SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended SEPTEMBER 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-9261
KESTREL ENERGY, INC.
--------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-0772451
----------------------------- -------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
999 18th Street, Suite 2490, Denver, CO 80202
--------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(303) 295-0344
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of common stock, as of September 30,
1998: 4,456,000
KESTREL ENERGY, INC.
AND SUBSIDIARIES
INDEX TO UNAUDITED FINANCIAL STATEMENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and June 30, 1998 3
Consolidated Statements of Operations
for the Three Months Ended September 30,
1998 and 1997 4
Consolidated Statements of Cash Flows for the
Three Months Ended September 30,
1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 9
ITEM 2. Changes in Securities 9
ITEM 3. Defaults Upon Senior Securities 9
ITEM 4. Submission of Matters to a Vote of Security Holders 9
ITEM 5. Other Information 9
ITEM 6. Exhibits and Reports of Form 8-K 9
Signatures 10
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
KESTREL ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of September 30, 1998 and June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1998 1998
-------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 229,870 $ 372,194
Short term investments 1,732,301 2,330,831
Accounts receivable 189,273 166,568
Due from related party 461,015 393,175
Other assets 59,839 36,890
----------- -----------
Total current assets 2,672,298 3,299,658
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, successful
efforts method of accounting:
Unproved 1,153,602 688,779
Proved 4,126,815 4,219,282
Furniture and equipment 130,468 130,468
----------- -----------
5,410,885 5,038,529
Accumulated depreciation and
depletion (2,716,731) (2,778,165)
----------- -----------
Net property and equipment 2,694,154 2,260,364
----------- -----------
$ 5,366,452 $ 5,560,022
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 153,451 $ 139,989
Accrued liabilities 22,950 21,687
----------- -----------
Total current liabilities 176,401 161,676
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, $1 par value;
1,000,000 shares authorized,
none issued at September 30, 1998 - -
Common Stock, no par value;
20,000,000 shares authorized,
4,456,000 and 4,431,000
issued and outstanding at
September 30, 1998 and
June 30, 1998, respectively 13,148,724 13,139,349
Accumulated deficit (7,958,673) (7,741,003)
---------- ----------
Total stockholders' equity 5,190,051 5,398,346
---------- ----------
$ 5,366,452 $ 5,560,022
=========== ===========
</TABLE>
KESTREL ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1998
-------------- -----------
<S> <C> <C>
REVENUE:
Oil and gas sales $ 206,421 $ 221,476
Interest 27,355 49,726
Gain on sale of property and equipment - 10,677
Other income 21,072 62
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TOTAL REVENUES 254,848 281,941
---------- ----------
COSTS AND EXPENSES:
Lease operating expenses 66,034 97,875
Dry holes, abandoned and impaired
properties 17,106 73,658
Exploration expenses 170,258 134,086
Depreciation and depletion 57,495 25,517
General and administrative 161,625 190,183
---------- ----------
TOTAL COSTS AND EXPENSES 472,518 521,319
---------- ----------
NET LOSS $ (217,670) $ (239,378)
---------- ----------
NET LOSS PER COMMON SHARE $ (0.05) $ (0.05)
========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,434,260 4,430,990
========== ==========
</TABLE>
KESTREL ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1998
-------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (217,670) $ (239,378)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Dry holes, abandoned and impaired
properties 12,373 12,373
Depreciation and depletion 57,495 25,517
Gain on sale of property and equipment - (10,677)
(Increase) decrease in accounts
receivable relating to operations (22,705) 7,246
(Increase) decrease in due from
related party (67,840) 6,307
(Increase) decrease in other
current assets (22,949) (24,578)
Increase (decrease) in accounts
payable, trade 13,462 (9,673)
Increase (decrease) in accounts
payable, related party - (23,972)
Increase (decrease) in accrued
liabilities 1,263 22,636
---------- ----------
Net cash (used) by
operating activities (246,571) (234,199)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition of
properties (494,283) (77,576)
Proceeds from sale of property and
equipment - 10,677
Redemption (purchase) of short-term
investments 598,530 (522,973)
---------- ----------
Net cash provided (used) by
investing activities 104,247 (589,872)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from excerise of stock
options - 6,250
Common stock surrendered by officer - (21,655)
---------- ----------
Net cash used by financing activities - (15,405)
---------- ----------
Net (decrease) in cash and cash
equivalents (142,324) (839,476)
Cash and cash equivalents at the
beginning of the period 372,194 1,524,138
---------- ----------
Cash and cash equivalents at the
end of the period $ 229,870 $ 684,662
========== ==========
SELECTED NON CASH ACTIVITIES:
Total property acquisitions $ 503,658 $ -
Common stock used to acquire property (9,375) -
---------- ----------
Net cash used to acquire property $ 494,283 $ -
========== ==========
</TABLE>
KESTREL ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. Management Opinion
These condensed financial statements should be read in conjunction
with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998.
In the opinion of management, the accompanying interim unaudited
financial statements contain all the adjustments necessary to present
fairly the financial position of the Company as of September 30,
1998, the results of operations for the periods shown in the
statements of operations, and the cash flows for the periods shown in
the statements of cash flows. All adjustments made are of a normal
recurring nature.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At September 30, 1998, the Company had working capital of $2,495,897. This
compares to the Company's working capital of $3,137,982 as of June 30,
1998.
Net cash used by operating activities was $246,571 for the three months
ending September 30, 1998, an increase of $12,372, over working capital
used of $234,199 for the same period in 1997. Operating cash flows
decreased during the first quarter due to lower oil and gas revenues and
higher total expenses. The Company's accounts receivable increased
$22,705 or 14% to $189,273 during the period as compared to an increase of
$7,246, or 4% for the same period in 1997. The increase in receivables is
primarily due to higher production volumes. Amounts due from related
party increased $67,840 to $461,015 during the current quarter. The
increase is a result of joint interest billings to VIctoria Petroleum USA,
Inc. for the San Joaquin Joint Venture. In October, $394,086 of this
amount was paid by Victoria Petroleum, USA. Other assets increased
$22,949 or 62% to $59,839 during the quarter ended September 30, 1998.
The increase was due to the payment of insurance coverages extending into
the year 2000. This compares to an increase of $24,578, or 284%, a year
ago. The Company's accounts payable increased $13,462, or 10%, to $153,451
during the period versus a decrease of $9,673, or 6%, a year ago. The
Company's accrued liabilities increased $1,263 or 6% to $22,950 for the
quarter ended September 30, 1998. This compared to an increase of $22,636
or 132% for the same period a year ago.
Net cash provided by investing activities was $104,247 for the quarter
ended September 30, 1998, versus cash used of $589,872 for the same period
in 1997. The increase in cash flow from investing activities was
attributable to redemptions by the Company of some of its short-term
investments for working capital purposes. Property acquisitions included
$20,750 to acquire an additional interest in the Lake Bouef Prospect,
LaFourche Parish, Louisiana, $5,350 to continue development and completion
of the CBM 24-15, coalbed methane well in the Hilight Field, Campbell
County, Wyoming, approximately $7,700 to continue development of the Kaye
Unit in Converse and Niobrara Counties, Wyoming, and approximately
$469,850 to acquire and begin development of the Poitevent Prospect in
Sweetwater County, Wyoming. In September, 1998 the Company acquired a
100% working interest in the Poitevent Prospect by issuing 25,000 shares
of stock to Green River Resources, Inc. valued at $9,375 and a commitment
to develop certain properties within the prospect.
No cash was provided or used from financing activities during the quarter
ended September 30, 1998 versus cash used in financing activities of
$15,405 for the quarter ended September 30, 1997.
RESULTS OF OPERATIONS
---------------------
First Quarter Results
- ---------------------
The Company reported a loss of $217,670, or 5 cents per share, for the
three month period ended September 30, 1998. This compares with a loss of
$239,378, or 5 cents per share, for the same period a year ago. The loss
in the current period is a result of lower oil and gas revenues and higher
exploration expenses more fully described below.
The Company's revenues for the three months ended September 30, 1998 were
$254,848 compared to $281,941 during the same period of 1997, a decrease
of $27,093, or 10%. Revenues from oil and gas sales were $206,421 for the
quarter ended September 30, 1998, a decrease of $15,055, or 7%, as
compared to $221,476 for the same period in 1997. The decrease in oil and
gas revenues, despite higher volumes of gas sold, was a result of lower
oil and gas prices and lower volumes of oil sold compared to a year ago.
Interest income decreased $22,371 or 45% to $27,355 from $49,726 a year
ago. The decrease in interest income is attributable to the reduction in
short-term investments.
The Company's total expenses decreased $48,801, or 9%, to $472,518 as
compared to $521,319 a year ago. The decrease in overall expenses is
primarily due to lower dry hole costs versus a year ago since the Company
did not participate in any drilling during the period. Other income
increased to $21,072 for the period. Other income reflects overhead
income charged to the Company's San Joaquin Joint Venture partner.
Production and operating expenses decreased $31,841, or 33%, to $66,034
versus $97,875 for the same period a year ago. The decrease in production
and operating expenses was primarily due to lower operating expenses on
the Pierce, Kuehne and Kaye Units as well as lower production taxes on oil
and gas sales.
Dry holes, abandoned and impaired properties decreased $56,552, or 77%, to
$17,106 from $73,658 a year ago. The decrease from year ago levels was
attributable to lower dry hole expense as the Company did not participate
in the drilling of any exploratory wells during the period. During the
period, the Company impaired certain international permits at a cost of
$12,374 and recorded additional dry hole costs on the Dewey #1 and
Sylvester #1 of $4,732.
Exploration expenses increased $36,172, or 27%, to $170,258 from $134,086
a year ago. The increase is attributable to higher geological and
geophysical costs on various prospects that the Company continues to
evaluate in the San Joaquin Basin as well as other prospects not currently
held by the Company.
General and Administrative costs decreased $28,558, or 15%, to $161,625 as
compared to $190,183 for the same period a year ago. The decrease in
overall expenses is attributable to significantly lower investor and
public relations costs and lower travel costs.
THE YEAR 2000 ISSUE
-------------------
The Problem. The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year.
As a result, any of the Company's computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations of the Company and its
suppliers and customers.
The Company's State of Readiness. The Company has instituted a Year 2000
Project. As a part of the Company's Year 2000 Project, the Company has
evaluated its current computer systems, software and embedded
technologies. The Company's internal systems and or programs are
predominantly "off-the-shelf" products with Year 2000 versions now
available. The Company's internal network, e-mail system and accounting
and business process software have or will be updated utilizing vendor
provided upgrades by June of 1999.
As part of the Company's Year 2000 Project, the Company plans to contact
its significant suppliers and large customers to determine the extent to
which the Company is vulnerable to those third parties failure to
remediate their own Year 2000 Issue. The communications are planned to be
completed by January, 1999. However, there can be no guarantee that the
systems of other companies on which the Company's business relies will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company operations.
The Costs to Address the Company's Year 2000 Issues. Expenditures through
September 30, 1998 that are related to the Year 2000 Project amounted to
approximately $40,000 for a new accounting program and internal network,
both of which are Year 2000 compliant. Management expects that the
completion of its Year 2000 Project may result in additional expenditures
but cannot accurately quantify these costs at this time.
The Risks Associated with the Company's Year 2000 Issues. The Company's
failure to resolve Year 2000 Issues on or before December 31, 1999 could
result in system failures or miscalculations causing disruption in
operations, including among other things, a temporary inability to process
transactions, send invoices, send and/or receive e-mail and voice mail, or
engage in normal business activities. Additionally, failure of third
parties upon whom the Company's business relies to timely remediate their
Year 2000 Issues could result in disruptions in the Company's field
operations, late, missed, or unapplied payments, and other general
problems related to the Company's daily operations. While the Company
believes its Year 2000 Project will adequately address the Company's
internal Year 2000 issues, until the Company receives responses from a
significant number of the Company's suppliers and customers, the overall
risks associated with the Year 2000 issue remain difficult to accurately
describe and quantify, and there can be no guarantee that the Year 2000
Issue will not have a material adverse effect on the Company and its
operations.
The Company's Contingency Plan. The Company has not, to date, implemented
a Year 2000 Contingency Plan. It is the Company's goal to have the major
Year 2000 Issues resolved by June, 1999. However, the Company would
expect to develop and implement a contingency plan by the end of March,
1999, in the event the Company's Year 2000 Project should fall behind
schedule.
FORWARD LOOKING STATEMENTS
--------------------------
This report includes one or more statements, which state or otherwise
indicate the Company's present belief or expectation concerning future
events. Such statements are forward looking statements on which investors
should not rely because they are subject to a wide variety of
contingencies and based on a number of assumptions, which may not prove to
be true. In particular, the Company's future success is highly dependent
on the success of its exploratory drilling efforts, which cannot be safely
predicted. In addition, the Company is highly dependent upon prevailing
prices for petroleum products, its ability to attract and retain qualified
personnel, as well as other risk factors affecting business generally,
such as overall economic conditions, changes in tax and other laws and the
effect of actions taken by competitors and regulatory authorities.
INFLATION AND CHANGING PRICES
-----------------------------
Inflation has not had a significant effect on the Company's results of
operations. However, the constantly fluctuating price of crude oil and
natural gas materially affects the Company's cash flow, either positively
or negatively.
PART II OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
KESTREL ENERGY, INC.
-----------------------------
(Registrant)
Date: November 13, 1998 /s/TIMOTHY L. HOOPS
----------------- ------------------------------
Timothy L. Hoops
President, Principal Executive
Officer, and Director
Date: November 13, 1998 /s/MARK A. BOATRIGHT
----------------- ------------------------------
Mark A. Boatright
Vice President - Finance,
Principal Financial and Accounting
Officer, and Director
EXHIBIT INDEX
No. Description Method of Filing
- --- ----------- ----------------
27 Financial Data Schedule Filed herewith
electronically
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 230
<SECURITIES> 1,732
<RECEIVABLES> 650
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,672
<PP&E> 5,411
<DEPRECIATION> 2,717
<TOTAL-ASSETS> 5,366
<CURRENT-LIABILITIES> 176
<BONDS> 0
0
0
<COMMON> 13,149
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<TOTAL-LIABILITY-AND-EQUITY> 5,366
<SALES> 206
<TOTAL-REVENUES> 255
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 473
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<INCOME-PRETAX> (218)
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<EPS-PRIMARY> (.05)
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