<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 DECEMBER 31, 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 January 29, 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)
December 31, March 31,
ASSETS 1997 1997
-------------------------------
CURRENT ASSETS:
Cash and cash equivalents $114,395 $341,464
Accounts receivable 23,358 229,593
Prepaid expenses 8,873 8,873
-------------------------------
Total current assets 146,626 579,930
-------------------------------
OIL AND GAS PROPERTIES
Successful efforts method of accounting,
at cost 272,113 583,378
Less--accumulated depreciation, depletion
and amortization (72,947) (192,336)
-------------------------------
199,166 391,042
-------------------------------
FURNITURE, FIXTURES AND EQUIPMENT
at cost less accumulated depreciation 5,944 17,041
-------------------------------
$351,736 $988,013
-------------------------------
-------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 14,287 $ 86,332
Advances from industry partners 0 30,379
Taxes payable 8,583 10,846
Other payables 1,928 0
-------------------------------
Total current liabilities 24,798 127,557
-------------------------------
Deferred rent 35,056 46,747
SHAREHOLDERS' EQUITY
Preferred shares, no par value; 25,000,000
and 2,500,000 shares authorized at December 31
and March 31, 1997, respectively; Common shares,
no par value; 100,000,000 and 10,000,000 shares
authorized at December 31 and March 31, 1997,
respectively;
5,863,800 shares issued and outstanding at
at December 31 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 (1,705,431) (1,183,604)
-------------------------------
Total shareholders' equity 291,882 813,709
-------------------------------
$351,736 $988,013
-------------------------------
-------------------------------
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 NINE MONTHS ENDED DECEMBER 31,
1997 AND 1996
(Unaudited-Expressed in U.S. dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
REVENUES 1997 1996 1997 1996
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Oil and gas sales ($86) $73,014 $30,374 $224,951
Sales of oil and gas properties 80,000 0 341,615 157,500
Other 1,060 1,706 7,631 5,907
--------------------------- ---------------------------
80,974 74,720 379,620 388,358
--------------------------- ---------------------------
COSTS AND EXPENSES
Lease operating 3,540 26,822 9,937 65,272
Production taxes (1,688) 2,837 (226) 8,253
General and administrative 34,153 123,547 292,043 382,958
Depreciation, depletion and amort. 3,699 22,139 34,858 58,417
Unsuccessful exploration, net 135 53,135 171,335 86,330
Geologic, geophysical and delay rental 381 7,211 36,373 56,636
Cost of leases sold 55,320 0 356,817 63,460
Interest 0 138 310 356
--------------------------- ---------------------------
95,540 235,829 901,447 721,682
Loss from operations (14,566) (161,109) (521,827) (333,324)
Income tax benefit 0 0 0 0
--------------------------- ---------------------------
Net loss ($14,566) ($161,109) ($521,827) ($333,324)
--------------------------- ---------------------------
--------------------------- ---------------------------
Earnings per common share $.00 ($.04) ($.09) ($.09)
Weighted average number
common shares outstanding 5,863,800 3,726,622 5,863,800 3,679,231
</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)
Nine Months Ended
December 31, December 31,
CASH FROM OPERATING ACTIVITIES: 1997 1996
---------------------------
Net loss ($521,827) ($172,215)
Noncash expenses and revenues included in net loss
Depreciation, depletion and amortization 34,858 36,278
Write-off of lease costs 10,833 0
Dry hole costs 160,502 0
(loss) gain on sale of oil and gas property 15,202 (94,040)
decrease in accounts receivable 227,069 35,776
(decrease) in accounts payable (49,307) (24,758)
Increase (decrease) in advances from
industry participants (30,379) (21,961)
(Decrease) in taxes payable (23,073) (4,787)
(Decrease) in deferred rent (11,691) (2,982)
Increase in other, net 73,434 0
--------------------------
Net cash used for operating activities (114,379) (248,689)
--------------------------
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 0 0
Proceeds from issuance of common stock 0 0
Proceeds from sale of properties 341,615 157,500
--------------------------
Net cash provided by financing activities 341,615 157,500
--------------------------
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas producing activities (454,305) (89,298)
Acquisition of furniture & equipment 0 (3,092)
(Purchase) Sale of short term investments 0 48,348
--------------------------
Net cash used for investing activities (454,305) (44,042)
--------------------------
--------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (227,069) (135,231)
CASH AND CASH EQUIVALENTS, beginning of period 341,464 379,133
--------------------------
CASH AND CASH EQUIVALENTS, end of period $114,395 $243,902
--------------------------
--------------------------
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, 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 nine
month periods ended December 31, 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 nine months ended
December 31, 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 three and nine month periods ended
December 31, 1997 and 1996, 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 and nine month period ended December 31, 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 December 31, 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. Effective December
15, 1997, the Company was required to adopt SFAS 128 "earnings per
share". However, the difference in accounting methods would result in
no impact to earnings per share for any of the periods presented.
<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 $121,828 at December 31, 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 activity is planned during the balance of 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 and
Louisiana.
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 except its office manager. 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 has received 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 allowed the Company to improve its cash position and continue
participation and development in the prospect at a substantially reduced cost.
During November and December of 1997, the third party fulfilled its contractual
obligation to the Company with the drilling of two wells (at no cost to the
Company), one of which was completed as a dry hole and one which is currently
being completed for production. The Company will have a 20% working interest
(16% net revenue interest) in the new well from the date of first production.
The well is projected to contribute $10,000 to $30,000 cashflow per month net to
the Company's revenue interest depending on gas prices, production rates and
other factors. It is anticipated that additional drilling will take place in
the Merlin Prospect in the spring or summer of 1998 for which the Company shall
be required to pay its proportionate 20% share. The Company's participation in
subsequent
<PAGE>
wells in the Merlin Prospect will have to be funded from working capital, cash
flow, loans or additional equity financings, the availability of which cannot be
assured.
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.
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 NINE MONTH STATEMENT OF OPERATIONS
During the nine months ended December 31, 1997, the Company experienced an
approximately 87% 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 nine months ended December 31, 1997, the Company sold
substantially all of its producing working interests located in Michigan,
California and Colorado for proceeds of $341,615. 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 $356,817 and $63,460 which are recorded as cost of leases sold for the nine
months ended December 31, 1997 and 1996, respectively.
General and administrative expenses for the nine months ended December 31,
1997 and 1996 were $292,643 and $382,958, 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 most employees. In addition, the Company
has subleased all available space at its corporate offices to reduce rent
expense. These cost reductions in combination with others that have been
implemented have and will result in significantly lower general and
administrative expenses in the third and fourth quarters of the 1998 fiscal year
ending March 31, 1998.
Oil and gas production expenses (lease operating and production tax expense
combined) for the nine months ended December 31, 1997 and 1996 were $9,711 and
$65,272, 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 $86,330 last year to
$171,335 in the latest nine 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 $56,636 in the prior year
period to $36,373 in the latest nine month period, due to lower delay rental,
geologic and seismic expense associated with the Company's California and
Wyoming leasehold positions. The Company has a lower working interest in those
leasehold positions in the
<PAGE>
current period as compared to one year ago.
RESULTS OF QUARTERLY STATEMENT OF OPERATIONS
During the third quarter ended December 31, 1997, the Company experienced
an approximate 100% 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 December 31,
1997 and 1996 were $292,043 and $382,958, respectively, a $90,915 or 24%
decrease. The reason for the decrease was due to lower salary expense resulting
from termination of full time salaried positions.
Oil and gas production expenses (lease operating and production tax expense
combined) for the three months ended September 30, 1997 were ($1,688). The
negative balance resulted from closing adjustments in connection with the
Company's sale of its Colorado properties. The Company reversed taxes which had
previously been recorded but incurred after the May 1, 1997 effective date of
the sale.
Unsuccessful exploration expense decreased from $53,135 last year to $135
in the latest quarter due to no exploratory drilling in the latest period in the
Company's prospects period in which the Company had a cost participation.
Geologic and geophysical costs and delay rentals decreased from $7,211 in the
prior year quarter to $381 in the latest quarter due to reduced exploration
activity.
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.
Effective January 6, 1998, the Company entered into an agreement with an
underwriter, Canacord Capital Corporation ("Canacord") of Vancouver, British
Columbia, Canada. The Company through Canaccord is offering up to 3,500,000
Units (the "Units") in a private placement. The purchase price of each Unit is
Canadian ("CDN")$0.20 and consists of 1 share of the Company's common stock, no
par value per share, and 1 Class D Common Stock Purchase Warrant. Two D
Warrants are exercisable to purchase one share of the Company's common stock
within six months from the closing date of this offering at a price of CDN$0.25
per share. The offering is being made on a "commercially reasonable efforts"
basis. Assuming that this Offering is fully subscribed (which cannot be
assured), the gross proceeds from the sale of the units will be CDN$700,000.
Using an exchange rate of CDN$1.43 to U.S. $1.00, the net proceeds to the
Company from the sale of the Units are estimated to be approximately US$440,700
(after deducting the Agent's maximum cash commission of US$34,300 and the
expenses of this Offering, estimated to be US$15,000). In addition, assuming
that this Offering is fully subscribed (which cannot be assured), the Company
may receive additional gross proceeds of up to US$362,250 upon exercise of the D
Warrants and the E Warrants included herein. However, there are no assurances
that any of the D Warrants, or the E Warrants, will be exercised.
The Company is offering the securities described above pursuant to certain
exemptions
<PAGE>
from the prospectus requirements of the SECURITIES ACT (British Columbia,
Canada, the "B.C. Act") and in reliance of an exemption from registration under
Regulation S of the Securities Act of 1933. Substantially all of the proceeds
of this offering will be applied to the acquisition of leases, the payment of
delay rentals, and the drilling and completion of an initial test well in the
Company's South Lakeside Prospect located in Cameron Parish, Louisiana. The
Company intends to retain a total of 10% working interest in the project. A 7%
working interest will be financed from the net proceeds of this offering. An
additional 3% working interest participation by the Company will be financed
from other sources, including working capital, cash flow and additional
financings, the availability of which cannot be assured. In the event the
Company is unable to finance the additional 3% working interest, the Company's
working interest participation will be limited to the 7% pursuant to the private
placement offering. The Company has entered into an option agreement to
participate in a ten percent (10%) working interest in the South Lakeside
Prospect (the "Prospect"). The Prospect encompasses an interest in
approximately 2,982 gross acres of oil and gas leases in Cameron Parish,
Louisiana. The proposed operation will involve the re-entry and sidetracking of
a previously abandoned well. The principal objective will be to test the MioGyp
sands at a depth of approximately 17,500 feet.
There is no assurance that offering described above will be subscribed and
proceeds will be available for participation in the Prospect. In the event that
no proceeds are available for participation, the Company shall not exercise its
option to participate in the Prospect.
<PAGE>
PART II
SHARON ENERGY LTD. AND SUBSIDIARY
OTHER INFORMATION
Item 5. Other Information
On December 9, 1997, the Company was notified by the Boston Stock Exchange that
the Company does not meet the minimum maintenance requirements in connection
with the Company's total assets, shareholder's equity and market value of the
public float shares. The notification required that the Company comply with the
maintenance requirements or provide a plan of action to comply with the
maintenance requirements by a specified date. The Company's management and
directors concluded that the Company's continued listing on the Boston Stock
Exchange was not strategically valuable to the Company at the present time and
does not warrant the payment of annual listing and other fees to the exchange.
The principal market for the Company's common shares is the Vancouver Stock
Exchange where substantially all of the trading volume in the company's common
shares occurs. Accordingly, on December 23, 1997, the Company received
notification from the Boston Stock Exchange that trading of the Company's common
shares was suspended and application was made to the Securities Exchange
Commission to delist the common shares from the Boston Exchange. The Company
will continue to file its periodic reports with the Securities Exchange
Commission under the Securities Exchange Act of 1934.
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: January 29, 1998 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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 114,395
<SECURITIES> 0
<RECEIVABLES> 23,358
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 146,626
<PP&E> 272,113
<DEPRECIATION> (72,947)
<TOTAL-ASSETS> 351,736
<CURRENT-LIABILITIES> 24,995
<BONDS> 0
0
0
<COMMON> 1,642,725
<OTHER-SE> (1,400,843)
<TOTAL-LIABILITY-AND-EQUITY> 351,736
<SALES> 371,989
<TOTAL-REVENUES> 379,620
<CGS> 366,528
<TOTAL-COSTS> 901,447
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (521,827)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (521,827)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> 0
</TABLE>
