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, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-9261
KESTREL ENERGY, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0772451
(State of other jurisdiction 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,
2000: 7,680,000
KESTREL ENERGY, INC.
AND SUBSIDIARIES
INDEX TO UNAUDITED FINANCIAL STATEMENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of December 31,
2000 and June 30, 2000 3
Consolidated Statements of Operations for
the Three Months and Six Months Ended
December 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of
Operations 7-9
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 2. Changes in Securities 10
ITEM 3. Defaults Upon Senior Securities 10
ITEM 4. Submission of Matters to a Vote of
Security Holders 10
ITEM 5. Other Information 10
ITEM 6. Exhibits and Reports of Form 8-K 10
Signatures 11
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
KESTREL ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000
AND JUNE 30, 2000
(Unaudited)
December 31, June 30,
ASSETS 2000 2000
------ ----------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 85,105 $ 502,034
Accounts receivable 235,237 181,075
Due from related party 33,251 524
Other assets 28,218 31,560
----------- -----------
Total current assets 381,811 715,193
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, successful
efforts method of accounting:
Unproved 353,027 353,027
Proved 11,623,908 10,933,518
Pipeline and facilities 804,667 772,164
Furniture and equipment 143,724 138,970
----------- -----------
12,925,326 12,197,679
Accumulated depreciation and
depletion (2,901,118) (2,833,816)
----------- -----------
Net property and equipment 10,024,208 9,363,863
----------- -----------
Investment in related party 1,628,903 2,191,403
----------- -----------
$ 12,034,922 $12,270,459
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable:
Trade $ 453,219 $1,423,788
Related party 29,492 9,399
Accrued liabilities 54,209 30,837
Line of credit, bank 1,384,500 -
----------- ----------
Total current liabilities 1,921,420 1,464,024
----------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock, $1 par value;
1,000,000 shares authorized,
none issued - -
Common Stock, no par value;
20,000,000 shares authorized,
7,680,000 and 7,680,000 issued
and outstanding at December 31, 2000
and June 30, 2000, respectively 19,048,223 19,044,885
Accumulated deficit (8,372,221) (8,238,450)
Accumulated other comprehensive loss (562,500) -
----------- -----------
Total stockholders' equity 10,113,502 10,806,435
----------- -----------
$ 12,034,922 $ 12,270,459
=========== ===========
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS
ENDED December 31, 2000 and 1999
(Unaudited)
Three months ended Six months ended
December 31, December 31,
2000 1999 2000 1999
-------- -------- --------- -------
REVENUE:
Oil and gas sales $440,590 $278,521 $ 793,270 $ 539,928
Interest 98 13,074 2,406 34,344
Other income 21,356 29,495 35,928 43,004
-------- --------- ---------- ---------
TOTAL REVENUES 462,044 321,090 831,604 617,276
-------- --------- ---------- ---------
COSTS AND EXPENSES:
Production and operating
expenses 182,669 171,491 304,710 268,644
Exploration expenses 28,958 77,607 56,448 192,981
Dry holes, abandoned and
impaired properties - 12,096 - 25,125
Depreciation and depletion 36,066 32,554 67,302 64,977
General and administrative 248,984 243,217 498,102 498,376
Interest expense 30,611 - 38,903 -
-------- -------- -------- ---------
TOTAL COSTS AND EXPENSES 527,288 536,965 965,375 1,050,103
-------- -------- -------- ---------
NET LOSS $(65,244)$(215,875) $(133,771)$(432,827)
-------- --------- --------- ---------
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.01) $ (0.03) $ (0.02) $ (0.07)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 7,680,000 6,501,217 7,680,000 6,132,522
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER
31, 2000 AND 1999
(Unaudited)
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(133,771) $(432,827)
Adjustments to reconcile net loss to net
cash used in operating activities:
Dry holes, abandoned and impaired properties - 24,257
Depreciation and depletion 67,302 64,914
Non cash compensation expense 3,338 2,319
(Increase) decrease in accounts receivable
relating to operations (54,162) (62,248)
(Increase) decrease in due from related party (32,727) 18,436
(Increase) decrease in other current assets 3,342 (309)
Increase (decrease) in accounts payable, trade (970,569) 94,762
Increase (decrease) in accounts payable,
related party 20,093 34,134
Increase (decrease) in accrued liabilities 23,372 (1,174)
---------- ----------
Net cash used in operating activities (1,073,782) (257,736)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition of properties (727,647) (3,439,055)
Purchase of short-term investments - (299,480)
---------- ----------
Net cash used in investing activities (727,647) (3,738,535)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
net of offering costs - 4,831,214
Payments on lease obligations - (4,631)
Net borrowings on line of credit 1,384,500 -
---------- ----------
Net cash provided by financing
activities 1,384,500 4,826,583
---------- ----------
Net increase (decrease) in cash and
cash equivalents (416,929) 830,312
Cash and cash equivalents at the
beginning of the period 502,034 394,980
---------- ----------
Cash and cash equivalents at the
end of the period $ 85,105 $1,225,292
========== ==========
Cash paid for interest $ 38,903 $ 371
========== ==========
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
These condensed financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2000.
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, 2000,
the results of operations for the periods shown in the statements of
operations, and the cash flows for the periods shown in the
statements of cash flows. All adjustments made are of a normal
recurring nature.
The components of total comprehensive earnings for the periods
consist of net loss and unrealized loss on investment in Victoria
Petroleum, NL (VP) common stock are as follows:
Three months ended Six months ended
December 31, December 31,
2000 1999 2000 1999
----- ----- ---- -----
Net loss $(65,244) $(215,875) $(133,771)$ (432,827)
Other comprehensive
net loss (48,500) - (562,500) -
--------- --------- --------- --------
Total comprehensive
net loss $(133,744) $(215,875) $(696,271)$(432,827)
========= ========= ========= =========
2. Investment in Related Party
On May 5, 2000, the Company sold six international permits with a net
book value of $143,179 for petroleum drilling in Western Australia
and New Guinea to Victoria Petroleum USA, Inc. (VP/USA), a Colorado
corporation and wholly owned subsidiary of VP, in exchange for
8,250,000 shares of VP Common Stock.
Also, on May 5, 2000, Kestrel Energy California, Inc. (KEC), VP and
VP/USA entered into an Agreement and Plan of Merger (Merger
Agreement). Pursuant to the Merger Agreement, on May 12, 2000, the
Company, as sole shareholder of KEC, acquired 66,750,000 shares of VP
Common Stock and VP/USA acquired all of the issued and outstanding
shares of KEC through a merger of KEC into VP/USA, with KEC as the
surviving corporation.
The investment in VP Common Stock is classified as available-for-
sale. Net unrealized gains and losses on the investment are recorded
to other comprehensive income or loss. At December 31, 2000, the
unrealized loss on the investment was $562,500. There were no
unrealized losses at June 30, 2000. There were no proceeds, realized
gains, or realized losses from the sales of investments for the six
months ended December 31, 2000 or 1999.
3. Line of Credit
On February 21, 2000, the Company entered into a $2,000,000 Line of
Credit agreement with Wells Fargo Bank West N.A., which provided the
Company with an initial borrowing base of $600,000 with interest at
Wells Fargo prime rate plus 2.5%. On September 27, 2000, the Company
and Wells Fargo amended the Line of Credit Agreement to provide the
Company a borrowing base of $2,000,000 and reduced the interest rate
to 1.5% over the Wells Fargo prime rate. The increase in borrowing
base resulted from the substantial increase in the Company's proved
reserves as of the June 30, 2000 reserve report. The line of credit
is due October 31, 2001, and is secured by Deeds of Trust on various
oil and gas producing properties held by the Company. As of December
31, 2000, $1,384,500 was outstanding on the line of credit.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had a working capital deficit of
$1,539,609. This compares to the Company's working capital deficit of
$748,831 as of June 30, 2000. The increase in working capital deficit of
$790,778 was a result of borrowings on the Company's line of credit less
amounts expended on drilling and completion of the Turner 1-23 and 3-14
wells in Oklahoma. The Company plans to fund the working capital deficit
at December 31, 2000 by utilizing revenues from oil and gas sales, and
obtaining additional funds from other sources as necessary.
Net cash used by operating activities was $1,073,782 for the six months
ending December 31, 2000, an increase of $816,046 over cash used by
operations of $257,736 for the same period in 1999. Operating cash flows
decreased during the six months ended December 31, 2000 due to the payment
of accounts payable previously incurred. The Company's accounts
receivable increased $54,162, or 30%, to $235,237 during the period as
compared to an increase of $62,248, or 56%, for the same period in 1999.
The increase in receivables for the six month period is primarily due to
an accrual of gas revenue on the Turner 1-23 and 3-14 wells completed in
October 2000 and higher natural gas prices received during the period.
Due from related party increased $32,727 to $33,251 from $524 a year ago.
The increase is attributable to the payment of expenses by the Company on
behalf of a related party. All of the related party receivable was
reimbursed to the Company in January 2001. The Company's accounts payable
trade decreased $970,569, or 68%, to $453,219 during the six months ended
December 31, 2000 versus an increase of $94,762, or 198%, a year ago.
Accounts payable related party increased $20,093 to $29,492 during the six
months ended December 31, 2000. The increase was a result of a cash
advance from the related party which the Company will offset with overhead
charges and expenses for the use of Company office space and personnel.
Accrued expenses increased $23,372 to $54,209 during the period compared
to a decrease of $1,174 a year ago. The increase was primarily due to
revenue and production taxes payable as of December 31, 2000.
Net cash used by investing activities was $727,647 for the period ended
December 31, 2000, versus cash used of $3,738,535 for the same period in
1999. Capital expenditures during the period included $329,900 to drill
and complete the Turner 3-14 well and $219,000 to drill and complete the
Turner 1-23 well; both wells were completed successfully and began
production during the fourth quarter of 2000. The wells are located in
Amber County, Oklahoma. Additional costs included $126,000 for completion
costs on the Poitevent and Greens Canyon 29-2 wells in Greens Canyon,
Wyoming. The Company also expended $32,500 to finish the flow line
located on the Greens Canyon Property and $15,000 to complete various
coalbed methane wells in the Hilight Field in Wyoming. Furniture,
computers and software accounted for approximately $5,200 of capital
expenditures during the period.
Cash provided by financing activities was $1,384,500 for the current
quarter. The increase in cash from financing activities was a result of
the Company accessing its line of credit at Wells Fargo Bank West, N.A. to
fund working capital during the period.
RESULTS OF OPERATIONS
The Company reported a loss of $65,244, or 1 cent per share, for the three
month period ended December 31, 2000. This compares with a loss of
$215,875, or 3 cents per share, for the same period a year ago. The loss
in the current period is a result of higher workover expenses incurred on
the Pierce and Burditt properties and higher lease operating expenses on
the coalbed methane and Greens Canyon wells in Wyoming.
The Company's revenues for the three months ended December 31, 2000 were
$462,044 compared to $321,090 during the same period of 1999, an increase
of $140,954, or 44%. Revenues from oil and gas sales were $440,590 for
the three months ended December 31, 2000, an increase of $162,069, or 58%,
as compared to $278,521 for the same period in 1999. The increase in oil
and gas revenues is attributable to higher oil and gas prices and higher
gas volumes compared to a year ago. Interest income decreased $12,976, or
99%, to $98 from $13,074 a year ago. The decrease in interest income is
attributable to the reduction in short-term investments from prior year
levels. Other income for the three months ended December 31, 2000
decreased $8,139, or 28%, to $21,356 from $29,495 in the same period a
year ago. Other income represents overhead charged to a related party for
use of the Company's office space and personnel.
The Company's total revenues for the six month period ended December 31,
2000 were $831,604 as compared to $617,276 during the same period in 1999,
an increase of $214,328, or 35%. Revenue from oil and gas sales was
$793,270 for the six months ended December 31, 2000, an increase of
$253,342, or 47%, as compared to sales of $539,928 a year ago. The
increase in oil and gas sales was attributable to significantly higher oil
and gas prices and higher gas volumes as a result of the production from
the Greens Canyon properties and the two Turner wells recently completed.
Interest income declined to $2,406 for the six months ended December 31,
2000 versus $34,344 a year ago. The decrease of $31,938, or 93%, is
attributable to the reduction of short-term investments, as investments
have been liquidated to meet cash flow requirements. Other income
decreased $7,076, or 16%, to $35,928 for the six months ended December 31,
2000 as compared to $43,004 a year ago.
The Company's total expenses for the second quarter ended December 31,
2000 decreased $9,677, or 2%, to $527,288 as compared to $536,965 a year
ago. The decrease in overall expenses is primarily due to lower
exploration expenses incurred during the quarter versus a year ago, offset
by interest charges on the Company's line of credit.
Total expenses for the six months ended December 31, 2000 decreased
$84,728, or 8%, to $965,375 versus $1,050,103 a year ago. The reduction
in overall expenses is a result of lower exploration expenses and dry hole
costs as the Company has reduced its exploration activity on a company
wide basis.
Production and operating expenses for the three month period increased
$11,178, or 7%, to $182,669 versus $171,491 for the same period a year
ago. The increase in production and operating expenses was due to
workover costs on the Pierce and Burditt properties and higher lease
operating costs associated with the Greens Canyon and coalbed methane
wells despite lower overall lease operating expenses on a Company wide
basis.
For the six months ended December 31, 2000, production and operating
expenses rose $36,067, or 13%, to $304,710 as compared to $268,644 a year
ago. Attributing to this increase are the expenses discussed above as
well as higher production taxes as a result of higher oil and gas revenues
received by the Company.
Exploration expenses for the quarter ended December 31, 2000 decreased
$48,649, or 63%, to $28,958 from $77,607 a year ago. The decrease is
attributable to a reduction of the Company's emphasis on exploration. The
costs incurred for the quarter reflect delay rentals paid to maintain
leasehold interests.
For the six months ended December 31, 2000, exploration expenses decreased
$136,533, or 71%, to $56,448 versus $192,981 a year ago. The decrease in
exploration expenses reflects the Company's emphasis on the Greens Canyon
development rather than exploration of unproved properties.
Dry holes, abandoned and impaired properties expenses for the second
quarter decreased $12,096, or 100%, from $12,096 a year ago. The decrease
from year ago levels was attributable to lower impairment expense.
Dry holes, abandoned and impaired properties expensed for the six months
ended December 31, 2000 declined $25,125, or 100%, from $25,125 a year
ago. The decrease in dry hole expenses during the six month period is
attributable to lower impairment expense.
Depletion expense for the three months ended December 31, 2000 was $36,066
versus $32,554 a year ago.
Depletion expense for the six months ended December 31, 2000 was $67,302
versus $64,977 a year ago. The increase in depletion for both the three
and six month periods ending December 31, 2000 is attributable to higher
capitalized costs on the Greens Canyon and Turner wells.
General and administrative costs for the three months ended December 31,
2000 increased $5,767, or 2%, to $248,984 as compared to $243,217 for the
same period a year ago. The increase in expenses was not attributable to
any particular expense category, but reflects a similar level of activity
within the Company versus the same period a year ago.
The Company's general and administrative expenses for the six months ended
December 31, 2000 decreased $274 to $498,102 as compared to $498,376 a
year ago.
Interest expense was $30,611 for the second quarter as a result of the
Company's utilization of its line of credit. For the six months ended,
interest expense was $38,903.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Until fiscal 2000, the Company did not invest in or hold market risk
sensitive or interest rate sensitive instruments and the only currency
exchange rate risk borne by the Company stemmed from the Company's
obligations to fund its international drilling in Australian dollars. As
of December 31, 2000, the Company owns 75,000,000 shares of Victoria
Petroleum, NL (VP) Common Stock. The investment in VP Common Stock is
classified as available-for-sale. Net unrealized gains and losses on the
investment are recorded to other comprehensive income or loss. The VP
shares are traded publicly on the Australian stock exchange and the price
for which the Company could sell its VP shares, which are quoted in prices
denominated in Australian dollars, could be higher or lower than the
Company's cost. The Company no longer has currency exchange risk relating
to its own operations, as it no longer participates in international
drilling.
FORWARD LOOKING STATEMENTS
This report includes one or more statements, which state or otherwise
indicate the Company's present belief or expectation concerning future
events. Such statements are forward looking statements on which investors
should not rely because they are subject to a wide variety of
contingencies and based on a number of assumptions, which may not prove to
be true. In particular, the Company's future success is highly dependent
on the success of its exploratory drilling efforts, which cannot be safely
predicted. In addition, the Company is highly dependent upon prevailing
prices for petroleum products, its ability to attract and retain qualified
personnel, as well as other risk factors affecting business generally,
such as overall economic conditions, changes in tax and other laws and the
effect of actions taken by competitors and regulatory authorities.
INFLATION AND CHANGING PRICES
Inflation has not had a significant effect on the Company's results of
operations. However, the constantly fluctuating price of crude oil and
natural gas materially affects the Company's cash flow, either positively
or negatively.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders on
December 19, 2000, in Denver, Colorado, the Company's
shareholders elected Timothy L. Hoops, Robert J. Pett, Kenneth
W. Nickerson, John T. Kopcheff, Mark A. E. Syropoulo and Neil T.
MacLachlan to the Company's Board of Directors. The
shareholders also approved KPMG LLP as the Company's independent
certified public accountants and auditors for the year ending
June 30, 2001, an amendment to the Company's stock option plan
to increase the number of shares reserved under the plan to
1,850,000 from 1,500,000, and an amendment to the Company's
Articles of Incorporation to require a majority vote of
outstanding shares only for major corporate transactions. The
meeting was adjourned from December 7, 2000 to December 19, 2000
because the Company did not have a quorum on the earlier date.
There were 7,680,000 shares of the Company's Common
Stock issued and outstanding, of which 7,680,000 were entitled
to vote at the reconvened meeting on December 19, 2000. Of that
number, 5,141,902 were present in person or by proxy at the
meeting. With respect to the election of directors, the votes
were as follows: Mr. Hoops - 5,132,750 in favor, 9,152
withheld; Mr. Pett - 5,138,750 in favor, 3,152 withheld; Mr.
Kopcheff - 5,138,750 in favor, 3,152 withheld; Mr. Nickerson -
5,138,750 in favor, 3,152 withheld and Mr. Syropoulo - 5,138,750
in favor, 3,152 withheld; and Mr. MacLachlan - 5,138,750 in
favor, 3,152 withheld. The selection of KPMG LLP received a
vote of 5,138,747 shares for, 922 against and 2,233 abstaining.
The amendment to the stock option plan was approved, with
5,114,030 shares for, 21,533 against and 6,339 abstaining. The
amendment to the Articles of Incorporation was approved, with
4,555,960 shares for, 16,638 against and 31,086 abstaining.
Abstentions and broker non-votes were counted for purposes of
establishing a quorum only. Only those votes cast for the
election of directors and the other proposals were counted as
voted in favor or affirmative votes.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(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: February 14, 2001 /s/TIMOTHY L. HOOPS
Timothy L. Hoops
President, Principal Executive
Officer, and Director
Date: February 14, 2001 /s/MARK A. BOATRIGHT
Mark A. Boatright
Vice President - Finance,
Principal Financial and Accounting
Officer