<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from .......... to ............
Commission File No. 0-9617
TERRITORIAL RESOURCES, INC.
(Exact name of small business issuer as
specified in its charter)
State of Colorado 84-0821158
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
450 North Sam Houston Parkway East, Suite 140
Houston, Texas 77060
(Address of Principal Executive Offices)
(281) 931-0604
Issuer's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
As of February 11, 1997, the issuer had 28,252,354 shares of Common Stock
issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
---- ----
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PART I. FINANCIAL INFORMATION
TERRITORIAL RESOURCES, INC.
Balance Sheets
Assets
($1,000)
Unaudited
December March
31, 1996 31, 1996
--------- --------
CURRENT ASSETS:
Cash $ 22 $ 39
Accounts Receivable:
Oil and Gas Sales 5 10
Other 75 --
Prepaids 7 --
-------- -------
Total Current Assets 109 49
-------- --------
NOTE RECEIVABLE 9 10
-------- --------
INVESTMENT IN SOCO TAMTSAG
MONGOLIA, INC. 2,700 1,744
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Oil and Gas (full cost accounting) (7,802) 7,934
Less: Accumulated depreciation,
depletion & amortization (7,802) (7,792)
-------- --------
Total Property & Equipment -- 142
-------- --------
TOTAL ASSETS $ 2,818 $ 1,945
======== ========
See notes to condensed financial statements.
2
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PART I. FINANCIAL INFORMATION - continued
TERRITORIAL RESOURCES, INC.
Balance Sheets
Liabilities and Stockholders' Equity
(1,000)
Unaudited
December, March,
31, 1996 31, 1996
-------- --------
CURRENT LIABILITIES:
Accounts payable $ 196 $ 15
Accrued liabilities and other - 49
Due to affiliated party 135 -
---------- ----------
Total Current Liabilities 331 64
---------- ----------
Total Liabilities 331 64
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, no par value, $.001
stated value; 30,000,000 shares
authorized; 28,252,354 and
26,066,112
shares issued at December 31,
1996 and
March 31, 1996 respectively 28 26
Preferred stock 11 -
Additional paid in capital 6,091 5,399
Accumulated deficit, $5,121 deficit
eliminated in quasi-reorganization
effective March 31, 1986 (3,626) (3,527)
Treasury stock, 5,456 shares, at cost (17) (17)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,487 1,881
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ (2,818) $ 1,945
========= ==========
See notes to condensed financial statements.
3
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PART I. FINANCIAL INFORMATION - continued
TERRITORIAL RESOURCES, INC.
Income Statements - Unaudited
December 31, 1996 and 1995
(1,000)
Three Months Ended December 31
----------------------------------
1996 1995
------------ ------------
REVENUES:
Oil & Gas Sales $ 1 $ 3
Other Income - 1
----------- -------------
Total Revenues 1 4
----------- -------------
COSTS AND EXPENSES:
Production Costs 0 1
Depreciation, Depletion,
and Amortization (7) 6
General and Administrative 55 6
------------ -------------
Total Costs & Expenses 48 13
------------ -------------
NET INCOME (LOSS) BEFORE INCOME TAXES (47) (9)
Income Tax Provision - -
------------ -------------
NET INCOME (LOSS) $ (47) $ (9)
============ ============
NET INCOME (LOSS) PER SHARE (.002) (.001)
============ ============
Average Common Shares Outstanding 28,184,835 20,570,656
============ ============
See notes to condensed financial statements.
4
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PART I. FINANCIAL INFORMATION - continued
TERRITORIAL RESOURCES, INC.
Income Statements - Unaudited
December 31, 1996 and 1995
(1,000)
Nine Months Ended December 31
-------------------------------
1996 1995
------------ ------------
REVENUES:
Oil & Gas Sales $ 17 $ 16
Other Income 1 2
------------ -----------
Total Revenues 18 18
------------ -----------
COSTS AND EXPENSES:
Production Costs 1 2
Depreciation, Depletion,
and Amortization 3 18
General and Administrative 113 30
------------ -----------
Total Costs & Expenses 117 50
------------ -----------
NET INCOME (LOSS) BEFORE INCOME TAXES (99) (32)
------------ -----------
Income Tax Provision - -
NET INCOME (LOSS) $ (99) $ (32)
============ ============
NET INCOME (LOSS) PER SHARE (.004) (.001)
============ ============
Average Common Shares Outstanding 27,237,329 20,570,656
============ ===========
See notes to condensed financial statements.
5
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PART I. FINANCIAL INFORMATION - continued
TERRITORIAL RESOURCES, INC.
Statements of Cash Flows - Unaudited
For the Three Months Ended December 31, 1996 and 1995
(1,000)
Three Months Ended December 31
-------------------------------
1996 1995
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ (47) (9)
Adjustments to reconcile net income
to cash provided (used) by operations:
Depreciation, depletion and
amortization (7) 6
Changes in operating assets
and liabilities:
Accounts receivable (73) 1
Prepaid expenses 2 -
Accounts payable (24) -
Accrued liabilities (1) -
----------- ---------
Cash provided by (used in) operations (150) (2)
----------- ----------
CASH FLOW FROM INVESTMENTS ACTIVITIES:
Additional investment in
SOCO Tamtsag Mongolia, Inc. (257) (2)
Additions to property and equipment - (7)
Proceeds from sales of oil and gas
property 135 3
---------- ----------
Cash provided (used in) from
investment activities (122) (6)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Note receivable advances 1 -
Advances from affiliated parties 80 -
Issuance of preferred stock 164 -
Issuance of common stock 43 -
---------- ----------
Cash provided by (used in)
financing activities 288 -
---------- ----------
Change in cash balance 16 (8)
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Cash balance - beginning 6 50
---------- ----------
Cash balance - ending $ 22 $ 42
========== ==========
See notes to condensed financial statements.
6
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TERRITORIAL RESOURCES, INC.
Statements of Cash Flows - Unaudited
For the Nine Months Ended December 31, 1996 and 1995
(1,000)
Nine Months Ended December 31
-------------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ (99) (32)
Adjustments to reconcile net income
to cash provided (used) by
operations:
Depreciation, depletion and
amortization 3 18
Changes in operating assets
and liabilities:
Accounts receivable (70) 19
Prepaid expenses (7) (3)
Accounts payable 185 (18)
Accrued liabilities (49) (3)
------------ ------------
Cash provided by (used in) operations (37) (19)
------------ ------------
CASH FLOW FROM INVESTMENTS ACTIVITIES:
Additional investment in
SOCO Tamtsag Mongolia, Inc. (956) (4)
Additions to property and equipment - (7)
Advances from affiliated parties 135 32
------------ ------------
Cash provided (used in) from
investment activities (821) 21
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Note receivable advances 1 (10)
Advances from affiliate - -
Issuance of preferred stock 164 -
Issuance of common stock 541 -
Advances from affiliated parties 135 -
------------ ------------
Cash provided by (used in)
financing activities 841 (10)
------------ ------------
Change in cash balance (17) (8)
------------ ------------
Cash balance - beginning 39 50
------------ ------------
Cash balance - ending $ 22 $ 42
============ ============
See notes to condensed financial statements.
7
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PART I. FINANCIAL INFORMATION
TERRITORIAL RESOURCES, INC.
Notes to Condensed Financial Statements
December 31, 1996 (Unaudited)
1. The information presented in this report on Form 10-QSB is condensed from
what would appear in annual financial statements. Accordingly, the financial
statements included herein should be read in conjunction with the
consolidated financial statements and notes thereto contained in the
Territorial Resources, Inc. March 31, 1996 Form 10-KSB. The financial
statements included herein include all adjustments that in the opinion of
management are necessary in order to make the financial statements not
misleading.
2. The results for the interim period are not necessarily indicative of results
to be expected of the Company for the fiscal year ended March 31, 1997, due
to seasonal or other factors. The Company believes that the interim period
reports filed on this Form 10-QSB are representative of its financial
position, changes in financial position and results of operations for the
periods covered thereby.
3. There is no provision for income taxes for the nine-month period ended
December 31, 1996.
4. Issuance of Shares. In October 1996, Territorial issued to certain non-U.S.
persons 112,500 shares (the "Series B Preferred Shares") of its newly
designated voting Preferred Stock, Series B, $0.10 par value each, a
majority of which were acquired by affiliates of the Company. Each Series B
Preferred Share is convertible, after March 31, 1997, following certain
events, into five shares of Common Stock. In early November 1996,
Territorial also issued, again to non-U.S. persons, an aggregate of 142,500
shares of Common Stock. The Company received an aggregate of approximately
$206,300 in connection with the sale of such Common Stock and such Series B
Preferred Shares, and these proceeds were used to reduce the outstanding
amounts payable balance (see Item 2- Management's Discussion and Analysis or
Plan of Operations). On November 18, 1996, Territorial issued 25,000 shares
of common stock in consideration for $2,500 upon the exercise of warrants
previously issued to an independent third party.
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Item 2. Management's Discussion and Analysis or Plan of Operation
During the third quarter ended December 31, 1996, the primary focus of
operations of Territorial Resources, Inc. ("Territorial" or the "Company")
continued to be its varying direct and indirect interests in certain oil and gas
related rights which it holds in the Tamtsag Basin of northeastern Mongolia. A
portion of those interests are owned indirectly by Territorial as a result of
its 12.68% ownership of SOCO Tamtsag Mongolia, Inc., a Delaware close
corporation ("SOTAMO").
Results of Drilling Program. During November 1996, SOTAMO signed a
drilling contract with China Petroleum Engineering and Construction Corporation
("CPECC"), a subsidiary of China National Petroleum Corp. ("CNPC"). Pursuant to
this contract, CPECC winterized a rig and during December 1996, began
transporting the rig and ancillary equipment to the SOTAMO 21-2 well location,
an offset to SOTAMO's previously announced 21-1 discovery. The 21-2 well, which
was spudded on January 8, 1997, is the first of four wells to be drilled during
1997 pursuant to the contract with CPECC. As of mid-February, the well was
drilling at a depth of 1685 meters. The well is projected to be drilled to a
total depth of 2500 meters.
The SOTAMO 21-1 well penetrated approximately 26 feet of oil saturated sand with
approximately 18 percent porosity in the upper part of the Lower Cretaceous-
Upper Jurassic Tsagaantsav Formation. A drill-stem test of the interval between
6,272.6 feet and 6,307.4 feet recovered approximately 5 barrels of medium
gravity oil before the test tool plugged off. The well has been suspended until
completion and production equipment is installed, which is expected to occur
prior to June 30, 1997.
SOTAMO issued 38 shares of its capital stock to an independent third party
during the first quarter of 1997, in consideration of $2,000,000. These funds
are being applied against the drilling costs of the 21-2 well and subsequent
wells. As a result of the issuance of these shares, Territorial's ownership of
SOTAMO was reduced from approximately 13.22% to 12.68%.
At least one of the 1997 locations will offset the Company's previously
announced discovery at the 19-2 well location, located approximately 60 miles
southwest of the 21-1 well. The 19-2 well is expected to be placed on
production as a low rate producer during the second quarter of 1997.
Administrative Expenses. During the quarter ended December 31, 1996, the
Company incurred additional administrative expenses primarily as a result of its
establishment of an office in Calgary, Alberta, Canada, and administrative
personnel at the Calgary office.
Issuance of Shares. In October 1996, Territorial Resources issued to certain
non-U.S. persons 112,500 shares (the "Series B Preferred Shares") of its newly
designated voting Preferred Stock, Series B, $0.10 par value each, a majority of
which were acquired by affiliates of the Company. Each Series B Preferred Share
is convertible, after March 31, 1997, following certain events, into five shares
of Common Stock. In early November 1996, Territorial also issued, again to non-
U.S persons, an aggregate of 142,500 shares of Common Stock. The Company
received an aggregate of approximately $206,300 in
9
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connection with the sale of such Common Stock and such Series B Preferred
shares. Such securities were exempt from registration under the Securities Act
of 1933 (the "Act") as a result of an exemption afforded by Regulation S,
promulgated by the Securities and Exchange Commission, and an exemption afforded
by Section 4 of the Act. On November 18 1996, Territorial issued 25,000 shares
of Common Stock in consideration for $2,500 upon the exercise of warrants
previously issued to an independent third party. Unless otherwise provided, all
dollar amounts stated herein represent United States dollars.
Subsequent Transactions. During the quarter ended December 31, 1996,
Territorial borrowed funds from two of its directors, Mr. Daniel A. Mercier and
Mr. Richard A.N. Bonnycastle, in the amounts of (Cdn) $25,000 and (Cdn) $85,000
respectively. These loans were in addition to a loan made by Mr. Mercier during
the quarter ended September 30, 1996, in the amount of (Cdn) $75,000. All such
loans bear interest at a per annum rate equal to the prime lending rate charged
by the Alberta Treasury Branch in Okotoks, Alberta (currently 4.75%), and are
payable on demand. Subsequent to year end, Territorial repaid the loan to Mr.
Bonnycastle together with interest in the amount of (Cdn) $486. 71. Also,
subsequent to year end, Territorial borrowed an additional amount of (Cdn)
$210,000 from Mr. Mercier on the same terms as the previous loans made to
Territorial.
Other. Management does not anticipate revenues to be generated from the
Company's Mongolian operations in the short term. As a result, the Company will
seek additional, outside sources of working capital in order to fund its
operations and commitments, including its mandatory financial contributions
arising under an agreement among the shareholders of SOTAMO.
Management currently estimates that Territorial's minimum working capital
commitments through the end of the current fiscal year and the next fiscal year
will require it to secure additional funds of approximately $50,000 and
$1,500,000 respectively. Such estimate is subject to change based on a number
of factors including, among other things, additional costs that may be incurred
in connection with its investment in SOTAMO. Such additional working capital
funds may be sought through, among other sources, one or more lines of credit,
the sale of direct or indirect interests in Territorial's projects and assets
and/or, when appropriate, the sale of Territorial securities (or a combination
of one or more of the foregoing). There can be no assurance, however, that such
additional funds will be available to the Company upon terms deemed acceptable
to management. In the event such funds are not secured, Territorial may be
required to forfeit all or a portion of its interests in SOTAMO.
10
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PART II. OTHER INFORMATION
Item 1. Legal Proceeding
In September 1996, a summary judgment was entered in favor of TRI Mongolia,
Inc., a subsidiary of Territorial, and certain other parties in a previously
reported action styled, Leo T. Metcalf III vs. Amgol Inc., SOCO International,
Inc., Exploration Associates International, Inc. et al., Cause No. 94-29503, in
the 113th Judicial District Court of Harris County, Texas. The plaintiff has
appealed the summary judgment. Territorial anticipates that arguments will be
heard regarding the appeal during the 1997 calendar year.
Item 5. Other Information
Jimmy M. McCarroll, President of McCarroll Energy, Inc., an independent oil
and gas operator on the Texas Gulf Coast, was appointed as an additional
director of Territorial in October 1996. Mr. McCarroll resides in Houston,
Texas.
Mr. Edward T. Story, Jr., President of SOCO International, Inc., resigned
as a director of Territorial on December 23, 1996, due to time constraints
imposed by his other obligations. On February 3, 1997, Mr. Douglas N. Baker,
Territorial's Chief Financial Officer, was appointed as a director to replace
Mr. Story. Mr. Baker is also the Vice President Finance of Asia Energy Ltd.,
the largest shareholder of Territorial Common Stock.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - Exhibit 27
b) Report of Form 8-K - None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TERRITORIAL RESOURCES, INC.
Dated: February 12, 1997 By: /s/ Daniel A. Mercier
---------------------
Daniel A. Mercier
Chairman of the Board and
Chief Executive Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Quarter
Ended December 31, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 22
<SECURITIES> 0
<RECEIVABLES> 80
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 109
<PP&E> 7,802
<DEPRECIATION> 7,802
<TOTAL-ASSETS> 2,818
<CURRENT-LIABILITIES> 331
<BONDS> 0
0
11
<COMMON> 28
<OTHER-SE> 2,448
<TOTAL-LIABILITY-AND-EQUITY> 2,818
<SALES> 17
<TOTAL-REVENUES> 18
<CGS> 1
<TOTAL-COSTS> 1
<OTHER-EXPENSES> 116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (99)
<INCOME-TAX> 0
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</TABLE>
