each US Investor entered into a purchase agreement with respect to the
acquisition of the securities. The agreement included representations concerning
the investor's intent to acquire the securities for investment only and not with
a view towards distribution. The agreement also disclosed that the securities
being acquired have not been registered under the Act. The purchase agreement,
debenture, stock certificate, and warrant provide that future disposition of the
securities is restricted except in compliance with the Act and state securities
laws. In connection with sales made to non-US Investors, Teton relied on an
exemption from registration provided under Regulation S promulgated under the
Act. Teton and each non-US Investor entered into a purchase agreement with
respect to the purchase of the securities. The agreement included
representations concerning the investor's intent to acquire the securities for
investment only and not with a view towards distribution. Transfers of the
securities held by non-US Investors are also restricted in accordance with
Regulation S.
In March 2002, Teton sold a $200,000 principal amount convertible note to a
non-U.S. person (the "Fund"). The principal amount of the note, together with
interest at 8% per annum, was due two years from the date of issuance. The note
was convertible into shares of Teton common stock, at a conversion price per
share equal to the lesser of 25 cents per share or 80% of average of the three
lowest closing prices for Teton's common stock on the OTC Bulletin Board or
other exchange for the 30 trading days prior to conversion. The conversion price
was subject to adjustment upon the happening of certain events specified in the
note. The Fund was also issued a stock purchase warrant to purchase an
additional 100,000 shares of Teton common stock. The Fund was granted certain
demand registration rights with respect to the shares of common stock issuable
upon conversion of the note and exercise of the warrant. On May 1, 2002, the
Fund purchased $500,000 principal amount convertible note, on terms identical to
the $200,000 convertible note. The $200,000 convertible note was cancelled and
applied to the purchase price for the $500,000 note. The stock purchase warrant
for 100,000 shares was also cancelled. In connection with the $500,000 note,
Teton issued a stock purchase warrant to purchase an additional 2,000,000 shares
of Teton common stock at 50 cents per share. The warrant expires May 1, 2005. On
May 15, 2002, Teton redeemed the $500,000 note in cash. The redemption amount of
$551,315 included the principal amount, accrued interest, and 10% premium. In
connection with such redemption, Teton's obligations under the purchase
agreement including the obligation to register the shares issuable upon
conversion of the note and exercise of the warrant were terminated. The warrant
to purchase 2,000,000 shares was modified to include a cashless exercise
provision with respect to 250,000 of the shares and to provide piggy-back
registration rights with respect to all shares issuable upon exercise of the
warrant. In connection with such transactions Teton paid a total of $50,000 as a
commission to the fund manager. In connection with such transactions, Teton
relied on an exemption from registration set forth in Regulation S of the Act.
Teton and the Fund entered into a purchase agreement with respect to the
acquisition of each note. The agreement included representation concerning the
Fund's intent to acquire the securities for investment only and not with a view
toward the distribution. The agreement also disclosed that the securities being
acquired had not been registered under the Act. The purchase agreement, note,
and warrant provide that future disposition of the securities is restricted
except in compliance with the Act and state securities laws.
During the quarter ended September 30, 2002, we also issued 20,000 shares of our
common stock to a former consultant. The shares were issued in connection with
the consultant's release of any claims against Teton, its president, and Teton
Oil (USA) Limited. Teton issued such shares in reliance on the exemption from
registration set forth in Section 4(2) of the Act. Teton also issued stop
transfer instructions to its transfer agent with respect to such shares to
ensure that any transfer of the shares complies with federal and state
securities laws.
On January 14, 2003, we issued the following shares of our common stock to the
following parties for services rendered:
1. 20,191 shares of common stock and 18,334 warrants exercisable at $6.00 to
Rockwell Capital Ventures in consideration of $55,000 for assisting in the
preparation of road shows in europe.
2. 406 shares of common stock to Ivy L. Frederick in consideration of $12,000
for an engagement fee.
3. 380 shares of common stock to John P. O'Shea in consideration of $11,250 for
an engagement fee.
II-10
4. 76 shares of common stock to Henry S. Kraus in consideration of $2,250 for an
engagement fee.
5. 76 shares of common stock to Daniel Luskind in consideration of $2,250 for an
engagement fee.
6. 76 shares of common stock to Arthur Niebaur in consideration of $2,250 for an
engagement fee.
The above-referenced offerings were deemed to be exempt under Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors, business
associates of Teton Petroleum Company or executive officers of Teton Petroleum
Company, and transfer was restricted by Teton Petroleum Company in accordance
with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment.
On January 22, 2003, we issued 44,052 shares of our common stock and 40,000
warrants exercisable at $6.00 to Current Capital Corporation in consideration of
$120,000 for investor relationship services in Canada. These services included
maintaining mailing lists, reviewing press releases, introducing us to
investment banks and other providers of capital in Canada, and assisting us in
planning and execution of an investor relations program in Canada. The
above-referenced offerings were deemed to be exempt under Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors, business
associates of Teton Petroleum Company or executive officers of Teton Petroleum
Company, and transfer was restricted by Teton Petroleum Company in accordance
with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment.
On March 23, 2003, we issued 7,408 shares of our common stock to Karl F. Arleth,
our director, in consideration of $20,000 for services rendered. This offering
was deemed to be exempt under Regulation D and Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of Teton Petroleum
Company or executive officers of Teton Petroleum Company, and transfer was
restricted by Teton Petroleum Company in accordance with the requirements of the
Securities Act of 1933. In addition to representations by the above-referenced
persons, we have made independent determinations that all of the
above-referenced persons were accredited or sophisticated investors, and that
they were capable of analyzing the merits and risks of their investment, and
that they understood the speculative nature of their investment.
On March 27, 2003, we issued 6,898 shares of our common stock and 6,274 warrants
exercisable at $6.00 to Ilia Gurevich in consideration of $18,790 for consulting
services rendered. In addition, we issued 11,013 shares of our common stock and
10,000 warrants exercisable at $6.00 to Maxim Partners in consideration of
$30,000 in order to be engaged as a placement agent. This offering was deemed to
be exempt under Regulation D and Section 4(2) of the Securities Act. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of Teton Petroleum Company or
executive officers of Teton Petroleum Company, and transfer was restricted by
Teton Petroleum Company in accordance with the requirements of the Securities
Act of 1933. In addition to representations by the above-referenced persons, we
have made independent determinations that all of the above-referenced persons
were accredited or sophisticated investors, and that they were capable of
analyzing the merits and risks of their investment, and that they understood the
speculative nature of their investment.
On March 28, 2003, we issued 73,422 shares of our common stock and 66,667
warrants exercisable at $6.00 to Strategic Partners Ltd. in consideration of
$200,000 for investor relations work in Europe. These services included
strategic advice for the European market, introductions to various investment
banks, development of an investor relation program in Europe, preparation of
corporate presentations, and advice on our business plan. This offering was
deemed to be exempt under Regulation D and Section 4(2) of the Securities Act.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of Teton Petroleum Company or
executive officers of Teton Petroleum Company, and transfer was restricted by
Teton Petroleum Company in accordance with the requirements of the Securities
Act of 1933. In addition to representations by the above-referenced persons, we
have made independent determinations that all of the above-referenced persons
were accredited or sophisticated investors, and that they were capable of
analyzing the merits and risks of their investment, and that they understood the
speculative nature of their investment.
II-11
On April 9, 2003, Teton issued an aggregate of 1,448,037 options to seven
officers and directors pursuant to the 2003 Stock Option Plan. The options have
an exercise price of $3.48 per share and expire on April 8, 2013. This offering
and sale was deemed to be exempt under Rule 701 and Section 4(2) of the
Securities Act of 1933. No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to an accredited
investor and transfer was restricted in accordance with the requirements of the
Securities Act of 1933.
On April 9, 2003, Teton issued 30,000 options to members of its Advisory
Committee in consideration for serving on the Advisory Committee. The options
have an exercise price of $3.48 per share and expire on April 8, 2013. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to an
accredited investor and transfer was restricted in accordance with the
requirements of the Securities Act of 1933.
On April 9, 2003 we issued 291,667 warrants exercisable at $3.48 to a consultant
for its involvement in assisting the Company in raising equity capital. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to an
accredited investor and transfer was restricted in accordance with the
requirements of the Securities Act of 1933.
On June 19, 2003, we issued a $350,000 six month 10% promissory note to a
shareholder along with 87,500 warrants exercisable at $6.00. This offering and
sale was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of
the Securities Act. No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to an accredited
investor and transfer was restricted in accordance with the requirements of the
Securities Act of 1933.
On June 24, 2003, we issued a $128,750 promissory note to a director along with
3,700 options exercisable at $3.48. This offering and sale was deemed to be
exempt under Rule 506 of Regulation D and Section 4(2) of the Securities Act. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to an accredited investor and transfer was
restricted in accordance with the requirements of the Securities Act of 1933.
On July 1, 2003, we issued a $150,000 six month 10% promissory note to a
shareholder along with 37,500 warrants exercisable at $6.00. This offering and
sale was deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of
the Securities Act. No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to an accredited
investor and transfer was restricted in accordance with the requirements of the
Securities Act of 1933.
On August 4, 2003, Teton issued 100,000 options to an outside director pursuant
to the 2003 Stock Option Plan. The options have an exercise price of $3.40 per
share and expire on August 4, 2013. This offering and sale was deemed to be
exempt under Rule 701 and Section 4(2) of the Securities Act of 1933. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to an accredited investor and transfer was
restricted in accordance with the requirements of the Securities Act of 1933.
On August 11, 2003, Teton issued 9,656 shares of series A convertible preferred
stock in exchange for investor relation services valued at $42,000. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to an
accredited investor and transfer was restricted in accordance with the
requirements of the Securities Act of 1933.
On August 25, 2003, Teton issued 22,989 warrants exerciseable at $6.00 per share
expiring August 25, 2005. The warrants were issued in connection with a finder's
fee. This offering and sale was deemed to be exempt under Rule 506 of Regulation
D and Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to an
accredited investor and transfer was restricted in accordance with the
requirements of the Securities Act of 1933.
II-12
On August 29, 2003 and September 30, 2003, Teton issued 1,250 shares of common
stock to a consultant in return for various financial advisory activities valued
at $5,062 and $4,875, respectively. This offering and sale was deemed to be
exempt under Rule 506 of Regulation D and Section 4(2) of the Securities Act. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to an accredited investor and transfer was
restricted in accordance with the requirements of the Securities Act of 1933.
On September 5, 2003, Teton issued 2,414 warrants exerciseable at $6.00 per
share expiring September 5, 2005. The warrants were issued in connection with a
finder's fee. This offering and sale was deemed to be exempt under Rule 506 of
Regulation D and Section 4(2) of the Securities Act. No advertising or general
solicitation was employed in offering the securities. The offerings and sales
were made to an accredited investor and transfer was restricted in accordance
with the requirements of the Securities Act of 1933.
On October 23, 2003, Teton announced it had completed the placement of
approximately $7.548 million of its series A convertible preferred stock. Teton
sold approximately 1.735 million unregistered series A convertible preferred
shares at a price of $4.35 per share. The private placement was priced on July
11, 2003, when Teton's common shares were trading at $4.30 per share and was
approximately 51% oversubscribed. The preferred shares carry an 8% dividend,
payable quarterly and are convertible into common stock at a price of $4.35 per
share. If converted within 60 days of the closing, the investors will be
entitled to receive (i) dividends payable in common stock for one year; and (ii)
100,000 Class B Warrants for each $500,000, exercisable at $6.00 per share. This
offering and sale was deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to an
accredited investor and transfer was restricted in accordance with the
requirements of the Securities Act of 1933.
On November 10, 2003, Teton announced that it closed an extended second round of
its privately placed series A convertible preferred stock. The initial offering
of convertible preferred shares, which closed on October 23, 2003, was extended
due to continued high investor demand. In the second round Teton raised
approximately $2.3 million and Teton sold approximately 526,000 restricted
series A convertible preferred shares at a price of $4.35 per share. Including
the second round the total funds raised in the convertible preferred private
placement equal approximately $9.8 million, a 96% over subscription. The
preferred shares issued in the second round require shareholder approval in
order to be converted into common shares. This offering and sale was deemed to
be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities Act.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to an accredited investor and transfer was
restricted in accordance with the requirements of the Securities Act of 1933.
Item 27. Exhibits.
The following exhibits are included as part of this Form SB-2. References to
"the Company" in this Exhibit List mean Teton Petroleum Company, a Nevada
corporation.
Exhibits.
Exhibit No. Description
----------- -----------
3.1.1 Certificate of Incorporation of EQ Resources Ltd incorporated by
reference to Exhibit 2.1.1 of Teton's Form 10-SB, filed July 3,
2001.
3.1.2 Certificate of Domestication of EQ Resources Ltd incorporated by
reference to Exhibit 2. 1.2 of Teton's Form 10-SB, filed
July 3, 2001.
3.1.3 Articles of Merger of EQ Resources Ltd. and American-Tyumen
Exploration Company incorporated by reference to Exhibit
2.1.3 of Teton's Form 10-SB, filed July 3, 2001.
3.1.4 Certificate of Amendment of Teton Petroleum Company incorporated
by reference to Exhibit 2.1.4 of Teton's Form 10-SB, filed
July 3, 2001.
3.1.5 Certificate of Amendment of Teton Petroleum Company incorporated
by reference to Exhibit 2.1.5 of Teton's Form 10-SB, filed July
3, 2001.
3.1.6 Certificate of Designation for Series A Convertable Preferred
Stock
5.1 Consent of Counsel
10.1 Employment Agreement, dated May 1, 2002, between Teton
Petroleum Company and H. Howard Cooper (filed herewith).
23.1 Auditor's Consent
II-13
Item 28. Undertakings.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii)Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-14
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Denver,
State of Colorado, on February 12, 2004.
TETON PETROLEUM COMPANY
By: /s/ Karl Arleth
-----------------
Karl Arleth, President and CEO
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
/s/ H. Howard Cooper Chairman and Founder February 12, 2004
---------------------------------
H. Howard Cooper
/s/ Karl Arleth President and CEO February 12, 2004
---------------------------------
Karl Arleth
/s/ Thomas F. Conroy Director February 12, 2004
---------------------------------
Thomas F. Conroy
/s/ James J. Woodcock Director February 12, 2004
---------------------------------
James J. Woodcock
Director February 12, 2004
---------------------------------
John Connor
/s/ John Mahar Chief Financial Officer February 12, 2004
---------------------------------
John Mahar
F-15