<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
------------------------------
WASHINGTON, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
--------- SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED MARCH 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
--------- OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained within this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
----
State issuer's revenues for its most recent fiscal year: $414,421. As of June 1,
1998, 9,563,800 shares of the registrant's common stock were outstanding and the
aggregate market value of such common stock held by non-affiliates was
approximately 1,886,713 based on the bid ($0.27) price on that date.
The proxy statement for the 1998 annual meeting is incorporated by reference
into Part III.
Traditional Small Business Disclosure Format: Yes No X
----- -----
Exhibit table is on page 45.
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SHARON ENERGY LTD.
INDEX TO ANNUAL REPORT
ON FORM 10-KSB
FISCAL YEAR ENDED MARCH 31, 1998
<TABLE>
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<S> <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 10
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 5. Market Price of, and Dividends on, the Company's Common Equity
and Related Stockholder Matters. . . . . . . . . . . . . . . . . . . . . 11
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 7. Financial Statements and Supplementary Data. . . . . . . . . . 17
FOR THE YEARS ENDED MARCH 31, 1997 AND 1998. . . . . . . . . . . . . . . . 22
TREASURY SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 43
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of The Exchange Act. . . . . . . . . . . . 44
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . 44
Item 11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Item 12. Certain Relationships and Related Transactions Condition and
Results of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . 44
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 45
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Sharon Energy Ltd. was incorporated in February 1980 under the laws of the
Province of British Columbia, Canada. Sharon Energy Ltd. operates through a
wholly owned Colorado subsidiary, Sharon Resources, Inc. and is engaged in
exploration and development of oil and gas reserves entirely within the United
States.
For convenience of reference, the consolidated entity of Sharon Energy Ltd. and
Sharon Resources, Inc. will be collectively referred to herein as the "Company"
or the "Registrant".
In its eighteen years of operation, the Company has drilled a total of 179 wells
(both operated and non-operated) and completed 124 wells for production.
During the fiscal year ended at March 31, 1995, the Company sold substantially
all of its producing well interests. The producing well interests sold were
located in Kansas, Pennsylvania and Wyoming and represented approximately 85%
and 95% of the Company's gross and net cash flows from oil and gas operations
for the year ended March 31, 1995. During fiscal 1998, the Company sold
additional property interests which are discussed herein in Item 2. "Properties
and Item 6. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
During fiscal 1996, 1997 and 1998, the Company reinvested the proceeds from
these dispositions into exploration and development activities in Colorado,
California, Michigan, Kansas, Illinois and Wyoming. During the latest fiscal
year ended March 31, 1998, the Company's principal area of activity has been in
the northern Sacramento Basin portion of California and more recently in
Louisiana and Illinois. The scope of these activities is described in detail
under Item 2. Properties.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Since the Company is presently actively engaged in only one industry, oil and
gas exploration, development and sale of production, this paragraph is not
applicable to the Company; see Item 7 herein for general financial information
concerning the Company.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Company is engaged in the exploration for and development of properties
containing or believed to contain recoverable oil and gas reserves and the sale
of production from such reserves.
All of the Company's business interests have been centered in the United States
of America with a majority of its exploration activities focused in Northern
California during the preceding year.
The Company intends to drill a minimum of 3 test wells on its undeveloped
acreage during the next six months. See further, Item 2 herein.
(i) PRINCIPAL PRODUCTS
The Company has working interests in various oil and gas properties
(developed and undeveloped). See Item 2 herein for a general
description of these properties.
(ii) STATUS OF PRODUCT OR SEGMENT
At present, the properties in which the Company has interests are both
producing and undeveloped properties. See Item 2 herein for a general
description of these properties.
(iii) RAW MATERIALS
This is not applicable to the Company.
(iv) PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS HELD
2
<PAGE>
Permits are important to the Company's operations, since they allow
the search for the extraction of any oil, gas and minerals discovered
on the areas covered. See further, Item 2 herein.
(v) SEASONALITY OF BUSINESS
The Company's business is not seasonal.
(vi) WORKING CAPITAL ITEMS
The majority of the Company's current assets are in the form of cash,
prepayments and accounts receivable, which are required to pay for the
cost of operations. See further, Item 6 herein.
(vii) CUSTOMERS
Gas production is currently sold at a Southern California Border Index
price, less transportation. One company purchases all of the
Company's gas production in northern California together constituting
100% of current gas revenues.
(viii) BACKLOG
This is not applicable to the Company.
(ix) RENEGOTIATION OF BUSINESS OR TERMINATION OF CONTRACTS OR
SUBCONTRACTS AT THE ELECTION OF THE GOVERNMENT
This is not applicable to the Company.
(x) COMPETITIVE CONDITIONS IN THE BUSINESS
The petroleum and natural gas industry is highly competitive and the
Company competes with a substantial number of other companies that
have greater resources. Many such companies not only explore for,
produce and market petroleum and natural gas but also carry on
refining operations and market the resultant products on a worldwide
basis. There is also competition between petroleum and natural gas
producers and other industries producing energy and fuel.
Furthermore, competitive conditions may be substantially affected by
various forms of energy legislation and/or regulation considered from
time to time by the governments (and/or agencies thereof) of the
United States and Canada; however, it is not possible to predict the
nature of any such legislation and/or regulation which may ultimately
be adopted or its effects upon the future operations of the Company.
Such laws and regulations may, however, substantially increase the
costs of exploring for, developing or producing oil and gas and may
prevent or delay the commencement or continuation of a given
operation. The exact effect of these risk factors cannot be
accurately predicted.
(xi) BUSINESS RISKS
The operations of the Company are subject to the many risks and
hazards incident to drilling for, producing and transporting oil and
gas, including blowouts, fires, pollution and equipment failures.
Such hazards may result in damage to or destruction of wells,
producing formations, production facilities and equipment and personal
injuries.
Oil and gas exploration and development involves a high degree of
risk, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. There is no assurance that
additional oil and gas in commercial quantities will be discovered or
acquired by the Company. The marketability of the Company's oil and
gas reserves or of reserves, which may be acquired or discovered by
the Company, may be affected by numerous factors beyond the control of
the Company. These factors include fluctuations in product markets
and prices, the proximity and capacity of pipelines to the Company's
oil and gas reserves, the ability of the Company to finance
exploration and development costs and the availability of processing
equipment. Additional factors are engineering and construction
delays, difficulties and hazards resulting from unusual or unexpected
geological or environmental conditions, or to the conditions involved
in drilling and operating wells.
Oil and gas operations also involve the risk that well fires,
blowouts, equipment failure, human error and other circumstances may
cause accidental leakage of toxic or hazardous materials, such as
petroleum liquids or drilling
3
<PAGE>
fluids into the environment, or cause other injuries to persons or
property. In such event, substantial liabilities to third parties or
governmental entities may be incurred, the payment of which could
substantially reduce available cash and possibly result in loss of oil
and gas properties. Such hazards may also cause damage to or
destruction of wells, producing formations, production facilities and
pipeline or other processing facilities.
Drilling and completion of oil and gas wells is hazardous and involves
a high degree of risk. In addition to the substantial risk that wells
drilled will not be productive, hazards such as unusual or unexpected
formations, pressures, down-hole fires, mechanical failures, blowouts
and loss of circulation of drilling fluids are inherent in oil and gas
exploration. Even though a well is completed and is found to be
productive, water, sulfur, or other deleterious substances may also be
produced that may impair or prevent production or impair or prevent
the marketing of such production. Drilling operations may also be
susceptible to delays caused by inclement weather and the resulting
condition of the terrain. If any of such hazards and delays are
encountered while conducting operations, substantial unbudgeted and
unexpected costs may be incurred.
As is common in the oil and gas industry, the Company will not insure
fully against all risks associated with its business either because
such insurance is not available or because premium costs are
considered prohibitive. A loss not fully covered by insurance could
have a materially adverse effect on the financial position and results
of operations of the Company.
The Company is a non-operating working interest owner in some of its
properties. Accordingly, the Company enters into joint operating
agreements with third party operators for the conduct and supervision
of drilling, completion and production operations on its wells. The
success of the oil and gas operations on a property (whether drilling
operations or production operations) depends in large measure on
whether the operator of the property properly performs its
obligations. The failure of such operators and their contractors to
perform their services in a proper manner could result in materially
adverse consequences to the owners of interests in that particular
property.
As is customary in the oil and gas industry, only a perfunctory title
examination is conducted at the time properties believed to be
suitable for drilling operations are first acquired. Prior to the
commencement of drilling operations, a more thorough title examination
is usually conducted and curative work is performed with respect to
known significant title defects. The Company typically depends upon
title opinions prepared at the request of the operator of the property
to be drilled; and, therefore, there can be no assurance that losses
will not result from title defects or from defects in the assignment
of leasehold rights. Pursuant to industry standard forms of operating
agreements, the operator of an oil and gas property is not to be
monetarily liable for loss of title.
(xii) REGULATIONS
Domestic exploration for, and production and sale of, oil and gas are
extensively regulated at both the federal and state levels.
Legislation affecting the oil and gas industry is under constant
review for amendment or expansion, frequently increasing the
regulatory burden. Also, numerous departments and agencies, both
federal and state, are authorized by statute to issue, and have
issued, rules and regulations binding on the oil and gas industry that
often are costly to comply with and that carry substantial penalties
for failure to comply. In addition, production operations are
affected by changing tax and other laws relating to the petroleum
industry, by constantly changing administrative regulations and
possible interruptions or termination by government authorities.
Effective January 1, 1993, all price controls on natural gas were
eliminated ending decades of federal pricing control of natural gas.
The impact of price decontrol on the Company is uncertain but at
present would appear not to cause a material adverse effect on the
business of the Company.
In the late 1980's the Federal Energy Regulatory Commission ("FERC"),
through a series of orders, made major changes in certain of its
regulations that have since significantly affected the transportation
and marketing of gas. These regulations required gas pipelines to
transport gas on a non-discriminatory basis. As a result, many
pipelines have become transporters of gas owned by others and have
greatly reduced their purchases of gas for resale.
On April 8, 1992, FERC issued Order No 636 which substantially
overhauled the current regulation of interstate natural gas pipelines
("Order 636"). Order 636 requires the pipelines to "unbundle" their
transportation and sales functions and furnish transportation service
for others on a comparable basis as it transports gas for itself. The
changes provided by Order 636 are intended to ensure that pipelines
provide transportation service that is equal in quality for all gas
supplies, whether the customer purchases the gas from the pipeline or
from another supplier. On August 3, 1992, FERC issued Order No. 636-A
which largely denied rehearing of Order 636. FERC is examining
4
<PAGE>
the overall relationship between interstate pipelines and their
customers, local distribution companies and end users. Although it is
FERC's present intention to stimulate competition and to create a
level playing field for all natural gas buyers and sellers, there can
be no assurances that such regulations will ultimately be implemented.
It is not possible to predict what impact Order 636 will have on the
Company's ability to sell gas directly into gas markets previously
served by the pipelines.
State regulatory authorities have established rules and regulations
requiring permits for drilling operations, drilling bonds and reports
concerning operations. Most states in which the Company operates also
have statutes and regulations governing a number of environmental and
conservation matters, including the unitization or pooling of oil and
gas properties and establishment of maximum rates of production from
oil and gas wells. Many states also restrict production to the market
demand for oil and gas. Such statutes and regulations may limit the
rate at which oil and gas could otherwise be produced from the
Company's properties.
The Company is subject to extensive and evolving environmental laws
and regulations. These regulations are administered by the United
States Environmental Protection Agency ("EPA") and various other
federal, state, and local environmental, zoning, health and safety
agencies, many of which periodically examine the Company's operations
to monitor compliance with such laws and regulations. These
regulations govern the release of waste materials into the
environment, or otherwise relating to the protection of the
environment, human, animal and plant health, and affect the Company's
operations and costs. In recent years, environmental regulations have
taken a "cradle to grave" approach to waste management, regulating and
creating liabilities for the waste at its inception to final
disposition. The Company's oil and gas exploration, development and
production operations are subject to numerous environmental programs,
some of which include solid and hazardous waste management, water
protection, air emission controls, and situs controls affecting
wetlands, coastal operations, and antiquities.
Environmental programs typically regulate the permitting, construction
and operations of a facility. Many factors, including public
perception, can materially impact the ability to secure an
environmental construction or operation permit. Once operational,
enforcement measures can include significant civil penalties for
regulatory violations regardless of intent. Under appropriate
circumstances, an administrative agency can request a "cease and
desist" order to terminate operations.
Newly strengthened environmental programs, such as the Clean Air Act
Amendments of 1990, will impact the Company's operations. New
programs and changes in existing programs are anticipated, some of
which include Natural Occurring Radioactive Materials ("NORM"), oil
and gas exploration and production waste management, and underground
injection of waste materials.
Each state in which the Company operates has laws and regulations
governing solid waste disposal, water and air pollution. Many states
also have regulations governing oil and gas exploration, development
and production operations.
The Company is also subject to Federal and State Hazard Communications
("OSHA") and Community Right to Know ("SARA Title III") statutes and
regulations. These regulations govern record keeping and reporting of
the use and release of hazardous substances. The Company believes it
is in compliance with these requirements in all material respects.
The Company may be required in the future to make substantial outlays
to comply with environmental laws and regulations. The additional
changes in operating procedures and expenditures required to comply
with future laws dealing with the protection of the environment cannot
be predicted.
(xiii) NUMBER OF PERSONS EMPLOYED BY REGISTRANT
The Company currently has one full-time employee and one part time
employee. The Company also employs consultants on a part time basis
as needed.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Since none of the Company's property interests and revenues are located or
derived outside of the United States, this paragraph is not applicable to the
Company.
5
<PAGE>
ITEM 2. PROPERTIES
GENERAL
The Company holds interests in producing properties and undeveloped acreage in
five states, with significant concentrations of properties in Louisiana,
California and Illinois.
COMPANY RESERVES
The Company's total net ownership in oil and gas reserves is based on
independent engineering reports. The reserve quantities and valuations for
fiscal 1998 and 1997 are based upon estimates by Norstar Petroleum, Inc.
Proved reserves are those that can be recovered through existing wells with
existing equipment and existing (either operating or tested) recovery
techniques. The Company's producing reserves include those expected to be
produced from existing completion intervals now open for production in existing
wells.
The Company wishes to emphasize that the estimates included in the following
tables are by their nature inexact and are subject to changing economic,
operating and contractual conditions.
These reserves are located entirely within the United States.
SHARON ENERGY LTD.
HISTORICAL RESERVE INFORMATION
AS OF MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
----------------------------------------------------------------
DESCRIPTION 1998 1997
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<S> <C> <C>
PROVED DEVELOPED RESERVES
OIL (bbls) 0 4,750
GAS (mcf) 151,201 822,039
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PROVED RESERVES
OIL (bbls) 0 4,750
GAS (mcf) 226,801 2,227,000
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FUTURE NET CASH FLOWS
BEFORE INCOME TAX $463,000 $1,256,000
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STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS $355,000 $583,000
----------------------------------------------------------------
</TABLE>
SOUTHEASTERN COLORADO AND MICHIGAN
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 was $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.
WYOMING
The Company has a 16.25% working interest in leases on approximately 8,000 gross
acres which it considers prospective for natural gas development. The Company
participated for a 16.25% non-operated working interest in the drilling of a dry
hole on the project. Current plans are to farmout the Company's interest in the
project.
6
<PAGE>
ILLINOIS
On May 15, 1998 the Company acquired 320 acres and 12 producing wells in the
Elbridge Field in Edgar County, Illinois for a total purchase price of $90,000.
The Company plans to rehabilitate the existing wells to improve production and
recovery rates. Additional plans call for a horizontal test well, a test well
to evaluate potential for gas recovery in an abandoned gas storage reservoir,
and possible use as a gas storage facility.
LOUISIANA
The Company has entered into an agreement to participate in a seven percent (7%)
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. The well
to be re-entered is called the CMS-NOMECO #1 Miami Corp. and was originally
drilled during the months of March through April of 1997. While drilling, the
well mud log (gas detector) encountered a significant gas show at a depth of
approximately 17,400 feet and the well experienced a significant (20%) decrease
of drilling mud weight, which was suggestive of gas entry into the drill hole.
Although the gas show was significant and occurred at depth correlative with
where the MioGyp sands were expected to be, subsequent log evaluation was
inconclusive and the well was abandoned.
Subsequent to the abandonment of the well, a 3-D seismic survey was conducted
over the well and surrounding acreage. A review and evaluation of the seismic
data indicates that the bottom hole location of the well narrowly missed a "high
amplitude" seismic event which is believed to indicate the presence of a thick,
gas charged, reservoir quality sand pay. The presence of a thick reservoir
quality MioGyp sand is also evident in a dry hole previously drilled by Arco
(the Arco #1 Miami Well) which is located approximately two miles to the west of
the proposed re-entry well. The Arco well encountered approximately 400 feet of
gross sand with hydrocarbon shows at the MioGyp level. The Arco well is
believed to be 2000 feet structurally downdip to the re-entry well, below the
gas-water contact and therefore non-commercial. Although the Arco well was a
dry hole, it is significant in that it indicates the existence of a thick
reservoir quality sand which could prove productive in an updip position.
Regionally, the MioGyp sands are productive. West Chalkley Field, discovered in
1989 and located 13 miles to the Northwest of the South Lakeside Prospect, has
produced 275 billion cubic feet of gas and 580,000 barrels of condensate from 5
wells. South Lake Arthur Field, discovered in 1980 and located 16 miles to the
Northeast of the South Lakeside Prospect, has produced 655 billion cubic feet of
gas and 1,600,000 barrels of condensate from 24 wells. Based upon its review of
the available data, the Company believes the reserve potential of the South
Lakeside Prospect to be in the same range as that of the aforementioned
productive fields.
The proposed operation will be to re-enter the CMS-NOMECO #1 Miami Corp. Well
which contains casing cemented in place to a depth below 17,000 feet and will
involve milling a hole in the 9 5/8 inch casing at approximately 14,000 feet and
drilling a sidetrack hole (a directional hole) to a projected bottom hole
location which will intersect the MioGyp sand in a more optimal location than
the original bottom hole. It is currently estimated that the operation will
commence and take place during June of 1998, subject to rig availability. The
estimated cost of the re-entry operation will be $5,119,000, being comprised of
a drilling cost of $2,448,000 and a completion cost of $2,671,000. The net
estimated cost to the Company is $358,299 for a 7% interest. Estimated land
acquisition and delay rentals are $51,092 for a 7% working interest.
CALIFORNIA
During fiscal 1997, the Company has participated in three 3-D seismic surveys in
the Northern Sacramento Basin of California. The Company purchased non-operated
working interests ranging from 3% to 18.75% in approximately 20,000 gross acres
and participated in the acquisition of approximately 50 square miles of 3-D
seismic in Sutter and Colusa Counties. During fiscal 1998, the Company sold its
interest in one of the prospects for $80,000 cash. The Company has no plans to
drill any additional wells in the two remaining prospects.
In addition, the Company entered into a joint venture for the exploration of gas
utilizing 2-D and 3-D seismic in the "Merlin" prospect located in Glenn County,
California. The Company originally retained a 40% working interest and was
Operator
7
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of the joint venture. The Company completed a 15.5 square mile 3-D seismic
survey and identified seven initial drilling locations thereon based on
interpretation of the data. Two wells were drilled in the survey during May of
1997, one which was completed for production and one which was abandoned as a
dry hole. The Company also purchased acreage and a gathering system which are
located within the Merlin Prospect survey area. The gathering system allowed
the Company to connect wells drilled in the prospect to an already existing
pipeline system. Effective July 1, 1997 the Company sold half of its 40% working
interest in the Merlin 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 5,000 acres (gross) under lease agreements. Under the terms of
the agreement, the Company 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 transferred operations of 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 was completed for production. In May of 1998, the Company
participated in the drilling of an additional well which is being completed for
production. The Company has a 20% working interest (16% net revenue interest)
in the new wells. It is anticipated that additional drilling will take place in
the Merlin Prospect in fiscal 1999 for which the Company shall be required to
pay its proportionate 20% share.
Well Statistics
The following table sets forth certain information, as of March 31, 1998,
relating to productive wells in which the Company owns working interests:
SHARON ENERGY LTD.
WELL STATISTICS
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
----------------------------
GROSS PRODUCTIVE WELLS
----------------------------
<S> <C>
OIL 0
GAS 1
---------
TOTAL 1
---------
---------
<CAPTION>
NET PRODUCTIVE WELLS
----------------------------
<S> <C>
OIL 0
GAS .20
---------
TOTAL .20
---------
---------
</TABLE>
8
<PAGE>
ACREAGE STATISTICS
The following table sets forth the developed acreage and undeveloped acreage of
the Company as of March 31, 1998:
SHARON ENERGY LTD.
ACREAGE HOLDINGS
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
-------------------------------------------------------
UNDEVELOPED ACREAGE ACRES
-------------------------------------------------------
<S> <C> <C>
GROSS
CALIFORNIA 4,289
COLORADO 670
LOUISIANA 2,982
WYOMING 8,202
-------------------------------------------------------
GROSS UNDEVELOPED ACREAGE 16,143
-------------------------------------------------------
-------------------------------------------------------
NET
CALIFORNIA 858
COLORADO 262
LOUISIANA 209
WYOMING 1,326
-------------------------------------------------------
NET UNDEVELOPED ACREAGE 2,655
-------------------------------------------------------
-------------------------------------------------------
<CAPTION>
DEVELOPED ACREAGE ACRES
-------------------------------------------------------
<S> <C> <C>
GROSS
CALIFORNIA 1,132
ILLINOIS 320
-------------------------------------------------------
GROSS UNDEVELOPED ACREAGE 1,452
-------------------------------------------------------
-------------------------------------------------------
NET
CALIFORNIA 226
ILLINOIS 320
-------------------------------------------------------
NET UNDEVELOPED ACREAGE 546
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
9
<PAGE>
DRILLING ACTIVITY
The following table sets forth the results of the Company's drilling activities
in the fiscal years ended March 31, 1998 and 1997:
SHARON ENERGY LTD.
SUMMARY OF DRILLING ACTIVITY
FOR FISCAL YEARS ENDING MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
-------------------------------------------------------
EXPLORATORY WELLS 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
GROSS
Productive 2 0
Dry 4 3
-------------------------------------------------------
TOTAL 3 3
-------------------------------------------------------
NET
Productive 0.60 0.00
Dry 1.135 0.4975
-------------------------------------------------------
TOTAL 1.735 0.4975
-------------------------------------------------------
-------------------------------------------------------
DEVELOPMENT WELLS 1998 1997
-------------------------------------------------------
GROSS
0 1
Productive
Dry 0 0
-------------------------------------------------------
TOTAL 0 1
-------------------------------------------------------
NET
0 .2104
Productive
Dry 0 0
-------------------------------------------------------
TOTAL 0 .2104
-------------------------------------------------------
</TABLE>
SUBSEQUENT DRILLING ACTIVITY
The Company plans to drill a minimum of three test wells on its undeveloped
acreage during the next six months.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 1998, the Company was not a party to any legal proceeding or
action of a material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the last quarter of the fiscal year covered by
this report to a vote of shareholders of the Company through the solicitation of
proxies or otherwise.
10
<PAGE>
PART II
ITEM 5. MARKET PRICE OF, AND DIVIDENDS ON, THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is presently being traded under the symbol SHY on the
Vancouver Stock Exchange in Canada and was previously traded on the Boston Stock
Exchange under the symbol SHA since 1992 in the United States. 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.
The following table sets forth the closing high and low trading prices in U.S.
dollars on the Boston Stock Exchange for each of the periods indicated below for
the Company's common stock:
SHARON ENERGY LTD.
BOSTON STOCK EXCHANGE SALES PRICE
FOR
SHARON ENERGY LTD. COMMON STOCK
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FISCAL YEAR ENDING 3/31 1998 1997
- --------------------------------------------------------------------------------
HIGH LOW HIGH LOW
------------------------------------
<S> <C> <C> <C> <C>
FIRST QUARTER $1.625 $ .75 $ 0.22 $ 0.22
SECOND QUARTER $ 0.32 $ 0.32 $ 0.22 $ 0.50
THIRD QUARTER $ 0.18 $ 0.18 $ 0.63 $ 0.38
FOURTH QUARTER N/A N/A $ 1.06 $ 0.66
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
The following table sets forth the closing high and low closing prices in
Canadian dollars on the Vancouver Stock Exchange for each of the periods
indicated below for the Company's common stock:
SHARON ENERGY LTD.
VANCOUVER STOCK EXCHANGE SALES PRICE
FOR
SHARON ENERGY LTD. COMMON STOCK
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FISCAL YEAR ENDING 3/31 1998 1997
- --------------------------------------------------------------------------------
HIGH LOW HIGH LOW
------------------------------------
<S> <C> <C> <C> <C>
FIRST QUARTER $ 1.50 $ 0.40 $ 0.98 $ 0.50
SECOND QUARTER $ 0.55 $ 0.16 $ 0.75 $ 0.50
THIRD QUARTER $ 0.32 $ 0.17 $ 0.75 $ 0.45
FOURTH QUARTER $ 0.38 $ 0.24 $1.80 $ 0.65
- --------------------------------------------------------------------------------
</TABLE>
As of March 31, 1998, there were 570 estimated holders of the Company's common
stock of record, of which 124 were U.S. registered shareholders. In many
instances, a registered shareholder is a broker holding shares in street name.
No cash dividends were paid by the Company during the fiscal year ended March
31, 1998. For the foreseeable future, the Company intends to retain any
available funds otherwise available for dividends for use in the expansion of
its business.
During the fiscal year ended March 31, 1993, the Company initiated a Corporate
stock buy-back program in which it repurchased 49,700 shares of Sharon Energy
Common Stock through an open market repurchase program. The repurchases took
place over a six month period ending August 18, 1992, with the repurchased
shares being retired to Treasury. During fiscal 1997, the Company issued
12,500 of the treasury shares in connection with a property acquisition.
There are no governmental laws, decrees or regulations in Canada that restrict
the export or import of capital, including but not limited to, foreign exchange
controls, other than tax withholding affecting the remittance of dividends,
interest or other payments to non-residents. The remittance of dividends to
non-resident shareholders is discussed below under "Taxation".
There are no special limitations on the right of non-resident or foreign
shareholders to hold or vote the Company's common stock imposed by Canadian law
or by the articles of incorporation and by- laws of Sharon Energy Ltd. except
that the British Columbia "B.C." Company Act requires that a majority of the
directors of the Company must be Canadian citizens and at least one director
must be a British Columbia resident. The British Columbia Securities Act
imposes special "insider" disclosure requirements on persons who own more than
10% of the Company's common stock regardless of such person's residency.
Insiders are required to file Insider Reports which disclose number of shares
owned and acquisitions and dispositions of the Company's common stock. The
British Columbia Securities Act also imposes certain limitations on the
disposition of the Company's shares by persons owning 20% or more of the
Company's common stock. However, such limitations are imposed regardless of
such person's residency.
Although there are restrictions imposed on the acquisition of control of certain
Canadian companies by non-Canadians under the Investment Canada Act, such
restrictions do not apply to the acquisition of control of the Company's common
stock since substantially all of the Company's assets are in the U.S. and all of
the Company's operations are conducted in the U.S.
TAXATION Any dividends paid by the Company to non-residents of Canada are
subject to a withholding tax at the rate of 25%. The Canada United States Tax
Conventions reduces this rate to 15% on dividends payable to United States
shareholders. Amounts withheld under Canadian tax law may be credited against a
U.S. shareholder's U.S. tax liability. The credit is available to U.S.
shareholders on foreign income, excess profits taxes, and similar taxes in the
nature of an income tax. The foreign income tax credit is based on the amount
of foreign taxes paid or accrued, translated into U.S. currency, and is limited
where the foreign taxes exceed the effective U.S. tax rate on the foreign
income.
For Canadian income tax purposes, where non-resident persons (i.e., U.S.
resident) together with all other related persons own not less than 25% of the
issued shares of any class of the capital stock of a Canadian corporation, they
may also be subject to tax in Canada on the disposition of those shares.
However, Article XIII of the Canada-U.S. Tax Convention will exempt such U.S.
12
<PAGE>
shareholders because the Company's value is based on oil and gas operations or
real property situated in the U.S.
ITEM 6. 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 $421,848 at March 31, 1998 compared to
a surplus of $452,373 at March 31, 1997. The Company's working capital
decreased slightly due to losses from operations.
Exploration activity is planned during fiscal 1999 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, Illinois and Louisiana.
The Company did not utilize any debt financing during fiscal 1998 and 1997.
In order to further preserve working capital, the Company has taken steps to
reduce general and administrative expenses. The Company has reduced the number
of full time employees from six at the beginning of fiscal 1998 to one full time
employee and one part time employee as well as one part time consultant at the
end of fiscal 1998.
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 and
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 transferred
operations of 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 was
completed for production. In May of 1998, the Company participated in the
drilling of an additional well which is being completed for production. The
Company's estimated share of drilling and completion costs are $90,000. The
Company has a 20% working interest (16% net revenue interest) in the new wells.
It is anticipated that additional drilling will take place in the Merlin
Prospect in fiscal 1998 for which the Company shall be required to pay its
proportionate 20% share. The Company's participation in subsequent 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.
DISPOSITION OF PROPERTIES
During fiscal 1995, the Company sold a majority of its producing wells. The
Company made no significant dispositions during fiscal 1996 but sold producing
well and nonproducing leasehold interests in fiscal 1997 totaling $132,500 and
210,193, respectively. During fiscal 1998, the Company sold its 65.625% working
interest in three wells located in Baca County for net proceeds of $229,031. In
addition, the Company sold its 12.5% to 21.04% working interests in three well
located in Michigan for net proceeds of $32,584.
FINANCIAL OUTLOOK
In fiscal 1998 and 1997, oil and gas sales, sales of properties, cost of sales
and overhead reimbursements (operator fees) have declined substantially from
historical levels resulting in operating losses. Until the Company is able to
replace the reserves and production disposed of, continued operating losses are
anticipated. Furthermore, there is no assurance that efforts to restore
previous reserve and production levels will be successful.
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 debt financing (see discussion of
subsequent events herein below), existing working capital and internally
generated cash flow from oil and gas sales to fund capital expenditures and
overhead requirements. The level of capital expenditures will vary in future
periods
13
<PAGE>
depending on the success it experiences in its development and exploratory
drilling activities, gas and oil price conditions and other related economic
factors. In addition to internally generated cash flow, additional equity and
debt financing may be used in future periods for oil and gas wells completed on
its prospects. During fiscal 1997, the Company issued 2,000,000 common shares
for net proceeds, after commissions and direct expenses, of Canadian $907,561
(U.S. $670,888). In connection with the stock issuance, the Company issued
2,000,000 Class B Warrants which were exercisable into 2,000,000 common voting
shares at a price of Canadian $0.60 per share. The Class B Warrants have
expired unexercised. In addition, the Company issued 150,000 common voting
shares as a corporate finance fee and 350,000 Class C Warrants for services
rendered in connection with the offering. The Class C Warrants expired
unexercised. The net proceeds of the 1997 offering were used as part of the
capital necessary for the Company to conduct 3-D seismic and drill wells in
connection with the Company's California exploration activities. During fiscal
1998, the Company issued 3,500,000 common shares at CDN$.20 per share for net
proceeds, after commissions and direct expenses, of U.S. $449,533. In
connection with the stock issuance, the Company issued 3,500,000 Class D
Warrants which are exercisable into 1,750,000 common voting shares at a price of
Canadian $0.25 per share. The Class D Warrants are exercisable until September
4, 1998. In addition, the Company issued 200,000 common voting shares as a
corporate finance fee and 400,000 Class E Warrants for services rendered in
connection with the offering. The Class E Warrant entitles the holder thereof
to purchase one share of common stock at an exercise price of $.20 per share
until September 4, 1998. The net proceeds of the 1998 offering were applied
to the acquisition of leases, the payment of delay rentals, and an advance
payment for 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 7% working interest in the prospect.
COMPARISON RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
During the year ended March 31, 1998, the Company experienced a decrease in oil
and gas revenues as compared to the prior year period due to the disposition of
substantially all of its producing properties.
Oil and gas sales for the year ended March 31, 1998 were $62,324 compared to
$272,859 for the year ended March 31, 1997, a 77% decrease. Company net oil
production totaled 644 bbls. in the latest period as compared to 4,821 bbls.
during the prior year period, an 87% decrease. Average crude oil prices were $
17.92 per barrel in the year ended March 31, 1998 compared to $20.82 in the
prior year period, a 14% decrease. Company net gas production totaled 26,286
mcf in the latest period as compared to 103,251 mcf during the prior year
period, a 75% decrease. Average gas prices were $2.07 per mcf in the year ended
March 31, 1998 compared to $1.67 in the prior year period, a 24% increase.
Sales of oil and gas properties in fiscal year 1998 were $341,615 compared to
$342,693 in fiscal year 1997. The properties sold in fiscal 1998 had a much
higher cost basis than those sold in fiscal 1997. Cost of properties sold was
$327,224 in fiscal 1998 as compared to $79,467 in fiscal 1997.
General and administrative expenses for the year ended March 31, 1998 and 1997
were $376,584 and $509,807, respectively, a $133,223 (26%) decrease. The
decrease was due primarily to personnel reductions which were effective in
September of 1997.
Oil and gas production expenses (lease operating and production tax expense
combined) for the year ended March 31, 1998 and 1997 were $16,817 and $110,050,
respectively, a $93,688 (85%) decrease. The decrease in production expense
resulted primarily from the disposition of substantially all of the Company's
producing properties.
Unsuccessful exploration and abandonment costs increased from $236,141 last year
to $380,605 in the latest fiscal year, a $144,464 (61%) increase. The Company
incurred higher costs in fiscal 1998 due to unsuccesful drilling attempts in
California, Illinois and Wyoming.
Geologic, geophysical and delay rentals decreased from $316,612 last year to
$68,206 in the latest fiscal year, a $248,406 (79%) decrease. The decrease in
geologic, geophysical and delay rentals expense is due to the Company's reduced
exploration program. The Company follows the successful efforts method of
accounting which requires it to charge the cost of exploratory dry holes and
leasehold abandonment costs to operations in the period incurred. Furthermore,
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 was engaged in exploration activities
during fiscal 1997 involving large up-front geologic and geophysical costs, such
as the California Merlin Prospect 3-D seismic survey ($275,814 net to the
Company's interest), which resulted in a significant charge to operations in
fiscal 1997. The Company reduced its geologic and geophysical activities
during fiscal 1998.
Impairment of oil and gas properties of $222,499 in fiscal 1997 resulted from
the writedown of costs associated with the Company's Michigan and Colorado
properties. Management had determined that the net book value associated with
the
14
<PAGE>
properties as of March 31, 1997 exceeded the realizable value of those
properties. Realizable value was determined by using an expected sales price in
the case of the Colorado properties where market value is determinable.
Realizable value was determined by using future estimated net cash flows
(discounted to present value using a 10% factor) in the case of the Michigan
properties where market value is not readily determinable.
SUBSEQUENT EVENTS
In May of 1998, the Company received $209,205 ($300,000 CDN) in loan proceeds
from a related party (a corporation) that is a shareholder of the Company and
whose officers are also directors of the Company. Per the terms of a promissory
note dated March 27, 1998, the Company is required to repay the principal amount
of $300,000 CDN and pay interest thereon at the annual rate of 10% on or before
the maturity date of May 1, 1999. As further consideration for providing the
loan, subject to Vancouver Stock Exchange approval, the Company agreed to issue
a warrant to the related party lender for the acquisition of 480,000 common
shares of the Company at $0.25 CDN per share, which warrant shall be
exercisable by the related party until March 27, 1999. The proceeds of the
loan are being used to pay the drilling and completion costs for the Company's
California well and the property acquisition costs discussed herein below.
On May 15, 1998 the Company acquired 320 acres and 12 producing wells in the
Elbridge Field in Edgar County, Illinois for a total purchase price of $90,000.
The Company plans to rehabilitate the existing wells to improve production and
recovery rates. Additional plans call for a horizontal test well, a test well
to evaluate potential for gas recovery in an abandoned gas storage reservoir,
and possible use as a gas storage facility. The additional plans for the
property will require expenditures that will exceed the existing working capital
of the Company and will necessitate additional financings, the availability of
which cannot be assured.
In May of 1998, the Company participated in the drilling of an additional
well in its Merlin Prospect located in Glen County, CA that is being
completed for production. The Company's estimated share of drilling and
completion costs are $90,000. The Company has a 20% working interest (16%
net revenue interest) in the new wells. It is anticipated that additional
drilling will take place in the Merlin Prospect in fiscal 1998 for which the
Company shall be required to pay its proportionate 20% share. The Company's
participation in subsequent 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.
As of March 31, 1998, the Company had advanced $358,299 representing estimated
drilling costs for a 17,500-foot well to be drilled in Louisiana. The cash
advance has been reflected as a prepaid asset as of March 31, 1998. Drilling
operations are expected to commence as early as June of 1998.
It is anticipated that these exploration activities together with others that
may be entered into will impose financial requirements, which will exceed the
existing working capital of the Company. Management is considering additional
equity financings to finance its continued participation in the wells. In the
event these efforts are unsuccessful, the Company will be compelled to reduce
the scope of its business activities and take further steps to reduce general
and administrative expenses.
INFLATION
In recent years inflation has not had a significant impact on the Company's
operations or financial condition. However, during the fiscal year 1998, the
company has experienced difficulty in securing drilling rigs, drill stem testers
and other field services in connection with drilling its wells. Although it is
not possible to accurately predict whether such shortages will continue in
future periods, they are likely to put upward pressure on costs incurred to
explore for, acquire, drill, complete and operate oil and gas properties and the
unavailability of drilling and related services may impose delays in the
Company's planned drilling activities.
INCOME TAXES
Sharon Energy Ltd. and Sharon Resources, Inc., file separate income tax returns
in Canada and the United States, respectively.
The fiscal 1997 benefit for income taxes of $58,000 relates entirely to U.S.
book loss which is classified as deferred. The deferred portion of the benefit
arises from timing differences in the recognition of revenue and expense items
for tax and financial purposes.
15
<PAGE>
As of March 31, 1998, Sharon Energy Ltd. had a tax loss carry-forward of
approximately $144,000, available to offset taxable income in future years.
This expires in the years ended 1999 to 2005 for Sharon Energy Ltd. Sharon
Resources, Inc. had a tax loss carry-forward of $1,914,000 as of March 31, 1998
which will expire in the year 2012.
Sharon Resources, Inc. also has a carryover for statutory depletion of
approximately $500,000 and $27,000 for the general business credit for which no
benefit has been recognized.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ----
<S> <C>
AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . . . . . 19
CONSOLIDATED STATEMENTS OF OPERATIONS. . . . . . . . . . . . . . . . . . 21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY. . . . . . . . . . . . . 22
CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . . . . . 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . 25
UNAUDITED SUPPLEMENTARY PETROLEUM AND NATURAL GAS
RESERVE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
17
<PAGE>
AUDITORS' REPORT
To the Shareholders of Sharon Energy Ltd.:
We have audited the consolidated balance sheets of Sharon Energy Ltd. as at
March 31, 1998 and 1997 and the consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at March 31, 1998
and 1997 and the results of its operations and its cash flows for the years then
ended in accordance with generally accepted accounting principles. As required
by the British Columbia Company Act, we report that, in our opinion, these
principles have been applied on a consistent basis.
Calgary, Alberta, ARTHUR ANDERSEN & CO.
May 8, 1998. Chartered Accountants
18
<PAGE>
Page 1 of 2
SHARON ENERGY LTD.
CONSOLIDATED BALANCE SHEETS
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
March 31,
--------------------------
ASSETS 1998 1997
------ ------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 78,525 $ 341,464
Accounts receivable-
Oil and gas sales 30,974 51,542
Joint interest billing 3,266 38,926
Other - 139,125
Prepaid drilling costs (Note 1) 358,299 -
Prepaid expenses 8,873 8,873
------- -------
Total current assets 479,937 579,930
------- -------
OIL AND GAS PROPERTIES, using the successful efforts
method of accounting, at cost (Notes 2 and 3) 72,857 583,378
Less- Accumulated depreciation, depletion, amortization
and impairments (1,330) (192,336)
------- -------
71,527 391,042
------- -------
FURNITURE, FIXTURES AND EQUIPMENT, at cost, less
accumulated depreciation of $200,791 and $187,653, respectively 5,328 17,041
------- -------
$556,792 $ 988,013
------- -------
------- -------
</TABLE>
APPROVED ON BEHALF OF THE BOARD:
/s/ Jack S. Steinhauser , Director /s/ David L. Bennington , Director
- ------------------------------- --------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
19
<PAGE>
Page 2 of 2
SHARON ENERGY LTD.
CONSOLIDATED BALANCE SHEETS
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
March 31,
-------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
------------------------------------ -------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 49,310 $ 86,332
Advances from joint ventures - 30,379
Taxes payable 8,779 10,846
----------- -----------
Total current liabilities 58,089 127,557
----------- -----------
DEFERRED RENT (Note 7) 29,211 46,747
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred shares, no par value; 25,000,000 shares authorized,
none outstanding
Common shares, no par value; 100,000,000 shares authorized,
9,563,800 and 5,863,800 shares outstanding, respectively 2,354,522 1,692,725
Warrants outstanding 129,616 341,880
Retained deficit (1,977,354) (1,183,604)
Treasury shares; 37,200 shares (at cost) (37,292) (37,292)
----------- -----------
Total shareholders' equity 469,492 813,709
----------- -----------
$ 556,792 $ 988,013
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE>
SHARON ENERGY LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 62,324 $ 272,859
Sales of oil and gas properties (Note 1) 341,615 342,693
Interest income and other 10,482 7,507
----------- -----------
414,421 623,059
----------- -----------
COSTS AND EXPENSES:
Lease operating 14,720 91,625
Production and severance taxes 2,097 18,425
Cost of properties sold 327,224 79,467
General and administrative 376,584 509,807
Depreciation, depletion and amortization 38,398 114,357
Geological and geophysical and delay rentals 68,206 316,612
Unsuccessful exploration and abandonments 380,605 236,141
Impairment of oil and gas properties - 222,499
Interest 337 488
----------- -----------
1,208,171 1,589,421
----------- -----------
LOSS BEFORE INCOME TAXES (793,750) (966,362)
INCOME TAX BENEFIT - (58,000)
----------- -----------
NET LOSS $ (793,750) $ (908,362)
----------- -----------
----------- -----------
NET LOSS PER SHARE (Note 2):
Basic $(.13) $(.22)
---- ----
---- ----
Fully diluted N/A N/A
--- ---
--- ---
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 6,272,627 4,222,595
--------- ---------
--------- ---------
Fully diluted 9,578,838 4,834,121
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
21
<PAGE>
SHARON ENERGY LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Common Shares Treasury Shares
------------------------ Warrants Retained ---------------
Shares Amount Outstanding Deficit Shares Amount
--------- ---------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, March 31, 1996 3,514,800 $1,326,802 $ - $ (268,168) 49,700 $(49,823)
Exercise of stock options 199,000 36,915 - - - -
Issuance of treasury shares - - - (7,074) (12,500) 12,531
Sale of shares and warrants (Note 4) 2,150,000 329,008 341,880 - - -
Net loss - - - (908,362) - -
--------- --------- ------- ---------- ------ ------
BALANCES, March 31, 1997 5,863,800 1,692,725 341,880 (1,183,604) 37,200 (37,292)
Sale of shares and warrants (Note 4) 3,700,000 319,917 129,616 - - -
Expiration of warrants (Note 4) - 341,880 (341,880) - - -
Net loss - - - (793,750) - -
--------- --------- ------- ---------- ------ ------
BALANCES, MARCH 31, 1998 9,563,800 $2,354,522 $ 129,616 $(1,977,354) 37,200 $(37,292)
--------- --------- ------- ---------- ------ ------
--------- --------- ------- ---------- ------ ------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
22
<PAGE>
Page 1 of 2
SHARON ENERGY LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1998 1997
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(793,750) $(908,362)
Noncash expenses and revenues included in net loss:
Depreciation, depletion and amortization 38,398 114,357
Impairment of oil and gas properties - 222,499
Write-off of lease costs 367,893 202,907
Deferred income taxes - (58,000)
Gain on sales of oil and gas properties (14,391) (263,226)
Decrease (increase) in accounts receivable 195,353 (104,749)
Increase in prepaid drilling costs (358,299) -
Decrease in accounts payable (37,022) (16,886)
Decrease in advances from joint ventures (30,379) (24,471)
Decrease in taxes payable (2,067) (2,836)
Decrease in deferred rent (17,536) (7,156)
------- -------
Net cash used in operating activities (651,800) (845,923)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options - 36,915
Proceeds from sale of shares and warrants, net 449,533 670,888
------- -------
Net cash provided by financing activities 449,533 707,803
------- -------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
23
<PAGE>
Page 2 of 2
SHARON ENERGY LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas property expenditures $(399,362) $(289,659)
Proceeds from sales of oil and gas properties 341,615 342,693
Acquisition of furniture, fixtures and equipment (2,925) (5,633)
Sale of short-term investments, net - 53,050
-------- --------
Net cash (used in) provided by investing activities (60,672) 100,451
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (262,939) (37,669)
CASH AND CASH EQUIVALENTS, beginning of year 341,464 379,133
-------- --------
CASH AND CASH EQUIVALENTS, end of year $ 78,525 $ 341,464
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for-
Income taxes $ - $ -
-------- --------
-------- --------
Interest $ 337 $ 488
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
24
<PAGE>
SHARON ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars unless indicated otherwise)
(1) ORGANIZATION AND OPERATIONS
THE COMPANY
Sharon Energy Ltd. (the "Company") was incorporated under the laws of the
Province of British Columbia, Canada on February 15, 1980, and is engaged
primarily in oil and gas exploration, development and production in the United
States through its wholly owned subsidiary, Sharon Resources, Inc.
OPERATIONS
Exploration activity is planned during fiscal 1999 on the Company's prospects,
which are located in California, Illinois and Louisiana. In order to provide
working capital for exploration expenditures, the Company sold producing
leasehold interests and reduced its working interest percentage and cost
participation in certain proposed exploratory wells during fiscal 1998.
Additionally, in fiscal 1998, the Company raised $490,000 before commission and
direct expenses through a private placement (Note 4). The proceeds are
designated for exploration activity on the Company's Louisiana prospect.
In order to further preserve working capital, the Company has taken steps to
reduce general and administrative expenses. The Company reduced the number of
full time employees from six at the beginning of fiscal 1998 to one full time
and one part time employee at the end of fiscal 1998. In addition, the Company
has one part time consultant providing management services.
25
<PAGE>
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 agreement, the Company retained a 20% working interest in the prospect
consisting of approximately 5,000 acres (gross) under lease agreements. The
prospect includes 15.5 square miles of 3-D seismic data. The Company received
$80,000 and a carried (no-cost) 20% working interest on two wells through
completion of the wells, and the Company transferred operations of 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 was completed for production.
In May of 1998, the Company participated in the drilling of an additional well
which is being completed for production. The Company's estimated share of
drilling and completion costs are approximately $90,000. The Company has a 20%
working interest (16% net revenue interest) in the new wells. It is anticipated
that additional drilling will take place in the Merlin Prospect in fiscal 1999
for which the Company will be required to pay its proportionate 20% share. The
Company's participation in subsequent wells in the Merlin Prospect will have to
be funded from working capital, cash flow, loans or additional equity financing,
the availability of which cannot be assured.
As of March 31, 1998, the Company had advanced $358,299 representing estimated
drilling costs for a 17,000-foot well re-entry and sidetrack to be drilled in
Louisiana. The cash advance has been reflected as prepaid drilling costs on the
accompanying consolidated balance sheet. Drilling operations are expected to
commence as early as June of 1998.
In July of 1997, the Company sold its 65.25% working interest, effective May 1,
1997, in three producing wells located in Baca County, Colorado for net proceeds
of $229,031. In addition, the
26
<PAGE>
Company sold its 12.5% to 21.04% working interests in three wells located in
Michigan for net proceeds of $32,584.
In the event the Company's exploration efforts are unsuccessful, it is possible
the Company will need to take further steps to reduce general and administrative
expenses and sell producing properties to meet its debt commitments in fiscal
year 1999 (Note 9).
(2) ACCOUNTING POLICIES
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
GAAP in the United States. Sharon Energy Ltd. would have to account for income
taxes under the provisions of Statement of Financial Accounting Standards No.
109 ("SFAS 109"), "Accounting for Income Taxes," which is not in accordance with
Canadian GAAP. SFAS 109 requires the liability method of accounting for income
taxes whereas Canadian GAAP requires the deferral method. Additionally, the
limitation of capitalized costs, including consideration for site restoration
costs, under Canadian GAAP for ceiling limitations differs from U.S. GAAP. This
ceiling test is similar to the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting For the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," issued in the United
States. SFAS 121 requires a company to examine its carrying value of proved
properties whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Generally, the basis for making such
assessments is based on future cash flow projections. The effect of these
differences is discussed in Note 8.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Sharon Energy Ltd.
and Sharon Resources, Inc., after elimination of all significant intercompany
accounts and transactions.
27
<PAGE>
Because virtually all transactions are in United States dollars, the
consolidated financial statements have been prepared in United States dollars.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
OIL AND GAS PROPERTIES
The successful efforts method of accounting is followed for oil and gas
producing activities. Acquisition costs as well as the costs of productive
wells and developmental dry holes are capitalized when incurred. The costs of
exploratory wells are initially capitalized pending the determination as to
whether they have successfully added proved reserves. Unsuccessful exploratory
well costs are ultimately charged to operations. Acquisition costs of unproved
oil and gas properties are periodically evaluated for impairment in value on a
prospect-by-prospect basis and are charged to operations during the period of
impairment. All other exploration costs, including geological and geophysical
costs and delay rentals, are charged to operations when incurred.
Depreciation, depletion and amortization of the capitalized costs of proved
properties is provided on a well-by-well basis by the unit-of-production method
based upon estimates of proved oil and gas reserves.
28
<PAGE>
The ceiling limitation of net book value of proved oil and gas properties is
limited to management's estimate of future net revenues less estimated general
and administrative costs, interest expense and income taxes, all on an
undiscounted basis. Additionally, upon the expected sale of proved properties,
the remaining net capitalized value is impaired if the expected sales price is
less than net book value.
JOINT VENTURES
Substantially all exploration and production activities are conducted jointly
with others and, accordingly, the accounts reflect only the Company's
proportionate interest in such activities.
The Company is reimbursed for certain overhead costs incurred in connection with
the joint ventures. These reimbursements amounted to approximately $6,000 and
$19,000 during fiscal 1998 and 1997, respectively. These amounts were recorded
as a reduction of general and administrative expense.
REVENUE RECOGNITION
Revenue is recognized as oil and gas production and delivery occurs.
FURNITURE, FIXTURES AND EQUIPMENT
Depreciation is provided on furniture, fixtures and equipment using the
straight-line method over estimated service lives which range from five to eight
years.
INCOME TAXES
The deferral method of tax allocation accounting is followed under which the
income tax benefit is based on the results of operations reported in the
accounts. The difference between the income tax benefit and taxes currently
payable is reflected as "deferred income taxes".
29
<PAGE>
NET LOSS PER SHARE
Basic net loss per share has been computed by dividing the net loss by the
weighted average number of shares outstanding during the respective years. In
fiscal 1998 and 1997, no disclosure was made of fully dilutive loss per share as
the effects of outstanding stock options and warrants were anti-dilutive.
CASH EQUIVALENTS
For purposes of the Statements of Cash Flows, cash and cash equivalents include
cash on hand, amounts held in banks and highly liquid investments purchased with
an original maturity of three months or less.
(3) SUMMARY OF OIL AND GAS OPERATIONS
Information related to oil and gas operations is summarized as follows:
<TABLE>
<CAPTION>
March 31,
----------------------
1998 1997
---------- -----------
<S> <C> <C>
Capitalized costs-
Proved properties $22,401 $ 473,178
Unproved properties 50,456 110,200
Less- Accumulated depreciation, depletion,
amortization and impairments (1,330) (192,336)
------- ---------
$71,527 $ 391,042
------- ---------
------- ---------
</TABLE>
Costs incurred in oil and gas producing activities are as follows:
<TABLE>
<CAPTION>
Year Ended March 31
----------------------
1998 1997
---------- -----------
<S> <C> <C>
Property Acquisition $ 21,333 $ 90,095
-------- ---------
-------- ---------
Exploration $211,322 $ 680,372
-------- ---------
-------- ---------
Development $234,913 $ 77,401
-------- ---------
-------- ---------
</TABLE>
30
<PAGE>
All oil and gas properties are located in the United States. Oil and gas sales
to three purchasers accounted for approximately 68%, 15% and 8% of total sales
during the year ended March 31, 1998. Sales to three purchasers accounted for
approximately 64%, 22% and 13% of total sales during the year ended March 31,
1997.
(4) PRIVATE PLACEMENT
During fiscal year 1998, the Company issued 3,500,000 equity units at CDN $0.20
through a private placement. Each unit entitled the purchaser to one share of
common stock and one Series D warrant in which two warrants are required to buy
one share of common stock at CDN $0.25. For accounting purposes, the warrants
were valued using the Black-Scholes Model. The following table summarizes the
private placement transactions and warrants outstanding as of March 31, 1998:
<TABLE>
<CAPTION>
Common Shares Warrants Outstanding Exercise
---------------------- -------------------------------- Price in
Shares Amount Units* Amount Expiration Canadian $
--------- -------- --------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1) Shares and warrants
issued 3,500,000 $360,384 1,750,000 $101,052 9/4/98 $0.25
2) Shares and warrants
issued as commission 200,000 (33,320) 400,000 28,564 9/4/98 0.20
3) Direct offering expenses - (7,147) - -
--------- -------- --------- --------
3,700,000 $319,917 2,150,000 $129,616
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
*Each warrant unit in the above schedule is the equivalent to purchase one
common share.
31
<PAGE>
During fiscal year 1997, the Company issued 2,000,000 equity units at CDN
$0.50 through a private placement. Each unit entitled the purchaser to one
share of common stock and one warrant to purchase common stock at CDN $0.60.
For accounting purposes, the warrants were valued using the Black-Scholes
Model. The following table summarizes the private placement transactions and
warrants outstanding as of March 31, 1997:
<TABLE>
<CAPTION>
Common Shares Warrants Outstanding Exercise
---------------------- -------------------------------- Price in
Shares Amount Units Amount Expiration Canadian $
--------- -------- --------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1) Tranch one 600,000 $136,447 600,000 $ 85,553 12/10/97 $0.60
2) Tranch two 1,400,000 318,375 1,400,000 199,625 2/12/98** 0.60
3) Shares and warrants
issued as commission 150,000 (56,702) 350,000 56,702 2/12/98** 0.50
4) Direct offering expenses - (69,112) - -
--------- -------- --------- --------
2,150,000 $329,008 2,350,000 $341,880
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
** During fiscal year 1998, the Board of Directors extended the expiration
of these warrants until May 15, 1998. However, as of this date the warrants
were not exercised. For accounting purposes, these warrants were expired
during fiscal year 1998 as they were never exercised.
(5) STOCK OPTIONS
Under the Employee Stock Incentive Plan (the "Plan") directors, officers, key
employees and consultants of the Company are entitled to receive incentive stock
options. The Plan is administered by the Board of Directors. Options may be
granted under the Plan for common shares up to 20% of the total outstanding
shares at the time of grant. The share option price may not be less than 100%
of the average trading price for ten trading days prior to the date of grant.
Options granted pursuant to the Plan must be exercised within five years
following the date of grant.
32
<PAGE>
The following table summarizes the changes in the number of shares reserved for
the exercise of stock options (per share prices are in Canadian dollars):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1998 1997
---------- ---------
<S> <C> <C>
BALANCE, beginning of year 579,000 308,000
Canceled (470,000) -
Granted 1,063,000 470,000
Exercised ($0.25 per share) - (199,000)
--------- --------
BALANCE, end of year 1,172,000 579,000
--------- --------
--------- --------
</TABLE>
The options are exercisable as follows at March 31, 1998:
<TABLE>
<CAPTION>
Price
(Canadian
Shares Dollars) Expiration Date
--------- ---------- --------------------
<S> <C> <C>
84,000 $.25 December 5, 2000
25,000 $.29 December 5, 2000
279,000 $.35 January 7, 2002
191,000 $.35 February 14, 2002
275,000 $.35 April 15, 2002
318,000 $.35 February 10, 2003
---------
1,172,000
---------
---------
</TABLE>
(6) INCOME TAXES
Sharon Energy Ltd. and Sharon Resources, Inc., file separate income tax returns
in Canada and the United States, respectively. The benefit for income taxes
relates entirely to U. S. book loss and is comprised of the following:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
1998 1997
---------- ---------
<S> <C> <C>
Current $ - $ -
Deferred - (58,000)
---------- --------
$ - $(58,000)
---------- --------
---------- --------
</TABLE>
33
<PAGE>
The income tax benefit for income taxes in the Consolidated Statements of
Operations varies from the income tax benefit for income taxes calculated at
the Canadian statutory rate. The following table reconciles the main
differences:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
1998 1997
---------- ---------
<S> <C> <C>
Loss before income tax benefit $(793,750) $(966,362)
Statutory rate 44.3% 44.3%
--------- ---------
Expected tax benefit (351,631) (428,098)
Loss in parent company for which no tax
benefit is provided 18,405 11,174
Difference in tax rates on U.S. operations 77,477 96,937
U.S. Loss carryforward for which no tax
benefit is provided 203,544 260,097
Valuation Allowance 50,242 -
State taxes and other 1,963 1,890
--------- ---------
$ - $ (58,000)
--------- ---------
--------- ---------
</TABLE>
The benefit for deferred income taxes arises from timing differences in the
recognition of revenue and expense items for tax and financial statement
purposes. The tax effects of these differences during fiscal 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Exploration and development costs $ 1,108 $(118,649)
Depreciable property, plant and equipment (51,350) 60,649
Valuation allowance 50,242 -
--------- ---------
Deferred income tax benefit $ - $ (58,000)
--------- ---------
--------- ---------
</TABLE>
34
<PAGE>
As of March 31, 1998, Sharon Energy Ltd. and Sharon Resources, Inc. had tax
loss carryforwards of approximately $144,000 and $1,914,000, respectively,
available to offset taxable income in future years for which no benefit is
provided. These expire in the years ended 1999 to 2005 for Sharon Energy Ltd.
and 2012 for Sharon Resources, Inc. Sharon Resources, Inc. also has
carryovers of approximately $500,000 for statutory depletion and $27,000 for
the general business credit, for which no benefit has been recognized.
(7) OTHER
RELATED PARTY TRANSACTIONS
Office space is sublet on a month to month basis to a company owned by an
officer and his family. The sublease provides for minimum annual rentals of
approximately $19,000. The sublease will terminate at the end of June 1998.
During fiscal 1997, a company owned by an officer and director and his family
entered into joint venture agreements with the Company on the same terms offered
or sold to others whereby it has a working interest in certain wells drilled.
These agreements cover future wells drilled within the same prospect. The
Company had a net payable of approximately $7,000 as of March 31, 1997 for
these joint venture agreements.
RESTRICTIONS ON TAKEOVER BIDS
During fiscal 1988, the Board of Directors amended the Articles of the Company
to add the following restrictions regarding takeover bids: (a) any offer to
acquire 20% or more of the Company must be approved by at least 60% of the
Company's shareholders, and (b) any takeover offer to acquire the Company's
shares shall be offered on identical terms to all shareholders.
35
<PAGE>
REMUNERATION OF MANAGEMENT
The aggregate remuneration paid or payable for the years ended March 31, 1998
and 1997, to directors and senior officers as defined in the British Columbia
Company Act, amounted to approximately $118,000 and $195,000, respectively.
LEASES
In January 1992, the Company moved to a new office location. The lease
agreement provides for an 87-month term expiring in March 1999. Monthly rent
payments under the lease agreement commenced in April 1992. The Company is
recognizing rent expense ratably over the term of the lease. Total minimum
future rental payments under this lease are $109,000 in fiscal 1999.
During fiscal 1998 and 1997, rental expense was approximately $127,000 and
$134,000, respectively. These amounts were offset in part by sublease rental
income received of approximately $121,000 and $79,000, respectively.
INCENTIVE AWARD PLAN
The Company has an Incentive Award Plan whereby the Board of Directors can grant
incentive awards to eligible corporate officers and key employees. The total
amount of incentive awards to be granted may, at the discretion of the Board of
Directors, be up to 12% of the consolidated before-tax annual profit of the
Company. Incentive awards to eligible officers and key employees are solely at
the discretion of the Board of Directors, both as to selection of participants
and amount of individual awards, and shall be made on an annual basis to
eligible participants following the release of the final audited, fiscal yearend
financial statements. No incentive award grants were made during fiscal 1998
and 1997.
36
<PAGE>
EMPLOYEE ROYALTY POOL
Overriding royalties for certain prospects are granted to certain officers and
key employees as discretionary incentive awards. The production from these
royalties are paid directly to the participants.
(8) DIFFERENCES BETWEEN CANADIAN AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
LOSS PER SHARE
Net loss per common share in accordance with U.S. GAAP is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1998 1997
---------- ----------
(expressed in U.S. dollars)
<S> <C> <C>
Basic $(.13) $(.22)
----- -----
----- -----
Diluted N/A N/A
</TABLE>
In calculating U.S. GAAP diluted loss per share, no consideration was given to
stock options and warrants as their effects were anti-dilutive.
In February 1997, Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings per Share," was issued in the United States, effective for the
Company in fiscal 1998. The adoption of SFAS 128 by the Company would not have
had a material impact on the loss per common share for fiscal 1998 or fiscal
1997.
The effects of SFAS 109 and SFAS 121 would not cause the consolidated financial
statements to differ materially from Canadian GAAP. However, under U.S. GAAP a
deferred tax asset of approximately $871,000 and $551,000 at March 31, 1998 and
1997, respectively, would exist and be fully reserved for with a valuation
allowance as it is more likely than not that the deferred tax asset
37
<PAGE>
would not be realizable. The net deferred tax asset would consist primarily
of U.S. net operating loss carryforward and carryover statutory depletion.
(9) SUBSEQUENT EVENTS
PROMISSORY NOTE
In May of 1998, the Company received $209,205 ($300,000 CDN) in loan proceeds
from a related party (a corporation) that is a shareholder of the Company and
whose officers are also directors of the Company. The terms of the promissory
note dated March 27, 1998, provide that the Company is required to repay the
principal amount of $300,000 CDN and pay interest thereon at the annual rate of
10% on or before the maturity date of March 27, 1999. As further consideration
for providing the loan, subject to Vancouver Stock Exchange approval, the
Company agreed to issue a warrant to the related party for the acquisition of
480,000 common shares of the Company at $0.25 CDN per share, which is
exercisable until May 1, 1999. The proceeds of the loan are being used to pay
the drilling and completion costs for the Company's California well and the
property acquisition costs discussed below.
ELBRIDGE FIELD ACQUISITION
In May of 1998, the Company acquired 320 acres and 12 producing wells in the
Elbridge Field in Edgar County, Illinois for a total purchase price of $90,000.
The Company plans to rehabilitate the existing wells to improve production and
recovery rates. Additional plans call for a horizontal test well, a test well
to evaluate potential for gas recovery in an abandoned gas storage reservoir,
and possible use as a gas storage facility. The additional plans for the
property will require expenditures that will exceed the existing working capital
of the Company and will necessitate additional financings, the availability of
which cannot be assured.
38
<PAGE>
SHARON ENERGY LTD.
UNAUDITED SUPPLEMENTARY
PETROLEUM AND NATURAL GAS RESERVE INFORMATION
The following supplementary information is presented in compliance with United
States Securities and Exchange Commission ("SEC") regulations and is not covered
by the report of the Company's independent auditors.
The information required to be disclosed for the fiscal years 1998 and 1997 in
accordance with FASB Statement No. 69, "Disclosures About Oil and Gas Producing
Activities," is discussed below and is further detailed in the following tables.
The reserve quantities and valuations for fiscal 1998 and 1997 are based upon
estimates by Norstar Petroleum, Inc. and Company management. Proved reserves
are the estimated quantities of petroleum and natural gas which are reasonably
certain of recovery in future years from known reservoirs under existing
operating conditions assuming current prices and costs.
Proved developed reserves are those that can be recovered through existing wells
with existing equipment and existing (either operating or tested) recovery
techniques. The Company's producing reserves include those expected to be
produced from existing completion intervals now open for production in existing
wells.
The Company wishes to emphasize that the estimates included in the following
tables are by their nature inexact and are subject to changing economic,
operating and contractual conditions.
39
<PAGE>
SHARON ENERGY LTD.
CHANGES IN QUANTITIES OF PROVED PETROLEUM AND NATURAL GAS RESERVES
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Oil Gas
PROVED RESERVES (Bbls) (Mcf's)
- --------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Balance at March 31, 1996 30,071 2,449,788
Sale of reserves in place (17,272) -
Production (4,821) (103,251)
Extensions and discoveries 4,278 -
Revisions of previous estimates (7,506) (119,537)
-------- ----------
Balance at March 31, 1997 4,750 2,227,000
Sale of reserves in place (4,106) (2,214,760)
Production (644) (26,286)
Extensions and discoveries - 240,847
-------- ----------
Balance at March 31, 1998 - 226,801
-------- ----------
-------- ----------
<CAPTION>
Oil Gas
PROVED DEVELOPED RESERVES (Bbls) (Mcf's)
- --------------------------------------------------------------- ---------- -----------
<S> <C> <C>
March 31, 1996 30,071 1,047,645
-------- ----------
-------- ----------
March 31, 1997 4,750 822,039
-------- ----------
-------- ----------
March 31, 1998 - 151,201
-------- ----------
-------- ----------
</TABLE>
40
<PAGE>
SHARON ENERGY LTD.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED PETROLEUM AND NATURAL GAS RESERVES (UNAUDITED)
For purposes of the following disclosures, estimates were made of quantities of
proved reserves and the periods during which they are expected to be produced.
Future cash flows were computed by applying yearend prices to estimated annual
future production from proved oil and gas reserves. The average yearend price
for oil was $19.30 per barrel at March 31, 1997. The average yearend prices for
gas were $2.29 and $1.24 per Mcf at March 31, 1998 and 1997, respectively.
Future development and production costs were computed by applying yearend costs
to be incurred in producing and further developing the proved reserves. Future
income tax expenses were computed by applying, generally, yearend statutory tax
rates (adjusted for permanent differences, tax credits and allowances) to the
estimated net future pre-tax cash flows. The discount was computed by
application of a 10% discount factor. The calculations assume the continuation
of existing economic, operating and contractual conditions. However, such
arbitrary assumptions have not proven to be the case in the past. Other
assumptions of equal validity could give rise to substantially different
results.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1998 1997
----------- -----------
(expressed in U.S. dollars)
<S> <C> <C>
Future cash inflows $ 519,000 $ 2,844,000
Future costs-
Production (54,000) (1,296,000)
Development (2,000) (292,000)
--------- -----------
Future net cash inflows before income tax 463,000 1,256,000
Future income tax (47,000) (273,000)
--------- -----------
Future net cash flows 416,000 983,000
10% discount factor (61,000) (400,000)
--------- -----------
Standardized measure of discounted
future net cash flows $355,000 $ 583,000
--------- -----------
--------- -----------
</TABLE>
41
<PAGE>
SHARON ENERGY LTD.
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS FROM PROVED PETROLEUM AND NATURAL GAS RESERVE
QUANTITIES (Unaudited)
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1998 1997
---------- ---------
(expressed in U.S. dollars)
<S> <C> <C>
Standardized measure of discounted future net cash
flows--beginning of year $ 583,000 $ 782,000
Sales and transfers, net of production costs (46,000) (163,000)
Net change in sales and transfer prices, net of production - 129,000
Extensions and discoveries, net of future costs 427,000 49,000
Sales of reserves in place (714,000) (163,000)
Revisions of quantity estimates - (75,000)
Accretion of discount 74,000 102,000
Income tax change 121,000 71,000
Changes in production rates and other (90,000) (149,000)
--------- ---------
Standardized measure of discounted future net cash
flows--end of year $ 355,000 $ 583,000
--------- ---------
--------- ---------
</TABLE>
42
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
43
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information concerning this item will be in the Company's 1998 Proxy Statement,
which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning this item will be in the Company's 1998 Proxy Statement,
which is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning this item will be in the Company's 1998 Proxy Statement,
which is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CONDITION AND RESULTS
OF OPERATION
Information concerning this item will be in the Company's 1998 Proxy Statement,
which is incorporated herein by reference.
44
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
3 -- Articles of Incorporation and By Laws (1)
3-a --"Companies Act" Memorandum of Sharon Energy Ltd. Dated February 4,
1980 (1)
3-b -"Company Act" Altered Memorandum of Sharon Energy Ltd. whereby the
Articles of the Registrant be altered by changing the authorized capital
of the Company (1)
3-c - Special Resolution dated September 6, 1985 whereby the Articles of
the Registrant be altered by adding thereto Part 24.1 - Directors Rights
to Issue in One or More Series and Part 24.2 - Winding up rights (1)
3-d - Special Resolution dated September 11, 1987 whereby the Articles of
the Registrant be altered by adding thereto Part 25.1 and 25.2 -
Restrictions on Takeover Bids (1)
4 -- Instruments defining the rights of security holders, including
indentures (1)
10-ii (A) #1 - Falcon Prospect Agreement dated September 1, 1994 between
the Registrant and Pearson Energy Corp. (1)
10-ii (A) #4 - Agreement to sublease Office Space between the Registrant
and Pearson Energy Corp. (1)
10-iii (A) #1 - Executive Compensation (1)
10-iii (A) #2 - Stock Options Plan (1)
10-iii (A) #3 - Incentive Award Plan (1)
10-iii (A) #4 - Employee Royalty Pool Plan (special resolution) dated June
16, 1987 (1)
Subsidiaries of the Registrant (1)
10-iv - Form of "D" Warrants (3)
10-v - Form of "E" Warrants (3)
10-vi - Form of "F" Warrants (3)
10-vii - Humbolt Capital (Related Party) Loan Agreement dated March 27,
1998 (3)
10-viii - Elbridge Field Acquistion Purchase/Sale Agreement effective May
15, 1998 (3)
10-ix - South Lakeside Prospect Agreement (3)
23-i - Consent of Norstar Petroleum Inc., Petroleum Engineers (3)
27 - Financial Data Schedules (3)
28-i Form 8-K dated March 4, 1998 (2)
------------
(1) Incorporated by reference to the Company's 1996 Form 10-KSB
(2) Incorporated by reference to the Company's Form 8-K dated
March 4, 1998
(3) Included herein
B) REPORTS ON FORM 8K
The Company filed a report on Form 8-K on March 4, 1998, pertaining to the
issuance of 3,500,000 unregistered securities pursuant to an exemption from
registration under Regulation S of the Securities Act of 1933. Each unit
consisted of one common voting share of the Company and one non-transferable
Class D Common Stock Warrant. Two Class D Warrants entitle the holder thereof to
purchase one additional common share of the Company at a price of Canadian $.25
per share to be exercised any time after, and within six months of the March 4,
1998 closing date of the offering. The Company received Canadian $649,190 in
net proceeds (after commissions and direct offering expenses) from the offering.
The Company issued 200,000 common shares as a corporate finance fee and, for
services rendered in connection with the offering, an additional 400,000 common
share purchase warrants (Class E Warrants) which are exercisable within six
months of March 4, 1998. The Class E Warrants are exercisable at Canadian $.20
per share.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 on the 26th day of June,
1998.
SHARON ENERGY LTD.
Date: June 27, 1998
By: /s/ Jack S. Steinhauser
--------------------------------
Jack S. Steinhauser
President, Chief Executive Officer,
and Principal Acccounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
------------------------ ---------------- ----------
/s/ Jack S. Steinhauser Director, President, 6/26/98
----------------------- Chief Executive Officer
Jack S. Steinhauser
/s/ David L. Bennington Director 6/26/98
-----------------------
David L. Bennington
/s/ Robert W. Lamond Director 6/26/98
-----------------------
Robert W. Lamond
/s/ C. A. Teare Director 6/27/98
-----------------------
C. A. Teare
46
<PAGE>
EXHIBIT 10-IV -- FORM OF "D" WARRANTS
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT").
THE HOLDER HEREOF, BY ACQUIRING SUCH SECURITIES, AGREES FOR THE BENEFIT OF
THE COMPANY THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY (a) TO THE COMPANY, (b) OUTSIDE THE UNITED STATES IN
ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAW, (c) PURSUANT TO THE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE 1933 ACT PROVIDED BY RULE 144 THEREUNDER,
IF AVAILABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (d)
IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE 1933 ACT OR ANY
APPLICABLE STATE LAWS AND REGULATIONS GOVERNING THE OFFER AND SALE OF
SECURITIES, AND THE HOLDER HAS, PRIOR TO SUCH SALE, FURNISHED TO THE COMPANY
AN OPINION OF COUNSEL, OF RECOGNIZED STANDING, OR OTHER EVIDENCE OF
EXEMPTION, REASONABLY SATISFACTORY TO THE COMPANY. DELIVERY OF THIS
CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS
ON STOCK EXCHANGES IN CANADA; A NEW CERTIFICATE BEARING NO LEGEND, DELIVERY
OF WHICH WILL CONSTITUTE "GOOD DELIVERY" MAY BE OBTAINED FROM THE REGISTRAR
AND TRANSFER AGENT OF THE COMPANY UPON DELIVERY OF THIS CERTIFICATE AND A
DULY EXECUTED DECLARATION, IN A FORM SATISFACTORY TO THE COMPANY AND ITS
REGISTRAR AND TRANSFER AGENT, TO THE EFFECT THAT THE SALE OF THE SECURITIES
REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH RULE 904 OF REGULATION S
UNDER THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
CLASS "D" WARRANT CERTIFICATE
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
WARRANT FOR PURCHASE OF COMMON SHARES
- ------------------------------------------------------------------------------
THIS WARRANT WILL BE VOID AND OF NO VALUE
UNLESS EXERCISED WITHIN THE LIMITS HEREIN PROVIDED
THIS WARRANT IS NOT TRANSFERABLE
SHARON ENERGY LTD.
(INCORPORATED UNDER THE LAWS OF BRITISH COLUMBIA)
WARRANT CERTIFICATE NO. 100,000 WARRANTS
8 -----------
- ----------
Two (2) such warrants entitling the
holder to purchase one (1) Common Share
at the Exercise Price of $0.25 per
Common Share on or before 4:30 p.m.
(Vancouver time) on September 4, 1998.
DATE OF ISSUANCE: MARCH 4, 1998 .
--------------------------
THIS IS TO CERTIFY THAT CANNACORD CAPITAL CORPORATION FOR THE A/C OF FRASER
GRANT, RRSP A/C #130 145 S4 (herein called the "Holder")
is entitled to acquire in the manner herein provided, subject to the
restrictions herein contained, during the period commencing on the date hereof
and ending at 4:30 p.m. (Vancouver time) on September 4, 1998 (the "Expiry
Date"), the number of fully paid and non-assessable common shares ("Common
Shares") without nominal or par value of Sharon Energy Ltd. ("the Company") as
set forth above.
Such right to purchase Common Shares may only be exercised by the Holder, in
whole or in part (but not to a fractional share), within the time hereinbefore
set out by:
(a) duly completing in the manner indicated and executing the
Exercise Form
<PAGE>
-2-
attached hereto; and
(b) surrendering this Warrant Certificate to the Company's Registrar
and Transfer Agent, Montreal Trust Company of Canada, (the
"Transfer Agent") at the principal office of the Transfer Agent
in the City of Vancouver, British Columbia; and
(c) payment by cash or certified cheque or money order in lawful
monies of Canada, payable to or to the order of the Company in
the amount of $0.25 for each Common Share to be purchased on or
before 4:30 p.m. (Vancouver time) on the Expiry Date (the
"Exercise Price") at the principal office of the Transfer Agent
in the City of Vancouver, British Columbia.
These Warrants shall be deemed to be so surrendered only upon personal delivery
thereof or, if sent by post or other means of transmission, upon actual receipt
thereof by the Transfer Agent at the office referred to above.
In the event of any exercise of the rights represented by this Warrant,
certificates for the Common Shares so purchased shall be delivered to the Holder
hereof within a reasonable time, not exceeding ten (10) business days after the
rights represented by the Warrant shall have been so exercised, and, unless this
Warrant has expired, a new Warrant representing the number of Common Shares, if
any, with respect to which this Warrant shall not then have been exercised shall
also be issued to the Holder hereof within such time.
The Company covenants and agrees that all Common Shares which may be issued upon
the exercise of the rights represented by the Warrant will, upon issuance, be
fully paid and non-assessable and free of all liens, changes and encumbrances.
The Company further covenants and agrees that during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved, a sufficient number of Common Shares to
provide for the exercise of the rights represented by this Warrant.
THE FOLLOWING ARE THE TERMS AND CONDITIONS REFERRED TO IN THIS WARRANT:
<PAGE>
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In these Terms and Conditions, unless there is something in the
subject matter or context inconsistent therewith:
(a) "Company" means Sharon Energy Ltd. or its successor corporation
as a result of consolidation, amalgamation or merger with or into
any other corporation or corporations, or as a result of the
conveyance or transfer of all or substantially all of the
properties and estates of the Company as an entirety to any other
corporation and thereafter "Company" will mean such successor
corporation;
(b) "Company's Auditors" means an independent firm of accountants
duly appointed as Auditors of the Company;
(c) "Director" means a Director of the Company for the time being,
and reference, without more, to action by the Directors means
action by the Directors of the Company as a Board, or whenever
duly empowered, action by an executive committee of the Board;
(d) "herein", "hereby" and similar expressions refer to these Terms
and Conditions as the same may be amended or modified from time
to time; and the expression "Article" and "Section" followed by a
number refer to the specified Article or Section of these Terms
and Conditions;
(e) "person" means an individual, corporation, partnership, trustee
or any unincorporated organization and words importing persons
have a similar meaning;
(f) "shares" means the common shares in the capital of the Company as
constituted at the date hereof and any shares resulting from any
subdivision or consolidation of the shares;
(g) "Transfer Agent" means Montreal Trust Company at its office at
510 Burrard Street, Vancouver, B.C. or its successors;
(h) "Warrant Holders" or "Holders" means the holders of the Warrants;
and
(i) "Warrants" mean the Class D Warrants of the Company.
<PAGE>
-2-
1.2 CURRENCY
Execept as otherwise provided, any monetary amount referred to herein
is in Canadian funds.
1.3 GENDER
Words importing the singular number include the plural and vice versa
and words importing the masculine gender include the feminine and neuter
genders.
1.4 INTERPRETATION NOT AFFECTED BY HEADINGS
The division of these Terms and Conditions into Articles and Sections,
and the insertion of headings are for convenience of reference only and will not
affect the construction or interpretation thereof.
1.5 APPLICABLE LAW
The Warrants will be construed in accordance with the laws of the
Province of British Columbia and the laws of Canada applicable thereto and will
be treated in all respects as British Columbia contracts.
ARTICLE 2
ISSUE OF ADDITIONAL WARRANTS
2.1 ADDITIONAL WARRANTS
The Company may at any time and from time to time issue additional
warrants or grant options or similar rights to purchase shares.
2.2 ISSUE IN SUBSTITUTION FOR LOST WARRANTS
(a) In case a Warrant becomes mutilated, lost, destroyed or stolen,
the Company, at its discretion, may issue and deliver a new
Warrant of like date and tenor as the one mutilated, lost,
destroyed or stolen, in exchange for and in place of and upon
cancellation of such mutilated Warrant, or in lieu of, and in
substitution for such lost, destroyed or stolen Warrant and the
substituted Warrant will be entitled to the benefit hereof and
rank equally in accordance with its terms with all other Warrants
issued or to be issued by the Company.
(b) The applicant for the issue of a new Warrant pursuant hereto will
bear the cost of the issue thereof and in case of loss,
destruction or theft furnish to the Company such evidence of
ownership and of loss, destruction, or theft of the Warrant so
lost, destroyed or stolen as will be satisfactory to the
<PAGE>
-3-
Company in its discretion and such applicant may also be required
to furnish indemnity in amount and form satisfactory to the Company
in its discretion, and will pay the reasonable charges of the
Company in connection therewith.
2.3 WARRANT HOLDER NOT A SHAREHOLDER
A Warrant Holder is not a shareholder of the Company, is not
entitled to any rights or interests as a shareholder of the Company and has
only the rights and interests expressly provided herein.
ARTICLE 3
NOTICE
3.1 NOTICE TO WARRANT HOLDERS
Any notice to be given to the Holders will be sent by prepaid
registered post and will be deemed to have been received by the Holder on the
fourth day following the mailing thereof. Any such notice will be addressed
to the Holder at the address of the Holder appearing on the Holder's Warrant
or to such other address as the Holder may advise the Company by notice in
writing.
3.2 NOTICE TO THE COMPANY
Any notice to be given to the Company will be sent by prepaid
registered post addressed to the Company at its registered office and will be
deemed to have been received by the Company on the fourth day following the
mailing thereof, provided that if there shall be at the time of mailing or
between the time of mailing and the actual receipt of the notice a labour
dispute, slow down, or other disruption which might effect the normal
delivery of such notice by the mails, then such notice shall only be
effective if and when received by the Company.
ARTICLE 4
EXERCISE OF WARRANTS
4.1 METHOD OF EXERCISE OF WARRANTS
The right to purchase shares conferred by the Warrants may be
exercised by the Holder of such Warrant surrendering it, with a duly
completed and executed Exercise Form in the form attached hereto and cash or
a certified cheque payable to or to the order of the Company, at par in
Vancouver, British Columbia, for the exercise price applicable at the time of
surrender in respect of the shares subscribed for in lawful money of Canada,
to the Transfer Agent at its principal office in the City of Vancouver,
British Columbia.
<PAGE>
-4-
4.2 EFFECT OF EXERCISE OF WARRANTS
(a) Upon surrender and payment as aforesaid the shares so subscribed
for will be deemed to have been issued and such person or persons
will be deemed to have become the holder or holders of record of
such shares on the date of such surrender and payment, and such
shares will be issued at the exercise price in effect on the date
of such surrender and payment.
(b) Within ten (10) business days after surrender and payment as
aforesaid, the Company will forthwith cause to be delivered to
the person or persons in whose name or names the shares so
subscribed for are to be issued as specified in such subscription
or mailed to him or them at his or their respective addresses
specified in such subscription, a certificate or certificates for
the appropriate number of shares not exceeding those which the
Warrant Holder is entitled to purchase pursuant to the Warrant
surrendered.
4.3 SUBSCRIPTION FOR LESS THAN ENTITLEMENT
The holder of any Warrant may subscribe for and purchase a number
of shares, less than the number which he is entitled to purchase pursuant to
the surrendered Warrant. In the event of any purchase of a number of shares
less than the number which can be purchased pursuant to a Warrant, the holder
thereof upon exercise thereof will in addition be entitled to receive a new
Warrant in respect of the balance of the shares which he was entitled to
purchase pursuant to the surrendered Warrant and which were not then
purchased.
4.4 WARRANTS FOR FRACTIONS OF SHARES
To the extent that the holder of any Warrant is entitled to receive
on the exercise or partial exercise thereof a fraction of a share, such right
may be exercised in respect of such fraction only in combination with another
Warrant or other Warrants which in the aggregate entitle the holder to
receive a whole number of such shares.
4.5 EXPIRATION OF WARRANTS
After the expiration of the period within which a Warrant is
exercisable, all rights thereunder will wholly cease and terminate and such
Warrant will no longer be valid and of no effect.
<PAGE>
-5-
4.6 TIME OF ESSENCE
Time will be of the essence hereof.
4.7 EXERCISE PRICE
Two Warrants and $0.25 per share are required to subscribe for each
share.
4.8 ADJUSTMENT OF EXERCISE PRICE
The exercise price and the number of shares deliverable upon the
exercise of the Warrants will be subject to adjustment in the event and in
the manner following:
(a) if and whenever the shares at any time outstanding are subdivided
into a greater or consolidated into a lesser number of shares the
exercise price will be decreased or increased proportionately, as
the case may be; upon any such subdivision or consolidation the
number of shares deliverable upon the exercise of the Warrants
will be increased or decreased proportionately as the case may be;
(b) (i) in case of any capital reorganization or of any
reclassification of the capital of the Company or in the
case of the consolidation, merger or amalgamation of the
Company with or into any other Company (hereinafter
collectively referred to as a "Reorganization"), each
Warrant will after such Reorganization confer the right
to purchase the number of shares or other securities of
the Company (or of the Company resulting from such
Reorganization) which the Warrant Holder would have been
entitled to upon Reorganization if the Warrant Holder had
been a shareholder at the time of such Reorganization;
(ii) in any such case, if necessary, appropriate adjustments
will be made in the application of the provisions of this
Article Four relating to the rights and interest
thereafter of the holders of the Warrants so that the
provisions of this Article ERROR! REFERENCE SOURCE NOT
FOUND. will be made applicable as nearly as reasonably
possible to any shares or other securities deliverable
after the Reorganization or the exercise of the Warrants;
(iii) the subdivision or consolidation of shares at any time
outstanding into a greater or lesser number of shares
(whether with or without par value) will not be deemed to
be a Reorganization for the purposes of this Section
ERROR! REFERENCE SOURCE NOT FOUND.;
(c) the adjustments provided for in this Section 4.8 are cumulative and
will become effective immediately after the record date for or, if a
record date
<PAGE>
-6-
is fixed, the effective date of the event which results in such
adjustments.
4.9 DETERMINATION OF ADJUSTMENTS
If any questions will at any time arise with respect to the
exercise price or any adjustment provided for in Section ERROR! REFERENCE
SOURCE NOT FOUND., such question will be conclusively determined by the
Company's Auditors, or, if they decline to so act any other firm of chartered
accountants, in Vancouver, British Columbia, that the Company may designate
and who will have access to all appropriate records and such determination
will be binding upon the Company and the holders of the Warrants.
ARTICLE 5
COVENANTS BY THE COMPANY
5.1 RESERVATION OF SHARES
The Company will reserve and there will remain unissued out of its
authorized capital a sufficient number of shares to satisfy the rights of
purchase provided for herein and in the Warrants should the holders of all
the Warrants from time to time outstanding determine to exercise such rights
in respect of all shares which they are or may be entitled to purchase
pursuant thereto and hereto.
5.2 COMPANY MAY PURCHASE
The Company may from time to time offer to purchase and purchase,
for cancellation only, any Warrants in such manner, from such persons and on
such terms and conditions as it determines.
ARTICLE 6
WAIVER OF CERTAIN RIGHTS
6.1 IMMUNITY OF SHAREHOLDERS, ETC.
The Warrant Holder, as part of the consideration for the issue of
the Warrants, waives and releases and will not have any right, cause of
action or remedy now or hereafter existing in any jurisdiction against any
past, present or future incorporator, shareholder, director or officer (as
such) of the Company for the issue of shares pursuant to any Warrant or on
any covenant, agreement, representation or warranty by the Company herein
contained or in the Warrant.
<PAGE>
-7-
ARTICLE 7
MODIFICATION OF TERMS, MERGER, SUCCESSORS
7.1 MODIFICATION OF TERMS AND CONDITIONS FOR CERTAIN PURPOSES
From time to time the Company may, subject to the provisions of
these Terms and Conditions, modify the Terms and Conditions hereof, for the
purpose of correction or rectification of any ambiguities, defective
provisions, errors or omissions herein.
7.2 TRANSFERABILITY
The Warrant and all rights attached to it are not transferable or
assignable.
IN WITNESS WHEREOF SHARON ENERGY LTD. has caused this Warrant to be signed by
its duly authorized officers under its corporate seal, and this Warrant to be
dated as of the date of issuance first above written.
SIGNED BY: COUNTERSIGNED BY:
SHARON ENERGY LTD. MONTREAL TRUST COMPANY
Per: Per:
------------------------------- -------------------------------
Authorized Signatory Authorized Signatory
Per: Per:
------------------------------- -------------------------------
Authorized Signatory Authorized Signatory
Date: Date:
------------------------------ ------------------------------
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
EXHIBIT 10-V--FORM OF "E" WARRANTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CLASS "E" WARRANT CERTIFICATE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
WARRANT FOR PURCHASE OF COMMON SHARES
- -------------------------------------------------------------------------------
THIS WARRANT WILL BE VOID AND OF NO VALUE
UNLESS EXERCISED WITHIN THE LIMITS HEREIN PROVIDED
THIS WARRANT IS NOT TRANSFERABLE
SHARON ENERGY LTD.
(INCORPORATED UNDER THE LAWS OF BRITISH COLUMBIA)
WARRANT CERTIFICATE NO. 2 74,000 WARRANTS
Each such warrant entitling the holder
to purchase one (1) Common Share at
the Exercise Price of $0.20 per Common
Share on or before 4:30 p.m.
(Vancouver time) on September 4, 1998.
DATE OF ISSUANCE: MARCH 4, 1998 .
-------------------------
THIS IS TO CERTIFY THAT UNION SECURITIES INTERNATIONAL, of Vancouver, British
Columbia (herein called the "Holder") is entitled to acquire in the manner
herein provided, subject to the restrictions herein contained, during the
period commencing on the date hereof and ending at 4:30 p.m. (Vancouver time)
on September 4, 1998 (the "Expiry Date"), the number of fully paid and
non-assessable common shares ("Common Shares") without nominal or par value
of Sharon Energy Ltd. ("the Company") as set forth above.
Such right to purchase Common Shares may only be exercised by the Holder, in
whole or in part (but not to a fractional share), within the time
hereinbefore set out by:
(a) duly completing in the manner indicated and executing the
Exercise Form attached hereto; and
(b) surrendering this Warrant Certificate to the Company's Registrar
and Transfer Agent, Montreal Trust Company of Canada, (the
"Transfer Agent") at the principal office of the Transfer Agent
in the City of Vancouver, British Columbia; and
(c) payment by cash or certified cheque or money order in lawful
monies of Canada, payable to or to the order of the Company in
the amount of $0.20 for each Common Share to be purchased on or
before 4:30 p.m. (Vancouver time) on the Expiry Date (the
"Exercise Price") at the principal office of the Transfer Agent
in the City of Vancouver, British Columbia.
These Warrants shall be deemed to be so surrendered only upon personal
delivery thereof or, if sent by post or other means of transmission, upon
actual receipt thereof by the Transfer Agent at the office referred to above.
<PAGE>
-2-
In the event of any exercise of the rights represented by this Warrant,
certificates for the Common Shares so purchased shall be delivered to the
Holder hereof within a reasonable time, not exceeding ten (10) business days
after the rights represented by the Warrant shall have been so exercised,
and, unless this Warrant has expired, a new Warrant representing the number
of Common Shares, if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such
time.
The Company covenants and agrees that all Common Shares which may be issued
upon the exercise of the rights represented by the Warrant will, upon
issuance, be fully paid and non-assessable and free of all liens, changes and
encumbrances. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved, a sufficient number
of Common Shares to provide for the exercise of the rights represented by
this Warrant.
THE FOLLOWING ARE THE TERMS AND CONDITIONS REFERRED TO IN THIS WARRANT:
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In these Terms and Conditions, unless there is something in the
subject matter or context inconsistent therewith:
(a) "Company" means Sharon Energy Ltd. or its successor corporation as
a result of consolidation, amalgamation or merger with or into any
other corporation or corporations, or as a result of the conveyance
or transfer of all or substantially all of the properties and
estates of the Company as an entirety to any other corporation and
thereafter "Company" will mean such successor corporation;
(b) "Company's Auditors" means an independent firm of accountants duly
appointed as Auditors of the Company;
(c) "Director" means a Director of the Company for the time being, and
reference, without more, to action by the Directors means action by
the Directors of the Company as a Board, or whenever duly
empowered, action by an executive committee of the Board;
(d) "herein", "hereby" and similar expressions refer to these Terms
and Conditions as the same may be amended or modified from time
to time; and the expression "Article" and "Section" followed by a
number refer to the specified Article or Section of these Terms
and Conditions;
(e) "person" means an individual, corporation, partnership, trustee or
any unincorporated organization and words importing persons have a
similar
<PAGE>
-3-
meaning;
(f) "shares" means the common shares in the capital of the Company as
constituted at the date hereof and any shares resulting from any
subdivision or consolidation of the shares;
(g) "Transfer Agent" means Montreal Trust Company at its office at 510
Burrard Street, Vancouver, B.C. or its successors;
(h) "Warrant Holders" or "Holders" means the holders of the Warrants;
and
(i) "Warrants" mean the Class E Warrants of the Company.
1.2 CURRENCY
Execept as otherwise provided, any monetary amount referred to
herein is in Canadian funds.
1.3 GENDER
Words importing the singular number include the plural and vice
versa and words importing the masculine gender include the feminine and
neuter genders.
1.4 INTERPRETATION NOT AFFECTED BY HEADINGS
The division of these Terms and Conditions into Articles and
Sections, and the insertion of headings are for convenience of reference only
and will not affect the construction or interpretation thereof.
1.5 APPLICABLE LAW
The Warrants will be construed in accordance with the laws of the
Province of British Columbia and the laws of Canada applicable thereto and
will be treated in all respects as British Columbia contracts.
<PAGE>
-4-
ARTICLE 2
ISSUE OF ADDITIONAL WARRANTS
2.1 ADDITIONAL WARRANTS
The Company may at any time and from time to time issue additional
warrants or grant options or similar rights to purchase shares.
2.2 ISSUE IN SUBSTITUTION FOR LOST WARRANTS
(a) In case a Warrant becomes mutilated, lost, destroyed or stolen,
the Company, at its discretion, may issue and deliver a new
Warrant of like date and tenor as the one mutilated, lost,
destroyed or stolen, in exchange for and in place of and upon
cancellation of such mutilated Warrant, or in lieu of, and in
substitution for such lost, destroyed or stolen Warrant and the
substituted Warrant will be entitled to the benefit hereof and
rank equally in accordance with its terms with all other Warrants
issued or to be issued by the Company.
(b) The applicant for the issue of a new Warrant pursuant hereto will
bear the cost of the issue thereof and in case of loss,
destruction or theft furnish to the Company such evidence of
ownership and of loss, destruction, or theft of the Warrant so
lost, destroyed or stolen as will be satisfactory to the Company
in its discretion and such applicant may also be required to
furnish indemnity in amount and form satisfactory to the Company
in its discretion, and will pay the reasonable charges of the
Company in connection therewith.
2.3 WARRANT HOLDER NOT A SHAREHOLDER
A Warrant Holder is not a shareholder of the Company, is not
entitled to any rights or interests as a shareholder of the Company and has
only the rights and interests expressly provided herein.
ARTICLE 3
NOTICE
3.1 NOTICE TO WARRANT HOLDERS
Any notice to be given to the Holders will be sent by prepaid
registered post and will be deemed to have been received by the Holder on the
fourth day following the mailing thereof. Any such notice will be addressed
to the Holder at the address of the Holder appearing on the Holder's Warrant
or to such other address as the Holder may advise the Company by notice in
writing.
3.2 NOTICE TO THE COMPANY
<PAGE>
-5-
Any notice to be given to the Company will be sent by prepaid
registered post addressed to the Company at its registered office and will be
deemed to have been received by the Company on the fourth day following the
mailing thereof, provided that if there shall be at the time of mailing or
between the time of mailing and the actual receipt of the notice a labour
dispute, slow down, or other disruption which might effect the normal
delivery of such notice by the mails, then such notice shall only be
effective if and when received by the Company.
ARTICLE 4
EXERCISE OF WARRANTS
4.1 METHOD OF EXERCISE OF WARRANTS
The right to purchase shares conferred by the Warrants may be
exercised by the Holder of such Warrant surrendering it, with a duly
completed and executed Exercise Form in the form attached hereto and cash or
a certified cheque payable to or to the order of the Company, at par in
Vancouver, British Columbia, for the exercise price applicable at the time of
surrender in respect of the shares subscribed for in lawful money of Canada,
to the Transfer Agent at its principal office in the City of Vancouver,
British Columbia.
4.2 EFFECT OF EXERCISE OF WARRANTS
(a) Upon surrender and payment as aforesaid the shares so subscribed
for will be deemed to have been issued and such person or persons
will be deemed to have become the holder or holders of record of
such shares on the date of such surrender and payment, and such
shares will be issued at the exercise price in effect on the date
of such surrender and payment.
(b) Within ten (10) business days after surrender and payment as
aforesaid, the Company will forthwith cause to be delivered to
the person or persons in whose name or names the shares so
subscribed for are to be issued as specified in such subscription
or mailed to him or them at his or their respective addresses
specified in such subscription, a certificate or certificates for
the appropriate number of shares not exceeding those which the
Warrant Holder is entitled to purchase pursuant to the Warrant
surrendered.
4.3 SUBSCRIPTION FOR LESS THAN ENTITLEMENT
The holder of any Warrant may subscribe for and purchase a number
of shares, less than the number which he is entitled to purchase pursuant to
the surrendered Warrant. In the event of any purchase of a number of shares
less than the number which can be purchased pursuant to a Warrant, the holder
thereof upon exercise thereof will in addition be entitled to receive a new
Warrant in respect of the balance of the shares which he was entitled to
purchase pursuant to the surrendered Warrant and which were not then
purchased.
<PAGE>
-6-
4.4 WARRANTS FOR FRACTIONS OF SHARES
To the extent that the holder of any Warrant is entitled to receive on
the exercise or partial exercise thereof a fraction of a share, such right may
be exercised in respect of such fraction only in combination with another
Warrant or other Warrants which in the aggregate entitle the holder to receive a
whole number of such shares.
4.5 EXPIRATION OF WARRANTS
After the expiration of the period within which a Warrant is
exercisable, all rights thereunder will wholly cease and terminate and such
Warrant will no longer be valid and of no effect.
4.6 TIME OF ESSENCE
Time will be of the essence hereof.
4.7 EXERCISE PRICE
One Warrant and $0.20 per share are required to subscribe for each
share.
4.8 ADJUSTMENT OF EXERCISE PRICE
The exercise price and the number of shares deliverable upon the
exercise of the Warrants will be subject to adjustment in the event and in the
manner following:
(a) if and whenever the shares at any time outstanding are subdivided
into a greater or consolidated into a lesser number of shares the
exercise price will be decreased or increased proportionately, as
the case may be; upon any such subdivision or consolidation the
number of shares deliverable upon the exercise of the Warrants
will be increased or decreased proportionately as the case may
be;
(b) (i) in case of any capital reorganization or of any
reclassification of the capital of the Company or in the
case of the consolidation, merger or amalgamation of the
Company with or into any other Company (hereinafter
collectively referred to as a "Reorganization"), each
Warrant will after such Reorganization confer the right
to purchase the number of shares or other securities of
the Company (or of the Company resulting from such
Reorganization) which the Warrant Holder would have been
entitled to upon Reorganization if the Warrant Holder had
been a shareholder at the time of such Reorganization;
(ii) in any such case, if necessary, appropriate adjustments
will be made in the application of the provisions of this
Article Four relating to the rights and interest
thereafter of the holders of the Warrants so that
<PAGE>
-7-
the provisions of this Article ERROR! REFERENCE SOURCE NOT
FOUND. will be made applicable as nearly as reasonably
possible to any shares or other securities deliverable
after the Reorganization or the exercise of the Warrants;
(iii) the subdivision or consolidation of shares at any time
outstanding into a greater or lesser number of shares
(whether with or without par value) will not be deemed to
be a Reorganization for the purposes of this Section
ERROR! REFERENCE SOURCE NOT FOUND.;
(c) the adjustments provided for in this Section 4.8 are cumulative
and will become effective immediately after the record date for
or, if a record date is fixed, the effective date of the event
which results in such adjustments.
4.9 DETERMINATION OF ADJUSTMENTS
If any questions will at any time arise with respect to the exercise
price or any adjustment provided for in Section ERROR! REFERENCE SOURCE NOT
FOUND., such question will be conclusively determined by the Company's Auditors,
or, if they decline to so act any other firm of chartered accountants, in
Vancouver, British Columbia, that the Company may designate and who will have
access to all appropriate records and such determination will be binding upon
the Company and the holders of the Warrants.
ARTICLE 5
COVENANTS BY THE COMPANY
5.1 RESERVATION OF SHARES
The Company will reserve and there will remain unissued out of its
authorized capital a sufficient number of shares to satisfy the rights of
purchase provided for herein and in the Warrants should the holders of all the
Warrants from time to time outstanding determine to exercise such rights in
respect of all shares which they are or may be entitled to purchase pursuant
thereto and hereto.
5.2 COMPANY MAY PURCHASE
The Company may from time to time offer to purchase and purchase, for
cancellation only, any Warrants in such manner, from such persons and on such
terms and conditions as it determines.
<PAGE>
-8-
ARTICLE 6
WAIVER OF CERTAIN RIGHTS
6.1 IMMUNITY OF SHAREHOLDERS, ETC.
The Warrant Holder, as part of the consideration for the issue of the
Warrants, waives and releases and will not have any right, cause of action or
remedy now or hereafter existing in any jurisdiction against any past, present
or future incorporator, shareholder, director or officer (as such) of the
Company for the issue of shares pursuant to any Warrant or on any covenant,
agreement, representation or warranty by the Company herein contained or in the
Warrant.
ARTICLE 7
MODIFICATION OF TERMS, MERGER, SUCCESSORS
7.1 MODIFICATION OF TERMS AND CONDITIONS FOR CERTAIN PURPOSES
From time to time the Company may, subject to the provisions of these
Terms and Conditions, modify the Terms and Conditions hereof, for the purpose of
correction or rectification of any ambiguities, defective provisions, errors or
omissions herein.
7.2 TRANSFERABILITY
The Warrant and all rights attached to it are not transferable or
assignable.
IN WITNESS WHEREOF SHARON ENERGY LTD. has caused this Warrant to be signed by
its duly authorized officers under its corporate seal, and this Warrant to be
dated as of the date of issuance first above written.
SIGNED BY: COUNTERSIGNED BY:
SHARON ENERGY LTD. MONTREAL TRUST COMPANY
Per: Per:
------------------------------ ------------------------------
Authorized Signatory Authorized Signatory
Per: Per:
------------------------------ ------------------------------
Authorized Signatory Authorized Signatory
Date: Date:
------------------------------ ------------------------------
<PAGE>
-9-
EXERCISE FORM
TO: MONTREAL TRUST COMPANY OF CANADA
The undersigned holder of Class E Warrants hereby exercises the right to
acquire Common Shares without nominal or par value of Sharon Energy Ltd. (or
such number of other securities or property to which such Warrants entitle
the undersigned in lieu thereof or in addition thereto under the provisions
set forth in the Class E Warrant Certificate) according to the terms set
forth in the Class E Warrant Certificate.
Such securities or property are to be issued as follows:
NAME:
ADDRESS IN FULL:
The undersigned acknowledges that Warrants and the Common Shares have not been
registered with the United States Securities and Exchange Commission under the
United States Securities Act of 1933 (the "U.S. Act"), as amended, or under the
securities laws of any state of the United States, and may not be sold or
otherwise transferred in the United States or its territories or possessions or
to a citizen, resident or national of the United States during the 90 day period
commencing on the date of issuance of the Warrants in accordance with Regulation
S or unless such securities are registered under the U.S. Act or pursuant to an
exemption from the U.S. Act.
The undersigned further acknowledges that the certificates representing the
Common Shares issuable hereunder shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A HOLD
PERIOD WHICH EXPIRES AT MIDNIGHT ON JULY 4, 1998, AND MAY NOT BE
TRADED IN BRITISH COLUMBIA UNTIL THE EXPIRY OF THE HOLD PERIOD EXCEPT
AS PERMITTED BY THE SECURITIES ACT (BRITISH COLUMBIA) AND THE
REGULATIONS MADE THEREUNDER.
DATED this day of , 19 .
-------- ------------------- ---
- --------------------------
SIGNATURE GUARANTEED SIGNATURE
(BY A CANADIAN SCHEDULE "A" CHARTERED
BANK, TRUST COMPANY OR A MEMBER OF (PRINT FULL NAME)
AN ACCEPTABLE MEDALLION GUARANTEE
PROGRAM)
(PRINT FULL ADDRESS)
<PAGE>
-10-
INSTRUCTIONS:
The registered holder may exercise his right to acquire Common Shares by
completing the above form, surrendering this Warrant Certificate and paying the
Exercise Price to Montreal Trust Company of Canada at its principal office in
Vancouver, British Columbia. For the protection of the holder, it would be
prudent to register if forwarding by mail. Certificates for Common Shares will
be delivered or mailed as soon as practicable after the exercise of the
Warrants. The rights of the registered holder cease if the Warrants are not
exercised prior to 4:30 p.m. (Vancouver time) on the Expiry Date. If any of the
Common Shares subscribed for are to be issued to a person or persons other than
the registered holder, the signature of the registered holder must be guaranteed
by a Canadian Schedule "A" major chartered bank, trust company or by a member of
an acceptable Medallion Guarantee Program.
* Please Note - Signature guarantees are not accepted from treasury branches or
credit unions unless they are members of the Stamp Medallion Program.
** Please Note - In the United States of America, signature guarantees must be
done by members of the Medallion Signature Guarantee Program only.
<PAGE>
-1-
EXHIBIT 10-vi - FORM OF "F" WARRANTS
The share purchase warrant represented by this certificate and the common
shares which may be obtained on exercise thereof are subject to a hold period
and may not be traded in British Columbia until March 28, 1998 except as
permitted by the SECURITIES ACT (British Columbia) and its regulations.
WARRANT CERTIFICATE
THIS WARRANT WILL BE VOID AND OF NO VALUE
UNLESS EXERCISED WITHIN THE LIMITS
HEREIN PROVIDED
THIS WARRANT IS NOT TRANSFERABLE
SHARON ENERGY LTD.
(Incorporated under the laws of British Columbia)
Right to Purchase
480,000 Common Shares
WARRANT FOR PURCHASE OF COMMON SHARES
THIS IS T0 CERTIFY THAT, for value received, HUMBOLDT CAPITAL CORPORATION, of
1760 - 633 Sixth Avenue SW, Calgary, Alberta, (hereinafter called the
"Holder") is entitled to subscribe for and purchase 480,000 fully paid and
non-assessable common shares ("Common Shares") in the capital of Sharon
Energy Ltd. (hereinafter called the "Company") at any time prior to 4:30 p.m.
(Vancouver Time) on March 27, 1999 at the price of $0.25 per share upon the
terms and conditions hereinafter set forth.
The rights represented by this Warrant may be exercised by the Holder hereof,
in whole or in part (but not as to a fractional share) by surrender of this
Warrant (properly endorsed if required) at the office of the Company's
Registrar and Transfer Agent, Montreal Trust Company of Canada, of 510 Burrard
Street, Vancouver, British Columbia, together with a certified cheque payable
to or to the order of the Company in payment of the purchase price of the
number of Common Shares subscribed for.
In the event of any exercise of the rights represented by this Warrant,
certificates for the Common Shares so purchased shall be delivered to the
Holder hereof within a reasonable time, not exceeding ____ ten days after
________ the rights represented by this Warrant shall have been so exercised,
and, unless this Warrant has expired, a new Warrant representing the number
of Common Shares, if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such
time.
The Company covenants and agrees that all Common Shares which may be issued
upon the exercise of the rights represented by this Warrant will, upon
issuance, be fully paid and non-assessable and free of all liens, charges and
encumbrances. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved, a sufficient number
of Common Shares to provide for the exercise of the rights represented by
this Warrant.
THE FOLLOWING ARE THE TERMS AND CONDITIONS REFERRED TO IN THIS WARRANT:
1. In case the Company shall at any time subdivide its outstanding common
shares into a greater number of shares, the Warrant purchase price
shall be proportionately reduced and the number of subdivided Common
Shares entitled to be purchased proportionately increased, and
conversely, in case the outstanding common shares of the Company shall
be combined into a smaller number of shares, the Warrant purchase
price shall
<PAGE>
-2-
be proportionately increased and the number of combined Common Shares
entitled to be purchased hereunder shall be proportionately decreased.
If any capital reorganization, reclassification or consolidation of
the capital stock of the Company, or the merger or amalgamation of the
Company with another corporation shall be effected, then as a
condition of such reorganization, reclassification, consolidation,
merger or amalgamation, adequate provision shall be made whereby the
Holder hereof shall have the right to purchase and receive upon the
basis and upon the terms and conditions specified in this Warrant and
in lieu of the Common Shares immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby, such
shares of stock, or other securities as may be issued with respect to
or in exchange for such number of outstanding Common Shares equal to
the number of Common Shares purchasable and receivable upon the
exercise of this Warrant had such reorganization, reclassification,
consolidation, merger or amalgamation not taken place. The Company
shall not effect any merger or amalgamation unless prior to or
simultaneously with the consummation thereof the successor corporation
(if other than the Company) resulting from such merger or amalgamation
shall assume by written instrument executed and mailed or delivered to
the Holder of this Warrant the obligation to deliver to such Holder
such shares of stock or securities in accordance with the foregoing
provisions, such Holder may be entitled to purchase.
2. In case at any time:
(a) the Company shall pay any dividend payable in stock upon its
common shares or make any distribution to the Holders of its
Common Shares;
(b) the Company shall offer for subscription pro rata to the Holders
of its Common Shares any additional shares of stock of any class
or other rights;
(c) there shall be any capital reorganization, or reclassification of
the capital stock of the Company, or consolidation or merger or
amalgamation of the Company with, or sale of all or substantially
all of its assets to, another corporation; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, and in any one or more of such cases, the Company shall give to
the Holder of this Warrant, at least twenty days' prior written notice
of the date on which the books of the Company shall close or a record
shall be taken for such dividend, distribution or subscription rights,
or for determining rights to vote with respect to such reorganization,
reclassification, consolidation, merger, or amalgamation, dissolution,
liquidation or winding-up and in the case of any such reorganization,
reclassification, consolidation, merger, amalgamation, sale,
dissolution, liquidation or winding-up, at least twenty days' prior
written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause, shall also
<PAGE>
-3-
specify, in the case of any such dividend, distribution or
subscription rights, the date on which the Holders of Common Shares
shall be entitled thereto, and such notice in accordance with the
foregoing shall also specify the date on which the Holders of
Common Shares shall be entitled to exchange their Common Shares for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, amalgamation, sale,
dissolution, liquidation or winding-up as the case may be. Each
such written notice shall be given by first class mail, registered
postage prepaid, addressed to the Holder of this Warrant at the
address of such Holder, as shown on the books of the Company.
3. As used herein, the term "Common Shares" shall mean and include the
Company's presently authorized common shares and shall also include
any capital stock of any class of the Company hereafter authorized
which shall not be limited to a fixed sum or percentage in respect of
the rights of the Holders thereof to participate in dividends and in
the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding-up of the Company.
4. This Warrant shall not entitle the Holder hereof to any rights as a
shareholder of the Company, including without limitation, voting
rights.
5. This Warrant and all rights hereunder are not transferable.
6. This Warrant is exchangeable, upon the surrender hereof by the Holder
hereof at the registered office of the Company, for new Warrants of
like tenor representing in the aggregate the right to subscribe for
and purchase the number of shares which may be subscribed for and
purchased hereunder, each of such new Warrants to represent the right
to subscribe for and purchase such number of Common Shares as shall be
designated by such Holder hereof at the time of such surrender.
IN WITNESS WHEREOF Sharon Energy Ltd. has caused this Warrant to be signed by
its duly authorized officers under its corporate seal, and this Warrant to be
dated March 27, 1998.
SHARON ENERGY LTD.
Per:
------------------------------------
Authorized Signatory
COUNTERSIGNED BY:
MONTREAL TRUST COMPANY OF CANADA
Per:
------------
<PAGE>
-4-
DATE:
------------
<PAGE>
- ------------------------------------------------------------------------------
EXHIBIT 10-vii - HUMBOLDT CAPITAL(RELATED PARTY) LOAN AGREEMENT
DATED MARCH 27, 1998
LOAN AGREEMENT
- ------------------------------------------------------------------------------
THIS LOAN AGREEMENT is made as of March 27, 1998.
BETWEEN:
SHARON ENERGY LTD., a company incorporated under the laws
of British Columbia, of 220 - 5995 Greenwood Plaza
Boulevard, Orchard Place One, Englewood, Colorado, U.S.A.
80111;
(the "Borrower")
AND:
HUMBOLDT CAPITAL CORPORATION, a body corporate, having an
office at #1760, 633 - Sixth Avenue SW, Calgary, AB T2P
2Y5;
(the "Lender")
WHEREAS the Borrower desires to borrow and the Lender is willing to lend to
the Borrower $300,000 upon and subject to the terms and conditions
hereinafter set forth;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises and
the mutual covenants and agreements hereinafter set forth, the parties hereto
agree as follows:
ARTICLE ONE
DEFINITIONS
1. Where used in this Agreement the following words and phrases shall have the
following meaning:
1.1 "Agreement" means this Agreement and the Schedules hereto, as at any
time amended or modified and in effect;
1.2 "Event of Default" means any event specified in paragraph 7.1;
1.3 "Loan" means the loan by the Lender to the Borrower established
pursuant to paragraph 3.1;
1.4 "Maturity Date" means March 27, 1999;
<PAGE>
-2-
1.5 "Note" means the promissory note to be made by the Borrower to the
Lender as evidence of the Loan which shall substantially be in the
form set forth in Schedule "A".
ARTICLE TWO
INTERPRETATION
2.1 GOVERNING LAW
This Agreement shall in all respects be construed in accordance with and
governed by the laws of the Province of British Columbia.
2.2 SEVERABILITY
If any one or more of the provisions contained in this Agreement should be
invalid, illegal or unenforceable in any respect the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.
2.3 PARTIES IN INTEREST
This Agreement shall enure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns.
2.4 HEADINGS AND MARGINAL REFERENCES
The division of this Agreement into articles, paragraphs, subparagraphs and
other subdivisions and the insertion of headings are for convenience of
reference only and shall not affect the construction or interpretation of this
Agreement.
2.5 CURRENCY
All statements of, or references to, dollar amounts in this Agreement mean
lawful currency of Canada.
ARTICLE THREE
THE LOAN
3.1 ESTABLISHMENT OF THE LOAN
The Lender agrees, on the terms and conditions set forth in this Agreement, to
advance by way of a loan to the Borrower the amount of $300,000.
3.2 EVIDENCE OF INDEBTEDNESS
Indebtedness of the Borrower to the Lender in respect of the Loan shall be
evidenced by the Note, which shall be made by the Borrower to the Lender at the
time of executing the Agreement.
3.3 INTEREST
The Borrower shall pay interest to the Lender both before as well as after the
Maturity Date on the principal advanced under the Loan from the date of
disbursement at an annual rate of 10%. Interest shall be calculated monthly in
arrears and shall be payable to the Lender on the Maturity Date of the Loan.
<PAGE>
-3-
3.4 REPAYMENT OF THE LOAN
The Borrower shall repay the Loan on the Maturity Date.
3.5 PREPAYMENT OF THE LOAN
The Borrower may prepay the Loan in whole or in part at any time, without notice
or penalty.
ARTICLE FOUR
FURTHER CONSIDERATION
4. As further consideration for providing the Loan, subject to Vancouver Stock
Exchange approval, the Borrower agrees to issue a warrant to the Lender for the
acquisition of 480,000 common shares of the Borrower at $0.25 per share, which
warrant shall be exercisable by the Lender until March 27, 1999.
ARTICLE FIVE
REPRESENTATIONS AND WARRANTIES
5.1 REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as hereinafter set forth:
5.1.1 the Borrower is a corporation duly incorporated, validly existing
and in good standing under the laws of British Columbia;
5.1.2 the Borrower has all requisite corporate power and authority to
enter into this Agreement and to carry out the obligations
contemplated herein and therein;
5.1.3 the Vancouver Stock Exchange has granted approval to the Borrower
to enter into this Agreement and to carry out the obligations
contemplated herein and therein;
5.1.3 this Agreement and the Note have been duly and validly
authorized, executed and delivered by the Borrower and are valid
obligations of it; and
5.1.4 no Event of Default and no event which, with the giving of notice
or lapse of time would become an Event of Default has occurred or
is continuing.
5.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES
All representations and warranties made herein shall survive the delivery of
this Agreement to the Lender and no investigation at any time made by or on
behalf of the Lender shall diminish in any respect whatsoever its rights to rely
thereon. All statements contained in any certificate or other instrument
delivered by or on behalf of the Borrower under or pursuant to this Agreement
shall constitute representations and warranties made by the Borrower hereunder.
<PAGE>
-4-
ARTICLE SIX
COVENANTS OF THE BORROWER
6. The Borrower covenants and agrees with the Lender that at all times during
the currency of this Agreement it will:
6.1 pay the principal sum, interest and all other monies required to be
paid to the Lender pursuant to this Agreement in the manner set forth
herein;
6.2 duly observe and perform each and every of its covenants and
agreements set forth in this Agreement; and
6.3 provide the Lender with immediate notice of any Event of Default.
ARTICLE SEVEN
EVENT OF DEFAULT
7.1 DEFINITION OF EVENT OF DEFAULT
The principal balance of the Loan and any other money owing to the Lender under
this Agreement shall immediately become payable, unless otherwise waived in
writing by the Lender, in any of the following events:
7.1.1 if the Borrower shall default in any payment when the same is due
under this Agreement;
7.1.2 if the Borrower shall become insolvent or shall make a general
assignment for the benefit of its creditors, or if an order be
made or an effective resolution be passed for the winding-up,
merger or amalgamation of the Borrower or if the Borrower shall
be declared bankrupt or if a custodian or receiver be appointed
for the Borrower under the BANKRUPTCY ACT, or if a compromise
or arrangement is proposed by the Borrower to its creditors or
any class of its creditors, or if a receiver or other officer
with like powers shall be appointed for the Borrower; and
7.1.3 if the Borrower defaults in observing or performing any other
covenant or agreement of this Agreement on its part to be
observed or performed and such default shall have continued for
a period of seven (7) days after notice in writing has been given
by the Lender to the Borrower specifying such default.
ARTICLE EIGHT
GENERAL
8.1 WAIVER OR MODIFICATION
No failure or delay on the part of the Lender in exercising any power or right
hereunder shall operate as a waiver thereof nor shall any single or partial
exercise of such right or power preclude any other right or power hereunder. No
amendment, modification or waiver of any condition of this Agreement or consent
to any departure by the Borrower therefrom shall in any event be effective
unless the same shall be in writing signed by the Lender. No notice to or
demand on the Borrower shall in any case entitle the Borrower to any other or
<PAGE>
-5-
further notice or demand in similar or other circumstances unless specifically
provided for in this Agreement. Time shall be of the essence hereof.
8.2 FURTHER ASSURANCES
The parties hereto will do, execute and deliver or will cause to be done,
executed and delivered all such further acts, documents and things as may be
reasonably required for the purpose of giving effect to this Agreement.
8.3 ASSIGNMENT
The Borrower shall not assign this Agreement or its interest herein or any part
hereof except with the prior written consent of the Lender.
8.4 NOTICES
Any notice, demand or other document required or permitted to be given under the
provisions of this Agreement shall be in writing and may be given by delivering
same or mailing same by registered mail or sending same by telegram, telex,
telecopier, telecommunication device or other similar form of communication
addressed as set forth herein. Any notice, demand or document shall, if
delivered, be deemed to have been given or made at the time of delivery; if
mailed by registered mail and properly addressed be deemed to have been given or
made on the third day following the day on which it was so mailed, provided that
if at the time of mailing or between the time of mailing and the actual receipt
of the notice, a mail strike, slowdown or other labour dispute which might
affect the delivery of such notice by Canada Post occurs, then such notice shall
be only effective if actually delivered; and if sent by telegraph, telex,
telecopier, telecommunication device or other similar form of communication, be
deemed to have been given or made on the day following the day on which it was
sent. Any party may give written notice of change of address in the same
manner, in which event such notice shall thereafter be given to it as above
provided at such changed address.
8.5 AMENDMENTS
Neither this Agreement nor any provision hereof may be amended, waived,
discharged or terminated orally, but only by instrument in writing signed by the
party against whom enforcement of the amendment, waiver, discharge or
termination is sought.
IN WITNESS WHEREOF the Lender and the Borrower have executed this Agreement
under their corporate seals and the hands of their proper officers in that
behalf as of the day and year first above written.
HUMBOLDT CAPITAL CORPORATION
Per:
-------------------------------
Authorized Signatory
SHARON ENERGY LTD.
Per:
-------------------------------
Authorized Signatory
<PAGE>
-6-
SCHEDULE "A"
PROMISSORY NOTE
CDN$300,000 March 27, 1998
FOR VALUE RECEIVED, Sharon Energy Ltd. (the "COMPANY"), with offices at 220
- -5995 Greenwood Plaza Boulevard, Orchard Place One, Englewood, Colorado, DOES
HEREBY PROMISE TO PAY, ON MARCH 27, 1999, to the order of HUMBOLDT CAPITAL
CORPORATION, at #1760, 633 - Sixth Avenue SW, Calgary, Alberta, the sum of
CDN$300,000 as well as the interest accrued thereon at an annual rate of
interest of 10%. The Company does hereby waive presentment for payment,
notice of protest and notice of non-payment.
SHARON ENERGY LTD.
Per:
-------------------------------
Authorized Signatory
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EXHIBIT 10-viii - ELBRIDGE FIELD ACQUISITION PURCHASE/SALE
AGREEMENT EFFECTIVE MAY 15, 1998
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT dated this 27th day of February, 1998, is between Dunlap Oil
Company, ("Seller"), with offices at 34 Brookside Drive, Terre Haute, Indiana
and Sharon Resources, Inc., ("Buyer"), with offices at 5995 Greenwood Plaza
Blvd., Suite 220, Englewood, Colorado 80111.
WHEREAS, Seller desires to sell, and Buyer desires to purchase, upon and subject
to the terms and conditions hereinafter set forth, all of Seller's right, title
and interest in and to the following:
(i) All of Seller's interest in, to and under oil and gas leases,
leasehold interests, mineral fee interests, rights and interests
attributable or allocable to the oil and gas leases or leasehold
interests by virtue of pooling, unitization, communitization, and
operating agreements, licenses, permits and other agreements, all
more particularly described on Exhibit "A" hereto, together with
identical undivided interests in and to all the property and rights
incident thereto (collectively the "Leases"), including, but not
limited to, all rights in, to and under all agreements, product
purchase and sale contracts, including any and all past, present
and future take-or-pay claims, leases, permits, rights-of-way,
easements, licenses, farmouts, farmins, options, orders and other
contracts or agreements of a similar nature in any way relating
thereto;
(ii) All of Seller's interest in and to all of the wells, equipment,
materials and other personal property, fixtures and improvements on
the Leases as of the Effective Time, appurtenant thereto or used or
obtained in connection with the Leases or with the production,
treatment, sale or disposal of hydrocarbons or waste produced
therefrom or attributable thereto, and all other appurtenances
thereunto belonging (the "Equipment");
(iii) All other leasehold interests, royalty and overriding royalty
interests owned by Seller in, to and under the Leases or
attributable to production therefrom as of the Closing Date (as
hereafter defined);
(iv) All unitization, communitization, pooling and operating agreements,
and the units created thereby which relate to the Leases or
interests therein described in Exhibit "A" or which relate to any
units or wells located on the Leases, including any and all units
formed under orders,
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regulations, rules and other official acts of the governmental
authority having jurisdiction, together with any right, title and
interest created thereby in the Leases;
(v) All rights to claim revenues or gas resulting from any
underproduction attributable to Seller's interest in the Leases;
and
(vi) All lease files, land files, well files, oil and gas sales
contracts files, gas processing files, division order files,
abstracts, title opinions, and all other books, files, maps, logs
and records, and all rights thereto, of Seller related to any of
the property purchased hereunder (the "Records").
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All of Seller's interest in the above-mentioned assets is herein collectively
referred to as the "Interests".
(vii) Seller shall reserve in the Assignment and Bill of Sale, in the
form as set forth in Exhibit "B", an overriding royalty in the
Leases equal to 1/32nd of 8/8ths (3.125%). In the event Buyer forms
a governmentally approved Gas Storage Facility which incorporates
any of the Leases, or adjacent thereto, including but not limited
to the "Nevin Dome", Seller shall be entitled to 1/32nd of 8/8ths
(3.125%) of the revenue stream generated by the operation of the
Gas Storage Facility.
NOW, THEREFORE, in consideration of the above recitals and of the covenants and
agreements herein contained, Seller and Buyer agree as follows:
1. PURCHASE AND SALE. Subject to and upon all of the terms and conditions
herein set forth, Seller shall sell, transfer, assign, convey and deliver
the Interests to Buyer, and Buyer shall purchase, receive, pay for and
accept the Interests from Seller, effective on or before May 15, 1998, 7
a.m. local time (the "Effective Time"). Except as otherwise specifically
provided in this Agreement, all costs, expenses and obligations relating to
the Interests which were incurred or accrue prior to the Effective Time
shall be paid and discharged by Seller; and all costs, expenses and
obligations relating to the Interests which were incurred or accrue after
the Effective Time shall be paid and discharged by Buyer.
2. PURCHASE PRICE.
(a) The purchase price for the Interests shall be NINTY THOUSAND
DOLLARS ($90,000.00)(the "Base Purchase Price"), subject to any
applicable purchase price adjustment as provided for herein.
(b) Seller and Buyer agree that the Base Purchase Price shall be
allocated among the Interests as set forth on Exhibit "A-1" (the
"Allocated Value") for the purpose of (i) establishing a basis for
certain taxes, (ii) giving notices of value to the owners of any
preferential rights to purchase the Interests, and (iii)
determining the value of a Title Defect or an Environment Defect
and handling those instances in which the Base Purchase Price is to
be adjusted.
3. TITLE DEFECTS. As used herein, the term:
(a) "Defensible Title" shall mean, as to the Interests, such title held
by Seller, that, subject to and except for Permitted Encumbrances
(as hereinafter defined);
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(i) Entitles Seller to receive not less than the "Net Revenue
Interest" as set forth in Exhibit "A-1" of all oil, gas and
associated liquid and gaseous hydrocarbons produced, saved
and marketed from the Interests;
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(ii) Obligates Seller to bear costs and expenses relating to the
maintenance, development, and operation of all wells located
on the Interests in an amount not greater than the "Working
Interest" set forth in Exhibit "A-1"; and
(iii) Is free and clear of any and all encumbrances, liens and
defects.
(b) The term "Permitted Encumbrances", as used herein, shall mean:
(i) Lessors' royalties, overriding royalties, and reversionary
interests if the net cumulative effect of such burdens does
not operate to reduce the Net Revenue Interest of any
Interest to less than the Net Revenue Interest set forth in
Exhibit "A-1";
(ii) Sales contracts covering oil, gas or associated liquid or
gaseous hydrocarbons;
(iii) Preferential rights to purchase and required third party
consents to assignments and similar agreements with respect
to which (x) waivers or consents are obtained from the
appropriate parties, or (y) required notices have been given
to the holders of such rights and the appropriate time
period for asserting such rights has expired without an
exercise of such rights;
(iv) Liens for taxes or assessments not due or not delinquent on
the Closing Date;
(v) All rights to consent by, required notices to, filings with,
or other actions by governmental agencies in connection with
the sale or conveyance of oil and gas leases or interests
therein or sale of production therefrom if the same are
prudently obtained subsequent to such sale or conveyance;
(vi) Easements, rights-of-way, servitudes, permits, surface
leases, and other rights in respect of surface operations on
or over any of the Interests which do not operate to
interfere with current or proposed operations on the
Interests;
(vii) Liens of operators relating to obligations not yet due or
pursuant to which Seller is not in default, and
materialmen's, mechanic's, repairmen's, or other similar
liens or charges arising in the ordinary course of business
incidental to construction,
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maintenance or operation of the Interests that are not such
as to interfere with the operation, value or use of the
Interests; and
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(viii) Such Title Defects or other defects waived by Buyer pursuant
to the terms of this Agreement.
(c) The term "Title Defect", as used herein, shall mean:
(i) Any encumbrance, encroachment, irregularity, defect in or
objection to Seller's title to the Interests (expressly
excluding Permitted Encumbrances) that renders Seller's
title to the Interests less than Defensible Title;
(ii) Seller is in default under some material provision of a
lease, farmout agreement or other contract or agreement
affecting the Interests which could (x) interfere with the
operation, value or use thereof, (y) prevent Seller from
receiving the proceeds of production attributable to
Seller's interest therein, or (z) result in cancellation of
Seller's interest therein;
(iii) Seller is overproduced with respect to any Interest as of
the Effective Time; or
(iv) Any provision or obligation affecting the Interests
contained in any contract or agreement disclosed in the
Records which is not customary to currently accepted oil and
gas industry standards and (x) requires an extraordinary
expenditure in connection with the acquisition, exploration,
development or operation of the Interests or (y) would
materially diminish the Net Revenue Interest set forth on
Exhibit "A-1", or materially increase the Working Interest
set forth on Exhibit "A-1", or (z) would otherwise have a
material and adverse affect on Buyer's ownership and/or
operation of the Interests.
4. PURCHASE PRICE ADJUSTMENTS FOR TITLE DEFECTS. Buyer may, by delivery of
written notice to Seller of the existence of a Title Defect, request
reduction of the purchase price for the Interest affected. Any such notice
by Buyer shall include appropriate evidence to substantiate its position
and shall be delivered to Seller on or before May 10, 1998. In the event
any such notice is not timely delivered, Buyer shall thereafter have no
right to claim a Title Defect; provided, however, Buyer shall retain its
right to claim breaches of the special warranty of title contained in
Section 22 hereof and the Assignment and Bill of Sale delivered at Closing.
Seller shall have until May 15, 1998, to cure any Title Defects. In the
event Seller is unable to cure a Title Defect, Buyer and Seller shall meet
and use their best efforts to agree on the validity of the claim and the
amount of any required purchase price adjustment utilizing the Allocated
Value for the Interest as set forth on Exhibit "A-1". In determining any
required purchase price adjustment, it is the intent of the parties to
include,
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when possible, only that portion of the Interest adversely
affected by the Title Defect. If the Allocated Value of the affected
Interest cannot be determined directly from Exhibit "A-1" because the Title
Defect is included within, but does not totally comprise, the Interest to
which the Allocated Value relates, Buyer and Seller shall attempt to agree
on a proportionate reduction of the Allocated Value. In the event the
parties cannot mutually agree on the amount of a purchase price adjustment,
Buyer shall have the right to (i) accept the Interest with the Title
Defect, or (ii) terminate this Agreement as to the Interest affected by the
Title Defect and receive a purchase price adjustment equal to the Allocated
Value for the affected Interest (iii) Buyer and Seller shall have the right
to terminate this Agreement in its entirety.
5. CONDITIONS OF CLOSING BY BUYER. The obligation of Buyer to close is
subject to the satisfaction of the following conditions:
(a) Seller shall have obtained and delivered to Buyer all prerequisite
waivers of preferential rights of purchase and all necessary
consents for transfer of the Interests, or Buyer and Seller shall
have adjusted the purchase price in accordance with the provisions
of Section 4;
(b) Buyer and Seller shall have adjusted the Base Purchase Price for
Environmental Defects in accordance with the provisions of Section
13 hereof;
(d) The representations of Seller contained in Section 7 shall be true
on and as of the Closing Date, and Seller shall have delivered to
Buyer at the Closing a certificate signed on its behalf to such
effect;
(e) Seller shall have performed in all material respects all of its
covenants and agreements contained in this Agreement; and
(f) Prior to Closing, there shall not have been a material adverse
change in the Interests, taken as a whole, excepting depletion due
to normal production and depreciation of equipment through ordinary
wear and tear.
6. CONDITIONS OF CLOSING BY SELLER. The obligation of Seller to close is
subject to the satisfaction of the following conditions:
(a) Transactions contemplated by, this Agreement by Buyer have been
duly authorized by all necessary action on the part of Buyer; and
(iii) this Agreement has been duly executed and delivered by Buyer
and constitutes a legal, valid and binding obligation of Buyer and
is
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enforceable against Buyer in accordance with its terms, except
that such enforcement may be subject to bankruptcy, insolvency,
moratorium or similar laws affecting creditors' rights; and
(b) The representations of Buyer contained in Section 8 hereof are true
on and as of the Closing Date, and Buyer shall have delivered to
Seller at the Closing a certificate signed on its behalf to such
effect.
(c) Confirmation by the appropriate agency of the State of Illinois of
transfer of well bonds from Seller to Buyer or evidence acceptable
to Seller that Buyer has acquired new well bonds acceptable to the
State.
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7. REPRESENTATIONS OF SELLER. Seller represents to Buyer that:
(a) Seller is a corporation validly existing and in good standing under
the laws of the State of Indiana and is duly qualified to own its
properties and assets and to carry on its business as now being
conducted;
(b) Seller has the requisite power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by Seller and
the consummation of the transactions contemplated hereby have been
duly authorized;
(c) This Agreement has been duly executed and delivered by Seller and
constitutes the valid and binding obligation of Seller, enforceable
against it in accordance with the terms hereof, subject to the
effects of bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting creditors' rights. No other act, approval
or proceeding on the part of Seller or any other party is required
to authorize the execution and delivery of this Agreement by Seller
or the consummation of the transactions contemplated hereby;
(d) This Agreement, and the execution and delivery hereof by Seller,
does not and the consummation of the transactions contemplated
hereby will not (i) conflict with or result in a breach of the
charter or bylaws of Seller or any other governing documents of
Seller, (ii) violate, or conflict with, or constitute a default
under, or result in the creation or imposition of any security
interest, lien or encumbrance upon any property or assets of Seller
under any mortgage, indenture or agreement to which it is a party
or by which the Interests are bound, which violation, conflict or
default might adversely affect the ability of Seller to perform its
obligation under this Agreement, or (iii) violate any statute or
law or any judgment, decree, order, writ, injunction, regulation or
rule of any court or governmental authority, which violation might
adversely affect the ability of Seller to perform its obligations
under this Agreement;
(e) Seller has not been advised directly or indirectly by any owner or
lessor under any Leases of any material default under any lease or
agreement which has not been remedied or waived, or of any
requirements or demands which have not been satisfied;
(f) All royalties, rentals and other payments due under the Leases have
been properly and timely paid, except for those amounts in
suspense, and all conditions necessary to keep the Leases in force
have been duly performed;
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(g) Seller is not obligated to deliver hydrocarbons produced from the
Interests at some future time without receiving full payment
therefor;
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(h) No overbalance of gas deliveries exists with regard to any
producing wells included in the Interests as to the interest of
Seller;
(i) No entity has any call upon, option to purchase or similar rights
under any agreement with respect to the Interests or to the
production therefrom;
(j) There are no actions, suits, proceedings or governmental
investigations or inquiries pending or threatened, against Seller
or the Interests which might delay, prevent or materially hinder
the consummation of the transactions contemplated hereby or
materially adversely affect the title to or value of any of the
Interests;
(k) Seller possesses all licenses, permits, certificates, orders,
approvals and authorizations necessary to own the Interests and to
carry on its business as now being conducted;
(l) Seller has complied with all laws, ordinances, rules, regulations
and orders applicable to the Interests necessary for the conduct of
legal operations of the Interests;
(m) Seller is unaware of any Title Defects;
(n) All ad valorem, property, production, severance, excise and similar
taxes and assessments based on or measured by the ownership of
property or the production of hydrocarbons or the receipt of
proceeds therefrom on the Interests that have become due and
payable have been properly and timely paid;
(o) Seller has incurred no liability, contingent or otherwise, for
brokers' or finders' fees relating to the transactions contemplated
by this Agreement for which Buyer shall have any responsibility
whatsoever; and
(p) Seller is unaware of any material inaccuracies in information
furnished relating to the interests, and has not knowingly withheld
material information, but does not warrant completeness or
accuracy.
8. REPRESENTATIONS OF BUYER. Buyer represents and warrants to Seller that:
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(a) Sharon Resources, Inc. is a corporation validly existing and in
good standing under the laws of the State of Colorado and is duly
qualified to own its properties and assets and to carry on its
business as now being conducted;
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(b) Buyer has the requisite power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by Buyer and
the consummation of the transactions contemplated hereby have been
duly authorized;
(c) This Agreement has been duly executed and delivered by Buyer and
constitutes the valid and binding obligation of Buyer, enforceable
against it in accordance with the terms hereof, subject to the
effects of bankruptcy, insolvency, reorganization, moratorium, and
similar laws affecting creditors' rights. No other act, approval
or proceeding on the part of Buyer or any other party is required
to authorize the execution and delivery of this Agreement by Buyer
or the consummation of the transactions contemplated hereby;
(d) This Agreement, and the execution and delivery hereof by Buyer,
does not and the consummation of the transactions contemplated
hereby will not (i) conflict with or result in a breach of the
charter or bylaws of Buyer or any other governing documents of
Buyer, or (ii) violate any statute or law or any judgment, decree,
order, writ, injunction, regulation or rule of any court or
governmental authority, which violation might adversely affect the
ability of Buyer to perform its obligations under this Agreement;
(e) Buyer possesses all required governmental licenses, permits,
certificates, orders and authorizations necessary to own the
Interests; and
(f) Buyer has incurred no liability, contingent or otherwise, for
brokers' or finders' fees relating to the transactions contemplated
by this Agreement for which Seller shall have any responsibility
whatsoever.
(g) Buyer has relied upon its own evaluations of written records and
other sources, which Buyer deems reliable, and has not, in
reviewing and assessing the interests, relied on any oral
representations of Seller or its agents or employees.
9. COVENANTS OF SELLER. Seller covenants and agrees that from and after the
Effective Time and until the Closing Date:
(a) SALES. Seller will not sell, transfer, assign, convey or otherwise
dispose of any Interests other than (i) oil, gas and other
hydrocarbons produced, saved and sold in the ordinary course of
business, and (ii) personal property and equipment which is
replaced with property and
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equipment of comparable or better value and utility in the ordinary
and routine maintenance and operation of the Interests;
(b) ENCUMBRANCES. Seller will not create or permit the creation of any
lien, security interest or encumbrance on any Interest, the oil or
gas produced therefrom, or the proceeds thereof;
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(c) OPERATION OF INTERESTS. Seller agrees to:
(i) Cause the Interests to be developed, maintained and operated
in a prudent, good and workmanlike manner, maintain
insurance now in force with respect to the Interests, and
pay or cause to be paid all costs and expenses in connection
therewith;
(ii) Not participate in the drilling of any new well on the
Interests or fail to participate in operations on the
Interests proposed by other parties, without the advance
written consent of Buyer, which consent or non-consent must
be given by Buyer within ten (10) days of the notice from
Seller;
(iii) Maintain and keep the Leases in full force and effect;
(iv) Perform and comply with all of its obligations under
agreements relating to or affecting the Interests;
(v) Take no action which will cause any purchaser of production
to place in suspense any payment for production sold;
(vi) Not enter into or assume any contract, agreement or
commitment which is not in the ordinary course of business
as theretofore conducted or which involves payments,
receipts or potential liabilities with respect to the
Interests without the written approval of the Buyer; and
(vii) Carry on its business with respect to the Interests in
substantially the same manner as it has heretofore, not
introducing any new method of management, operation or
accounting with respect to the Interests;
(d) CONTRACTS AND AGREEMENTS. Seller will not:
(i) Grant any preferential right to purchase or similar right or
agree to require the consent of any party to the transfer
and assignment of the Interests to Buyer;
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(ii) Enter into any gas sales contract or new crude oil sales or
supply contract with respect to the Interests which is not
terminable without penalty or detriment on notice of sixty
(60) days or less;
(iii) Incur or agree to incur any contractual obligation or
liability, absolute or contingent, with respect to the
Interests;
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(iv) Enter into any transaction the effect of which, considered
as a whole, would be to cause Seller's ownership interest in
any of the Interests to be altered from its ownership
interest as of the Effective Time; or
(v) Enter into any settlement of or relinquish any outstanding
receivables (including, without limitation, the right to
receive any retroactive price adjustments, take-or-pay
monies, FERC mandated refunds, accounting adjustments, tax
adjustments, and Minerals Management Service refunds);
(e) CONSENTS. If any approval or consent by any federal, state or
local government authority is required to vest good and Defensible
Title to any of the Interests in Buyer at Closing, Seller agrees to
exercise its best efforts, as reasonably requested by Buyer, to
obtain all such required approvals or consents. Seller will
execute appropriate transfer orders covering the Interests
submitted to it for execution designating Buyer as the appropriate
party for payment, effective as of the Effective Time;
(f) NOTICE OF DEFAULTS. Seller will give prompt written notice to
Buyer of any notice of default (or written threat of default,
whether disputed or denied) received or given by Seller under any
instrument or agreement affecting the Interests to which Seller is
a party or by which it or any of the Interests is bound; and
(g) NOTICE OF EVENTS AND PROPOSALS. If Seller becomes aware of
(i) any action or occurrence which reasonably may materially affect
any of the Interests, (ii) any proposal from a third party to
engage in any material transaction with respect to any of the
Interests, or (iii) any suit, action or other proceeding before
any court or governmental agency which relates to the Interests
or which might result in impairment or loss of the Seller's title
to any of the Interests or the value thereof or which might
hinder or impede the operation of the Interests, it will give
prompt written notice to Buyer of such action, occurrence or
proposal.
10. LIABILITIES AND INDEMNITIES OF SELLER. In connection with the sale,
conveyance, transfer, assignment and delivery of the Interests to Buyer,
Buyer shall not assume or become obligated in any way with respect to the
following:
(a) Any cost, expense or obligation relating to the Interests which
accrued prior to the Effective Time unless specifically assumed by
Buyer in Section 11 hereof;
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(b) Any litigation which affects the Interests, whether pending or
threatened, which is based upon omissions, events or occurrences
prior to the Effective Time;
(c) Any federal or state income tax or other tax liability of Seller
arising by reason of the transaction contemplated by this
Agreement;
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(d) Any federal, state, county, municipal, ad valorem, production,
windfall profits or other tax liability attributable to Seller's
ownership or operation of any of the Interests prior to the
Effective Time except as to prorate taxes for the current tax
period;
(e) Any claims arising out of the production or sale of hydrocarbons
from the Interests, or the proper accounting or payment to parties
for their interests therein, prior to the Effective Time; and
(f) Any other claim or demand against, or liability or obligation of
Seller arising from any act or omission whatsoever of Seller, prior
to the Effective Time, whether such claim, demand, liability or
obligation is fixed or contingent, and whether the same arises by
contract, tort or otherwise.
Seller shall, to the fullest extent permitted by law, protect, defend,
indemnify and hold Buyer and its affiliates, including its directors,
officers, employees, agents and representatives of each of them, harmless
from and against any and all claims, losses, damages, costs, expenses,
diminutions in value, suits, causes of action or judgments of any kind or
character with respect to any and all liabilities and obligations or
alleged or threatened liabilities and obligations, including, but not
limited to, any interest, penalty and any attorneys' fees and other costs
and expenses incurred in connection with investigating or defending any
claims or actions, whether or not resulting in any liability, attributable
to or arising out of (i) Seller's ownership or operation of the Interests
prior to the Effective Time, (ii) the breach by Seller of the
representations and warranties contained in Sections 7 and 22 hereof, (iii)
the breach by Seller of the covenants contained in Sections 9, 14 and 22
hereof, and (iv) the sale, conveyance, transfer, assignment and delivery of
the Interests from Seller to Buyer.
11. ASSUMPTION OF OBLIGATIONS AND INDEMNITIES OF BUYER. Buyer shall assume, as
of the Effective Time, all contractual obligations of Seller related to the
Interests which are recorded or were disclosed by Seller to Buyer in the
Records, including without limitation, Seller's obligations under Quit
Claim and Release dated _________ ___, 1998, between Midwestern Gas
Transmission Company and Dunlap Oil, Inc.; provided, however, Buyer shall
not assume any obligation of Seller to pay for another party's debts,
expenses or costs incurred prior to the Effective Time owed to an operator
of an Interest pursuant to the terms of an Operating Agreement applicable
to any of the Interests, or any agreement or obligation claimed as a Title
Defect. Buyer shall, to the fullest extent permitted by law, protect,
defend, indemnify and hold Seller and its directors, officers, employees,
agents and representatives of each of them, harmless from and against any
and all claims, losses, damages, costs, expenses, diminutions in value,
suits, causes of action or judgments of any kind or character with respect
to any and all liabilities and obligations or alleged or threatened
liabilities and obligations, including, but not limited to, any interest,
penalty and any attorneys' fees and other costs and
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expenses incurred in connection with investigating or defending any
claims or actions, whether or not resulting in any liability,
attributable to or arising out of (i) Buyer's ownership or operation of
the Interests subsequent to the Effective Time, (ii) the breach by
Buyer of the representations contained in Section 8 hereof, and (iii)
the breach by Buyer of the covenants contained in Section 14 hereof.
12. ACCESS OF BUYER.
(a) Seller will make available to Buyer for examination and copying any
of the Records as Buyer may reasonably request, including, but not
limited to, engineering, geological, and geophysical data, reports,
maps, electric logs, mud logs, production logs, well records
relating to the Interests, files relating to claims against or
relating to the Interests, if any, and information relating to the
physical condition of the Interests and the land adjoining the
Interests, including, if any, results of any water or soil testing,
NORM and PCB evaluations.
(b) Seller shall permit Buyer and Buyer's authorized representatives to
consult with Seller's employees during reasonable business hours
and to conduct, at Buyer's sole risk and expense, inspections and
inventories of the Interests that are Seller-operated. During such
inspections, Buyer shall have the right to review and conduct tests
on the Interests to determine the environmental condition of the
Equipment and Lease premises. To the extent Buyer desires similar
access to Seller's non-operated Interests, Seller shall assist
Buyer in obtaining such access.
13. PURCHASE PRICE ADJUSTMENTS FOR ENVIRONMENTAL DEFECTS
(a) "Environmental Defect" shall mean a violation (i) of any
environmental rule, regulation or order of any governmental agency
having jurisdiction over the Interests and (ii) to which remedial
or corrective action either is required or would be undertaken by a
prudent operator.
(b) Buyer may, by delivery of written notice to Seller of the existence
of an alleged Environmental Defect, request reduction of the
purchase price for the Interest affected. The Environmental Defect
notice shall indicate the nature and a description of the
Environmental Defect, the Interest to which it relates, and the
dollar amount which Buyer believes it would take to rectify or
remediate the Environmental Defect.
(c) The Environmental Defect notice by Buyer shall be delivered to
Seller on or before May 10, 1998. In the event any such notice is
not timely delivered, all Environmental Defects shall be
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deemed waived for the purposes of Closing. Seller shall have the
right, but not the obligation, to attempt to cure any alleged
Environmental Defect prior to Closing. In the event Seller is
unable or unwilling to cure an alleged Environmental Defect, Buyer
and Seller shall meet and use their best efforts to agree on the
validity of the claim of the Environmental Defect and the amount of
any required purchase price adjustment.
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(d) In the event the parties cannot mutually agree on the purchase
price adjustment for an alleged Environmental Defect, Buyer shall
have the right to (i) proceed to Closing and accept the Interest
with the alleged Environmental Defect, or (ii) terminate this
Agreement as to the Interest affected by the alleged Environmental
Defect and receive a purchase price adjustment for such Interest as
set forth in Exhibit "A-1", or, where feasible, the proportionate
allocated value.
(e) In the event Seller elects not to cure the alleged Environmental
Defect or reduce the purchase price, Seller and Buyer shall have
the right to terminate this Agreement in its entirety.
14. CONFIDENTIALITY. All engineering, geological and geophysical data, reports
and maps, and all other confidential data provided to Buyer, whether before
or after the date of this Agreement, relating to the Interests shall be
treated by Buyer as strictly confidential, and shall not be disclosed to
any person, firm or corporation without the prior written consent of
Seller. In the event this purchase and sale does not close, this covenant
shall survive termination of this Agreement; and in the event the sale
closes, this covenant with respect to Buyer shall terminate at Closing.
After Closing, any information, data or records, either originals or copies
thereof, relating to the Interests and retained by Seller shall be treated
by Seller as strictly confidential and shall not be disclosed to any
person, firm or corporation without the prior written consent of Buyer.
15. CLOSING. The Closing shall be held at 9:00 a.m. on or before May 15, 1998,
at the offices of Seller at 34 Brookside Drive, Terre Haute, IN 47802 or at
such other time and place as Seller and Buyer may mutually agree in writing
(the "Closing" or the "Closing Date").
16. TRANSACTIONS AT CLOSING. On the Closing Date:
(a) Seller shall execute, acknowledge and deliver to Buyer an
Assignment and Bill of Sale in the form as set forth in Exhibit "B"
hereto (in sufficient counterparts to facilitate recording in
applicable counties and filing with the Bureau of Land Management
or other governmental authorities) conveying the Interests;
(b) Seller and Buyer shall execute and deliver a settlement statement
that shall set forth the purchase price and each adjustment and the
calculation of such adjustments used to determine such amount (the
"Closing Amount");
(c) Seller shall deliver to Buyer originals of the Records;
<PAGE>
-24-
(d) Seller and Buyer shall execute, acknowledge and deliver transfer
orders or letters-in-lieu prepared by Seller, and approved by
Buyer, directing all purchasers of production to make payment to
Buyer of proceeds attributable to production from the Interests;
<PAGE>
-25-
(e) Seller shall deliver to Buyer exclusive possession of the
Interests; and
(f) Buyer shall deliver to Seller cash by wire transfer or a cashier's
check in the amount of the Closing Amount.
17. POST-CLOSING ADJUSTMENTS. Within ninety (90) days after the Closing, the
parties shall undertake to agree with respect to the adjustments or
payments that were not finally determined as of the Closing, and the amount
due from Buyer or Seller, as the case may be, pursuant to the Post-Closing
adjustment. Seller shall provide Buyer access to such of Seller's records
as may be reasonably necessary to a determination of Post-Closing
adjustments. Payment by Buyer or Seller shall be made in immediately
available funds within five (5) days of agreement. If the Post-Closing
adjustment has not been agreed upon within the time period set forth
herein, either party may seek to enforce any rights it claims hereunder.
18. PRORATION OF TAXES. All ad valorem taxes, real property taxes, and similar
obligations with respect to the tax period in which the Effective Time
occurs (the "current tax period") shall be apportioned between Seller and
Buyer as of the Effective Time based on an estimate of the immediately
preceding tax period assessment, and the purchase price shall be reduced at
Closing by the amount of such estimated taxes owed by Seller for that
portion of the current tax period prior to the Effective Time.
19. PROCEEDS OF PRODUCTION. Seller shall be entitled to all proceeds of
production attributable to the Interests and accruing to the period prior
to the Effective Time. Buyer shall be entitled to all proceeds of
production attributable to the Interests and accruing to the period on and
after the Effective Time. Seller shall receive a credit in an amount equal
to the proceeds received for all production in storage or in transit as of
the Effective Time and not previously sold by Seller, which production
Seller shall have the right to cause to be measured or gauged as of the
Effective Time. All proceeds held in suspense or escrow from the sale of
production by Seller prior to the Effective Time attributable to the
Interests shall be delivered to Buyer at Closing. Seller shall have no
responsibility or liability for the proper distribution of proceeds from
and after the Closing Date; provided, however, in the event Seller receives
distributions for proceeds of production after the Closing Date for
production on or after the Effective Time, Seller will promptly remit such
proceeds, along with the supporting documentation, to Buyer.
20. NOTICES. All communications required or permitted under this Agreement
shall be in writing and any communication or delivery hereunder shall be
deemed to have been fully made if actually delivered, or if mailed by
registered or certified mail, postage prepaid, return receipt requested, to
the address as set forth below:
SELLER BUYER
<PAGE>
-26-
Dunlap Oil Company Sharon Resources, Inc.
34 Brookside Drive 5995 Greenwood Plaza Blvd., Suite 220
Terre Haute, IN 47802 Englewood, CO 80111
Attn.: Garrett Pendergast Attn.: Jack S. Steinhauser
<PAGE>
-27-
21. FURTHER ASSURANCE. Incidental and subsequent to Closing, each of the
parties shall execute, acknowledge, and deliver to the other such further
instruments, and take such other actions as may be reasonably necessary to
carry out the provisions of this Agreement.
22. WARRANTIES. THE ASSIGNMENT AND BILL OF SALE EXECUTED PURSUANT HERETO SHALL
BE EXECUTED WITHOUT ANY WARRANTY OF TITLE, EITHER EXPRESS OR IMPLIED;
PROVIDED, HOWEVER, SELLER SHALL SPECIALLY WARRANT AND AGREE TO DEFEND THE
TITLE TO THE INTERESTS AS SET FORTH ON EXHIBIT "A" and "A-1" HERETO AGAINST
THE LAWFUL CLAIMS AND DEMANDS OF ALL PERSONS OR ENTITIES CLAIMING THE SAME
OR ANY PART THEREOF BY, THROUGH OR UNDER SELLER, BUT NOT OTHERWISE. SELLER
MAKES NO EXPRESS OR IMPLIED WARRANTY OR REPRESENTATION AS TO THE EQUIPMENT,
WHICH SHALL BE CONVEYED TO BUYER "AS IS, WHERE IS," AND WITH ALL FAULTS AND
DEFECTS, INCLUDING WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR ANY PURPOSE.
23. CASUALTY LOSS. Seller assumes the risk of any casualty loss prior to
Closing.
24. TERMINATION. This Agreement may be terminated at any time by mutual
consent of Seller and Buyer. In addition, this Agreement may be terminated
(i) by Seller by notice to Buyer if all conditions described in Section 6
and 15 shall not have been met and such non-compliance shall not have been
caused or waived by the actions or inactions of Seller, (ii) by Buyer by
notice to Seller if all conditions described in Section 5 shall not have
been met and such non-compliance shall not have been caused or waived by
the actions or inactions of Buyer, or (iii) by Buyer or Seller by notice to
the other party if purchase price adjustments for Title Defects required by
Section 4 and/or Environmental Defects required by Section 13 hereof exceed
ONE DOLLARS ($1.00). Upon termination of this Agreement the parties shall
thereafter be under no further obligation to one another hereunder.
25. EXPENSES. Whether or not the transactions contemplated by this Agreement
are consummated, each of the parties hereto shall pay its own fees and
expenses incident to the negotiation, preparation and execution of this
Agreement, including attorneys' and accountants' fees.
26. ENTIRE AGREEMENT. This instrument states the entire agreement between the
parties and may be supplemented, altered, amended, modified or revoked by
writing only, signed by both parties.
<PAGE>
-28-
27. SURVIVAL OF REPRESENTATIONS AND COVENANTS. All representations,
warranties, and covenants of the parties to the extent not fully performed
or waived prior to Closing shall survive the Closing, other than those
contained in Sections 3, 4, 5, 6 and 13 hereof.
<PAGE>
-29-
28. COUNTERPART. This Agreement may be executed by Buyer and Seller in any
number of counterparts, each of which shall be deemed an original
instrument, but all of which together shall constitute one and the same
instrument.
29. TIME OF ESSENCE. Time is of the essence in this Agreement.
30. ANNOUNCEMENTS. Seller and Buyer shall consult with each other prior to the
release of any press releases and other announcements concerning this
Agreement or the transactions contemplated hereby.
31. SEVERABILITY. If, at any time subsequent to the date hereof, any provision
of this Agreement shall be held by any court of competent jurisdiction to
be illegal, void or unenforceable, such provision shall be of no force and
effect, but the illegality or unenforceability of such provision shall have
no effect upon and shall not impair the enforceability of any other
provision of this Agreement.
32. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois. The validity of the
various conveyances and transfers affecting the title to the Interests
shall be governed by and construed in accordance with the laws of the
jurisdiction in which such Interests are situated.
EXECUTED as of the date first above mentioned.
SELLER
DUNLAP OIL COMPANY
By:
----------------------------
Title:
-------------------------
BUYER
SHARON RESOURCES, INC.
By:
----------------------------
Jack S. Steinhauser
<PAGE>
-30-
Title: Chief Executive Officier
<PAGE>
-31-
Attached to and made a part of Purchase and Sale Agreement dated February 27,
1998
EXHIBIT "A"
EDGAR COUNTY, ILLINOIS
ELLIOTT-LUKKEN-MASON UNIT
- -------------------------
E/2 NE/4 of Section 2, Township 12 North, Range 11 West
Lessor: Henry H. Elliott and Garnett H. Elliot, husband and wife
Lessee: H. R. Snavely
Lease Date: March 5, 1949
Lease Description: Lot #5 of the County Clerk's Subdivision of the Northeast
Quarter, containing 32.5 acres as shown by plat in Plat Book
1, page 237, except that part of said lot lying North of the
Paris and Terre Haute Wagon Road, leaving 20 acres, more or
less, Section 2, Township 12 North, Range 11 West, Edgar Co.
IL
Recording Data: Book 3, Page 158
Lessor: Hartvig B. Lukken and Nina Lukken, husband and wife
Lessee: H. R. Snavely
Lease Date: March 3, 1949
Lease Description: The North 26 acres of even width of the Northwest Quarter of
the Southeast Quarter: all that part of Lot 2 of the County
Clerk's subdivision of the Northeast Quarter lying south of
the Paris and Terre Haute Wagon road, (27.64 acres by
survey); Lot 34 of the County Clerk's subdivision of said
Northeast Quarter (NE/4), (34.20 acres), all in Section 2,
Township 12 North, Range 11 West; Also, the East 15.48
acres of the South 35.48 acres of the E/2 SW/4 Section 1,
and a part of the E/2 SW/4 Section 1 described as the North
14.08 acres of the South 49.56 acres of said E/2 SW/4,
except that part lying south of the North Bank of the ditch
running East and West near the South line of said 14.08 acre
tract: Also a part of the E/2 SW/4 of said section 1
described as beginning in the East line thereof at a point
180 feet south of the Northeast Corner of said E/2 SW/4,
said point being in the North line of lot #16 of the
original town of Elbridge, thence South 50 rods to the North
line of tract first above described; thence West 55 rods,
thence North to the Northwest Corner of Lot #13 in Taylor's
addition to the said town of Elbridge, thence East to the
Northwest Corner of Lot #17 in said addition, thence North
to the Northwest corner of Lot #9 in said original town of
Elbridge, thence East with the South line of Main Street in
said original town to the Place of Beginning, containing 17
acres, more or less, containing in total 134.40 acres ,
more or less, in Township 12 North, Range 11 West, Edgar Co.
IL
Recording Data: Book 3, Page160
Lessor: James Mason and Alta Mason, husband and wife
Lessee: H. R. Snavely
Lease Date: March 10, 1949
Lease Description: The West 55 acres of even width of that part of the
Northwest Quarter(NW/4) of Section 1, that lies north of the
Paris and Terre Haute wagon road except 1/4 acre in the
Southwest Corner thereof being used for cemetery purposes;
and that part of the Northeast Quarter (NE/4) of Section 2
bounded and described
<PAGE>
-32-
as follows: Beginning at the Northeast Corner of said
Section 2, thence West along the North line of said
Section 2, 126 rods, thence South to the center of the
Paris and Terre Haute Wagon road, thence Southeasterly
with said centerline of the Paris and Terre Haute Wagon
Road to the east line of the said section 2, thence North
along the east line of said Section 2 to the Place of
beginning, containing in all One Hundred Two (102) acres,
more or less, being in Township 12 North, Range 11 West,
Edgar Co. IL
Recording Data: Book 3, Page 161
<PAGE>
-33-
MASON-COCKCROFT UNIT
- --------------------
W/2 NW/4 of Section 2, Township 12 North, Range 11 West
Lessor: Frank Stratton and Gladys C. Stratton, husband and wife and
Harlan S. Cockcroft and Nelle R. Cockcroft, his wife
Lessee: H. R. Snavely
Lease Date: March 3, 1949
Lease Description: Lots 1 and 2 of County Clerk's subdivision of the E/2 SW/4
(9.85 acres); Lot #5 except the West 150 feet of the County
Clerk's Subdivision of the NW/4 (3.18 acres), Lot 38 of the
County Clerk's subdivision of the NW/4 (.61 acres) and East
23 acres of Lot #2 of County Clerk's Subdivision of the
NW/4, containing 116.64 acres, more or less Section 1, T12
North, Range 11 West, Edgar Co. Illinois
Recording Data: Book 3, Page 159
Lessor: Trustees of Schools of Township 12 North, Range 11 West
Lessee: Forrest H. Lindsay
Lease Date: June 21, 1949
Lease Description: Lot #6 of the County Clerk's Subdivision of the NW/4 and
Lots # 4 and 5 of Tailors Addition to the Town of Elbridge,
Illinois, Section 1, Township 12 North, Range 11 West,
Edgar Co. Il
Recording Data Book 3, page 164
Lessor: Harlan S. Cockcroft and Nelle R. Cockcroft, his wife
Lessee Forrest H. Lindsay
Lease Date June 7, 1949
Lease Description The West 10 acres of that part of the NW/4 lying South of
the Paris and Terre Haute Wagon Road in Section 1, Township
12 North, Range 11 West, Edgar Co. IL
Recording Data Book 3, page 144
Lessor: Margaret Reed Etal
Lessee Forrest H. Lindsay
Lease Date September 7, 1949
Lease Description 1/2 acre, more or less, out of the Southwest Corner of Lot
#2 of County Clerk's Subdivision of the NW/4, Section 1,
Township 12 North, Range 11 West, Edgar Co. IL
Recording Data Book 5, page 223
Lessor: Halalie Beasley Etal
Lessee Forrest H. Lindsay
Lease Date September 7, 1949
Lease Description 1/2 acre, more or less, out of the Southwest Corner of Lot
#2 of County Clerk's Subdivision of the NW/4, Section 1,
Township 12 North, Range 11 West, Edgar Co. IL
Recording Data Book 2, page 432
<PAGE>
-34-
H. S. COCKCROFT UNIT
- --------------------
W/2 SW/4 of Section 1, Township 12 North, Range 11 West
Lessor: Frank Stratton and Gladys C. Stratton, husband and wife and
Harlan S. Cockcroft and Nelle R. Cockcroft, his wife
Lessee: H. R. Snavely
Lease Date: March 3, 1949
Lease Description: Lots 1 and 2 of County Clerk's subdivision of the E/2 SW/4
(9.85 acres); Lot #5 except the West 150 feet of the County
Clerk's Subdivision of the NW/4 (3.18 acres), Lot 38 of the
County Clerk's subdivision of the NW/4 (.61 acres) and East
23 acres of Lot #2 of County Clerk's Subdivision of the
NW/4, Containing 116.64 acres, more or less Section 1, T12
North, Range 11 West, Edgar Co. Illinois
Recording Data: Book 3, Page 159
W. I. MADDOCK UNIT
- ------------------
E/2SE/4 of Section 2, Township 12 North, Range 11 West
Lessor: W. I. Maddock and Elizabeth Maddock, husband and wife
Lessee: Forrest H. Lindsay
Lease Date: March 21, 1949
Lease Description: W/2 SW/4, lying South of Sugar Creek, Containing 74 acres,
more or less, Section 36, Township 13 North, Range 11 West,
Edgar Co. IL
Recording Data: Book 3, Page 34
Lessor: W. I. Maddock and Elizabeth Maddock, husband and wife
Lessee: Forrest H. Lindsay
Lease Date: May 21, 1949
Lease Description: E/2 SE/4 and East 28 acres of the South 54 acres of the W/2
SE/4, containing 148 acres, more or less, Section 2,
Township 12 North, Range 11 West, Edgar Co. IL
Recording Data: Book 3, Page 114
<PAGE>
-35-
Attached to and made a part of Purchase and Sale Agreement dated February 27,
----------------------------------------------------------------------------
1998
----
EXHIBIT "A-1"
<TABLE>
<CAPTION>
<S> <C> <C>
EDGAR COUNTY, ILLINOIS
WORKING NET REVENUE ALLOCATED
PROPERTY DESCRIPTION INTEREST INTEREST
VALUE
ELLIOTT-LUKKEN-MASON UNIT 100.00% 87.50%
$32,535.00
E/2NE/4 of Section 2, Township 12 North, Range 11 West
Containing 80.00 acres, more or less
MASON-COCKCROFT UNIT 100.00% 86.682420%
$31,428.00
W/2NW/4 of Section 1, Township 12 North, Range 11 West
Containing 80.00 acres, more or less
H. S. COCKCROFT UNIT
$19,386.00 100.00% 87.50%
W/2SW/4 of Section 1, Township 12 North, Range 11 West
Containing 80.00 acres, more or less
W. I. MADDOCK UNIT 100.00%
87.50% $6,651.00
E/2SE/4 of Section 2, Township 12 North, Range 11 West
Containing 80.00 acres, more or less ----------
$90,000.00
</TABLE>
<PAGE>
-1-
EXHIBIT 10-IX - SOUTH LAKESIDE PROSPECT AGREEMENT
SHARON ENERGY LTD.
SUITE 220, 5995 GREENWOOD PLAZA BOULEVARD
ENGLEWOOD, COLORADO
U.S.A. 80111
BUSINESS: (303) 694-4920
FACSIMILE: (303) 773-9057
February 3, 1998
Clive M. Stockdale
c/o Canaccord Capital Corporation
2200, #609 Granville Street
Vancouver, British Columbia
Canada
V7Y 1H2
Dear Clive:
This is to confirm our agreement to provide you with, or arrange for the
provision to you of, the funds necessary to exercise your option (the "Orbit
Option") to acquire a 10% working interest in approximately 2,982 gross acres
subject to oil and gas leases located in Cameron Parish, Louisiana and
referred to as the South Lakeside Prospect. The Orbit Option is provided for
in an agreement between you and Orbit Oil & Gas Inc. ("Orbit") dated January
7, 1998 (the "Orbit Agreement"), a copy of which is appended hereto as
Schedule "A". Orbit has represented in the Orbit Agreement that it has
acquired a 50% working interest in the South Lakeside Prospect pursuant to an
agreement between Orbit and Oilexco Incorporated, The Wiser Oil Company, CMS
NOMECO Oil & Gas Co., Atlas Energy Group, Inc., NuGas Resources (U.S.) Inc.
and FCP Petroleum Inc. dated November 27, 1997 (the "Oilexco Agreement"), a
copy of which is attached hereto as Schedule "B", of which it has assigned a
20% interest to Diaz Resources Ltd., and retained the remaining 30%. The oil
and gas leases comprising the South Lakeside Prospect (the "Leases") are
described in Schedule "A" to the Oilexco Agreement.
Pursuant to the Orbit Option, you may acquire a 10% working interest in the
Leases by providing Orbit with notice of your intent to exercise the Orbit
Option, together with your cheque in the amount of U.S. $584,844 (the "Option
Price") on or before March 6, 1998 (the "Exercise Date"). The Option Price
will be subject to adjustment as provided in the Orbit Agreement, depending
on the interest Orbit is able to acquire in the Louisiana State Lease
referred to therein.
As you know, it is our intention to raise a portion of the funds necessary
for you to exercise the Orbit Option through a private placement (the
"Private Placement") of our equity securities through Canaccord Capital
Corporation ("Canaccord"), as agent. As you also know, Canaccord has advised
us it will be able to raise a maximum of Cdn. $700,000 by way of the Private
Placement. It is our intention to arrange for the provision of the balance
of the Option Price to you by a third party.
Our agreement is as follows:
1. We will provide you with our cheque in the amount of some or all of
the Option Price, as it may be adjusted (the "Sharon Funds"), and will
arrange for the provision to you of a cheque or cheques in the amount
of the balance of the Option Price by a third party or parties (the
"Third Party Funds"), on or before March 3, 1998 (the "Termination
Date");
2. Forthwith upon receipt of the Sharon Funds and the Third Party Fundson
or before the Exercise Date, you will provide Orbit with written
notice of your intent to exercise the Orbit Option and your cheque in
the amount of the Option Price, and take all other measures and
execute all other documents as we, acting reasonably, may consider
necessary in order for you to validly exercise the Orbit Option. You
will use the Sharon Funds and the Third Party Funds for no other
purpose whatsoever; and
<PAGE>
-2-
3. Forthwith upon conveyance of a 10% working interest in the Leases to
you by Orbit, you will take all such measures and execute all such
documents as we, acting reasonably, consider necessary to convey such
interest to Sharon Resources, Inc., or as we may otherwise direct.
In consideration of our entry into this Agreement, you will not:
1. Exercise the Orbit Option prior to the Termination Date, unless we
have provided you with the Sharon Funds and the Third Party Funds have
been provided to you; or
2. Assign or otherwise transfer the Orbit Option to any party apart from
us, unless we have failed to provide you with the Sharon Funds, or the
Third Party Funds have not been provided to you, by 5:00 p.m.
(Vancouver time) on the Termination Date.
Our agreement is subject to the following conditions precedent:
1. the Vancouver Stock Exchange will have provided to us such approval as
may be necessary for the Private Placement and the provision of the
Sharon Funds to you on or before 5:00 p.m. (Vancouver time) on that
day which falls three business days before the Termination Date;
2. The Private Placement will fully close on or before that day which is
one business day before the Termination Date;
3. We shall be satisfied, acting reasonably, with the state of title to
the Leases; and
4. We shall be satisfied, acting reasonably, with the form and substance
of Joint Operating Agreements concerning the Leases to be prepared by
Orbit.
In consideration of your entry into this Agreement, we will indemnify and
save you harmless from and against all legal proceedings or actions to which
you may be subject as a result of your entry into this Agreement and
consummation of the transactions described herein, and all costs, losses,
damages or liabilities which you may incur or suffer as a result of such
legal proceedings or actions. If the foregoing accurately reflects our
agreement, would you please sign the enclosed copy of this letter in the
space provided below, and return it to us at the above address.
Yours truly,
SHARON ENERGY LTD.
Per:
/s/ Jack S. Steinhause
- -------------------------------------------------
Jack S. Steinhauser
The foregoing accurately reflects our agreement
Clive M. Stockdale
- -------------------------------------------------
Clive M. Stockdale
<PAGE>
-1-
EXHIBIT 23-i--CONSENT OF EXPERT
Original on Norstar Petroleum, Inc. Letterhead
CONSENT OF NORSTAR PETROLEUM, INC.
As oil and gas consultants, Norstar Petroleum, Inc. hereby consent to: (a)
the use of our reserve report dated May of 1998 and (b) all references to
our firm included in or made a part of Sharon Energy Ltd.'s Annual Report on
Form 10-KSB to be filed with the Securities and Exchange Commission on or
about June 26, 1998.
NORSTAR PETROLEUM, INC.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 78,525
<SECURITIES> 0
<RECEIVABLES> 34,240
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 479,937
<PP&E> 278,976
<DEPRECIATION> 202,121
<TOTAL-ASSETS> 556,792
<CURRENT-LIABILITIES> 58,089
<BONDS> 0
0
0
<COMMON> 2,354,522
<OTHER-SE> 129,616
<TOTAL-LIABILITY-AND-EQUITY> 556,792
<SALES> 403,939
<TOTAL-REVENUES> 414,421
<CGS> 344,041
<TOTAL-COSTS> 1,208,171
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 337
<INCOME-PRETAX> (793,750)
<INCOME-TAX> 0
<INCOME-CONTINUING> (793,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (793,750)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> 0
</TABLE>
