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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 DECEMBER 31, 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 February 1, 1997, the Registrant had 4,247,600 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)
<TABLE>
<S> <C> <C>
DECEMBER 31, MARCH 31,
ASSETS 1996 1996
CURRENT ASSETS: -------------------------
Cash and cash equivalents $ 250,800 $ 379,133
Short term investments 0 53,050
Accounts receivable 89,563 124,844
Prepaid expenses 8,873 8,873
-------------------------
Total current assets 349,236 565,900
-------------------------
OIL AND GAS PROPERTIES
Successful efforts method of accounting,
at cost 878,615 793,135
Less--accumulated depreciation, depletion
and amortization (138,336) (92,336)
-------------------------
740,279 700,799
-------------------------
FURNITURE, FIXTURES AND EQUIPMENT
at cost less accumulated depreciation 16,440 25,765
-------------------------
$1,105,955 $1,292,464
-------------------------
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 30,304 $ 103,218
Advances from industry partners 30,379 54,850
Royalty and working interest owner payable 30,796 0
Taxes payable 9,580 13,682
-------------------------
Total current liabilities 101,059 171,750
-------------------------
Deferred tax liability 58,000 58,000
Deferred rent 48,536 53,903
SHAREHOLDERS' EQUITY
Preferred shares, no par value; 2,500,000 shares authorized
Common shares, no par value; 10,000,000 shares authorized;
4,114,800 and 3,514,800 shares issued and outstanding at
December and March 31, 1996, respectively 1,549,672 1,326,802
Less: treasury stock (37,200 shares at cost) (49,823) (49,823)
Retained earnings (601,489) (268,168)
-------------------------
Total shareholders' equity 898,360 1,008,811
-------------------------
$1,105,955 $1,292,464
-------------------------
-------------------------
</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 DECEMBER 31, 1996 AND 1995
(Unaudited-Expressed in U.S. dollars)
<TABLE>
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
REVENUES 1996 1995 1996 1995
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Oil and gas sales $ 73,014 $ 64,470 $ 224,951 $ 139,590
Sales of oil and gas properties 0 0 157,500 15,885
Other 1,706 13,893 5,907 42,165
-------------------------- -------------------------
74,720 78,363 388,358 197,640
-------------------------- -------------------------
COSTS AND EXPENSES
Lease operating 26,822 22,017 65,272 59,466
Production taxes 2,837 905 8,253 3,750
General and administrative 123,547 113,238 382,958 339,958
Depreciation, depletion and amortization 22,139 22,662 58,417 60,376
Unsuccessful exploration, net 53,135 43,055 86,330 222,893
Geologic, geophysical and delay rental costs 7,211 0 56,636 0
Cost of leases sold 0 0 63,460 0
Interest 138 1,180 356 1,180
-------------------------- -------------------------
235,829 203,057 721,682 687,623
Loss from operations (161,109) (124,694) (333,324) (489,983)
Income tax benefit 0 21,351 0 105,045
-------------------------- -------------------------
Net loss $ (161,109) $ (103,343) $ (333,324) $ (281,595)
-------------------------- -------------------------
-------------------------- -------------------------
Earnings per common share $ (.04) $ (.03) $ (.09) $ (.11)
Weighted average number of
common shares outstanding 3,726,622 3,332,778 3,679,231 3,362,153
</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>
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
---------------------------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES:
Net loss ($333,324) ($384,938)
Noncash expenses and revenues included in net loss
Depreciation, depletion and amortization 58,417 60,376
Write-off of lease costs 0 532
Deferred tax benefit 0 (91,000)
Dry hole costs 0 185,450
Gain on sale of oil and gas property (94,040) (15,885)
decrease in accounts receivable 35,274 (85,701)
(decrease) in accounts payable (42,108) (77,019)
Increase (decrease) in advances from
industry participants (24,471) 112,695
(Decrease) in taxes payable (5,367) (1,315)
Decrease in deferred rent (4,102) (11,922)
Increase in other, net 0 23,938
---------------------------
Net cash used for operating activities (409,721) (284,789)
---------------------------
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 0 0
Proceeds from issuance of common stock 222,870 34,753
Proceeds from sale of properties 160,741 81,625
---------------------------
Net cash provided by financing activities 383,611 116,378
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---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas producing activities (152,181) (389,610)
Acquisition of furniture & equipment (3,092) (839)
(Purchase) Sale of short term investments 53,050 (16,841)
---------------------------
Net cash used for investing activities (102,223) (407,290)
---------------------------
---------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (128,333) (575,701)
CASH AND CASH EQUIVALENTS, beginning of period 379,133 723,444
---------------------------
CASH AND CASH EQUIVALENTS, end of period $250,800 $147,743
---------------------------
---------------------------
</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 December 31, 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 and
nine month periods ended December 31, 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 and nine months ended
December 31, 1996 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. Under the rules of the Securities and Exchange
Commission, earnings per share is adjusted for the assumed
conversion of shares issuable upon exercise of stock options, after
the assumed repurchase of common shares with the related proceeds
(the treasury stock method), if the stock options are exercisable at
prices below the average and ending market price of the stock during
the latest periods presented.
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 nine month period ended
December 31, 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 with a valuation allowance as it is more
likely than not that the deferred tax asset would not be utilized at
December 31, 1996. 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 $248,177 at December 31, 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 overhead expenditures and
is using the proceeds of common stock issuances 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.
As more fully explained below, the Company is presently engaged in
exploration and development of oil and gas reserves in California and
subsequent to December 31, 1996, has incurred and will continue to incur
capital costs in connection with such activities.
RESULTS OF SIX MONTH STATEMENT OF OPERATIONS
During the nine months ended December 31, 1996, the Company experienced
an increase in oil and gas revenues as compared to the prior year period due
to increased oil production and higher oil and gas prices.
Oil and gas sales for the nine months ended December 31, 1996 were
$224,951 compared to $139,590 for the nine months ended December 31, 1995, a
61% increase. Company net oil production totaled 4,551 bbls. in the latest
nine months as compared to 2,140 bbls. during the prior year nine month
period, a 113% increase. Average crude oil prices were $19.19 per barrel
during the nine months ended December 31, 1996 compared to $15.80 in the
prior period, a 22% increase. Gas production decreased from 98,571 mcf in
the prior year period to 82,866 mcf in the nine months ended December 31,
1996, a 16% decrease. The average gas price received in the latest period
was $1.63 per mcf as compared to $1.07 per mcf in the prior year period, a
52% increase.
During the nine months ended December 31, 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 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 associated with the properties sold of $63,460 which are recorded as
cost of leases sold. During the nine months ended December 31, 1995, the
Company realized $15,885 in net cash proceeds from the sale of working
interests to participants in its exploratory prospects.
General and administrative expenses for the nine months ended December
31, 1996 and 1995 were $382,958 and $339,958, respectively, a $43,000 or 13%
increase. The major reason for the increase were legal and administrative
expenses associated with the Company's private placement issuance of common
stock.
Oil and gas production expenses (lease operating and production tax
expense combined) for the nine months ended December 31, 1996 and 1995 were
$73,525 and $63,216, respectively.
<PAGE>
The primary reason for the increase was due to well workovers performed on
the Company's Colorado properties in the latest period.
Unsuccessful exploration expense decreased from $222,893 last year to
$86,330 in the latest nine month period due to decreased exploratory drilling
activity. Geologic and geophysical costs and delay rentals increased from $0 in
the prior year period to $56,636 in the latest nine 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 third quarter ended December 31, 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 December 31, 1996 were
$73,014 compared to $64,470 for the three months ended December 31, 1995, a
13% increase. Company net oil production totaled 2,009 bbls. in the latest
quarter as compared to 986 bbls. during the prior year three month period, a
104% increase. Average crude oil prices were $18.63 per barrel during the
three months ended December 31, 1996 compared to $15.92 in the prior year
period, a 17% increase. Gas production decreased from 32,937 mcf in the
prior year period to 22,137 in the nine months ended December 31, 1996, a 33%
decrease. Average gas prices during the prior year quarter were $1.19 per
mcf as compared to $2.07 in the latest quarter, a 74% increase.
General and administrative expenses for the three months ended December
31, 1996 and 1995 were $123,547 and $113,238, respectively, a $10,309 or 9%
increase. The reasons for the increase were legal and administrative
expenses associated with the Company's issuance of stock.
Oil and gas production expenses (lease operating and production tax
expense combined) for the three months ended December 31, 1996 and 1995 were
$29,659 and $22,922, respectively, a $6,737 (29%) increase. The reason for
the increase was due to well workovers in the latest quarter.
Unsuccessful exploration expense increased from $43,055 last year to
$53,135 in the latest quarter. Geologic and geophysical costs and delay
rentals increased from $0 in the prior year quarter to $7,211 in the latest
quarter.
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. Acreage acquisition and 3-D seismic
acquisition and interpretation has been completed on three of the prospects
resulting in the identification of approximately forty potential drilling
locations. The Company has participated as a non-operator in the drilling of
one well in which it had a 25%
<PAGE>
working interest. The well was completed in January of 1997 as a dry hole.
Drilling operations have commenced on another well location in which the
Company has a 6% non-operated working interest. The outcome of the well is
not yet known as of the date of this report. Although the Company has not
received any formal proposals for additional wells to be drilled in the
prospects, management anticipates that additional wells will be drilled
within the balance of the Company's fiscal year ended March 31, 1997. The
Company will have non-operated working interests ranging from 3 to 6% in the
wells.
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 and farm-in agreements covering approximately
10,000 gross acres have been acquired and additional leasing efforts are
underway. Subsequent to December 31, 1996 the Company is proceeding with a
15.5 square mile 3-D seismic survey covering a portion of its leasehold.
Estimated costs net to the Company are $231,000 for the seismic acquisition.
It is not possible at this time to predict the number of drilling locations
that will result from the seismic survey or estimate future costs associated
with the joint exploration agreement.
Until the Company is able to replace the reserves and production sold in
1995, 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 reliance on 3-D and 2-D seismic will 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 acquiring additional leasehold in
California 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 ended December 31, 1996, and subsequently in
February 1997, the Company has raised additional equity capital through
private placement issuances of common stock under Regulation S and D
exemptions from registration under the 1933 Securities Act. The net proceeds
after offering expenses total approximately $700,000 in U.S. funds and will
be used to fund the Company's seismic and lease acquisition efforts and
initial drilling costs in the Company's California exploration programs. The
Company is also divesting non-strategic properties to raise additional
working capital. 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 interest in 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
SHARON ENERGY LTD. AND SUBSIDIARY
OTHER INFORMATION
(a) During the quarter ended December 31, 1996 the Company issued 300,000
units of unregistered securities pursuant to an exemption from
registration under Rule 505 of Regulation D of the Securities Act of
1933. Each unit consists of one common voting share of the Company and
one non-transferable Class B Common Stock Warrant entitling the
purchaser thereof to purchase one additional common share of the Company
at a price of Canadian $.60 per share to be exercised any time after,
and within one year from, the date of closing. The closing date of the
offering was December 19, 1996.
(b) All of the units were sold to Company management who are accredited
investors as the term is defined in Regulation D under the Securities
Act of 1933.
(c) The Company received cash consideration of Canadian $150,000 (U.S.
$110,000) from the issuance of the units. There were no underwriting
discounts or commissions in connection with the offering.
(d) The above offering was made concurrently with an additional issuance of
the Company's securities made in reliance on Regulation S of the
Securities Act of 1933. The Regulation S offering was closed on
February 12, 1997 and will be described in detail in a Form 8-K to be
filed by the Company to be filed within fifteen days of the February 12,
1997 closing date.
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: February 12, 1997 By: /s/ J. CHRIS STEINHAUSER
J. Chris Steinhauser
Chief Financial Officer and
Chief Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000844680
<NAME> SHARON ENERGY LTD.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 250,800
<SECURITIES> 0
<RECEIVABLES> 89,563
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 349,236
<PP&E> 878,615
<DEPRECIATION> 138,336
<TOTAL-ASSETS> 1,105,955
<CURRENT-LIABILITIES> 101,159
<BONDS> 0
0
0
<COMMON> 1,549,672
<OTHER-SE> (651,312)
<TOTAL-LIABILITY-AND-EQUITY> 1,105,955
<SALES> 73,014
<TOTAL-REVENUES> 74,720
<CGS> 29,659
<TOTAL-COSTS> 235,829
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138
<INCOME-PRETAX> (161,109)
<INCOME-TAX> 0
<INCOME-CONTINUING> (161,109)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (161,109)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
