SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-9261
KESTREL ENERGY, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0772451
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
999 18th Street, Suite 2490, Denver, CO 80202
---------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(303) 295-0344
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of common stock, as of December 31, 1998:
4,456,000
KESTREL ENERGY, INC.
AND SUBSIDIARIES
INDEX TO UNAUDITED FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Consolidated Balance Sheets as of December 31, 1998
and June 30, 1998 3
Consolidated Statements of Operations for the Three
and Six months Ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Change in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports of Form 8-K 9
Signatures 10
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements
KESTREL ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS as of December 31, 1998 and June 30, 1998
<TABLE>
<CAPTION> (Unaudited)
December 31, June 30,
ASSETS 1998 1998
- ---------------------------------------- ------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 504,584 $ 372,194
Short term investments 1,291,153 2,330,831
Accounts receivable 177,188 166,568
Due from related party 54,342 393,175
Other assets 46,414 36,890
----------- -----------
Total current assets 2,073,681 3,299,658
----------- -----------
PROPERTY AND EQUIPMENT, AT COST, NET:
Oil and gas properties, successful efforts
method of accounting:
Unproved 1,817,118 688,779
Proved 4,144,333 4,219,282
Furniture and equipment 137,260 130,468
----------- -----------
6,098,711 5,038,529
Accumulated depreciation and depletion (2,906,324) (2,778,165)
----------- -----------
Net property and equipment 3,192,387 2,260,364
----------- -----------
$ 5,266,068 $ 5,560,022
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 473,702 $ 139,989
Accrued liabilities 22,968 21,687
----------- -----------
Total current liabilities 496,670 161,676
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, $1 par value;
1,000,000 shares authorized, none
issued - -
Common Stock, no par value;
20,000,000 shares authorized, 4,456,000
and 4,431,000 issued and outstanding
at December 31, 1998 and June 30,
1998, respectively 13,148,724 13,139,349
Accumulated deficit (8,379,326) (7,741,003)
----------- -----------
Total stockholders' equity 4,769,398 5,398,346
----------- -----------
$ 5,266,068 $ 5,560,022
=========== ===========
</TABLE>
KESTREL ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Oil and gas sales $ 168,269 $ 242,175 $ 374,690 $ 463,651
Interest 34,368 63,039 61,723 112,765
Gain on sale of
property and
equipment - - - 10,677
Other income 17,427 3,647 38,499 3,709
---------- ---------- ---------- ----------
TOTAL REVENUES 220,064 308,861 474,912 590,802
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Production and
operating expenses 114,202 124,391 180,236 222,266
Exploration expenses 161,038 164,078 331,296 298,164
Dry holes, abandoned
and impaired
properties 176,292 330,728 193,398 404,386
Depreciation and
depletion 27,482 45,984 84,977 71,501
General and
administrative 161,703 198,554 323,328 388,737
---------- ---------- ---------- ----------
TOTAL COSTS AND
EXPENSES 640,717 863,735 1,113,235 1,385,054
---------- ---------- ---------- ----------
NET LOSS $(420,653) $(554,874) $(638,323) $(794,252)
---------- ---------- ---------- ----------
BASIC AND DILUTED
LOSS PER COMMON
SHARE $ (0.09) $ (0.13) $ (0.14) $ (0.18)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,456,000 4,430,990 4,445,130 4,430,990
========== ========== ========== ==========
</TABLE>
KESTREL ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION> December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (638,323) $ (794,252)
Adjustments to reconcile net loss to
net cash provided (used) by operating
activities
Depreciation and depletion 84,977 71,501
Dry holes, abandoned and impaired
properties 186,889 24,746
Gain on sale of property and equipment,
net - (10,677)
(Increase) decrease in accounts receivable (10,620) 14,084
(Increase) decrease in related party
receivable 338,833 (11,258)
(Increase) in other current assets (9,524) (18,244)
Increase in accounts payable, trade 333,713 114,604
Increase in accrued liabilities 1,281 47,419
(Decrease) in accounts payable to related
party - (23,972)
----------- -----------
Net cash provided (used) by operating
activities 287,226 (586,049)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition of
properties (1,194,514) (105,024)
Proceeds from sale of property and
equipment - 10,677
Redemption (purchase) of short-term
investments, net 1,039,678 (376,016)
----------- -----------
Net cash used by investing activities (154,836) (470,363)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock
options - 6,250
Common stock surrendered by officer - (21,655)
----------- -----------
Net cash used by financing activities - (15,405)
----------- -----------
Net increase (decrease) in cash and cash
equivalents 132,390 (1,071,817)
Cash and cash equivalents at the beginning
of the period 372,194 1,524,138
----------- -----------
Cash and cash equivalents at the end of the
period $ 504,584 $ 452,321
=========== ===========
SELECTED NON CASH ACTIVITIES:
Total property acquisitions $ 1,203,889 $ -
Common stock issued to acquire property (9,375) -
----------- -----------
Net cash used to acquire property $ 1,194,514 $ -
=========== ===========
</TABLE>
KESTREL ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Management Opinion
These condensed financial statements should be read in conjunction
with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998.
In the opinion of management, the accompanying interim unaudited
financial statements contain all the adjustments necessary to present
fairly the financial position of the Company as of December 31, 1998,
the results of operations for the periods shown in the statements of
operations, and cash flows for the periods shown in the statements of
cash flows. All adjustments made are of a normal recurring nature.
2. Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At December 31, 1998, the Company had working capital of $1,577,011. This
compares to the Company's working capital of $3,137,982 as of June 30,
1998. The decrease in working capital during the period is attributable
to the net loss incurred by the Company and to the use of working capital
for capital expenditures and acquisition of properties.
Net cash provided by operating activities was $287,226 for the six months
ended December 31, 1998, an increase of $873,275 over net cash used of
$586,049 a year ago. The increase in operating cash flows resulted
primarily from the receipt of receivables from a related party and an
increase in accounts payable during the period. Additionally, the
Company's net loss decreased substantially as compared to the prior year.
The Company's accounts receivable increased $10,620 or 6% to $177,188
during the period as compared to a decrease of $14,084 or 9% for the same
period a year ago. The increase in receivables from year ago levels is a
result of higher joint interest billings and not oil or gas revenues.
Amounts due from related party decreased $338,833 or 86% to $54,342 versus
an increase of $11,258 a year ago. The decrease is a result of payment of
joint interest billings by Victoria Petroleum USA, Inc. Other assets
increased $9,524 or 26% to $46,414 during the period versus an increase of
$18,244 or 211% a year ago. The increase for the period is due to the
payment of insurance premiums covering the fiscal year ending in June
1999. Accounts payable increased $333,713 or 238% to $473,702 for the
period versus an increase of $114,604 or 69% a year ago. The increase in
accounts payable is attributable to costs incurred to acquire non-
producing property during the second quarter of fiscal 1999 and not paid
as of December 31, 1998. The Company's accrued liabilities increased
$1,281 or 6% to $22,968 during the period versus an increase of $47,419 or
276% a year ago.
Net cash used by investing activities was $154,836, for the six month
period ended December 31, 1998, versus the cash used of $470,363 for the
same period in 1997. The decrease in cash flow used in investing
activities was attributable to redemptions by the Company of short-term
investments, in the amount of $1,039,678 for working capital purposes.
Property acquisitions included $21,250 to acquire an additional interest
in the Lake Bouef Prospect, LaFourche Parish, Louisiana, $18,000 to
continue development and completion of the CBM 24-15, coalbed methane well
in the Hilight Field, Campbell County, Wyoming, approximately $18,200 to
continue development of the Kaye Unit in Converse and Niobrara Counties,
Wyoming and approximately $1,133,500 to acquire and begin development of
the Poitevent and Dines Prospects in Sweetwater County, Wyoming. In
September 1998 the Company acquired a 100% working interest in the
Poitevent Prospect by issuing 25,000 shares of stock to Green River
Resources, Inc. valued at $9,375 and a commitment to develop certain
properties within the prospect. Additional purchases included $6,800 for
computers and related equipment and $6,150 for various leases acquired in
the San Joaquin Basin.
No cash was provided or used from financing activities during the six
month period ended December 31, 1998 versus cash used in financing
activities of $15,405 for the period ended December 31, 1997.
RESULTS OF OPERATIONS
---------------------
Second Quarter Results
- ----------------------
The Company reported a loss of $420,653, or 9 cents per share, for the
three-month period ended December 31, 1998. This compares with a loss of
$554,874, or 13 cents per share, for the same period a year ago. The
decrease in net loss versus a year ago is attributable to lower dry hole
and general and administrative expenses.
The Company's revenues for the three month period ended December 31, 1998
were $220,064 compared to $308,861 during the same period of 1997, a
decrease of $88,797 or 29%. Revenue from oil and gas sales was $168,269
for the period ended December 31, 1998, a decrease of $73,906, or 31%, as
compared to $242,175 for the same period in 1997. The decrease in oil and
gas revenues, despite higher volumes of gas sold, was a result of
significantly lower oil and gas prices and lower volumes of oil sold
compared to a year ago. Interest income decreased $28,671 or 45% to
$34,368 from $63,039 a year ago. The decrease in interest income is
attributable to the reduction of short-term investments, as investments
have been liquidated to meet cash flow requirements. Other income
increased $13,780 to $17,427 during the period versus $3,647 a year ago.
Other income reflects overhead income charged to the Company's San Joaquin
Joint Venture partner.
The Company's total expenses decreased $223,018, or 26%, to $640,717 as
compared to $863,735 a year ago. The decrease in overall expenses is due
to lower dry hole and administrative expenses.
Production and operating expenses decreased $10,189, or 8%, to $114,202
versus $124,391 for the same period a year ago. The decrease in
production and operating expenses was primarily due to lower operating
expenses on the Pierce, Kuehne Ranch and Kaye Units as well as lower
production taxes on oil and gas sales.
Dry holes, abandoned and impaired properties decreased $154,436, or 47%,
to $176,292 from $330,728 a year ago. The decrease from year ago levels
was attributable to lower dry hole expense as the Company did not
participate in the drilling of any exploratory wells during the period.
The Company recorded $162,143 of impairment expense for the three month
period ended December 31, 1998 in accordance with FASB 121, Impairment of
Long-Lived Assets, due to significantly lower oil and gas prices as of
December 31, 1998. During the period, the Company impaired certain
international permits at a cost of $12,374 and recorded additional dry
hole costs on the Dewey #1 and Sylvester #1 of $1,775.
Exploration expenses decreased $3,040 or 2%, to $161,038 from $164,078 a
year ago.
General and Administrative costs decreased $36,851, or 19%, to $161,703 as
compared to $198,554 for the same period a year ago. The decrease in
overall expenses is attributable to significantly lower investor and
public relations costs and lower travel costs.
THE YEAR 2000 ISSUE
-------------------
The Problem. The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year.
As a result, any of the Company's computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations of the Company and its
suppliers and customers.
The Company's State of Readiness. The Company has instituted a year 2000
project. As a part of the Company's year 2000 project, the Company has
evaluated its current computer systems, software and embedded
technologies. The Company's internal systems and or programs are
predominantly "off-the-shelf" products with year 2000 versions now
available. The Company's internal network, e-mail system and accounting
and business process software have been updated to be year 2000 compliant
utilizing vendor provided upgrades.
As part of the Company's year 2000 project, the Company will contact its
most significant suppliers and large customers to determine the extent to
which the Company is vulnerable to those third parties' failure to
remediate their own year 2000 issue. However, there can be no guarantee
that the systems of other companies on which the Company's business relies
will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not
have a material adverse effect on the Company operations.
The Costs to Address the Company's Year 2000 Issues. Expenditures through
December 31, 1998 that can be attributed, at least in part, to the year
2000 project were to approximately $40,000 for a new accounting program
and internal network, both of which are year 2000 compliant based on
vendor assertions. Management expects that the completion of its year
2000 project may result in additional expenditures but cannot accurately
quantify these costs at this time.
The Risks Associated with the Company's Year 2000 Issues. The Company's
failure to resolve year 2000 issues on or before December 31, 1999 could
result in system failures or miscalculations causing disruption in
operations, including among other things, a temporary inability to process
transactions, send invoices, send and/or receive e-mail and voice mail, or
engage in normal business activities. Additionally, failure of third
parties upon whom the Company's business relies to timely remediate their
year 2000 issues could result in disruptions in the Company's field
operations, late, missed, or unapplied payments, and other general
problems related to the Company's daily operations. While the Company
believes its year 2000 project will adequately address the Company's
internal year 2000 issues, until the Company receives responses from a
significant number of the Company's suppliers and customers, the overall
risks associated with the year 2000 issue remain difficult to accurately
describe and quantify, and there can be no guarantee that the year 2000
issue will not have a material adverse effect on the Company and its
operations.
The Company's Contingency Plan. The Company has not, to date, developed a
year 2000 contingency plan. It is the Company's goal to have the major
year 2000 issues resolved by June, 1999. However, the Company would
expect to develop and implement a contingency plan by the end of March,
1999, in the event the Company's year 2000 project should fall behind
schedule.
FORWARD LOOKING STATEMENTS
--------------------------
This report includes one or more statements, which state or otherwise
indicate the Company's present belief or expectation concerning future
events. Such statements are forward looking statements on which investors
should not rely because they are subject to a wide variety of
contingencies and based on a number of assumptions, which may not prove to
be true. In particular, the Company's future success is highly dependent
on the success of its exploratory drilling efforts, which cannot be safely
predicted. In addition, the Company is highly dependent upon prevailing
prices for petroleum products, its ability to attract and retain qualified
personnel, as well as other risk factors affecting business generally,
such as overall economic conditions, changes in tax and other laws and the
effect of actions taken by competitors and regulatory authorities.
INFLATION AND CHANGING PRICES
-----------------------------
Inflation has not had a significant effect on the Company's results of
operations. However, the constantly fluctuating price of crude oil and
natural gas materially affects the Company's cash flows, both positively
and negatively.
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
On October 29, 1998, the Company issued 25,000 restricted
shares of the Company's no par value Common Stock to Green
River Resources, Inc. in exchange for a 100% working
interest in the Poitevent Prospect in Sweetwater County,
Wyoming and a commitment to develop certain properties
within the Prospect. The aggregate value of the shares as
determined by the Board of Directors on September 18, 1998
was $9,375. For this sale, the Company relied on Section
4(2) of the Securities Act of 1933, as amended. The
securities sold were offered for investment only and not
for the purposes of resale or distribution, and the
transfer thereof was appropriately restricted by the
Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KESTREL ENERGY, INC.
-------------------------------------
(Registrant)
Date: /s/TIMOTHY L. HOOPS
-------------------------------------
Timothy L. Hoops
President, Principal Executive
Officer, and Director
Date: /s/MARK A. BOATRIGHT
-------------------------------------
Mark A. Boatright
Vice President - Finance, Principal
Financial and Accounting Officer, and
Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 506
<SECURITIES> 1,291
<RECEIVABLES> 231
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,074
<PP&E> 6,098
<DEPRECIATION> 2,906
<TOTAL-ASSETS> 5,266
<CURRENT-LIABILITIES> 497
<BONDS> 0
0
0
<COMMON> 13,149
<OTHER-SE> (8,380)
<TOTAL-LIABILITY-AND-EQUITY> 5,266
<SALES> 375
<TOTAL-REVENUES> 475
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,113
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (638)
<INCOME-TAX> 0
<INCOME-CONTINUING> (638)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (638)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> 0
</TABLE>
