TETON ENERGY CORP - SB-2 - 20040127 - DIRECTOR_COMPENSATION
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
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.
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.
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.
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
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:
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 January 27, 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 January 27, 2004
---------------------------------
H. Howard Cooper
/s/ Karl Arleth President and CEO January 27, 2004
---------------------------------
Karl Arleth
/s/ Thomas F. Conroy Director January 27, 2004
---------------------------------
Thomas F. Conroy
/s/ James J. Woodcock Director January 27, 2004
---------------------------------
James J. Woodcock
Director January 27, 2004
---------------------------------
John Connor
/s/ John Mahar Chief Financial Officer January 27, 2004
---------------------------------
John Mahar
F-15
Exhibit 3.1.6
CERTIFICATE OF DESIGNATION
Karl Arleth certifies that he is the President and Secretary of Teton Petroleum
Company., a Delaware corporation (hereinafter referred to as the "Company") and
that, pursuant to the Company's Certificate of Incorporation, as amended, and
Section 151 of the General Business Corporation Law, the Board of Directors of
the Company adopted the following resolutions on July 11, 2003, and that none of
the shares of Series A Convertible Preferred Stock referred to in this
Certificate of Designation have been issued.
Creation of Series A Convertible Preferred Stock
1. There is hereby created a series of preferred stock consisting of 1,200,000
shares and designated as the Series A Convertible Preferred Stock ("Preferred
Stock"), having the voting powers, preferences, relative, participating,
limitations, qualifications, optional and other special rights and the
qualifications, limitations and restrictions thereof that are set forth below.
Redemption Provisions
2. Outstanding Preferred Stock may be redeemed by the Company from holders of
shares of Preferred Stock by: (i) delivering notice in writing thereof to such
holders after the date which is three hundred and sixty-five (365) calendar days
following the date on which the Company received payment in full for the
Preferred Stock from and issued the Preferred Stock to a particular holder of
Preferred Stock (the "Issuance Date"); and (ii) by the payment to such holders
of the sum of $4.35 per share of Preferred Stock so redeemed within three (3)
business days of such notice by way of wire transfer, certified cheque of bank
draft. The Company may not redeem any shares of Preferred Stock for which it has
received a Conversion Notice (as defined herein).
Conversion Provisions
3. The holders of Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):
Conversion
(a) Right to Convert. After the day on which the Company receives payment
in full for Preferred Stock from, and issues Preferred Stock to, a
particular holder of Preferred Stock (the "Issuance Date"), all
Preferred Stock held by that holder shall be convertible at the option
of the holder into such number of shares of common stock of the
Company ("Common Stock") on a one for one basis. If the holder of the
Preferred Stock elects to convert within 60 days of the Issuance Date,
the holder of Preferred Stock will be entitled to receive (i)
dividends for one year payable in Common Stock; and (ii) 100,000 class
B common stock purchase warrants for every 114,943 shares of Preferred
Stock purchased.
(b) Automatic Conversion. The Preferred Stock will be automatically
converted into Common Stock in the event (i) of a underwritten public
offering of shares of Common Stock in an offering with gross proceeds
to the Company of not less than $20,000,000; or (ii) the price of the
Company's Common Stock averages $6.00 for a period of 30 days.
1
(c) No Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of the Preferred Stock, and in lieu thereof the
number of shares of Common Stock to be issued for each share of
Preferred Stock converted shall be rounded down to the nearest whole
number of shares of Common Stock. Such number of whole shares of
Common Stock to be issued upon the conversion of one share of
Preferred Stock shall be multiplied by the number of shares of
Preferred Stock submitted for conversion pursuant to the Notice of
Conversion (defined below) to determine the total number of shares of
Common Stock to be issued in connection with any one particular
conversions.
(d) Method of Conversion. In order to convert Preferred Stock into shares
of Common Stock, a holder of Preferred Stock shall
(A) complete, execute and deliver to the Company the conversion
certificate attached hereto as Exhibit A (the "Notice of Conversion"),
and
(B) surrender the certificate or certificates representing the Preferred
Stock being converted (the "Converted Certificate") to the Company.
Subject to paragraph 2(h) hereof, the Notice of Conversion shall be
effective and in full force and effect for a particular date if delivered
to the Company prior to 5:00 pm, eastern standard time, by facsimile
transmission or otherwise, provided that particular date is a business day,
and provided that the original Notice of Conversion and the Converted
Certificate are delivered to and received by the Company within three (3)
business days thereafter and that particular date shall be referred to
herein as the "Conversion Date". The person or persons entitled to receive
the shares of Common Stock to be issued upon conversion shall be treated
for all purposes as the record holder or holders of such shares of Common
Stock as of the Conversion Date. If the original Notice of Conversion and
the Converted Certificate are not delivered to and received by the Company
within three (3) business days following the Conversion Date, the Notice of
Conversion shall become null and void as if it were never given and the
Company shall, within two (2) business days thereafter, return to the
holder by overnight courier any Converted Certificate that may have been
submitted in connection with any such conversion. In the event that any
Converted Certificate submitted represents a number of shares of Preferred
Stock that is greater than the number of such shares that is being
converted pursuant to the Notice of Conversion delivered in connection
therewith, the Company shall deliver a certificate representing the
remaining number of shares of Preferred Stock not converted.
(e) Absolute Obligation to issue Common Stock. Upon receipt of a Notice of
Conversion, the Company shall absolutely and unconditionally be
obligated to cause a certificate or certificates representing the
number of shares of Common Stock to which a converting holder of
Preferred Stock shall be entitled as provided herein, which shares
shall constitute fully paid and non-assessable shares of Common Stock
and shall be issued to, delivered by overnight courier to, and
received by such holder by the sixth (6th) business day following the
Conversion Date. Such delivery shall be made at such address as such
holder may designate therefor in its Notice of Conversion or in its
written instructions submitted together therewith.
2
(f) Minimum Conversion. No less than 10 shares of Preferred Stock may be
converted at any one time by a particular holder, unless the holder
then holds less than 10 shares and converts all such shares held by it
at that time.
Adjustments to Conversion Rate
(g) Reclassification, Exchange and Substitution. If the Common Stock to be
issued on conversion of the Preferred Stock shall be changed into the
same or a different number of shares of any other class or classes of
stock, whether by capital reorganization, reclassification, reverse
stock split or forward stock split or stock dividend or otherwise
(other than a subdivision or combination of shares provided for
above), the holders of the Preferred Stock shall, upon its conversion
be entitled to receive, in lieu of the Common Stock which the holders
would have become entitled to receive but for such change, a number of
shares of such other class or classes of stock that would have been
subject to receipt by the holders if they had exercised their rights
of conversion of the Preferred Stock immediately before that changes.
(h) Reorganizations, Mergers, Consolidations or Sale of Assets. If at any
time there shall be a capital reorganization of the Company's common
stock (other than a subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this Section 3) or merger
of the Company into another corporation, or the sale of the Company's
properties and assets as, or substantially as, an entirety to any
other person, then, as a part of such reorganization, merger or sale,
lawful provision shall be made so that the holders of the Preferred
Stock receive the number of shares of stock or other securities or
property of the Company, or of the successor corporation resulting
from such merger, to which holders of the Common Stock deliverable
upon conversion of the Preferred Stock would have been entitled on
such capital reorganization, merger or sale if the Preferred Stock had
been converted immediately before that capital reorganization, merger
or sale to the end that the provisions of this paragraph (including
adjustment of the Conversion Rate then in effect and the number of
shares purchasable upon conversion of the Preferred Stock) shall be
applicable after that event as nearly equivalently as may be
practicable.
(i) No Impairment. The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, recapitalization,
transfer of assets, merger, dissolution, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but
will at all times in good faith assist in the carrying out of all the
provisions of this Section 3 and in the taking of all such action as
may be necessary or appropriate in order to protect the Conversion
Rights of the holders of the Preferred Stock against impairment.
(j) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the Conversion Rate for any shares of Preferred
Stock pursuant to paragraphs 2(g) or (h) hereof, the Company at its
3
expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each
holder of Preferred Stock effected thereby a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. The Company shall,
upon the written request at any time of any holder of Preferred Stock,
furnish or cause to be furnished to such holder a like certificate
setting forth: (i) such adjustments and readjustments; (ii) the
Conversion Rate at the time in effect; and (iii) the number of shares
of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of such holder's shares of
Preferred Stock
Liquidation Provisions
4. In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, holders of Preferred Stock shall be entitled
to receive an amount equal to $4.35 per share, plus any accrued and unpaid
dividends. After the full preferential liquidation amount has been paid to, or
determined and set apart for the Preferred Stock and all other series of
preferred stock hereafter authorized and issued, if any, the remaining assets of
the Company available for distribution to shareholders shall be distributed
ratably to the holders of the Common Stock. In the event the assets of the
Company available for distribution to its shareholders are insufficient to pay
the full preferential liquidation amount per share required to be paid to the
holders of Company's Preferred Stock, the entire amount of assets of the Company
available for distribution to shareholders shall be paid up to their respective
full liquidation amounts first to the holders of Preferred Stock, then to any
other series of preferred stock hereafter authorized and issued, all of which
amounts shall be distributed ratably among holders of each such series of
preferred stock, and the Common Stock shall receive nothing. A reorganization or
any other consolidation or merger of the Company with or into any other
corporation, or any other sale of all or substantially all of the assets of the
Company, shall not be deemed to be a liquidation, dissolution or winding up of
the Company within the meaning of this Section 4, and the Preferred Stock shall
be entitled only to: (i) the rights provided in any agreement or plan governing
the reorganization or other consolidation, merger or sale of assets transaction;
(ii) the rights contained in the Delaware General Business Corporation Law; and
(iii) the rights contained in other Sections hereof.
Dividend Provisions
5. The holders of shares of Preferred Stock shall be entitled to receive
dividends in preference to any dividend on the Common Stock. Dividends shall
accrue quarterly and be payable in cash commencing on January 1, 2004 at the
annual rate of 8%.
Notices
6. In the event of the establishment by the Company of a record of the holders
of any class of securities for the purpose of determining the holders thereof
who are entitled to receive any distribution, the Company shall mail to each
holder of Preferred Stock at least twenty (20) days prior to the date specified
therein a notice specifying the date on which any such record is to be taken for
the purpose of such distribution and the amount and character of such
distribution.
7. Any notices required by the provisions hereof to be given to the holders of
shares of Preferred Stock shall be deemed given if deposited in the United
States mail, postage prepaid and return receipt requested, and addressed to each
holder of record at its address appearing on the books of the Company or to such
other address of such holder or its representative as such holder may direct.
4
Voting Provisions
8. Except as otherwise expressly provided or required by law, the Preferred
Stock shall vote on all matters submitted for stockholder approval. Each share
of Preferred Stock shall be entitled to such number of votes as is equal to the
number of shares of Common Stock into which such shares are convertible.
IN WITNESS WHEREOF, the Company has caused this Certificate of Designation
of Series A Convertible Preferred Stock to be duly executed by its President and
attested to by its Secretary this 23rd day of July 2003, who, by signing their
names hereto, acknowledge that this Certificate of Designation is the act of the
Company and state to the best of their knowledge, information and belief, under
the penalties of perjury, that the above matters and facts are true in all
material respects.
TETON PETROLEUM COMPANY
/s/ KARL ARLETH
----------------
Karl Arleth,
President and Secretary
5
EXHIBIT A
CONVERSION CERTIFICATE
TETON PETROLEUM COMPANY
SERIES A CONVERTIBLE PREFERRED STOCK
The undersigned holder (the "Holder") is surrendering to Teton Petroleum
Company., a Delaware corporation (the "Company"), one or more certificates
representing shares of Series A Convertible Preferred Stock of the Company (the
"Preferred Stock") in connection with the conversion of all or a portion of the
Preferred Stock into shares of Common Stock, $0.01 par value per share, of the
Company (the "Common Stock") as set forth below.
1. The Holder understands that the Preferred Stock was issued by the Company
pursuant to the exemption for registration under the United States Securities
Act of 1933, as amended (the "Securities Act"), provided by Regulation D
promulgated thereunder.
2. The Holder represents and warrants that all offers and sales of the Common
Stock issued to the Holder upon such conversion of the Preferred Stock shall be
made (a) pursuant to an effective registration statement under the Securities
Act, (in which case the Holder represents that a prospectus has been delivered)
(b) in compliance with Rule 144, or (c) pursuant to some other exemption from
registration.
Number of Shares of Preferred Stock being Converted:_______________
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Teton Petroleum Company
Form SB-2 Registration Statement (File No. 333-
Ladies and Gentlemen:
We refer to the above-captioned registration statement on Form SB-2 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"), filed by Teton Petroleum Company, a Delaware corporation (the
"Company"), with the Securities and Exchange Commission.
We have examined the originals, photocopies, certified copies or other evidence
of such records of the Company, certificates of officers of the Company and
public officials, and other documents as we have deemed relevant and necessary
as a basis for the opinion hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as certified copies or photocopies and the authenticity of the
originals of such latter documents.
Based on our examination mentioned above, we are of the opinion that the
securities being sold pursuant to the Registration Statement are duly authorized
and will be, when issued in the manner described in the Registration Statement,
legally and validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm under "Legal Matters" in
the related Prospectus. In giving the foregoing consent, we do not hereby admit
that we are in the category of persons whose consent is required under Section 7
of the Act, or the rules and regulations of the Securities and Exchange
Commission.
Very truly yours,
/s/ Sichenzia Ross Friedman Ference LLP
---------------------------------------
Sichenzia Ross Friedman Ference LLP
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement No. (333- ) of Teton
Petroleum Company on Form SB-2 of our report dated March 28, 2003 on the
December 31, 2002 consolidated financial statements of Teton Petroleum Company,
appearing in the prospectus, which is part of this Registration Statement. We
also consent to the reference to us under the headings "Experts" in such
prospectus.
/S/ Ehrhardt Keefe Steiner & Hottman PC
January 26, 2004
Denver, Colorado
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