<PAGE>
- -------------------------------------------------------------------------------
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 JUNE 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 August 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>
JUNE 30, MARCH 31,
ASSETS 1997 1997
-------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 458,017 $ 341,464
Accounts receivable 400,170 229,593
Prepaid expenses 8,873 8,873
-------------------------
Total current assets 867,060 579,930
-------------------------
OIL AND GAS PROPERTIES
Successful efforts method of accounting,
at cost 524,842 583,378
Less--accumulated depreciation, depletion
and amortization (209,167) (192,336)
-------------------------
315,675 391,042
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FURNITURE, FIXTURES AND EQUIPMENT
at cost less accumulated depreciation 13,342 17,041
-------------------------
$1,196,077 $ 988,013
-------------------------
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 330,327 $ 86,332
Advances from industry partners 197,841 30,379
Royalty and working interest owner payable 24,705 0
Taxes payable 8,583 10,846
Other payables 6,589 0
-------------------------
Total current liabilities 568,045 127,557
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Deferred rent 42,363 46,747
SHAREHOLDERS' EQUITY
Preferred shares, no par value; 25,000,000 shares
authorized Common shares, no par value; 100,000,000
shares authorized; 5,863,800 shares issued
and outstanding at at June 30 and March 31, 1997,
respectively 1,692,725 1,692,725
Less: treasury stock (37,200 shares at cost) (37,292) (37,292)
Warrants outstanding 341,880 341,880
Retained earnings (1,411,644) (1,183,604)
-------------------------
Total shareholders' equity 585,669 813,709
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$1,196,077 $ 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 ENDED JUNE 30, 1997 AND 1996
(Unaudited-Expressed in U.S. dollars)
<TABLE>
THREE MONTHS ENDED JUNE 30,
---------------------------
REVENUES 1997 1996
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<S> <C> <C>
Oil and gas sales $ 22,725 $ 83,615
Sales of oil and gas properties 230,000 0
Other 3,624 3,093
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256,349 86,708
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COSTS AND EXPENSES
Lease operating 14,723 19,172
Production taxes 1,457 3,017
General and administrative 127,453 139,537
Depreciation, depletion and amortization 20,530 18,139
Unsuccessful exploration, net 61,652 0
Geologic, geophysical and delay rental costs 13,200 23,832
Cost of properties sold 245,175 0
Interest 199 95
---------------------------
484,389 203,792
Loss from operations (228,040) (117,084)
Income tax benefit 0 0
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Net loss $(228,040) $(117,084)
---------------------------
---------------------------
Loss per common share $(.04) $(.03)
Weighted average number of
common shares outstanding 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>
THREE MONTHS ENDED JUNE 30,
----------------------------
CASH FROM OPERATING ACTIVITIES: 1997 1996
----------------------------
<S> <C> <C>
Net loss $(228,040) $(117,084)
Noncash expenses and revenues included in net loss
Depreciation, depletion and amortization 20,530 18,139
Unsuccessful exploration, net 60,164 0
Cost of properties sold 245,175 0
(Increase) in accounts receivable (170,577) 4,871
Increase (decrease) in accounts payable 275,289 (45,656)
Increase (decrease) in advances from industry
participants 167,462 (21,408)
(Decrease) in taxes payable (2,263) (5,099)
(Decrease) in deferred rent (4,384) (1,789)
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Net cash used for operating activities 363,356 (168,026)
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Net cash provided by financing activities 0 0
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CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas producing activities (246,803) (38,911)
Acquisition of furniture & equipment 0 (3,092)
Sale of short term investments 0 3,050
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Net cash used for investing activities (246,803) (38,953)
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NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 116,553 (206,979)
CASH AND CASH EQUIVALENTS, beginning of period 341,464 379,133
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CASH AND CASH EQUIVALENTS, end of period $ 458,017 $ 172,154
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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
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Note 1. In the opinion of management, the accompanying condensed financial
statements contain all adjustments necessary to present fairly the
financial position as of June 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 periods ended June
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 ended June 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 June 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 under Statement of
Financial Accounting Standards ("SFAS") 109 and 121. The provisions
of SFAS 109 and 121 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 June 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 June 30, 1997. The net
deferred tax asset would consist primarily of carryover statutory
depletion and U.S. net operating loss carryforward.
<PAGE>
PART I
-CONTINUED-
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 $299,015 at June 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 as more fully described below.
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 is selling producing and non-producing
leasehold and reducing its working interest percentage 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 and Wyoming.
In order to further preserve working capital, the Company is taking
steps to reduce general and administrative expenses. Although the
administrative cost reductions have not yet been fully implemented, 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
plans to terminate full time employment, effective September 15, 1997, for
Messrs. Jack Steinhauser, J. Chris Steinhauser, and Cliff Clark who currently
serve as President, Executive Vice President and Vice President of
Exploration, respectively. The aforementioned individuals will continue in
their capacities as officers of the Company and will consult to the Company
as needed. The terms of any such consulting arrangements have not yet been
determined. In addition, the Company plans to end full time employment for
its Land Manager, effective September 15, 1997, and continue his services on
a part time, yet to be determined basis.
During the quarter ended June 30, 1997, the Company drilled two
exploratory wells on its acreage in the Merlin Prospect located in
California. One well has been completed and placed on production August 1,
1997 at a restricted rate of 800 mcf per day. Effective July 1, 1997 the
Company sold half of its 40% working interest in the prospect 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, 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 and development in
the prospect at a substantially reduced cost.
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. In addition, the Company is finalizing arrangements to sell
its 12.5% to 21.04% working interests in three wells located in Michigan for
$35,000.
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
<PAGE>
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 THREE MONTHS STATEMENT OF OPERATIONS
During the three months ended June 30, 1997, the Company experienced a
decrease in oil and gas revenues as compared to the prior year period due to
dispositions of the Company's producing properties. The properties sold
accounted for the majority of the Company's production revenues in the prior
year periods.
Oil and gas sales for the three months ended June 30, 1997 were $22,725
compared to $83,615 for the three months ended June 30, 1996, a 73% decrease.
Company net oil production totaled 501 bbls. in the latest three months as
compared to 1,388 bbls. during the prior year three month period, a 64%
decrease. Average crude oil prices were $15.88 per barrel during the three
months ended June 30, 1997 compared to $19.33 in the prior period, an 18%
decrease. Gas production decreased from 30,509 mmbtu in the prior year period
to 6,505 mmbtu in the three months ended June 30, 1997, a 79% decrease. The
decrease is due to the sale, effective May 1, 1997, of Sharon's gas production
in the three producing wells in Baca County, Colorado. The average gas price
received in the latest period was $1.93 per mmbtu as compared to $1.44 per mmbu
in the prior year period, a 35% increase.
During the three months ended June 30, 1997, the Company sold working
interests in three producing gas wells located in Colorado. Total cash
proceeds to be realized are $230,000. The gross proceeds from this transaction
are recorded as sales of oil and gas properties. The Company had net remaining
unamortized costs associated with the properties sold of $245,175 which are
recorded as cost of properties sold.
General and administrative expenses for the three months ended June 30,
1997 and 1996 were $127,453 and $139,537, respectively, a $12,000 or 9%
decrease. The reasons for the decrease were cost cutting measures
implemented by management.
Oil and gas production expenses (lease operating and production tax
expense combined) for the three months ended June 30, 1997 and 1996 were
$16,180 and $22,189, respectively. The primary reason for the decrease was
due to a reduced number of wells in which the Company has ownership in the
current period as compared to the prior year period.
Unsuccessful exploration expense increased from $0 last year to $61,652
in the current period due to exploratory drilling activity in the latest
period. Geologic and geophysical costs and delay rentals decreased from
$23,832 in the prior year period to $13,200 in the latest three month period
due to decreased geologic expenditures.
COMPANY OUTLOOK
As noted above, the Company is taking steps to reduce its overhead and
capital expenditures. The Company is also proceeding to sell 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
<PAGE>
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 likely result in significant charges to current and future operations.
Management intends to use the Company's existing working capital to fund
prospect acquisition, exploration, exploitation, development and Company
overhead requirements. The Company is evaluating additional prospects, which
Management considers prospective.
<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: August 14, 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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 458,017
<SECURITIES> 0
<RECEIVABLES> 400,170
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 867,060
<PP&E> 524,842
<DEPRECIATION> 209,167
<TOTAL-ASSETS> 1,196,077
<CURRENT-LIABILITIES> 568,045
<BONDS> 0
0
0
<COMMON> 1,692,725
<OTHER-SE> (1,107,056)
<TOTAL-LIABILITY-AND-EQUITY> 1,196,077
<SALES> 22,725
<TOTAL-REVENUES> 256,349
<CGS> 16,180
<TOTAL-COSTS> 281,885
<OTHER-EXPENSES> 202,305
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199
<INCOME-PRETAX> (228,040)
<INCOME-TAX> 0
<INCOME-CONTINUING> (228,040)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (228,040)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
