<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO __________
Commission File Number: 000-18337
SHARON ENERGY LTD.
(Exact name of registrant as specified in its charter)
BRITISH COLUMBIA, CANADA 84-0820328
(State of Incorporation) (I.R.S. Employer Identification No.)
5995 GREENWOOD PLAZA BLVD., #220, ENGLEWOOD, CO 80111
(Address of principal executive offices) (Zip Code)
(303) 694-4920
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed
from last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 November 1, 1996, the Registrant had 3,477,600 shares of Common Stock,
no par value, outstanding.
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<PAGE>
PART I
FINANCIAL INFORMATION
SHARON ENERGY LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited - Expressed in U.S. dollars)
SEPT 30, MARCH 31,
ASSETS 1996 1996
CURRENT ASSETS: ---------- -----------
Cash and cash equivalents $ 243,902 $ 379,133
Short term investments 4,702 53,050
Accounts receivable 89,068 124,844
Prepaid expenses 8,873 8,873
---------- -----------
Total current assets 346,545 565,900
---------- -----------
OIL AND GAS PROPERTIES
Successful efforts method of accounting,
at cost 774,595 793,135
Less--accumulated depreciation, depletion
and amortization (75,958) (92,336)
---------- -----------
698,637 700,799
---------- -----------
FURNITURE, FIXTURES AND EQUIPMENT
at cost less accumulated depreciation 20,579 25,765
---------- -----------
$1,065,761 $1,292,464
---------- -----------
---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 50,240 $ 103,218
Advances from industry partners 32,889 54,850
Royalty and working interest owner payable 28,220 0
Taxes payable 8,895 13,682
---------- -----------
Total current liabilities 120,244 171,750
---------- -----------
Deferred tax liability 58,000 58,000
Deferred rent 50,921 53,903
SHAREHOLDERS' EQUITY
Preferred shares, no par value; 2,500,000
shares authorized
Common shares, no par value; 10,000,000
shares authorized; 3,514,800 shares
issued and outstanding at September 30,
and March 31, 1996, respectively 1,326,802 1,326,802
Less: treasury stock (37,200 shares at cost) (49,823) (49,823)
Retained earnings (440,383) (268,168)
---------- -----------
Total shareholders' equity 836,596 1,008,811
---------- -----------
$1,065,761 $1,292,464
---------- -----------
---------- -----------
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PART I
(CONTINUED)
FINANCIAL INFORMATION
SHARON ENERGY LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited-Expressed in U.S. dollars)
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
REVENUES 1996 1995 1996 1995
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Oil and gas sales $ 68,322 $ 37,349 $ 151,937 $ 75,120
Sales of oil and gas properties 157,500 0 157,500 15,885
Other 1,108 10,917 4,201 28,272
---------- ---------- ---------- ---------
226,930 48,266 313,638 119,277
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
COSTS AND EXPENSES
Lease operating 19,278 19,361 38,450 37,449
Production taxes 2,399 1,134 5,416 2,845
General and administrative 119,874 130,281 259,411 226,720
Depreciation, depletion and
amortization 18,139 22,663 36,278 37,714
Unsuccessful exploration, net 33,195 73,795 33,195 179,838
Geologic, geophysical and delay
rental costs 25,593 0 49,425 0
Cost of leases sold 63,460 0 63,460 0
Interest 123 0 218 0
---------- ---------- ---------- ---------
282,061 247,234 485,853 484,566
Loss from operations (55,131) (198,968) (172,215) (365,289)
Income tax benefit 0 27,145 0 83,694
---------- ---------- ---------- ---------
Net loss $ (55,131) $ (171,823) $ (172,215) $(281,595)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Earnings per common share:
Basic $ (.02) $ (.05) $ (.05) $ (.08)
Weighted average number of common
shares outstanding 3,514,800 3,332,778 3,514,800 3,329,805
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PART I
(CONTINUED)
FINANCIAL INFORMATION
SHARON ENERGY LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - Expressed in U.S. dollars)
SIX MONTHS ENDED
SEPT 30, SEPT 30,
CASH FROM OPERATING ACTIVITIES: 1996 1995
--------- ---------
Net loss ($172,215) ($281,595)
Noncash expenses and revenues included in net loss
Depreciation, depletion and amortization 36,278 37,714
Write-off of lease costs 0 1,158
Deferred tax benefit 0 (91,000)
Dry hole costs 0 140,607
Gain on sale of oil and gas property (94,040) (15,885)
decrease in accounts receivable 35,776 21,787
(decrease) in accounts payable (24,758) (148,446)
Increase (decrease) in advances from
industry participants (21,961) 45,106
(Decrease) in taxes payable (4,787) (11,932)
Decrease in deferred rent (2,982) (822)
Increase in other, net 0 9,798
--------- ---------
Net cash used for operating activities (248,689) (293,510)
--------- ---------
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 0 0
Repayment of debt 0 0
Proceeds from sale of properties 157,500 50,234
--------- ---------
Net cash provided by financing activities 157,500 50,234
--------- ---------
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas producing activities (89,298) (276,770)
Acquisition of furniture & equipment (3,092) (839)
(Purchase) Sale of short term investments 48,348 (27,217)
--------- ---------
Net cash used for investing activities (44,042) (304,826)
--------- ---------
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (135,231) (548,102)
CASH AND CASH EQUIVALENTS, beginning of period 379,133 723,444
CASH AND CASH EQUIVALENTS, end of period $243,902 $175,342
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
NOTES
PART I (CONTINUED)
FINANCIAL INFORMATION
SHARON ENERGY LTD. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
Note 1. In the opinion of management, the accompanying condensed financial
statements contain all adjustments necessary to present fairly the
financial position as of September 30, 1996 and March 31, 1996 of
Sharon Energy Ltd. and its subsidiary (the "Company") and the results
of its operations and its cash flows for the three month period ended
September 30, 1996 and 1995.
The accounting policies followed by the Company and other relevant
financial statement footnotes are set forth in the Company's annual
report on Form 10-KSB for the fiscal year ended March 31, 1996.
Note 2. The results of operations for the three months ended September 30,
1996 may not necessarily be indicative of the results of operations
that may be incurred for the entire fiscal year.
Note 3. Basic and fully diluted earnings per share are computed by
dividing net income by the summation of the weighted average number
of common shares outstanding during the period and the dilutive
effect of outstanding stock options. However, in the quarters ended
September 30, 1996 and 1995, no consideration was given as their
effects would be antidilutive or immaterial.
Note 4. The consolidated financial statements are prepared in accordance
with generally accepted accounting principles ("GAAP") in Canada.
These consolidated financial statements would not be materially
different if they had been prepared using generally accepted
accounting principles in the United States, except that under U.S.
GAAP, the Company was required to adopt Statement Number 109 ("SFAS
109"), "Accounting For Income Taxes", effective April 1, 1993. The
provisions of SFAS 109 do not comply with GAAP in Canada and have not
been adopted by the Company. The difference in accounting methods
would result in no impact to the Company's Consolidated Statement of
Operations for the three month period ended September 30, 1996.
However, for U.S. GAAP purposes, the Company would reflect a deferred
tax asset of approximately $296,000 which would be fully reserved for
valuation allowance as it is more likely than not that the deferred
tax asset would not be utilized at September 30, 1996. The net
deferred tax asset would consist primarily of carryover statutory
depletion and U.S. net operating loss carry-forward.
<PAGE>
SCHEDULE C
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
FINANCIAL CONDITION AND LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital surplus was $226,301 at September 30, 1996
compared to a surplus of $394,150 at March 31, 1996. The Company's working
capital decreased due to expenditures in connection with the Company's oil
and gas producing and exploration activities as more fully described below.
In the opinion of management, current cash flow projections indicate the
Company can meet its operating overhead expense requirements. The timing of
most of the Company's capital expenditures is discretionary. There are no
material long-term commitments associated with the Company's capital
expenditure plans. Consequently, the Company has a significant degree of
flexibility to adjust the level of such expenditures as circumstances
warrant. Presently, the Company is using existing working capital and
internally generated cash flow to fund capital expenditures. The level of
capital expenditures will vary in future periods depending on the success it
experiences in its development and exploratory drilling activities, oil and
gas price conditions and other related economic factors. In addition to
internally generated cash flow, additional debt or equity financing may be
used in future periods to fund the Company's activities. As more fully
explained below, the Company is presently engaged in exploration and
development of oil and gas reserves in Michigan and California and subsequent
to September 30, 1996, will incur capital costs in connection with such
activities.
RESULTS OF SIX MONTH STATEMENT OF OPERATIONS
During the six months ended September 30, 1996, the Company experienced an
increase in oil production and revenues as compared to the prior year period
due to the addition of several producing wells and higher oil and gas prices.
Oil and gas sales for the six months ended September 30, 1996 were $151,937
compared to $75,120 for the six months ended September 30, 1995, a 102%
increase. Company net oil production totaled 2,542 bbls in the latest six
months as compared to 1,157 bbls. during the prior year period, a 120%
increase. Average crude oil prices were $19.64 per barrel during the six
months ended September 30, 1996 compared to $16.18 in the prior fiscal year
period, a 21% increase. Gas production decreased from 61,041 mbtu in the
prior year period to 60,729 mbtu in the six months ended September 30, 1996.
Average gas prices during the prior year period were $.94 per mbtu as
compared to $1.47 in the latest six month period, a 56% increase. During the
six months ended September 30, 1996, the Company sold working interests in 2
oil wells located in western Kansas. Total net cash proceeds realized were
$132,500. The Company also sold some undeveloped acreage in Wyoming for
$25,000. The gross proceeds from these transactions are recorded as sales of
oil and gas properties. The Company had net remaining unamortized costs of
$63,460 associated with the properties sold which are recorded as cost of
leases sold. During the six months ended September 30, 1995, the Company
realized $15,885 in net cash proceeds from the sale of working interests to
participants in its exploratory prospects.
<PAGE>
General and administrative expenses for the six months ended September 30, 1996
and 1995 were $259,411 and $226,720, respectively, a $32,691 or 14% increase.
The major reason for the increase were legal and administrative expenses
associated with the Company's proposed private placement issuance of common
stock. Oil and gas production expenses (lease operating and production tax
expense combined) for the six months ended September 30, 1996 and 1995 were
$43,866 and $40,294, respectively. Unsuccessful exploration expense decreased
from $179,838 last year to $33,195 in the latest six months period due to
decreased exploratory drilling activity. Geologic and geophysical costs and
delay rentals increased from $0 in the prior year period to $49,425 in the
latest six month period, due to large delay rental and seismic expense
associated with the Company's California and Wyoming leasehold positions.
RESULTS OF QUARTERLY STATEMENT OF OPERATIONS
During the second quarter ended September 30, 1996, the Company experienced an
increase in oil and gas revenues as compared to the prior year quarter due to
increased oil production and higher oil and gas prices. Oil and gas sales for
the three months ended September 30, 1996 were $68,322 compared to $37,349 for
the three months ended September 30, 1995, an 83% increase. Company net oil
production totaled 1,154 bbls. in the latest quarter as compared to 564 bbls.
during the prior year three month period, a 104% increase. Average crude oil
prices were $20.01 per barrel during the three months ended September 30, 1996
compared to $16.18 in the prior fiscal year period, a 24% increase. Gas
production decreased from 35,495 mbtu in the prior year period to 30,220 mbtu in
the six months ended September 30, 1996, a 15% decrease. Average gas prices
during the prior year quarter were $.87 per mbtu as compared to $1.51 in the
latest quarter, a 74% increase. During the three months ended September 30,
1996, the Company sold working interests in 2 oil wells located in western
Kansas. Total net cash proceeds realized were $132,500. The Company also sold
some undeveloped acreage in Wyoming for $25,000. The gross proceeds from these
transactions are recorded as sales of oil and gas properties. The Company had
net remaining unamortized costs of $63,460 which are recorded as cost of leases
sold. During the three months ended September 30, 1995, the Company did not
record any sales of oil and gas properties.
General and administrative expenses for the three months ended September 30,
1996 and 1995 were $119,874 and $130,281, respectively, a $10,407 or 8%
decrease. Oil and gas production expenses (lease operating and production tax
expense combined) for the three months ended September 30, 1996 and 1995 were
$21,677 and $20,495, respectively, a $1,182 (6%) increase. Unsuccessful
exploration expense decreased from $73,795 last year to $33,195 in the latest
quarter due to decreased exploratory drilling. Geologic, geophysical costs and
delay rentals increased from $0 in the prior year period to $25,593 in the
latest six month period, due to large delay rental and seismic expense
associated with the Company's California and Wyoming leasehold positions.
COMPANY OUTLOOK
In January of 1995, the Company sold a majority of its producing wells. The
Company has reinvested the proceeds from the sale of properties into acreage,
seismic and exploratory drilling. A significant portion of the Company's
working capital has been invested in acreage and 3-D seismic acquisition on its
Northern Sacramento Basin prospects located in California.
<PAGE>
Acreage acquisition and 3-D seismic acquisition and interpretation have been
completed on three of the prospects resulting in the identification of
approximately forty potential drilling locations. The Company has working
interests in the three prospects ranging from 3% to 18.75%. To date no
formal drilling proposals or authorizations for expenditures have been
received, it is therefore not possible to know at this time what the
Company's estimated drilling expenditures will be in connection with these
prospects. In addition, The Company owns a 40% operated working interest in
a joint exploration agreement in the vicinity of the above mentioned
prospects in California. To date, leases covering over 6,000 gross acres
have been acquired and additional leasing efforts are underway. The Company
is tentatively planning a 14 square mile 3-D seismic survey covering a
portion of its leasehold. It is not possible at this stage to estimate
future costs associated with the exploration agreement.
The Company is engaged in an oil development project in central Michigan. To
date, two wells have been completed and are producing oil and a third well is
being completed as a dual oil producer and salt water disposal well. The
Company expects to drill another well in this prospect in the third or fourth
quarter of its fiscal year. The estimated drilling cost for the Company's
12.5% working interest in the proposed well is $16,250.
Until the Company is able to replace the reserves and production sold,
continued operating losses are anticipated. The Company follows the
successful efforts method of accounting which requires it to charge the cost
of exploratory dry holes and leasehold abandonments to operations in the
period incurred. Furthermore, all geological, geophysical costs and delay
rentals are expensed immediately when incurred, regardless of whether they
result in a commercially successful discovery of hydrocarbons. The Company's
continued use and acquisition of 3-D and 2-D seismic will result in
significant charges to current and future operations.
Management intends to use the Company's working capital to fund prospect
acquisition, exploration, exploitation, development and Company overhead
requirements. The Company is acquiring additional leasehold in California
and Michigan which Management considers prospective and will conduct
additional seismic surveys in California. It is anticipated that these
activities together with others that may be entered into will impose
financial requirements which will exceed the existing working capital of the
Company. During the latest quarter, the Company attempted to raise additional
capital through the private placement issuance of common stock. Management
withdrew the stock offering due to changing market conditions and the concern
that issuing stock at or below current market prices would be materially
dilutive to existing shareholders. As an alternative to issuing the
Company's common stock to raise working capital, the Company is divesting
non-strategic properties. With oil and gas prices at relatively high levels,
the market for selling oil and gas properties is favorable. As part of this
divestment effort, the Company sold its Kansas properties effective August 1,
1996. The Company is currently engaged in discussions concerning the sale of
its Colorado producing wells.
<PAGE>
PART II
OTHER INFORMATION
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHARON ENERGY LTD.
Date: November 1, 1996 By: /s/ J. Chris Steinhauser
------------------------------------------
J. Chris Steinhauser
Chief Financial Officer and
Chief Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 243,902
<SECURITIES> 4,702
<RECEIVABLES> 89,068
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 346,127
<PP&E> 774,595
<DEPRECIATION> 75,958
<TOTAL-ASSETS> 1,065,761
<CURRENT-LIABILITIES> 120,244
<BONDS> 0
0
0
<COMMON> 1,326,802
<OTHER-SE> (490,206)
<TOTAL-LIABILITY-AND-EQUITY> 1,065,761
<SALES> 309,437
<TOTAL-REVENUES> 313,638
<CGS> 107,326
<TOTAL-COSTS> 485,853
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 218
<INCOME-PRETAX> (172,215)
<INCOME-TAX> 0
<INCOME-CONTINUING> (172,215)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (172,215)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
