<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
------------------------------------
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, 1997
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, 1997, the Registrant had 5,863,800 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)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
ASSETS 1997 1997
-------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $99,960 $341,464
Accounts receivable 48,840 229,593
Prepaid expenses 8,873 8,873
-------------------------
Total current assets 157,673 579,930
-------------------------
OIL AND GAS PROPERTIES
Successful efforts method of accounting,
at cost 314,704 583,378
Less--accumulated depreciation, depletion
and amortization (72,947) (192,336)
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241,757 391,042
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FURNITURE, FIXTURES AND EQUIPMENT
at cost less accumulated depreciation 9,643 17,041
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$409,073 $988,013
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-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $38,866 $86,332
Advances from industry partners 16,640 30,379
Taxes payable 8,583 10,846
Other payables 557 0
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Total current liabilities 64,646 127,557
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Deferred rent 37,979 46,747
SHAREHOLDERS' EQUITY
Preferred shares, no par value; 2,500,000 shares
authorized Common shares, no par value;
10,000,000 shares authorized; 5,863,800 shares
issued and outstanding at at September 30
and March 31, 1997, respectively 1,692,725 1,692,725
Warrants outstanding 341,880 341,880
Less: treasury stock (37,200 shares at cost) (37,292) (37,292)
Retained earnings (1,690,865) (1,183,604)
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Total shareholders' equity 306,448 813,709
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$409,073 $988,013
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</TABLE>
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, 1997 AND 1996
(Unaudited-Expressed in U.S. dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
REVENUES 1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Oil and gas sales $7,735 $68,322 $30,460 $151,937
Sales of oil and gas properties 31,615 157,500 261,615 157,500
Other 2,947 1,108 6,571 4,201
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42,297 226,930 298,646 313,638
---------------------------- ---------------------------
COSTS AND EXPENSES
Lease operating (8,326) 19,278 6,397 38,450
Production taxes 3 2,399 1,462 5,416
General and administrative 130,437 119,874 257,890 259,411
Depreciation, depletion and amort. 10,629 18,139 31,159 36,278
Unsuccessful exploration, net 109,548 33,195 171,200 33,195
Geologic, geophysical and delay rental 22,792 25,593 35,992 49,425
Cost of leases sold 56,322 63,460 301,497 63,460
Interest 111 123 310 218
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321,516 282,061 805,907 485,853
Loss from operations (279,219) (55,131) (507,261) (172,215)
Income tax benefit 0 0 0 0
---------------------------- ---------------------------
Net loss ($279,219) ($55,131) ($507,261) ($172,215)
---------------------------- ---------------------------
---------------------------- ---------------------------
Earnings per common share ($.05) ($.02) ($.09) ($.05)
Weighted average number of
common shares outstanding 5,863,800 3,514,800 5,863,800 3,514,800
</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)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
September 30, September 30,
CASH FROM OPERATING ACTIVITIES: 1997 1996
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<C> <C> <C>
Net loss ($507,261) ($172,215)
Noncash expenses and revenues included in net loss
Depreciation, depletion and amortization 31,159 36,278
Write-off of lease costs 10,736 0
Dry hole costs 160,464 0
Gain (loss) on sale of oil and gas property 39,882 (94,040)
decrease in accounts receivable 180,753 35,776
(decrease) in accounts payable (24,728) (24,758)
Increase (decrease) in advances from
industry participants (13,739) (21,961)
(Decrease) in taxes payable (24,444) (4,787)
(Decrease) in deferred rent (8,768) (2,982)
Increase in other, net 80,832 0
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Net cash used for operating activities (75,114) (248,689)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 0 0
Proceeds from issuance of common stock 0 0
Proceeds from sale of properties 261,615 157,500
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Net cash provided by financing activities 261,615 157,500
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CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas producing activities (428,005) (89,298)
Acquisition of furniture & equipment 0 (3,092)
(Purchase) Sale of short term investments 0 48,348
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Net cash used for investing activities (428,005) (44,042)
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NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (241,504) (135,231)
CASH AND CASH EQUIVALENTS, beginning of period 341,464 379,133
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CASH AND CASH EQUIVALENTS, end of period $99,960 $243,902
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
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, 1997 and March 31, 1997 of
Sharon Energy Ltd. and its subsidiary (the "Company") and the
results of its operations and its cash flows for the three month
and six month periods ended September 30, 1997 and 1996. 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, 1997.
Note 2. The results of operations for the three months and six months ended
September 30, 1997 may not necessarily be indicative of the results
of operations that may be incurred for the entire fiscal year.
Note 3. 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
and warrants. However, in the quarters ended September 30, 1997 and
1996, no consideration was given as their effects would be
antidilutive or immaterial. Earnings per share, basic and diluted,
would not differ materially if reported on a pro forma basis in
conformance with Financial Accounting Standards No. 128 "Earnings Per
Share."
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 and six month period ended September 30,
1997. However, for U.S. GAAP purposes, the Company would reflect a
deferred tax asset of approximately $551,000 which would be fully
reserved for with a valuation allowance as it is more likely than not
that the deferred tax asset would not be utilized at September 30,
1997. The net deferred tax asset would consist primarily of carryover
statutory depletion and the differences between tax basis and
remaining net book value of oil and gas properties, respectively.
<PAGE>
PART I
(CONTINUED)
FINANCIAL INFORMATION
SHARON ENERGY LTD. AND SUBSIDIARY
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 $93,027 at September 30, 1997
compared to a surplus of $452,373 at March 31, 1997. The Company's working
capital decreased due to expenditures in connection with the Company's oil and
gas producing and exploration activities and losses from operations.
Exploration drilling is planned during fiscal 1998 on the Company's
prospects. In order to limit exploration expenditures to the Company's
available working capital, management has sold producing and non-producing
leasehold interests and has reduced its working interest percentage and cost
participation in certain proposed exploratory wells. Management is limiting the
Company's participation in exploratory wells to those which are considered to be
in core areas of interest, principally California.
In order to further preserve working capital, the Company has taken steps
to reduce general and administrative expenses. Administrative cost reductions
have been implemented and the resultant loss of certain key personnel could
impair the Company's ability to carry out its business plan. As of the date of
this report, the Company has terminated full time employment, effective
September 15, 1997, for Messrs. Jack Steinhauser, J. Chris Steinhauser, and
Cliff Clark who have served as President, Executive Vice President and Vice
President of Exploration, respectively. Messrs. Jack Steinhauser and J. Chris
Steinhauser are continuing in their capacities as officers of the Company and
will consult to the Company as needed. In addition, the Company has terminated
full time employment for all other employees. Mrs. Jo Beth McFadden, Vice
President and Treasurer, is continuing employment on a part time basis.
Effective July 1, 1997 the Company sold half of its 40% working interest
in the Merlin Prospect, Glenn County, California to a third party. Under the
terms of the sale, the Company will retain a 20% working interest in the
prospect consisting of approximately 8,000 acres (gross) under lease or farmout
agreements. The prospect also includes the producing well described above, a
shut-in gas well, and a gas gathering system and 15.5 square miles of 3-D
seismic data. Under the terms of the agreement, the Company will receive an
$80,000 cash payment and a carried (no-cost) 20% working interest on two wells
through completion of the wells, and the Company will transfer operations on the
prospect to the third party. The sale of the partial working interest in the
prospect will allow the Company to improve its cash position and continue
participation in the development of the prospect at a substantially reduced
cost. Under the terms of the agreement, the two wells must be drilled by the
third party on or before December 31, 1997.
In July of 1997, the Company entered into a letter of intent to sell its
65.625% working interest, effective May 1, 1997, in three producing wells
located in Baca County, Colorado. The sales price is $230,000 subject to
adjustment for revenues received and expenses incurred subsequent to the
effective date. The transaction was closed in late August and operations of the
wells were transferred to the purchaser on September 1, 1997. In addition, the
Company completed arrangements to sell its 12.5% to 21.04% working interests in
three wells located in Michigan for $35,000.
<PAGE>
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 overhead and 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, the Company's ability to secure additional equity
or debt funding, and other related economic factors.
RESULTS OF SIX MONTH STATEMENT OF OPERATIONS
During the six months ended September 30, 1997, the Company experienced an
approximately 80% decrease in oil and gas revenues as compared to the prior year
period due to the sale of substantially all of its producing well interests.
During the six months ended September 30, 1997, the Company sold
substantially all of its producing working interests located in Michigan,
California and Colorado for proceeds of $261,615. During the prior year period,
the Company sold oil and gas properties totaling $157,500. The gross proceeds
from these transactions are recorded as sales of oil and gas properties. The
Company had net remaining unamortized costs associated with the properties sold
of $301,497 and $63,460 which are recorded as cost of leases sold for the six
months ended September 30, 1997 and 1996, respectively.
General and administrative expenses for the six months ended September 30,
1997 and 1996 were $257,890 and $259,411, respectively. General and
administrative expenses for the first six months of the fiscal year ending March
31, 1998 are not indicative of what those expenses will be in the third and
fourth quarters of the fiscal year. As indicated previously, the Company has
terminated full time employment for all employees and has retained two employees
on a part time basis. In addition, the Company is attempting to sublease
additional space at its corporate offices to reduce rent expense. These cost
reductions in combination with others that have been implemented will result in
significantly lower general and administrative expenses in the second half of
the fiscal year.
Oil and gas production expenses (lease operating and production tax
expense combined) for the six months ended September 30, 1997 and 1996 were
$7,859 and $43,866, respectively. The reason for the decrease was due to the
disposition of substantially all of the Company's producing wells.
Unsuccessful exploration expense increased from $33,195 last year to
$171,200 in the latest six month period due to increased exploratory drilling
activity in the Company's California, Wyoming and Illinois prospects. Geologic
and geophysical costs and delay rentals decreased from $49,425 in the prior year
period to $35,992 in the latest six month period, due to lower delay rental,
geologic 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, 1997, the Company
experienced an approximate 90% decrease in oil and gas revenues as compared to
the prior year quarter due to the disposition of substantially all of its
producing wells.
General and administrative expenses for the three months ended September
30, 1997 and
<PAGE>
1996 were $130,437 and $119,874, respectively, a $10,563 or 8% increase. The
reason for the increase was cash payments of unused vacation time accrued to
the employees whose positions were terminated.
Oil and gas production expenses (lease operating and production tax
expense combined) for the three months ended September 30, 1997 were ($8,323).
The negative balance resulted from closing adjustments in connection with the
Company's sale of its Colorado properties. The Company reversed lease operating
expenses and taxes which had previously recorded but incurred after the May 1,
1997 effective date of the sale.
Unsuccessful exploration expense increased from $33,195 last year to
$109,548 in the latest quarter due to recent exploratory drilling in the
Company's California, Wyoming and Colorado prospects. Geologic and geophysical
costs and delay rentals increased slightly from $25,593 in the prior year
quarter to $22,792 in the latest quarter.
COMPANY OUTLOOK
As noted above, the Company has taken steps to significantly to reduce its
overhead and capital expenditures. The Company has sold substantially all of
its producing properties. Until the Company is able to replace the reserves and
production sold in these transactions, 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. In addition, all geological
and 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 heavy emphasis on petroleum exploration
will result in significant charges to current and future operations.
<PAGE>
PART II
SHARON ENERGY LTD. AND SUBSIDIARY
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 7, 1997 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-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 99,460
<SECURITIES> 0
<RECEIVABLES> 48,840
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 157,673
<PP&E> 314,704
<DEPRECIATION> 72,947
<TOTAL-ASSETS> 409,073
<CURRENT-LIABILITIES> 64,646
<BONDS> 0
0
0
<COMMON> 1,692,725
<OTHER-SE> (1,386,277)
<TOTAL-LIABILITY-AND-EQUITY> 409,073
<SALES> 292,075
<TOTAL-REVENUES> 298,646
<CGS> 309,356
<TOTAL-COSTS> 805,907
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (507,261)
<INCOME-TAX> 0
<INCOME-CONTINUING> (507,261)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (507,261)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
