UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 1998 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No: 0-9261
KESTREL ENERGY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0772451
----------------------- ----------------------------------
State of Incorporation: I.R.S. Employer Identification No.
999 - 18th Street, Suite 2490
Denver, Colorado 80202
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 295-0344
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
--------------------------
Common Stock, No Par Value
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
At August 31, 1998 4,444,000 common shares (the registrant's only class of
voting stock) were outstanding. The aggregate market value of the
3,227,869 common shares of the registrant held by nonaffiliates on that
date (based upon the mean of the closing bid and asked price on the NASDAQ
system) was $1,613,935.
TABLE OF CONTENTS
PART I 3
ITEM 1. BUSINESS. 3
General Description of Business 3
Recent Activities 3
Operations and Policies 4
ITEM 2. PROPERTIES 5
Oil and Gas Interests 5
Royalty Interests Under Producing Properties 5
Permit Obligations 6
Drilling Activities 9
Farmout Agreements 9
Oil and Gas Production, Prices and Costs 10
Customers 10
Office Facilities and Administrative Services 10
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
PART II 11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 11
Outstanding Shares of Common Stock 11
Stock Price 11
Dividend Policy 11
ITEM 6. SELECTED FINANCIAL DATA 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
Liquidity and Capital Resources 12
Results of Operations 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 17
Financial Statements 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 17
PART III 17
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 17
ITEM 11. EXECUTIVE COMPENSATION 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
PART IV 17
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 17
SIGNATURES 20
PART I
------
ITEM 1. BUSINESS.
GENERAL DESCRIPTION OF BUSINESS
Kestrel Energy, Inc. (the "Company") was incorporated under the laws of
the State of Colorado on November 1, 1978. The Company's principal
business at this time is the acquisition, either alone or with others, of
interests in proved developed producing oil and gas leases, and
exploratory and developmental drilling. The Company has pursued an
aggressive exploration program over the last few years, which it plans to
continue during fiscal 1999.
The Company presently owns oil and gas interests in the states of
California, Colorado, Kansas, Louisiana, New Mexico, Oklahoma, South
Dakota, Texas, and Wyoming.
The Company has also acquired farm-in interests in Production Prospecting
License PPL 106 and PPL 202 in Papua New Guinea and Exploration Permit EP
325, EP 359, WA-254-P, WA-261-P, ATP 593 and ATP 560P in Australia. The
Company, through its affiliation with Victoria International Petroleum
N.L., has earned farm-in interests ranging from 2% to 5% in various wells
on the prospects listed above. The Company earns the farm-in interest by
contributing to the costs of drilling a well on the prospect. To date,
the Company has earned: (i) a 2.5% working interest in PPL 106 in Papua
New Guinea; (ii) a 5% working interest in PPL 202 in Papua New Guinea;
(iii) a 3.75% working interest in EP 359; (iv) a 2.5% working interest in
WA-254-P in Western Australia; (v) a 2.5% working interest in WA-261-P in
Western Australia; (vi) a 2% interest in EP 325 in Western Australia;
(vii) a 3% interest in Authority to Prospect (ATP) 560P in Queensland; and
(viii) a 3% working interest in ATP 593, Heather Downs Block,
respectively. The Company believes that the international permits
diversify its drilling program. The Company's obligations relating to the
international permits are more fully described in Item 2, Properties,
under Permit Obligations.
On the domestic front, the Company through its wholly owned subsidiary,
Kestrel Energy California, Inc., acquired a 50% working interest in
certain petroleum leases in California's San Joaquin Basin in March of
1997. This acquisition totaled 9,000 acres net to Kestrel, seismic data
covering 16,000 miles, well data from 3,800 wells as well as technical
interpretations of that information from Ampolex (USA), Inc.
RECENT ACTIVITIES
The Company participated in drilling two wells during the fourth quarter
of fiscal 1998. Both wells were drilled in the San Joaquin Basin in
California. The Dewey #1 was drilled in April, 1998 and was abandoned as
a dry hole at an approximate cost to the Company of $92,800. The
Sylvester #1 was drilled in June, 1998 and was abandoned as a dry hole at
an approximate cost to the Company of $112,688. The Company successfully
completed the Cab Hughes #5 well, Kinta Field, Pittsburg County, Oklahoma
in the fourth quarter of fiscal 1998. The Company incurred approximately
$236,000 to complete the gas well. The Company also participated in the
completion of the CBM 24-15, coalbed methane well, Hilight Field, Campbell
County, Wyoming in June, 1998. The Company has incurred approximately
$20,500 of costs to date and anticipates additional costs of approximately
$40,000 to fully develop the shallow CBM zone in the Hilight Field. The
CBM 24-15 increased the Company's proved reserves by 90,000 mcf.
OPERATIONS AND POLICIES
The Company does not limit its consideration of acquisition opportunities
to any geographical area. However, the acquisition, development,
production and sale of oil and gas acreage are subject to many factors
outside the Company's control. These factors include worldwide and
domestic economic conditions; proximity to pipelines; existing oil and gas
sales contracts on properties being evaluated; the supply and price of oil
and gas as well as other energy forms; anticipated prices of oil and gas;
the regulation of prices, production, transportation and marketing by
federal and state governmental authorities; and the availability of, and
interest rates charged on, borrowed funds.
Historically, in attempting to acquire, explore and drill for oil and gas
leases, the Company has often been at a competitive disadvantage since it
had to compete with many companies and individuals with greater capital
and financial resources and larger technical staffs. The Company is
attempting to alleviate some of these problems by forming acquisition
joint ventures with other companies, including its affiliate parent,
Victoria International Petroleum N.L. These joint ventures allow the
Company access to more acquisition candidates and enable the Company to
share the evaluation and other costs among the venture partners. One
recent example is the Company's joint venture with Black Coral, LLC in
connection with the development of the Company's recently acquired San
Joaquin properties, whereby Black Coral provides ongoing geological and
geophysical consulting regarding prospects and potential wells in the San
Joaquin Basin.
The Company's operations are subject to various provisions of federal,
state and local laws regarding environmental matters. The impact of these
environmental laws on the Company may necessitate significant capital
outlays, which may materially affect the earnings potential of the
Company's oil and gas business in particular, and could cause material
changes in the industry in general. The Company strongly encourages the
operators of the Company's oil and gas wells to do periodic environmental
assessments of potential liabilities. No significant liabilities of this
kind are known to the Company at this time. To date, the existence of
environmental laws has not materially hindered nor adversely affected the
Company's business.
The Company has four full-time employees, including the Company's
President, Timothy L. Hoops. The Company also hires outside professional
consultants to handle certain additional aspects of the Company's
business. With the addition of Black Coral, LLC, the burden on the
Company from such outside contractors has substantially increased along
with the Company's comparably increased exploration activity, largely in
the San Joaquin Basin. Management believes this type of contracting for
professional services is the most economical and practical means for the
Company to obtain such services at this time.
The Company intends to actively review, select and negotiate for the
purchase of producing oil and gas properties, subject to the Company's
ability to obtain reasonable and adequate financing for such properties.
The Company will also continue to explore for oil and gas by participating
in prospects generated by outside parties. Such prospects are often
subject to a premium, or promote, to the generating party. The Company is
willing to pay these promotes as an alternative to internally generating
all of its prospects with Company personnel or consultants. A willingness
to consider transactions brought to the Company by third parties affords
the Company a wider range of opportunities than could be generated in-
house. The Company has agreed to pay to its affiliate, Victoria
International Petroleum N.L., a 5% royalty with respect to the Company's
working interest in the international permits, acquired by the Company
from its affiliate which produce net revenues for the Company. The
Company has agreed to pay Black Coral, LLC an overriding royalty based on
the net revenue interest received by the Company relating to commercial
production of oil or gas on properties developed in the San Joaquin Basin.
The overriding royalty could range from 1% to 5%.
ITEM 2. PROPERTIES.
OIL AND GAS INTERESTS
The following table sets forth information concerning the Company's
leasehold interests in developed and undeveloped oil and gas acreage at
June 30, 1998.
<TABLE>
<CAPTION>
TOTAL TOTAL
Developed Acreage (1)(2) Undeveloped Acreage (1)(2)
State Gross Net Gross Net
----- ------ ----- ------ ------
<S> <C> <C> <C> <C>
California 290 44 40,512 16,531
Colorado -0- -0- -0- -0-
Kansas 480 62 -0- -0-
Louisiana 6,307 1,728 -0- -0-
New Mexico 2,520 1,456 -0- -0-
Oklahoma 3,332 415 -0- -0-
South Dakota 160 20 -0- -0-
Texas 1,140 74 -0- -0-
Wyoming 35,143 3,061 5,370 1,755
------ ----- ----- -----
TOTAL 49,372 6,860 45,882 18,286
Canada 640 19 -0- -0-
Papua New Guinea -0- -0- 1,825,577 91,279(3)
Australia -0- -0- 2,240,537 63,989
</TABLE>
(1) Gross acres are the total acreage involved in a single lease or group
of leases. Net acres represent the number of acres attributable to an
owner's proportionate working interest in a lease (e.g., a 50% working
interest in a lease covering 320 acres is equivalent to 160 net acres).
(2) The acreage figures are stated on the basis of applicable state oil
and gas spacing regulations.
(3) If the Papua New Guinea government elects to back in for 22.5%, then
net acreage would be reduced to 77,741 acres.
ROYALTY INTERESTS UNDER PRODUCING PROPERTIES
At June 30, 1998 the Company held overriding royalty interests ranging
from 0.013% to 9.26% in 116 producing oil and gas wells located on 30,245
gross developed acres in the United States.
PERMIT OBLIGATIONS
Irrespective of the Company's current exploration plans for a given
prospect, many of the international permits in which the Company has an
interest require certain actions to be taken by the Company or co-holders
of the permits for the Company to retain or continue to earn its interest
in the permit.
PPL 106, Papua New Guinea
- -------------------------
In November, 1994 the Company earned a 5% working interest in PPL 106 by
the drilling of the Menga #1. Concurrent with the earning of the working
interest are the following permit obligations. The Company can withdraw
from the permit at the end of any permit year without penalty.
Kestrel Share of
Anticipated Expenditures
Current: Work 2.5% Working Interest
- ------- ---- ------------------------
Year 5 (ending January 31, 1999) One well $ 70,000
--------
Total $ 70,000
The royalty to Papua New Guinea from petroleum production is 1.25% with a
50% income tax being applied to gross revenues less royalty, depreciation
and expenses. An Additional Profits Tax (APT) of 50% is levied on net
cash flow after a return on investment of 27% is achieved.
The state has a right to participate in any Petroleum Development License
(PDL) which is granted at up to a 22.5% interest level on a carried basis
(shared proportionally between license holders). The carried previous
exploration and development costs are recovered by taking the state
entity's share of production until made up with interest at the US AAA
Corporate rate plus 5%.
PPL 202, Papua New Guinea
- -------------------------
In March 1998, the Company acquired by application a 5% interest in PPL
202 with the following permit obligations. The Company can withdraw from
the permit at the end of the second permit year without penalty.
Kestrel Share of
Anticipated Expenditures
Current: Work 5% Working Interest
- -------- ---- ------------------------
Years 1&2 (ending March 2, 2000) Data review
and seismic
reprocessing $ 13,000
Years 3&4 (ending March 2, 2002) Aeromagnetic
survey and 50
kms seismic $ 85,000
Years 5&6 (ending March 2, 2004) One well and
data review $ 400,000
---------
Total $ 498,000
The royalty to Papua New Guinea from petroleum production is 1.25% with a
50% income tax being applied to gross revenues less royalty, depreciation
and expenses. An Additional Profits Tax (APT) of 50% is levied on net
cash flow after a return on investment of 27% is achieved.
The state has a right to participate in any Petroleum Development License
(PDL) which is granted at up to a 22.5% interest level on a carried basis
(shared proportionally between license holders). The carried previous
exploration and development costs are recovered by taking the state
entity's share of production until made up with interest at the US AAA
Corporate rate plus 5%.
EP 325, Australia
- -----------------
Exploration Permits (EP) for petroleum are granted by the State of Western
Australia over exploration areas in state controlled inshore waters and
onshore for a period of five years in exchange for a five year work
program on a year by year basis.
Permitees may withdraw without penalty from a permit once the current
year's work program is satisfied and prior to entry into the next year's
program.
At the end of the five-year term, permitees may relinquish the permit or
apply for renewal of the permit with a further five-year work program
acceptable to the state and 50% relinquishment of the existing permits
acreage.
Kestrel Share of
Anticipated Expenditures
Current: Work 2% Working Interest
- -------- ---- ------------------------
Year 5 (ended January 20, 1998)
(continues in force until Data review
renewal approved) and one well $ 3,000
-------
Total $ 3,000
EP 359 Australia
- ----------------
Kestrel Share of
Anticipated Expenditures
Current: Work 3.75% Working Interest
- -------- ---- ------------------------
Year 5 ended November 11, 1996
(permit continues in force until One well and
renewal approved) data review $ 20,000
--------
TOTAL $ 20,000
WA-254-P, Australia
- -------------------
Kestrel Share of
Anticipated Future
Expenditures
Current: Work 2.5% Working Interest
- -------- ---- ---------------------
Year 5 (ending January 30, 1999) 100 miles
seismic $ 8,000
Year 6 (ending January 30, 2000) One well $ 187,500
---------
Total $ 195,500
The permit WA-254-P is an offshore federal permit granted by the
commonwealth of Australia under the Petroleum Submerged Lands Act.
Permits are granted for a period of 6 years on the basis of a six-year
work program, the work program specified on a year by year minimum work
commitment basis. The first three-year's work program is mandatory.
After completion of the first three-year's work program, permitees can
withdraw from the permit at any time once the current year's work program
is satisfied and prior to entry into the next year's program.
At the end of the six-year term, permitees may relinquish the permit or
apply for a renewal of the permit with a further six-year work program
acceptable to the federal commonwealth authority and 50% relinquishment of
the existing permits acreage.
WA-261-P, Australia
- -------------------
Kestrel Share of
Anticipated Future
Expenditures
Current: Work 2.5% Working Interest
- -------- ---- ---------------------
Year 3 (ending January 2, 1999) Data review $ 5,000
Year 4 (ending January 2, 2000) 100 km 3D
Seismic $ 20,000
Year 5 (ending January 2, 2001) One well $ 40,000
Year 6 (ending January 2, 2002) Data review $ 5,000
---------
Total $ 70,000
The permit WA-261-P is an offshore federal permit granted by the
commonwealth of Australia under the Petroleum Submerged Lands Act.
Permits are granted for a period of 6 years on the basis of a six-year
work program, the work program specified on a year by year minimum work
commitment basis. The first three-year's work program is mandatory.
After completion of the first three-year's work program, permitees can
withdraw from the permit at any time once the current year's work program
is satisfied and prior to entry into the next year's program.
At the end of the six-year term, permitees may relinquish the permit or
apply for a renewal of the permit with a further six-year work program
acceptable to the federal commonwealth authority and 50% relinquishment of
the existing permits acreage.
ATP 560p, Australia
- -------------------
Kestrel Share of
Anticipated Future
Expenditures
Current: Work 3% Working Interest
- -------- ---- -------------------
Year 4 (ended December 1, 1997) Data review $ 1,500
(permit continues in force until -------
renewal approved)
Total $ 1,500
The McIver Block is contained within Authority to Prospect No. 560 for
petroleum (ATP 560P). The McIver Block is subject to the following
royalties (ORRI) on production: 2% ORRI to Australian Grazing and
Pastoral Company Pty. Ltd.; 2% ORRI to Sheri L. Harley.
ATP 593, Heather Downs Block, Australia
- ---------------------------------------
Kestrel Share of
Anticipated Future
Expenditures
Current: Work 3% Working Interest
- -------- ---- --------------------
Year 4 (ending September 30, 1998) Data review $ 10,000
--------
Total $ 10,000
The Heather Downs Block is contained within Authority to Prospect No. 593
for petroleum (ATP 593P). The McIver Block is subject to a 5% ORRI to
Victoria Petroleum.
Authorities to Prospect for Petroleum (ATPP) are granted by the State of
Queensland for a period of four years in exchange for a four-year
exploration expenditure work program on a year by year basis. Permitees
may withdraw without penalty from a permit once the current year's work
program is satisfied and prior to entry into the next year's work program.
At the end of the three-year term, permitees are required to relinquish
25% of the permit with a further 25% of the permit at the end of the four-
year term. Permitees may at the end of the four-year term apply for
renewal of the permit with a further four-year work expenditure program
acceptable to the state.
Authorities to Prospect for Petroleum are subject to a 10% net interest
royalty on production payable to the State of Queensland.
DRILLING ACTIVITIES
The Company has participated in drilling ten wells since June 30, 1997.
Eight of the ten wells were dry holes. The unsuccessful wells were the
Heather Downs #1 on the ATP-593-P Prospect, Western Australia in July,
1997, the Longhorn #1 on the WA-261-P Prospect, Western Australia in
August, 1997, the Daisy 31-26 on the Goose Lake Prospect in Kern County,
California in August, 1997, the Greer #1 and Greer Side-track on the West
Lemore Prospect in California in November, 1997, the Janus #1 on the WA-
254-P Prospect in Western Australia in January, 1998, the Dewey #1 on the
Goose Lake Prospect in California in April, 1998 and the Sylvester #1 on
the Goose Lake Prospect in California in June, 1998. The Company
successfully completed the Cab Hughes #5, Kinta Prospect, in Oklahoma in
April, 1998, and is in the process of completing the CBM 24-15 well in the
Hilight Prospect, Campbell County, Wyoming.
Kestrel and its subsidiaries owned interests in net exploratory and net
development wells for the years ended June 30, 1998, 1997 and 1996 as set
forth below. This information does not include wells drilled under
farmout agreements.
<TABLE>
<CAPTION>
United States Australia
------------------------- -------------------------
6/30/98 6/30/97 6/30/96 6/30/98 6/30/97 6/30/96
<S> <C> <C> <C> <C> <C> <C>
Net Exploratory Wells: (1)
Dry (2) 2.50 - - 0.02 - 0.07
Productive (3)
2.50 - - 0.02 - 0.07
==== ==== ==== ==== ==== ====
Net Development Wells: (1)
Dry (2) - - - - - -
Productive (3) 0.88 0.34 0.03 - - -
---- ---- ---- ---- ---- ----
0.88 0.34 0.03 - - -
==== ==== ==== ==== ==== ====
</TABLE>
(1) A net well is deemed to exist when the sum of fractional ownership
working interests in gross wells equals one. The number of net wells
is the sum of the fractional working interests owned in gross wells
expressed as whole numbers and fractions thereof.
(2) A dry well (hole) is a well found to be incapable of producing either
oil or natural gas in sufficient quantities to justify completion as
an oil or natural gas well.
(3) Productive wells are producing wells and wells capable of production,
including wells that are shut-in.
FARMOUT AGREEMENTS
Under a farmout agreement, outside parties undertake exploration
activities using prospects owned by Kestrel. This enables the Company to
participate in the exploration prospects without incurring additional
capital costs, although with a substantially reduced ownership interest in
each prospect.
For June 30, 1998, two exploratory wells were drilled under farmout
agreements. Both wells were dry holes.
OIL AND GAS PRODUCTION, PRICES AND COSTS
As of June 30, 1998, the Company had a royalty and/or working interest in
83 gross (12.77 net) wells that produce oil only, 25 gross (3.45 net)
wells that produce gas only, and 242 (8.91 net) wells that produce both
oil and gas. All wells that produced gas were connected to pipelines.
For information concerning the Company's oil and gas production, estimated
oil and gas reserves, and estimated future cash inflows relating to proved
oil and gas reserves, see Note 7 to the financial statements included in
Item 8 of this Report. The reserve estimates for the reporting year were
prepared by Reed Ferrill of Ferrill & Associates, an independent
petroleum engineer. The Company did not file any oil and gas reserve
estimates with any federal authority or agency during its fiscal year
ended June 30, 1998.
For the year ended June 30, 1998, the Company's average operating cost
(including taxes and marketing) per barrel of oil equivalent (BOE)
(converting gas to oil at 6:1) was $5.75. The average operating cost per
BOE on an equivalent basis for fiscal years 1997 and 1996 was $7.13 and
$6.94, respectively. The average sales price per barrel of oil sold was
$14.63 for 1998, $21.86 for 1997, and $18.65 for 1996. The average sales
price per mcf of gas sold was $1.78 for 1998, $2.22 for 1997, and $1.60
for 1996.
CUSTOMERS
During fiscal year 1998, the Company had three major customers, Oxley
Petroleum, Inc., Saba Energy and Eighty-Eight Oil Company. Sales to these
customers accounted for 19%, 16% and 10% respectively, of oil and gas
sales in 1998. The Company does not believe that it is dependent on a
single customer. The Company has the option at most properties to change
purchasers if conditions so warrant.
OFFICE FACILITIES AND ADMINISTRATIVE SERVICES
The Company's executive offices are currently located at 999 18th Street,
Suite 2490, Denver, Colorado 80202 which is comprised of approximately
3,953 square feet, at an annual rate of $38,891.80. The Company's current
lease obligation expires February 28, 2003.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property subject to, any
material pending legal proceedings. The Company knows of no material
legal proceedings contemplated or threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
OUTSTANDING SHARES OF COMMON STOCK
The Company's common stock trades over-the-counter on the NASDAQ SmallCap
Market under the symbol "KEST." At June 30, 1998 the Company had
4,431,000 shares outstanding. At June 30, 1998, the Company had
approximately 1,300 shareholders of record, although the Company believes
that there are more beneficial owners of its stock, the number of which is
unknown.
STOCK PRICE
These quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Fiscal Year June 30, 1997 Sales Price
-----------
High Low
----- -----
<S> <C> <C>
First Quarter $4.50 $1.00
Second Quarter 2.50 .94
Third Quarter 2.88 1.13
Fourth Quarter 3.13 1.75
Fiscal Year June 30, 1998 Sales Price
-----------
High Low
----- -----
First Quarter $4.13 $1.94
Second Quarter 2.63 .94
Third Quarter 1.69 1.00
Fourth Quarter 1.56 .72
</TABLE>
DIVIDEND POLICY
While there are no covenants or other aspects of any finance agreements or
Bylaws that restrict the declaration or payment of cash dividends, the
Company has not paid any dividends on its common stock and does not expect
to do so in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The summary of selected financial data for the Company for its last five
fiscal years is as follows:
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Oil and Gas Sales $895,017 $1,278,502 $1,198,795 $1,334,667 $ 706,337
Total Revenue 1,204,261 1,420,056 1,268,456 1,397,775 730,413
Net Income
(Loss) (2,018,692)(1,312,365) (160,231)(1,119,133) 928
Income (Loss) per
Share (.46) (.56) (.08) (.64) *
At June 30,
Total Assets 5,560,022 7,638,626 4,115,211 4,287,984 4,044,086
Long-term Debt - - - - 600,000
Stockholders'
Equity 5,398,346 7,432,443 3,964,708 4,072,225 3,226,022
</TABLE>
* Less than .01 per share
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Cash Flows: Net working capital at June 30,
1998, was $3,137,982 compared to working capital of $5,026,785 on June 30,
1997 and working capital of $1,009,113 at June 30, 1996. The decrease in
working capital of $1,888,803 for the current year ended June 30, 1998 was
a result of lower operating cash flows and capital expenditures. The
increase in working capital of $4,017,672 from June 30, 1996 to 1997 was a
result of a private placement of the Company's stock in May 1997, less
amounts expended on drilling and operating activities.
Net cash used by operating activities totaled $1,654,630 for fiscal year
1998 as compared to cash provided by operating activities of $35,143 for
fiscal 1997, a decrease of $1,689,773. The decrease was a result of lower
oil and gas revenues coupled with substantially higher dry hole and
exploration costs resulting from the Company's emphasis on exploration
during the year. Net cash provided by operating activities totaled
$35,143 for fiscal year 1997 as compared to cash used by operating
activities of $28,380 for fiscal 1996, an increase of $63,523. The
increase was a result of higher oil and gas revenues, and overall
revenues, despite higher operating and general and administrative
expenses.
Net cash provided by investing activities was $518,091 in 1998 as compared
to $3,522,504 used in 1997. During the fiscal year ended June 30, 1998,
$575,056 was used to purchase producing and non-producing leasehold
interests and fixed assets. Non-producing leasehold purchases included
$184,000 to acquire various leasehold interests in the San Joaquin Basin,
approximately $26,000 to acquire additional interests in the Pierce Unit
in Campbell County, Wyoming and $18,000 to commence development of the
Kaye Unit in Converse and Niobrara Counties, Wyoming. Approximately
$288,000 was used to acquire well equipment on various wells, complete the
Cab Hughes #5 and Gallion #6 in Oklahoma and to complete the Scribner 11-
10 and the CBM 24-15 in Wyoming. The Company also spent $59,000 to acquire
computers, accounting software and furniture for use in its expanded
operations in fiscal 1998. For the fiscal year ended June 30, 1998, the
Company sold short-term investments of $1,078,256 versus purchases of
short-term investments of $2,764,253 and $348,360 for fiscal years 1997
and 1996, respectively. The change in short-term investments reflects the
Company's deployment of its excess cash to facilitate the exploration
program. Proceeds from the sale of property amounted to $14,891 for fiscal
1998 as compared to proceeds of $77,946 and $60,879 for fiscal 1997 and
1996, respectively. Net cash used by investing activities was $3,522,504
in 1997 as compared to $500,076 used in 1996. During the fiscal year
ended June 30, 1997, $836,197 was used to purchase producing and non-
producing leasehold interests and fixed assets. The Company also
purchased short-term investments in the amount of $2,764,253 with its
excess cash in 1997 as compared to investment purchases of $348,360 in
1996. Property acquisitions in 1997 included $714,000 to acquire non-
producing leasehold interests in the San Joaquin Basin from Ampolex (USA),
Inc., and approximately $88,000 to acquire well equipment on various wells
and to commence the drilling of two offset wells, the Gallion #6 in
Oklahoma, and the Scribner 11-10 in Wyoming. The Company spent $34,000 to
acquire computers, software and related equipment in 1997. During the
fiscal year ended June 30, 1996, $212,595 was used to purchase producing
and non-producing leasehold interests and fixed assets. The expenditures
included the purchase of a 20% working interest in the Boos Unit, Campbell
County, Wyoming, and additional investments in various Australian
prospects, including WA-254-P and EP 325, and PPL 106 in Papua, New
Guinea. Proceeds from sale of assets were $77,946 for the fiscal year
ended June 30, 1997. The Company sold its 20% working interest in the
Boos Unit, Campbell County, Wyoming for approximately $9,000 in June. All
other proceeds were related to the sale of well equipment on the Kuenhe
Ranch and Pierce Unit properties. Proceeds from assets sales for 1996
were $60,879, consisting of sales of used well equipment, and the sale of
the Company's interests in the Sam Acola lease in Texas and the Royal
Federal 35-7 on the North Adon leasehold in Wyoming.
Cash used by financing activities in 1998 was $15,405 as compared to cash
provided of $4,711,100 last year. The use of cash reflects $6,250
received by the Company relating to stock option exercises by officers of
the Company in August, 1997 and $21,655 worth of stock purchased from an
officer to complete the stock option exercise and to satisfy withholding
taxes payable as a result of a stock option exercise. Cash provided by
financing activities was $4,711,100 in 1997 as compared to $52,714 in
1996. The increase in cash from financing activities was a result of the
Company's private placement of 2,502,000 shares of its common stock at
$2.00 per share less offering and related expenses. Approximately $41,625
of the cash provided in 1996 was attributable to the payment to the
Company of the short-term gain realized by an affiliate on the sale of
shares of the Company's stock held less than six months. Additional
proceeds from the issuance of common stock in the amount of $11,089 were
received by the Company in 1996 pursuant to the exercise of stock options
under the Company's Nonqualified Stock Option Plan.
The Company has capital commitments of approximately $117,500 for the
fiscal year ending June 30, 1999, as described more fully under Permit
Obligations on Pages 6-8. These commitments may increase if operators of
various permits and prospects propose additional exploration or
development projects. Commitments can also be less if the Company elects
to withdraw or reduce its interest in a permit. The Company, through its
wholly owned subsidiary, Kestrel Energy California, Inc., has entered into
a contract with Black Coral, LLC, in which Black Coral will provide
ongoing geological and geophysical consulting with regard to an Area of
Mutual interest located in the San Joaquin Basin in California. The
contract term is for a period of one year ending September 30, 1998. The
parties have verbally agreed to continue that agreement on a month to
month basis until they formalize a written agreement. The Company's share
of Black Coral, LLC consulting costs for the fiscal year ending June 30,
1999 is anticipated to be approximately $144,000.
Stockholders' Equity: Stockholders' equity decreased $2,034,097, or
27%, to $5,398,346 at 1998 fiscal year end from a year earlier. The
decrease is attributable to the net loss incurred by the Company for the
year. Stockholders' equity increased $3,467,735, or 87%, to $7,432,443
for the fiscal year ended June 30,1997. The increase was primarily a
result of the private placement of stock during the year offset by the net
loss incurred during the year.
Debt Obligations: The Company had no long-term debt at June 30,
1998, 1997 and 1996.
Reserves and Future Cash Flows: For the fiscal year ended June 30,
1998, the Company's proved oil reserves decreased approximately 45,000
bbls. to 222,000 bbls., or 17%, from 267,000 a year ago. The Company's
proved gas reserves decreased 1,134 Mmcf from 4,617 Mmcf in 1997 to 3,483
Mmcf in 1998, a 25% decrease. The decrease in proved reserves is
attributable to revisions of previous quantity estimates, production, and
lower oil and gas prices for the fiscal year ended June 30, 1998. For the
fiscal year ended June 30, 1997, the Company's proved oil reserves
decreased approximately 213,000 bbls. to 267,000 bbls., or 44%, from year
ago levels of 480,000 bbls. The Company's proved gas reserves decreased
283 Mmcf from 4,900 Mmcf in 1996 to 4,617 Mmcf in 1997, a 6% decrease.
The decreases in proved reserves is attributable to revisions of previous
quantity estimates, production and changes in oil and gas prices for the
fiscal year ended June 30, 1997.
The Company's undiscounted net future cash flows have been estimated by
Ferrill & Associates, an independent petroleum engineering firm, to be
approximately $4,697,000 as of June 30, 1998. This compares to $8,281,000
in 1997 and $9,300,000 in 1996. The decrease in the current year is a
result of revisions of previous quantity estimates reflecting
significantly lower oil and gas prices. The decrease in 1997 versus 1996
was a result of revisions of previous quantity estimates.
Gas Balancing: The Company at June 30, 1998 was underproduced by
approximately 13,000 mcf. At June 30, 1997, the Company was underproduced
approximately 31,000 mcf. The Company was underproduced by 33,000 mcf of
gas at June 30, 1996. These amounts are reflected in the reserves and
estimated net future cash flows.
Natural Gas Sales Contracts: The Company's gas production is
generally sold under short term contracts with pricing set on current spot
markets with adjustments for marketing and transportation costs. All
contracts are cancelable within 30-90 days notice by the Company. The
Company has no contracts that are based on a fixed natural gas price.
Net Operating Loss and Tax Credit Carryforwards: At June 30, 1998,
the Company estimated that, for United States federal income tax purposes,
it had consolidated net operating loss carryforwards of approximately
$7,315,000. The utilization of approximately $1,695,000 of these
carryforwards are limited to an estimated $80,000 annually. Of the
balance of the loss carryforwards, $1,900,000 are limited to the extent of
future taxable income generated by the Company's subsidiary, Victoria
Exploration, Inc., and $3,720,000 is available to offset any future
taxable income of the Company. If not utilized, the net operating loss
carryforwards will expire during the period from 1999 through 2013.
Year 2000 Compliance: The Company has conducted a review of its
computer systems to identify software that could be affected by the "Year
2000" issue which results from computer programs being written using two
digits rather than four to define the applicable year. Any computer
programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000, possibly resulting in a major
system failure or miscalculations. Since 1997, the Company has updated
all of its computer hardware and software to be Year 2000 compliant.
Although the Company believes it has identified the internal Year 2000
issues which might impact its operations, no assurance can be given that
all such issues have been identified or will be corrected. Additionally,
no assurances can be given that the Company's vendors, banks or other
third parties will not experience Year 2000 issues, which may have a
significant impact on the Company's operations. The Company plans to work
with its most significant vendors and consultants to ensure that they do
not encounter Year 2000 problems that affect their work for the Company.
Accounting Policies: In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
121 ("SFAS No. 121"), Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. This Statement was effective
for financial statements for fiscal years beginning after December 15,
1996. Under SFAS No. 121 the Company is required to review long-lived
assets and certain identifiable intangibles to be held and used for
impairment whenever events or changes in circumstances indicate that the
carrying amount for an asset may not be recoverable. The Company must also
estimate the future cash flows expected to result from the use of such
assets and their eventual disposition. Future cash flows are future cash
inflows expected to be generated by an asset less the future cash outflows
expected to be necessary to obtain those inflows. If the sum of expected
future cash flows (undiscounted and without interest charges) is less than
the carrying amount of the asset, the Company is required to recognize an
impairment loss in accordance with SFAS No. 121. The Company adopted SFAS
No. 121 as of July 1, 1997 and has recorded a provision for impairment of
its proved oil and gas properties of approximately $25,000 and $841,000
for the years ended June 30, 1998 and 1997, respectively.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" (SFAS No. 123), was issued by the Financial Accounting
Standards Board in October 1995. SFAS No. 123 establishes financial
accounting and reporting standards for stock-based employee compensation
plans as well as transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. The Company
has included the disclosures required by SFAS No. 123 in the notes to its
financial statements. See Note 4 to the financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS No. 128") which was effective for years ending after December 15,
1997. SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share for entities with publicly
held common stock or potential common stock. The Company has adopted SFAS
No. 128 for the year ending June 30, 1998. The effect of such adoption
did not have any effect on the earnings (loss) per share of the Company.
RESULTS OF OPERATIONS
Fiscal 1998 vs. Fiscal 1997
- ---------------------------
Net Earnings: The Company reported a loss of $2,018,692 in fiscal
1998 compared to a loss of $1,312,365 in 1997, an increase of $706,327.
The increase in loss is attributable to lower oil and gas revenues and to
higher dry hole and exploration expenses.
Revenue: Total revenues decreased in fiscal 1998 by $215,795, or
15%, to $1,204,261 versus $1,420,056 in 1997. The decrease in overall
revenues was a result of lower oil and gas revenues, despite higher
interest income and overhead recovery from the Company's San Joaquin Joint
Venture partner.
Revenue from oil and gas sales decreased $383,485, or 30%, to $895,017
from $1,278,502 a year ago. The decrease in revenues was a result of
lower oil and gas prices as well as lower sales volumes for oil. Average
prices per barrel of oil decreased 33% to $14.63 from $21.86 a year ago.
Average prices received per mcf of gas decreased 20% to $1.78 versus $2.22
a year ago. Sales volumes for oil decreased 15% to 28,000 from 33,000 a
year ago. Sales volumes for gas increased 10% to 276 mmcf from 251 mmcf a
year ago.
Lease Operating Expenses: Lease operating expenses decreased
$106,074, or 20% to $427,046 from $533,120 a year ago. The decrease in
lease operating expense is attributable to lower production taxes
resulting from the decline in oil and gas revenues and lower operating
costs on the Pierce and Kuehne Ranch Units. Lease operating costs on a
BOE (barrel of oil equivalent) decreased 19% to $5.75 from $7.13 a year
ago.
Exploration Expenses: Exploration expenses increased $432,622, or
224%, to $625,533 from $192,911 in 1997. The increase in exploration
expense reflects the Company's emphasis in fiscal 1998 on exploration of
new oil and gas reserves. The increase was a result of higher geological
and geophysical costs as well as higher delay rentals paid on exploration
acreage.
Dry Holes, Abandoned and Impaired Properties: Dry hole costs were
$681,046 for fiscal 1998. The Company participated in drilling eight
wells that were abandoned as dry holes in fiscal 1998. In the San Joaquin
Basin of California, the Company incurred dry hole costs on the Daisy 31-
26 of $64,200, the Greer #1 and Greer Sidetrack of $352,638, the Dewey #1
of $92,800 and the Sylvester #1 of $112,688. Internationally, the Company
participated in three wells which were abandoned as dry holes. In July
1997, the Company drilled the Heather Downs #1 and in August 1997 the
Company participated in the Longhorn #1, both in Western Australia. Both
wells were dry holes at no cost to the Company by virtue of a carried
interest in the drilling. The Company also participated in the Janus #1
in Western Australia in January, 1998. The well was abandoned as a dry
hole at a cost to the Company of approximately $58,600. There were no dry
hole costs for fiscal 1997. Abandonment costs increased $353,099, or
346%, to $455,028 from $101,929 a year ago. The increase is a result of
the Company's decision to abandon some leaseholds in the San Joaquin
Basin, which are no longer a part of the Company's exploration strategy.
Impairment expense decreased $822,242, to $75,010 from $897,252 a year
ago. The decrease was attributable to lower impairment expense under SFAS
No. 121, which amounted to $25,500 in fiscal 1998 versus $841,262 in 1997.
The remaining impairment expense of $49,500 related to various
international permits.
General and Administrative Expense: General and administrative
expenses increased $159,938, or 26%, to $768,216 as compared to $608,278 a
year ago. The increase in general and administrative expenses is due to
expanded land, engineering, and accounting departments to facilitate the
higher exploration activity level of the Company during fiscal 1998, as
well as higher public relations costs.
Fiscal 1997 vs. Fiscal 1996
- ---------------------------
Net Earnings: The Company reported a loss of $1,312,365 in fiscal
1997 compared to a loss of $160,231 in 1996, an increase of $1,152,134.
The increase in loss was attributable to impairment and abandonment costs
of $999,181, higher exploration expenses, and an increase in general and
administrative expenses, as described below. Of the $999,181 recorded as
abandonment or impaired property expense for 1997, approximately $953,000
was non-cash and therefore had no effect on that year's working capital.
The Company also recorded $69,000 in non-cash public relations expense as
required by SFAS No. 123, because the Company issued stock options to
various consultants for services. Excluding these non-cash expenses, the
Company lost $290,365 in fiscal 1997 from operations as a result of its
materially increased exploration activity.
Revenue: Total revenue increased in fiscal 1997 by $151,600, or 12%,
to $1,420,056 versus $1,268,456 in 1996. The increase in revenues was
associated with higher average oil and gas prices, increased interest
income and higher gains attributed to property sales.
Revenue from oil and gas sales was $1,278,502 in 1997, an increase of
$79,707, or 7%, from the $1,198,795 recorded in 1996. Sales volumes
decreased for both oil and gas during 1997 to 33,000 bbls. of oil and 251
mmcf of gas from 41,000 bbls. of oil and 273 mmcf of gas in 1996. Average
prices per barrel of oil increased 17% to $21.86 from $18.65 in 1996.
Average prices received per mcf of gas increased 39% to $2.22 versus $1.60
in 1996.
Lease Operating Expenses: Lease operating expenses decreased
$60,812, or 10%, to $533,120 from $593,932 in the previous year. The
decrease in lease operating expenses was a result of lower expenses on the
Pierce Unit in Wyoming and the Kuehne Ranch Unit. Lease Operating costs
on a BOE (barrel of oil equivalent) increased 3% to $7.13 from $6.94 in
1996, despite lower lease operating expenses, due to lower BOE's in 1997.
Exploration Expenses: Exploration expenses increased $188,356 to
$192,911 from $4,555, a year ago. The increase in exploration costs is
attributable to the Company's exploration program in the San Joaquin Basin
in California, which began in March, 1997. The Company incurred
geological and geophysical costs to identify various prospects for future
drilling. Exploration costs in 1996 were attributable to the payment of
delay rentals by the Company on various leaseholds held by the Company.
Dry Holes, Abandoned and Impaired Properties: No dry hole costs were
recorded in 1997 versus $135,448 in 1996. Abandonment costs increased
$83,447 to $101,929 from $18,482 in 1996. The Company abandoned the EP
367 Permit in Australia at a cost of $51,068, various non-producing
leaseholds domestically at a cost of $15,000 and incurred abandonment
expense relating to the N.E. Kuehne Ranch Field of $36,000. Impairment
expense increased $848,435 to $897,252 from $48,817 in 1996. The Company
adopted SFAS No. 121 in July, 1997 and accordingly, recorded a provision
for impairment of its proved oil and gas properties of $841,262. The
remaining impairment expense of $55,990 related to various international
permits. Included in the $897,252 of impairment expense in 1997 was the
write down of the Pierce Waterflood project in Wyoming at a cost of
$454,000.
General and Administrative Expense: General and administrative
expenses increased $170,884, or 39%, to $608,278 in 1997 versus $437,394
in 1996. Included in the increased general and administrative expenses
was $69,000 of non-cash expense for common stock and options issued for
services. The increase in general and administrative expense was a result
of higher public relations expense, higher travel expense relating to the
California properties, higher professional fees, and higher employee
costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not invest in or hold market risk sensitive or interest
rate sensitive instruments. The only currency exchange rate risk borne by
the Company is minimal, stemming from the Company's obligations to fund
its international drilling in Australian dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See pages F-1 through F-17 for this information.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
KESTREL ENERGY, INC.:
We have audited the accompanying consolidated balance sheets of Kestrel
Energy, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended June 30,
1998. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated 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 the audit to
obtain reasonable assurance about 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. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Kestrel Energy, Inc. and subsidiaries as of June 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the years
in the three-year period ended June 30, 1998, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, Kestrel
Energy, Inc. adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived and for
Long-Lived Assets to be Disposed Of, in the year ended June 30, 1997.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
September 18, 1998
KESTREL ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets 1998 1997
- ------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 372,194 1,524,138
Short-term investments 2,330,831 3,409,087
Accounts receivable 166,568 162,108
Related party receivables 393,175 128,989
Other current assets 36,890 8,646
----------- -----------
Total current assets 3,299,658 5,232,968
----------- -----------
Property and equipment, at cost:
Oil and gas properties, successful efforts
method of accounting (note 6):
Unproved 688,779 911,485
Proved 4,219,282 4,128,034
Furniture and equipment 130,468 92,009
----------- -----------
5,038,529 5,131,528
Accumulated depreciation and depletion (2,778,165) (2,725,870)
----------- -----------
Net property and equipment 2,260,364 2,405,658
----------- -----------
$ 5,560,022 $ 7,638,626
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable:
Trade $ 139,989 165,041
Related party - 23,972
Accrued liabilities 21,687 17,170
----------- -----------
Total current liabilities 161,676 206,183
----------- -----------
Stockholders' equity (note 2):
Preferred stock, $1 par value. 1,000,000
shares authorized; none issued - -
Common stock, no par value. 20,000,000
shares authorized; 4,431,000 and
4,414,624 shares issued at June 30, 1998
and 1997, respectively 13,139,349 13,154,754
Accumulated deficit (7,741,003) (5,722,311)
----------- -----------
Total stockholders' equity 5,398,346 7,432,443
----------- -----------
Commitments (note 5)
$ 5,560,022 $ 7,638,626
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Oil and gas sales $ 895,017 $ 1,278,502 $ 1,198,795
Gain on sale of property and
equipment 14,832 43,993 14,289
Interest income 202,496 67,986 44,147
Other, net 91,916 29,575 11,225
----------- ---------- ----------
Total revenue 1,204,261 1,420,056 1,268,456
----------- ---------- ----------
Costs and expenses:
Lease operating expenses 427,046 533,120 593,932
Dry holes, abandoned and impaired
properties 1,211,084 999,181 202,747
Exploration expenses 625,533 192,911 4,555
Depreciation and depletion 191,074 398,931 190,059
General and administrative 768,216 608,278 437,394
----------- ---------- ----------
Total costs and expenses 3,222,953 2,732,421 1,428,687
----------- ---------- ----------
Net loss $(2,018,692) (1,312,365) (160,231)
=========== ========== ==========
Loss per share $(.46) (.56) (.08)
=========== ========== ==========
Weighted average number of
common shares outstanding 4,429,626 2,325,041 1,908,612
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock Total
--------------------- Accumulated stockholders'
Shares Amount deficit equity
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 1,900,808 $ 8,321,940(4,249,715) 4,072,225
Exercise of stock
options (note 2) 6,750 11,089 - 11,089
Proceeds from sale of
stock by Victoria
International Petroleum
N.L. (note 4) - 41,625 - 41,625
Adjustment for previously
issued and unrecorded
shares (note 2) 44 - - -
Net loss - - (160,231) (160,231)
--------- ----------- ---------- ----------
BALANCE, JUNE 30, 1996 1,907,602 8,374,654(4,409,946) 3,964,708
Common shares issued, net
of offering costs
(note 2) 2,502,000 4,711,100 - 4,711,100
Common shares issued for
services (note 2) 5,000 12,500 - 12,500
Options issued for
services (note 2) - 56,500 - 56,500
Adjustment for previously
issued and unrecorded
shares (note 2) 22 - - -
Net loss - - (1,312,365) (1,312,365)
--------- ----------- ---------- ----------
BALANCE, JUNE 30, 1997 4,414,624 13,154,754(5,722,311) 7,432,443
Exercise of stock
options (note 2) 32,884 44,472 - 44,472
Common shares surrendered
by officer (note 2) (16,518) (59,877) - (59,877)
Adjustment for previously
issued and unrecorded
shares (note 2) 10 - - -
Net loss - - (2,018,692) (2,018,692)
--------- ----------- ---------- ----------
BALANCE, JUNE 30, 1998 4,431,000 $13,139,349(7,741,003) 5,398,346
========= =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,018,692) (1,312,365) (160,231)
Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating
activities:
Depreciation and depletion 191,074 398,931 190,059
Abandoned and impaired
properties 529,217 953,250 56,717
Gain on sale of property and
equipment (14,832) (43,993) (14,289)
Noncash compensation expense
for common stock and options
issued for services - 69,000 -
Changes in operating assets and
liabilities:
(Increase) decrease in
accounts receivable (4,460) 2,697 (13,581)
Increase in related party
receivables (264,186) (103,429) -
(Increase) decrease in other
current assets (28,244) 15,372 (21,799)
Increase (decrease) in
accounts payable - trade (25,052) 86,361 (28,067)
Increase (decrease) in
accounts payable -
related party (23,972) (8,770) 29,986
Increase (decrease) in
accrued liabilities 4,517 (21,911) (67,175)
---------- ---------- --------
Net cash provided
(used) by operating
activities (1,654,630) 35,143 (28,380)
---------- ---------- --------
Cash flows from investing activities:
Capital expenditures (575,056) (836,197) (212,595)
Sale (purchase) of short-term
investments, net 1,078,256 (2,764,253) (348,360)
Proceeds from sales of property
and equipment 14,891 77,946 60,879
---------- ---------- --------
Net cash provided
(used) by investing
activities 518,091 (3,522,504) (500,076)
---------- ---------- --------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net of offering costs - 4,711,100 -
Proceeds from exercise of stock
options 6,250 - 11,089
Common stock purchased for
withholding tax (21,655) - -
Proceeds from sale of stock by VIP - - 41,625
---------- ---------- --------
Net cash provided
(used) by financing
activities (15,405) 4,711,100 52,714
---------- ---------- --------
Net increase (decrease)
in cash and cash
equivalents (1,151,944) 1,223,739 (475,742)
Cash and cash equivalents at
beginning of year 1,524,138 300,399 776,141
---------- ---------- --------
Cash and cash equivalents at
end of year $ 372,194 1,524,138 300,399
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
Kestrel Energy, Inc. (the Company) was incorporated under the laws of
the State of Colorado on November 1, 1978. The Company's principal
business is the acquisition, either alone or with others, of
interests in proved developed producing oil and gas leases, and
exploratory and development drilling.
The Company presently owns oil and gas interests in the states of
California, Colorado, Kansas, Louisiana, New Mexico, Oklahoma, South
Dakota, Texas and Wyoming. The Company also has an interest in seven
international exploration permits, one in New Guinea and six in
Australia.
Victoria International Petroleum N.L. (VIP) owns 26.3% of the common
shares of the Company at June 30, 1998.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its subsidiaries, Victoria Exploration, Inc. (Victoria)
and Kestrel Energy California, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash Equivalents
----------------
Cash equivalents consist of money market funds. For purposes of the
consolidated statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or
less to be cash equivalents.
Short-Term Investments
----------------------
Short-term investments at June 30, 1998 consist primarily of U.S.
Treasury securities with maturities of less than one year which are
classified as available for sale. Short-term investments are
recorded at cost, which approximates market value.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
----------------------
The Company follows the successful efforts method of accounting for
its oil and gas activities. Accordingly, costs associated with the
acquisition, drilling and equipping of successful exploratory wells
are capitalized. Geological and geophysical costs, delay and surface
rentals and drilling costs of unsuccessful exploratory wells are
charged to expense as incurred. Costs of drilling development wells,
both successful and unsuccessful, are capitalized. Upon the sale or
retirement of oil and gas properties, the cost thereof and the
accumulated depreciation or depletion are removed from the accounts
and any gain or loss is credited or charged to operations.
Depreciation and depletion of capitalized exploration and development
costs is computed on the units-of-production method by individual
fields as the related proved reserves are produced. A reserve is
provided for estimated future costs of site restoration,
dismantlement, and abandonment activities, net of residual salvage
value, as a component of depletion.
Furniture and equipment are depreciated using the straight-line
method over estimated lives ranging from three to five years.
Management periodically evaluates capitalized costs of unproved
properties and provides for impairment, if necessary, through a
charge to operations.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This statement was effective for financial
statements for fiscal years beginning after December 15, 1995. Under
SFAS No. 121 an entity shall review long-lived assets and certain
identifiable intangibles to be held and used for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If the changes in circumstances
are present or if other events in circumstances indicate that the
carrying amount of an asset that an entity expects to hold and use
may not be recoverable, the entity shall estimate the future cash
flows expected to result from the use of the asset and its eventual
disposition. Future cash flows are the future cash inflows expected
to be generated by an asset (grouped at the lowest level for which
there are identifiable cash flows which is on a field-by-field basis)
less the future cash outflows expected to be necessary to obtain
those inflows. If the sum of expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the
asset, the entity shall recognize an impairment loss in accordance
with SFAS No. 121. Otherwise, an impairment loss shall not be
recognized. The Company adopted SFAS No. 121 effective July 1, 1996
and recorded a provision for impairment of its proved oil and gas
properties of approximately $25,000 and $841,000 for the years ended
June 30, 1998 and 1997, respectively.
Prior to July 1, 1996, the Company assessed the impairment of proved
oil and gas properties on an aggregate basis using undiscovered
estimated future net revenue and constant prices and costs.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Gas Balancing
-------------
The Company uses the sales method of accounting for gas balancing of
gas production. Under this method, all proceeds from production
credited to the Company are recorded as revenue until such time as
the Company has produced its share of related reserves. Thereafter,
additional amounts received are recorded as a liability.
As of June 30, 1998 and 1997, the Company is in an under-produced
position of approximately 13,000 MCF and 31,000 MCF, respectively.
Accordingly, these amounts have been included in the reserve
quantities as set forth in note 7.
Income Taxes
------------
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
Accounting for Income Taxes. Under the asset and liability method of
SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted income tax rates expected to apply to taxable
income in the years in which those differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax
assets and liabilities of a change in income tax rates is recognized
in the results of operations in the period that includes the
enactment date.
Stock-Based Compensation
------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), effective for fiscal years
beginning after December 15, 1995. This statement defines a fair
value method of accounting for employee stock options and encourages
entities to adopt that method of accounting for its stock
compensation plans. SFAS 123 allows an entity to continue to measure
compensation costs for these plans using the intrinsic value based
method of accounting as prescribed in Accounting Pronouncement
Bulletin Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25). The Company has elected to continue to account for its
employee stock compensation plans as prescribed under APB 25. The
pro forma disclosures of net loss and loss per share required by SFAS
123 are included in note 2.
Loss per Share
--------------
Loss per share is based on the weighted average number of common
shares outstanding during the period. Outstanding stock options are
excluded from the computation as their effect was antidilutive.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------
(2) STOCKHOLDERS' EQUITY
Preferred Stock
---------------
The Company is authorized to issue up to 1 million shares of $1 par
value preferred stock, the rights and preferences of which are to be
determined by the Board of Directors at or prior to the time of
issuance.
Common Stock
------------
In July 1997, the Company's president exercised options to purchase
27,884 shares of the Company's common stock. Payment for the shares
of common stock purchased upon exercise of the option was made in
shares of the Company's common stock previously owned by the
Company's president, valued at the market price on the date of
exercise. The Company recorded the 10,544 shares of the Company's
common stock reacquired at cost, which shares were subsequently
retired. In exchange for the withholding taxes due as a result of
the gain on sale recognized by the Company's president, 5,974 shares
of the Company's common stock value at $21,655 were reacquired at
cost, which shares were subsequently retired.
In May 1997, the Company sold 2,502,000 shares of common stock $2.00
per share in a private placement. Total proceeds, net of brokers
commissions, were $4,711,100.
Also in May 1997, the Company issued 5,000 shares of common stock
valued at $2.50 per share to a company for services. The fair value
of the common stock of $12,500 was charged to expense in fiscal 1997.
During the years ended June 30, 1998, 1997 and 1996, certificates for
previously issued shares of the Company's common stock, representing
10, 22 and 44 shares, respectively, were presented for transfer.
Prior to presentment, such shares had not been recorded as issued by
the Company.
Stock Option Plans
------------------
The Company has reserved 36,000 shares of its no par common stock for
key employees of the Company under its 1993 Amended Restated Stock
Incentive Plan (the Incentive Plan). Under the terms of the Plan, no
stock options are exercisable more than ten years after the date of
grant (five years after date of grant for 10% shareholders). As of
June 30, 1998, all options had been granted under the Incentive Plan.
The Company has reserved 750,000 shares of its no par common stock
for employees, officers, directors, consultants and advisors of the
Company under its 1993 Nonqualified Stock Option Plan (the
Nonqualified Plan). Under the terms of the Plan and the Nonqualified
Plan, no stock options are exercisable more than ten years after the
date of grant (five years after date of grant for 10% shareholders).
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------
(2) STOCKHOLDERS' EQUITY (CONTINUED)
During fiscal 1998, the Company merged the Incentive Plan and the
Nonqualified Plan into the Stock Option Plan (the Plan). The Company
has reserved 1,000,000 shares of its no par common stock for
employees, officers, directors, consultants and advisors of the
Company under the Plan. Under the terms of the Plan, no stock
options are exercisable more than ten years after the date of grant
(five years after date of grant for 10% shareholders).
During fiscal 1998, 1997 and 1996, the Board of Directors granted
options to purchase shares of common stock to key employees and
directors pursuant to the Plan and the Nonqualified Plan. The
exercise prices of the options range from $1.25 to $3.88 per share.
The options granted are exercisable upon issuance.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for stock options granted to key employees and directors.
Had compensation cost for the Company's two stock-based compensation
plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method prescribed in
FASB Statement 123, the Company's net loss and loss per share would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended June 30,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Net loss:
As reported $(2,018,692) (1,312,365)
Pro forma (2,038,934) (1,400,899)
Loss per share:
As reported (.46) (0.56)
Pro forma (.46) (0.60)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for grants in fiscal 1998, 1997 and 1996,
respectively: no dividend yield for all years; expected volatility of
93%, 98% and 98%; weighted average risk-free interest rates of 6.1%
in fiscal 1998 for the Plan, and 6.5% in fiscal 1997 for the
Incentive Plan options, and 6.7% in fiscal 1997 and 6.2% in fiscal
1996 for the Nonqualified Plan options; and expected lives of seven
years for all years.
During fiscal 1997, the Company granted options to purchase 35,500
shares of common stock at prices ranging from $1.47 to $3.69 per
share to consultants for services. The fair value of the options
granted of $56,500 was charged to expense in fiscal 1997.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------
(2) STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's two fixed stock options
plans as of June 30, 1998, 1997 and 1996, and changes during the
years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Fixed options Shares price Shares price Shares price
- ------------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning
of year 648,500 $ 2.49 570,000 $ 2.54 311,000 $ 2.27
Granted 10,000 2.28 81,500 2.11 267,250 2.86
Exercised (32,884) 1.35 - - (8,250) 2.61
Expired - - (3,000) 2.47 - -
------- ------- -------
Outstanding at
end of year 625,616 2.55 648,500 2.49 570,000 2.54
======= ======= =======
Options
exercisable
at year
end 625,616 648,500 570,000
Weighted
average fair
value of
options
granted
during the
year $ 2.01 $ 1.78 $ 2.56
</TABLE>
The following table summarizes information about fixed stock options
outstanding at June 30, 1998 (all of which are exercisable):
<TABLE>
<CAPTION>
Weighted Weighted
average average
Range of Number remaining exercise
exercise price outstanding contractual life price
-------------- ----------- ---------------- --------
<S> <C> <C> <C>
$ 1.25-1.3125 37,000 5.6 years $ 1.29
1.875-2.00 141,616 8.0 1.90
2.25-2.875 329,000 7.2 2.52
3.625-4.00 118,000 7.2 3.78
-------
1.25-4.00 625,616 7.3 2.55
=======
</TABLE>
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------
(3) INCOME TAXES
At June 30, 1998 and 1997, the Company's significant deferred tax
assets are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $2,850,000 $2,129,000
Depletion carryforwards 151,000 103,000
Investment tax credit carryforwards - 47,000
Oil and gas properties, principally
due to differences in
depreciation and depletion and
impairment - 418,000
Other - 22,000
---------- ----------
3,001,000 2,719,000
Deferred liabilities:
Oil and gas properties, principally
due to differences in depreciation
and depletion and impairment (40,000) -
Other (24,000) -
---------- ----------
(64,000) -
---------- ----------
Valuation allowance (2,937,000) (2,719,000)
---------- ----------
Net deferred tax assets $ - -
========== ==========
</TABLE>
The valuation allowance for deferred tax assets as of June 30, 1998
was $2,937,000. The net change in the valuation allowance for the
year ended June 30, 1998 was an increase of $218,000.
At June 30, 1998, the Company had net operating loss carryforwards of
approximately $7,315,000. The utilization of approximately
$1,695,000 of these loss carryforwards is limited to an estimated
$80,000 per year as a result of a change of ownership which occurred
June 30, 1994. Of the balance of the net operating loss
carryforwards, $1,900,000 is limited to the extent of future taxable
income generated by Victoria, and $3,720,000 is available to offset
future taxable income of the Company. If not utilized, the tax net
operating losses will expire during the period from 1999 through
2013.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------
(4) RELATED PARTY TRANSACTIONS
The Company, through its affiliation with VIP, has the opportunity to
participate in various international permits throughout the world.
The Company earns a right to participate by sharing in the costs of
data review, seismic and drilling. To date, the Company has agreed
to farm-in on eight international permits, two in New Guinea and six
in Australia. The Company has agreed to pay VIP a 5% royalty with
respect to the Company's interest in the international permits for
any permits which produce net revenues for the Company.
In 1996, the Company received a payment of $41,625 from VIP,
attributed to the gain realized by VIP on the sale of shares of the
Company's stock held less than six months.
(5) LEASE COMMITMENTS
The Company has noncancelable operating leases, primarily for rent of
office facilities that expire over the next five years. Rental
expense for operating leases was $38,793, $33,958 and $31,179 for the
years ended June 30, 1998, 1997 and 1996, respectively.
Future minimum rental commitments under noncancelable operating
leases as of June 30, 1998 are as follows:
Fiscal year
-----------
1999 $ 56,001
2000 58,636
2001 62,590
2002 65,886
2003 44,807
--------
$287,920
========
The Company currently has a 2% to 5% interest in two prospects in
Papua New Guinea and six in Australia. Under the terms of the
exploration permits, the Company is obligated to share in spending
specified amounts in each annual period in order to retain its
interest in the permit. The Company can generally withdraw from the
permit at the end of any annual period without penalty and forfeit
its interest in the permit. Estimated permit obligations expected to
be incurred over the next 5 years are as follows:
Permit year
-----------
1998 $ 34,500
1999 83,000
2000 220,500
2001 40,000
2002 90,000
Thereafter 400,000
--------
$868,000
========
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------
(6) DISCLOSURES ABOUT CAPITALIZED COSTS, COSTS INCURRED AND MAJOR
CUSTOMERS
Capitalized costs related to oil and gas producing activities are as
follows:
<TABLE>
<CAPTION>
June 30,
1998 1997
---------- ----------
<S> <C> <C>
Unproved:
Domestic $ 577,504 750,714
Foreign 111,275 160,771
Proved 4,219,282 4,128,034
---------- ----------
4,908,061 5,039,519
Accumulated depreciation and
depletion and impairment (2,732,345) (2,678,585)
---------- ----------
$2,175,716 2,360,934
========== ==========
</TABLE>
Costs incurred in oil and gas producing activities for the years
ended June 30, 1998, 1997 and 1996 were approximately as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Unproved property
acquisition costs $228,000 714,000 123,000
Proved property
acquisition costs - - 37,000
Development costs 289,000 88,000 52,000
Exploration costs - - 146,000
</TABLE>
During fiscal 1998, the Company had three major customers. Sales to
these customers accounted for approximately 19%, 16% and 10% of
fiscal 1998 oil and gas sales. During fiscal 1997, the Company had
two major customers. Sales to these customers accounted for
approximately 22% and 18% of fiscal 1997 oil and gas sales. During
fiscal 1996, the Company had two major customers. Sales to these
customers accounted for approximately 26% and 15% of fiscal 1996 oil
and gas sales.
(7) INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED)
The information presented below regarding the Company's oil and gas
reserves were prepared by independent petroleum engineering
consultants. All reserves are located within the continental United
States.
Proved oil and gas reserves are the estimated quantities of crude
oil, natural gas and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed oil and gas
reserves are those expected to be recovered through existing wells
with existing equipment and operating methods. The determination of
oil and gas reserves is highly complex and interpretive. The
estimates are subject to continuing changes as additional information
becomes available.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------
(7) INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED)
(CONTINUED)
Estimated net quantities of proved reserves of oil and gas for the
years ended June 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- -------------------
Oil Gas Oil Gas
(BBLS) (MCF) (BBLS) (MCF)
------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Beginning of year 267,000 4,617,000 480,000 4,900,000
Purchases of oil and
gas reserves in place - - - -
Revisions of previous
quantity estimates (17,000) (1,092,000) (182,000) (59,000)
Extensions, discoveries
and improved
recovery - 234,000 10,000 24,000
Sales of reserves
in place - - (8,000) -
Production (28,000) (276,000) (33,000) (248,000)
------- ---------- ------- ---------
End of year 222,000 3,483,000 267,000 4,617,000
======= ========== ======= =========
Proved developed
reserves -
beginning of year 211,000 2,735,000 400,000 2,717,000
======= ========== ======= =========
Proved developed
reserves -
end of year 166,000 2,903,000 211,000 2,735,000
======= ========== ======= =========
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------
Oil Gas
(BBLS) (MCF)
------- ---------
<S> <C> <C>
Beginning of year 439,000 4,325,000
Purchases of oil and
gas reserves in place 8,000 -
Revisions of previous
quantity estimates 77,000 689,000
Extensions, discoveries
and improved recovery - 159,000
Sales of reserves in place (1,000) -
Production (43,000) (273,000)
------- ---------
End of year 480,000 4,900,000
======= =========
Proved developed reserves -
beginning of year 327,000 2,436,000
======= =========
Proved developed reserves -
end of year 400,000 2,717,000
======= =========
</TABLE>
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------
(7) INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED)
(CONTINUED)
Standardized Measure of Discounted Future
Net Cash Flows Relating to Proved Oil and Gas Reserves
------------------------------------------------------
Future net cash flows presented below are computed using year-end
prices and costs. Future corporate overhead expenses and interest
expense have not been included.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Future cash inflows $8,593,000 13,230,000 16,470,000
Future costs:
Production (3,392,000) (4,326,000) (6,227,000)
Development (504,000) (623,000) (893,000)
Income taxes - - (50,000)
---------- ---------- ----------
Future net cash flows 4,697,000 8,281,000 9,300,000
10% discount factor (1,820,000) (3,074,000) (3,855,000)
---------- ---------- ----------
Standardized measure of
discounted future net
cash flows $2,877,000 5,207,000 5,445,000
========== ========== ==========
</TABLE>
The principal sources of changes in the standardized measure of
discounted future net cash flows during the years ended June 30,
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Beginning of year $5,207,000 5,445,000 4,119,000
Sales of oil and gas produced
during the period, net of
production costs (468,000) (745,000) (605,000)
Net change in prices and
production costs (1,325,000) 650,000 750,000
Changes in estimated future
development costs 103,000 169,000 (46,000)
Purchase of reserves in place - - 22,000
Extensions, discoveries and
improved recovery 96,000 50,000 112,000
Revisions of previous quantity
estimates and other (1,257,000) (934,000) 732,000
Net change in income taxes - 50,000 (50,000)
Sales of reserves in place - (23,000) (1,000)
Accretion of discount 521,000 545,000 412,000
---------- --------- ----------
End of year $2,877,000 5,207,000 5,445,000
========== ========= =========
</TABLE>
KESTREL ENERGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------
(7) INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED)
(CONTINUED)
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves and the changes in standardized
measure of discounted future net cash flows relating to proved oil
and gas reserves were prepared in accordance with the provisions of
Statement of Financial Accounting Standards No. 69. Future cash
inflows were computed by applying current prices at year-end to
estimated future production. Future production and development costs
are computed by estimating the expenditures to be incurred in
developing and producing the proved oil and gas reserves at year-end,
based on year-end costs and assuming continuation of existing
economic conditions. Future income tax expenses are calculated by
applying appropriate year-end tax rates to future pretax net cash
flows relating to proved oil and gas reserves, less the tax basis of
properties involved and tax credits and loss carryforwards relating
to oil and gas producing activities. Future net cash flows are
discounted at a rate of 10% annually to derive the standardized
measure of discounted future net cash flows. This calculation
procedure does not necessarily result in an estimate of the fair
market value or the present value of the Company's oil and gas
properties.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the names of all directors and executive officers
of the Company, their ages, all positions and offices held by each such
person, the period during which he has served as such, and the principal
occupations of each such person during at least the last five years:
TIMOTHY L. HOOPS, age 42, was appointed President, Chief Executive
Officer and Director on June 1, 1992. Mr. Hoops is a petroleum geologist
with 19 years experience in the continental USA and Australia. Mr. Hoops
has been Vice President and a Director of the Company's wholly owned
subsidiary, Victoria Exploration, Inc., an independent oil and gas
producer, since 1987, and has been President and a Director of Kestrel
Energy California, Inc., another wholly owned subsidiary, since March
1997. He has also been a Director of Victoria International Petroleum
N.L. and of Victoria Petroleum N.L. since 1987. Mr. Hoops was Exploration
Manager for Royal Resources Corporation, a publicly held Denver based
company engaged in the exploration and development of oil and gas, from
1984 to 1987. Prior to 1984, Mr. Hoops was employed by Amoco Production,
Cities Service and Santa Fe Energy. Mr. Hoops is a 1979 graduate of the
Colorado School of Mines, with a degree in geology. Mr. Hoops is the
brother in law of Mr. Boatright.
ROBERT J. PETT, age 51, was appointed as a Director on June 1, 1992
and Chairman of the Board on January 16, 1995. Mr. Pett served as
Secretary from June 1, 1992 until December 16, 1992, as Vice President
from November 1, 1992 until January 16, 1995, and as Treasurer from
January 4, 1993 to January 16, 1995. Mr. Pett has been a director of
Victoria International Petroleum N.L. since 1986. Mr. Pett has been
Chairman of Victoria Petroleum N.L. for 14 years. He is currently
Chairman of Resolute Limited, an Australian mining and natural resources
company, which provides office facilities and administrative services to
Victoria Petroleum N.L. on a pro rata reimbursement of expenses basis. He
is a Director of Sapphire Mines N.L., an Australian precious gem mining
company, and he is a Director of Victoria Exploration, Inc. and Kestrel
Energy California, Inc., independent oil and gas producers which are a
wholly owned subsidiaries of the Company. Mr. Pett holds a Masters Degree
in Economics (Queens University, Canada).
MARK A. BOATRIGHT, age 41, was appointed a Director on October 18,
1993, and as Vice President - Finance, Chief Financial Officer, Treasurer
and Secretary on January 16, 1995. He has also held the same positions
since March 1997 for Kestrel Energy California, a wholly owned subsidiary
of the Company. Mr. Boatright is President of Boatright and Associates,
P.C., Certified Public Accountants. Mr. Boatright has over 19 years
experience in financial accounting and specializes in oil and gas
accounting and international taxation. Mr. Boatright currently acts as a
consultant in international taxation and accounting for various oil and
gas companies. He also is President of Regatta Financial Services, a
registered investment advisory firm. Prior to establishing his own
accounting practice, Mr. Boatright was the tax manager for Bradley, Allen
& Associates, P.C., Certified Public Accountants. Mr. Boatright is a 1979
cum laude graduate of the University of Colorado with a degree in finance.
He has been providing accounting and financial services to the Company
since June, 1992. Mr. Boatright is the brother in law of Mr. Hoops.
JOHN T. KOPCHEFF, age 50, was appointed as Vice President -
International and a Director of the Company on January 16, 1995. He has
also held the same positions since March 1997 for Kestrel Energy
California, a wholly owned subsidiary of the Company. Mr. Kopcheff is a
geologist with 28 years experience in petroleum in Australia, Southeast
Asia, United States, South America and the North Sea, both in field
geological operations and management. Mr. Kopcheff has been a Director
and Secretary of Victoria Exploration, Inc. since 1986, a Director of
Victoria International Petroleum N.L. since 1986, and a Director of
Victoria Petroleum N.L. since 1984. Prior to his appointment , he
provided various services to the Company relating to the Company's
international exploration activities on a consulting basis. He received a
Bachelor of Science degree with honors from the University of Adelaide in
1970.
KENNETH W. NICKERSON, age 78, is an independent petroleum and mineral
geologist with over 49 years experience. He was appointed as a Director
of the Company on December 16, 1992. From 1981 until 1988, Mr. Nickerson
served as President, Director and Chief Operating Officer of Royal
Resources Corporation, a publicly held Denver based company engaged in the
exploration and development of oil and gas. Since then Mr. Nickerson has
worked as a consulting geologist for various energy companies. Mr.
Nickerson is a 1948 graduate of the Colorado School of Mines with a degree
in geological engineering.
MARK A.E. SYROPOULO, age 46, was appointed as a Director on January
14, 1998. Mr. Syropoulo has been an independent corporate consultant
since 1994 and has during that time provided services to various entities
in the natural resources, information technology and investment sectors,
principally in Australia. He also acted as a consultant to the Company
from May 1, 1997 until January 1998. Prior to 1994 he was managing
director from 1987 to 1993 of Anglo Pacific Resources Limited, a United
Kingdom mining and oil company associated with Anglovaal Holdings Limited,
a major South African mining house. Mr. Syropoulo is a graduate of
mathematics and economics and an honors graduate in economics of the
University of Natal Durban, South Africa.
There is no arrangement or understanding between any of the
directors, executive officers or any other persons pursuant to which he
was or is to be selected as a director or executive officer, nor is there
any family relationship between or among any executive officers, except
that Mr. Boatright is the brother-in-law of Mr. Hoops.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following sets forth in summary form the compensation received
during each of the Company's last three completed fiscal years by the
Chief Executive Officer of the Company. No other officers of the Company
received salary, bonus or other annual compensation in total from the
Company, in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------
Fiscal Salary Bonus Options
Name And Principal Position Year ($) ($) (#)
- --------------------------- ------ ------ ------- -------
<S> <C> <C> <C> <C>
Timothy L. Hoops, President, 1998 $144,000 $0 0
Chief Executive Officer, 1997 $75,000 $35,000 18,000
and Director 1996 $75,000 $0 80,000
- -----------------------------
</TABLE>
Mr. Hoops did not receive additional compensation other than noted
above the aggregate amount of which was the lesser of either $50,000 or
10% of the total of annual salary, bonus and consulting fees reported for
the executive officer.
The Company reimburses its officers and directors for ordinary and
necessary business expenses incurred by them on behalf of the Company.
It is anticipated that, in fiscal 1999, Mr. Hoops will be paid a
salary of $144,000 for services rendered to the Company and Victoria
Exploration, Inc., plus retirement and health benefits. In fiscal 1997,
Mr. Hoops received approximately $18,000 in consulting fees from Victoria
Petroleum N.L. ("VP") and companies owned by VP for services provided to
those companies in fiscal 1997. In fiscal 1998 Mr. Hoops no longer
received those consulting fees. In addition, Mr. Hoops received fees as a
director of VP in the amount of Australian $5,000 for fiscal 1998 and he
expects to receive the same amount in 1999. Resolute Limited, a publicly
held Australian mining and natural resources company, owns 28.45% of VP,
which indirectly owns 26.4% of the Company.
OPTION GRANTS FOR FISCAL YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
% of Total
Number of Options
Securities Granted to Exercise
Underlying Employees or
Options in Fiscal ($/share) Expiration
Name Granted Base Price Date
- ----------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Timothy L. Hoops
President, Chief
Executive Officer
and Director 0 0% N/A N/A
Robert J. Pett
Chairman of the Board
and Director 0 0% N/A N/A
Mark A. Boatright
Vice President -
Finance, Chief
Financial Officer
and Director 5,000(3) 100% $2.2776 9/30/07
John T. Kopcheff
Vice President -
International and
Director 0 0% N/A N/A
Kenneth W. Nickerson
Director 5,000(3) N/A $2.2776 9/30/07
Mark A.E. Syropoulo
Director 0 N/A N/A N/A
Denis I. Rakich
Assistant Secretary 0 0% N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Assumed Annual Rates of
Stock Price Appreciation
For Option Term
Name 5%($)(1) 10%($)(2)
- --------------------- -------------------------
<S> <C> <C>
Timothy L. Hoops
President, Chief
Executive Officer
and Director N/A N/A
Robert J. Pett
Chairman of the Board
and Director N/A N/A
Mark A. Boatright
Vice President -
Finance, Chief
Financial Officer
and Director $7,174 $18,107
John T. Kopcheff
Vice President -
International and
Director N/A N/A
Kenneth W. Nickerson
Director $7,174 $18,107
Mark A.E. Syropoulo
Director N/A N/A
Denis I. Rakich
Assistant Secretary N/A N/A
</TABLE>
(1) This column represents the potential realizable value of each grant
of options, based on the assumption that the market price of shares
of Common Stock underlying the options will appreciate in value from
the date of the grant to the end of the option term at the annual
rate of five percent.
(2) This column represents the potential realizable value of each grant
of options, based on the assumption that the market price of shares
of Common Stock underlying the options will appreciate in value from
the date of the grant to the end of the option term at the annual
rate of ten percent.
(3) Of this grant, all were nonqualified stock options.
AGGREGATED OPTION EXERCISES FOR FISCAL YEAR ENDED JUNE 30, 1998
AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Shares Securities Value of
Exercised Underlying Unexercised
during Unexercised In-the-Money-
fiscal Value Options at Options At
year to Realized June 30, 1998 June 30, 1998
Name date (#) ($) (#) ($)(1)
- ---------------------- ---------- -------- ------------- -------------
Exercisable/ Exercisable/
Unexercisable Unexercisable
------------- -------------
<S> <C> <C> <C> <C>
Timothy L. Hoops
President, Chief
Executive Officer,
and Director 0 0 0/175,116 $0/0
Robert J. Pett
Chairman of the
Board and Director 0 0 0/92,50 $0/0
Mark A. Boatright
Vice President -
Finance, Chief
Financial and
Accounting Officer
and Director 0 0 0/34,500 $0/0
John T. Kopcheff
Vice President -
International and
Director 0 0 0/160,000 $0/0
Kenneth W. Nickerson
Director 0 0 0/23,000 $0/0
Mark A.E. Syropoulo
Director 0 0 0/30,000 $0/0
Denis I. Rakich
Assistant Secretary 0 0 0/80,000 $0/0
</TABLE>
(1) For all unexercised options held as of June 30, 1998, the aggregate
dollar value is the excess of the market value of the stock
underlying those options over the exercise price of those unexercised
options. The price used to calculate these figures is the closing
price as of June 30, 1998 on the Nasdaq SmallCap Market, which was
$0.75 per share.
KESTREL ENERGY, INC.
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
COMPENSATION POLICIES TOWARD EXECUTIVE OFFICERS
The Compensation Committee's executive compensation polices are
designed to provide competitive levels of compensation through a
combination of base level compensation, incentive stock options and cash
bonus awards.
The Committee reviews the President's performance periodically and
reports to the Board of Directors on its evaluation of that performance.
The Committee does not believe that it is reasonable, necessary or
appropriate for such a small company to require or establish a direct or
fixed relationship between the Company's financial performance and the
Chief Executive Officer's compensation. The Committee instead considers a
number of factors in making a subjective determination as to the
compensation of the Chief Executive Officer, including determinations as
to the level of salary, options and benefits: quality of service
provided, amount of time devoted to the Company's business, level of
expertise, dedication to the Company and its best interests, general
management abilities and the Company's operational and financial
performance.
Mr. Hoops, the President of the Company, received a salary from the
Company of $144,000 in fiscal 1998. While this was an increase from the
$110,000 in total cash compensation paid to Mr. Hoops by the Company in
1997, the increase merely reflected the restructuring of Mr. Hoops' total
compensation package from the Company, Victoria Petroleum, N.L., the
parent company of one of the Company's largest shareholders, and the
Company's then newly acquired subsidiary, Victoria Exploration, Inc., that
began in 1997. For example, Mr. Hoops did not receive any consulting fees
from Victoria Petroleum in 1998 as he had in prior years. Mr. Hoops'
overall increase to $144,000 in fiscal 1998 (as compared to a total of
$128,000 in 1997 from Victoria Petroleum and the Company) was based on the
Committee's expectation last year that Mr. Hoops would be required to
devote substantially all of his time and expend an even greater level of
effort on the Company's affairs than he did in 1997. This expectation
proved to be accurate, as there was a significantly greater management
burden in 1998 stemming from the Company's acquisition of a 50% working
interest in 9,000 net acres of petroleum leases in the San Joaquin Basin
in California and serving as operator of those properties.
The Committee is, however, very cognizant of the Company's poor
financial results in fiscal 1998 and the downward slide in the market
price of the Company's common stock. The Committee believes that the most
significant causes of the poor 1998 financial results are the persistently
low oil prices over the past year and, more importantly, the lack of
success to date in the Company's exploratory drilling efforts. Similarly,
the Committee believes that much of the downturn in the Company's stock
price can be blamed on the general market malaise faced by most other
Nasdaq SmallCap companies over the past several months, and by other oil
companies of all sizes. On the other hand, the Committee has concluded
that the Company's negative financial results and low stock price still
preclude consideration of any bonus or stock option grants to the
executive officers by the Committee on account of fiscal 1998.
Mark Boatright, the Company's Vice President of Finance, who became
an employee of the Company during fiscal 1998 at an annual salary of
$48,000, was the only executive officer to receive a stock option grant by
the Committee in fiscal 1998. Mr. Boatright, who had previously provided
services to the Company on a contract basis through his accounting firm,
Boatright & Associates, received only an automatic grant of options in his
capacity as a director serving on the Compensation Committee.
During the 1998 fiscal year, each Compensation Committee member
received an automatic grant of options to purchase 5,000 shares pursuant
to the Nonqualified Stock Option Plan. The options were granted at the
fair market value on the date of grant. The award of these options was in
accordance with the above stated policy of the Compensation Committee and
the terms of the Nonqualified Stock Option Plan.
September 21, 1998 Compensation Committee Of
The Board of Directors
Kenneth W. Nickerson
Mark A.E. Syropoulo
DIRECTORS' REMUNERATION
Directors who are not officers or employees of the Company are paid
$900 for attendance at meetings of the Board or Committees thereof. Any
director who serves on the Compensation Committee automatically receives
5,000 options each September 30 pursuant to the Company's Stock Option
Plan. Accordingly, on September 30, 1997, both Messrs. Boatright and
Nickerson, as members of the Compensation Committee, received fully vested
options to purchase 5,000 shares of Common Stock at an exercise price of
$2.2776 per share, the fair market value on the date of grant. The
options are exercisable for ten years from the date of grant.
PERFORMANCE GRAPH
The following line graph compares the yearly percentage change in the
cumulative total shareholder return for (i) the Company, (ii) the MG
Industry Group 353 - Oil and Natural Gas Exploration and (iii) the Nasdaq
Market Index. The MG Industry Group 353 consists of approximately 130
companies involved in the oil and gas industry, including the Company.
The line graph and table cover the five year period from July 1993 through
June 1998 and represent the total value of a $100 investment in each
security/market index on July 1, 1993. All dividends are assumed to be
reinvested
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Kestrel Energy Inc. 100 54.44 25.00 65.91 53.41 13.64
MG Industry Group 353 100 103.95 114.78 139.60 157.73 160.36
Nasdaq Market Index 100 109.66 128.61 161.89 195.02 258.52
</TABLE>
The information contained in this graph was compiled by Media General
Financial Services of Richmond, Virginia. The Company will provide a list
of the companies included in the various indices upon the written request
of any shareholder.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
STOCK OWNERSHIP OF PRINCIPAL SHAREHOLDERS
AND MANAGEMENT
The following table sets forth, as far as is known to the Board of
Directors or the management of the Company, the only persons owning on
September 21, 1998 more than five percent of the outstanding shares of the
Company's Common Stock. For purposes of this disclosure, the amount of
the Company's Common Stock beneficially owned is the aggregate number of
shares of the Common Stock outstanding on such date plus an amount equal
to the aggregate amount of Common Stock which could be issued upon the
exercise of stock options within 60 days of such date.
<TABLE>
<CAPTION>
Number of Shares of Common Stock Beneficially Owned
Voting and Investment Power
Total Percent
Name and Address Direct Indirect Shares Owned
- ---------------------------- ------------------------ --------- ------
<S> <C> <C> <C> <C>
Victoria International 1,166,221 --- 1,166,221 26.4%
Petroleum N.L.
4th Flr., Griffin Centre
28 The Esplanade
Perth 6000
Western Australia
Victoria Petroleum N.L. --- 1,166,221(1) 1,166,221 26.4%
4th Flr., Griffin Centre
28 The Esplanade
Perth 6000
Western Australia
Timothy L. Hoops 203,026(2) 1,166,221(3) 1,369,247 29.8%
P.O. Box 1079
Denver, CO 80201-1079
Robert J. Pett 102,500(4) 1,166,221(5) 1,268,721 28.1%
4th Flr., Griffin Centre
28 The Esplanade
Perth 6000
Western Australia
John T. Kopcheff 164,000(6) 1,166,221(7) 1,330,221 29.0%
4th Flr., Griffin Centre
28 The Esplanade
Perth 6000
Western Australia
The Equitable Life Assurance 840,000 --- 840,000 19.0%
Society
City Place House
55 Basinghall St.
London England EC2V 5DR
</TABLE>
(1) Victoria International Petroleum N.L. ("VIP"), the record holder of
the shares, is a wholly owned subsidiary of Victoria Petroleum N.L.
("VP"), which is therefore deemed to be another beneficial owner of
the shares. Resolute Samantha Limited, a publicly held Australian
mining and natural resources company ("Resolute"), owns 28.45% of VP.
Resolute disclaims beneficial ownership of the shares.
(2) Includes vested options to purchase up to 175,116 shares
(3) Mr. Hoops is a director of VIP and of VP. As a result, all shares
held by VIP directly and VP indirectly are listed as indirectly held
by Mr. Hoops.
(4) Includes vested options to purchase up to 92,500 shares
(5) Mr. Pett is the Chairman and a director of VIP and a director of VP.
As a result, all shares held by VIP directly and VP indirectly are
listed as indirectly held by Mr. Pett.
(6) Includes vested options to purchase up to 160,000 shares
(7) Mr. Kopcheff is a director of VIP and VP. As a result, all shares
held by VIP directly and VP indirectly are listed as indirectly held
by Mr. Kopcheff.
The following table sets forth the number of shares beneficially
owned on September 21, 1998 by the Company's executive officers and
directors, and by all of the executive officers and directors as a group.
For purposes of this disclosure, the amount of the Company's Common Stock
beneficially owned is the aggregate number of shares of the Common Stock
outstanding on such date plus an amount equal to the aggregate amount of
Common Stock which could be issued upon the exercise of stock options
within 60 days of such date.
<TABLE>
<CAPTION>
Shares of
Common Stock
Position(s) Beneficially
With the Owned and Percent
Name and Address Company Options Granted Owned
- ---------------------------- ------------------- --------------- ------
<S> <C> <C> <C>
Timothy L. Hoops President, 1,369,247(1)(2) 29.8%
P.O. Box 1079 Chief Executive
Denver, CO 80201-1079 Officer and Director
Robert J. Pett Chairman of the 1,268,721(3)(4) 28.1%
4th Flr., Griffin Centre Board and
28 The Esplanade Director
Perth 6000
Western Australia
Mark A. Boatright Vice President - 38,500(5) *
1475 Lawrence St. Finance, Chief
Suite 310 Financial Officer
Denver, CO 80202 and Director
John T. Kopcheff Vice President - 1,330,221(5)(6) 29.0%
4th Flr., Griffin Centre International
28 The Esplanade and Director
Perth 6000
Australia
Kenneth W. Nickerson Director 23,000(5) *
10780 Hanson St.
Johannesburg, MI 49751
Mark A.E. Syropoulo Director 68,000(5)(7) 1.5%
Lot 42 Gumboil Road
Cooroy Queensland 4563
Australia
All Directors and Executive 1,765,247 35.8%
Officers as a Group
(6 persons)
</TABLE>
* Less than one percent (1.0%)
(1) Mr. Hoops is a director of Victoria International Petroleum N.L.
("VIP") and of Victoria Petroleum N.L. ("VP"). As a result, all
shares held by VIP directly and by VP indirectly are listed as held
by Mr. Hoops.
(2) Includes vested options to purchase up to 175,116.
(3) Mr. Pett is the Chairman and a director of VIP and a director of VP.
As a result, all shares held by VIP directly and VP indirectly are
listed as held by Mr. Pett.
(4) Includes vested options to purchase up to 92,500 shares.
(5) Includes vested options to purchase up to 34,500 shares, 160,000
shares, 23,000 shares and 30,000 shares granted to Messrs. Boatright,
Kopcheff, Nickerson and Syropoulo, respectively.
(6) Mr. Kopcheff is a director of VIP and VP. As a result, all shares
held by VIP directly and VP indirectly are listed as indirectly held
by Mr. Kopcheff.
(7) Includes vested options to purchase 30,000 shares and 8,000 shares
owned by Syrops & Co. Pty. Ltd.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 31, 1993, the Board of Directors authorized the exchange
of 207,263 restricted shares of the Company's Common Stock for $466,343 in
indebtedness owed to Victoria Exploration, Inc. ("VicX") effective January
1, 1994. Because the shares received were issued in a private,
unregistered transaction, several years ago, they can be publicly resold
by VicX or its successors in interest in accordance with the provisions of
Securities Act Rule 144, including the limitation on the amount of shares
which may be sold in any ninety (90) day period. The exchange rate for
the transaction was approximately $2.25 per share. As a result of the
transaction, VicX owned 380,913 shares, or 59% of the outstanding Common
Stock at that time. The remaining debt owed to VicX after the transaction
amounted to approximately $600,000.
On June 10, 1994, the Company transferred 709,108 shares of its
Common Stock and unvested options to acquire up to an additional 1,285,353
shares of that stock to Victoria International Petroleum N.L. ("VIP") in
exchange for all of the outstanding shares of VicX. The shares of VicX
were valued at $1,595,493, the aggregate value of the assets of VicX less
certain undeveloped properties. The value of the Company's Common Stock
in the exchange was an agreed upon value of $2.25 per share. At the time
of the exchange the Company's Common Stock was being traded at prices
between $1.75 and $2.00 per share. The options were given in
consideration for certain undeveloped properties owned by VicX which the
Company agreed to develop. It was agreed that these options would only
vest to VIP if the undeveloped properties were successfully developed into
proved producing properties by June 30, 1997. Because the undeveloped
properties were not successfully developed by that date, the options
terminated as of December 31, 1997 pursuant to the agreement.
In conjunction with the foregoing acquisition of undeveloped oil and
gas properties from VicX, the Company issued a $1,000,000 note payable to
VicX, which bore interest at the Norwest Bank Denver, N.A. prime rate with
quarterly interest payments. In December 1992, the terms of a $58,500
unsecured short term note to VicX were conformed to the terms of the
$1,000,000 note payable and the notes were combined. The note was secured
by the oil and gas properties acquired from VicX. As noted above, the
note was reduced to approximately $600,000 by the exchange of 207,263
shares of Common Stock for $466,343 in indebtedness owed to VicX on
December 31, 1993. Also, as indicated above, VicX transferred the note to
VIP on June 10, 1994. On December 27, 1994, prior to the December 31,
1994 maturity date of the note, the Company agreed to assign an unproved
waterflood project (Rocky Butte) acquired in a June 1992 transaction to
VIP in exchange for the surrender of indebtedness to VIP in the amount of
approximately $600,000, thereby eliminating the note receivable from the
Company to VIP.
VIP's current shareholding interest in the Company is 26.4% (23.6%
diluted for currently vested options). As a result of the Company's close
relationship with VIP, it has been afforded the opportunity to participate
in various international oil and gas drilling opportunities located by
VIP. In most cases, VIP has its own interest in the same drilling
projects in which the Company agrees to participate and in some cases the
Company has acquired its interest from VIP rather than directly from the
operator or lead promoter of the prospects.
To date, the Company has agreed to farm-in on several such
international drilling permits, including some in Papua New Guinea and in
Western Australia. The Company earns a right to participate by sharing in
the costs of data review, seismic and drilling. In addition to the
benefit, if any, to VIP's interest in these permits resulting from the
Company's agreement to share these costs, the Company has agreed to pay a
5% royalty to VIP on the Company's interest in any international permits
referred to the Company by VIP which produce net revenues for the Company.
The Company believes that this arrangement is fair and reasonable and that
the potential compensation to VIP is no greater than the Company would
have paid in an arms length transaction with an unrelated party who
provided comparable services. No royalties have ever been paid to VIP nor
are any royalties owed to VIP as of the date hereof.
Mark A.E. Syropoulo provided corporate, investor relations, and
consulting services to the Company from May of 1997 until January of 1998
when he became a Director of the Company. He received a monthly retainer
of $1,800 a month for an aggregate of $10,800 during that period. The
Board of Directors believes the fees paid to Mr. Syropoulo were in line
with industry standards.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Articles of Incorporation,
as filed with the Secretary of State of Colorado on
March 16, 1995, filed as Exhibit (3)1 to the Annual
Report on Form 10-K/A for the fiscal year ended June
30, 1994 and incorporated herein by reference.
3.2 Amended and Restated Bylaws, as adopted by the
Board of Directors on January 16, 1995, filed as
Exhibit (3)2 to the Annual Report on Form 10-K/A for
the fiscal year ended June 30, 1994 and incorporated
herein by reference.
4.1 The form of common stock share certificate filed
as Exhibits 5.1 to the Registrant's Form S-2
Registration (No. 2-65317) and Article II of the
Registrant's Articles of Incorporation filed as
Exhibit 4.1 thereto, as amended on March 4, 1994 and
filed with the Annual Report on Form 10-K for the
fiscal year ended June 30, 1994 are incorporated
herein by reference.
4.2 That portion entitled "Selling Restriction" of
the Registrant's Private Placement memorandum dated
April 2, 1997 filed as Exhibit 4.4 to the Registrant's
Form S-3 Registration Statement (No. 333-27769) and
incorporated herein by reference.
10.1 Purchase and Sale Agreement between the Company
and Victoria Exploration, Inc. dated June 1, 1992, and
filed as Exhibit B with the Form 8-K filed on June 15,
1992 and incorporated herein by reference.
10.2 Consent to Corporate Action dated June 1, 1992 of
Victoria Exploration, Inc. and filed as Exhibit C with
the Form 8-K filed on June 15, 1992 and incorporated
herein by reference.
10.3 Mortgage, Security Agreement, Assignment of
Proceeds, and Financing Statement between the Company
and Victoria Exploration, Inc. dated June 1, 1992, and
filed as Exhibit D with the Form 8-K filed on June 15,
1992 and incorporated herein by reference.
10.4 Agreement for Exchange of Stock dated May 3, 1994
filed as Exhibit 2.01 with the Form 8-K filed on July
8, 1994 and incorporated herein by reference.
10.5 $600,000 Promissory Note dated September 23, 1994
payable to Victoria International Petroleum N.L., as
amended, filed as Exhibit 10.10 with the Annual Report
on Form 10-K for the fiscal year ended June 30, 1994
and incorporated herein by reference.
10.6 Amended and Restated Incentive Stock Option Plan
as amended March 14, 1995 and filed as Exhibit 10.7
with the Annual Report on Form 10-K for the fiscal
year ended June 30, 1995 and incorporated herein by
reference.
10.7 Kestrel Energy, Inc. Stock Option Plan as amended
April 1, 1998 and filed as Exhibit 10.1 with the
Company's Registration Statement on Form S-8 (SEC No.
333-51875) and Incorporated herein by reference.
10.8 Purchase and Sale Agreement between Ampolex
(USA), Inc., Kestrel Energy California, Inc. and
Victoria Petroleum USA, Inc. dated March 21, 1997 and
filed as Exhibit 10.9 with the Annual Report on Form
10-K for the year ended June 30, 1997 and incorporated
herein by reference.
21 Subsidiaries of the Registrant filed as Exhibit
21 with the Annual Report on Form 10-K for the year
ended June 30, 1997 and incorporated herein by
reference.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
(b) Financial Statements.
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
All schedules are omitted as the required information is inapplicable
or presented in the financial statements or related notes.
(c) Reports on Form 8-K.
None
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.
KESTREL ENERGY, INC.
--------------------
(Registrant)
Date: October 7, 1998 By: /s/ Timothy L. Hoops
---------------------
Timothy L. Hoops, President
and Chief Executive 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.
Date: October 7, 1998 By: /s/ Timothy L. Hoops
-----------------------------
Timothy L. Hoops, President,
Chief Executive Officer,
and Director
Date: October 7, 1998 By: /s/ Robert J. Pett
-----------------------------
Robert J. Pett, Chairman of
the Board
Date: October 7, 1998 By: /s/ Mark A. Boatright
-----------------------------
Mark A. Boatright, Vice President,
Finance, Chief Financial Officer,
and Director
Date: October 7, 1998 By: /s/ Kenneth W. Nickerson
-----------------------------
Kenneth W. Nickerson, Director
Date: October 7, 1998 By: /s/ John T. Kopcheff
-----------------------------
John T. Kopcheff, Vice President
International, and Director
EXHIBIT INDEX
No. Description Method of Filing
23 Consent of KPMG Peat Marwick LLP Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Kestrel Energy, Inc.:
We consent to the incorporation by reference in the registration
statements (No. 33-63171, 333-45587 and 333-51875) on Form S-8
and the registration statements (Nos. 33-89716 and 333-27769) on
Form S-3 of Kestrel Energy, Inc. our report dated September 18,
1998, relating to the consolidated balance sheets of Kestrel
Energy, Inc. and subsidiaries as of June 30, 1998 and 1997, and
the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year
period ended June 30, 1998, which report appears in the June 30,
1998 Annual Report on Form 10-K of Kestrel Energy, Inc.
Our report on the consolidated financial statements refers to the
adoption of the provisions of Statement of Financial Accounting
Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED TO BE DISPOSED OF, in the year ended
June 30, 1997.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
October 5, 1998
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