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, 2001
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 Identification No.)
incorporation or organization)
999 18th Street, Suite 2490, Denver, CO 80202
(Address of principal executive offices) Zip Code)
(303) 295-0344
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of common stock, as of December 31,
2001: 7,700,200
KESTREL ENERGY, INC.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of December 31, 2001
and June 30, 2001, unaudited 3
Statements of Operations for the Three Months
and Six Months Ended December 31, 2001 and 2000,
unaudited 4
Statements of Cash Flows for the Six Months Ended
December 31, 2001 and 2000, unaudited 5
Notes to Financial Statements, unaudited 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-9
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.
BALANCE SHEETS AS OF DECEMBER 31, 2001
AND JUNE 30, 2001
(Unaudited)
December 31, June 30,
ASSETS 2001 2001
----------------------------------- ------------ ---------
CURRENT ASSETS:
Cash and cash equivalents $ 83,757 $ 119,025
Accounts receivable 154,666 278,834
Due from related party 6,003 -
Other assets 5,957 5,957
------------ ------------
Total current assets 250,383 403,816
------------ ------------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties,
successful efforts method
of accounting:
Unproved 215,892 217,941
Proved 12,443,339 12,398,775
Pipeline and facilities 807,851 807,851
Furniture and equipment 146,322 143,724
------------ ------------
13,613,404 13,568,291
Accumulated depreciation
and depletion (3,280,824) (3,190,983)
------------ ------------
Net property and equipment 10,332,580 10,377,308
------------ ------------
Investment in related party 956,556 2,130,178
------------ ------------
$ 11,539,519 $ 12,911,302
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
Accounts payable:
Trade $ 325,233 $ 121,464
Related party - 26,397
Accrued liabilities 98,179 124,808
Line of credit, bank 1,356,000 1,882,000
Due to related party 350,000 -
------------ ------------
Total current liabilities 2,129,412 2,154,669
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $1 par value;
1,000,000 shares authorized, none issued - -
Common Stock, no par value;
20,000,000 shares authorized,
7,700,200 and 7,700,200 issued
and outstanding at December 31, 2001
and June 30, 2001, respectively 19,073,023 19,073,023
Accumulated deficit (9,097,178) (8,342,821)
Accumulated other comprehensive
(loss) income (565,738) 26,431
------------ ------------
Total stockholders' equity 9,410,107 10,756,633
------------ ------------
$ 11,539,519 $ 12,911,302
============ ============
See accompanying notes to financial statements.
KESTREL ENERGY, INC.
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED
December 31, 2001 and 2000
(Unaudited)
Three months ended Six months ended
December 31, December 31,
2001 2000 2001 2000
-------- -------- -------- -------
REVENUE:
Oil and gas sales $ 214,219 $ 440,590 $ 567,712 $ 793,270
Interest 16 98 2,070 2,406
Other income 18,663 21,356 62,532 35,928
Loss on sale of
available-for-sale
securities (226,520) - (220,531) -
---------- ---------- ---------- ----------
TOTAL REVENUES 6,378 462,044 411,783 831,604
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Production and
operating expenses 169,698 182,669 390,893 304,710
Exploration expenses 67,632 28,958 114,164 56,448
Dry holes, abandoned and
impaired properties 1,492 - 29,209 -
Depreciation and depletion 59,208 36,066 117,775 67,302
General and administrative 197,604 248,984 450,305 498,012
Interest expense 25,234 30,611 63,794 38,903
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES 520,868 527,288 1,166,140 965,375
---------- ---------- ---------- ----------
NET LOSS $ (514,490) $ (65,244) $(754,357) $(133,771)
---------- ---------- ---------- ----------
Other comprehensive loss -
unrealized loss from
available-for-sale
securities - (48,500) (565,738) (562,500)
---------- ---------- ---------- ----------
Comprehensive loss (514,490) (133,744)(1,320,095) (696,271)
========== ========== ========== ==========
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.07)$ (0.01)$ (0.10)$ (0.02)
========== ========= ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 7,700,200 7,680,000 7,700,200 7,680,000
========== ========= ========== ==========
See accompanying notes to financial statements.
KESTREL ENERGY, INC.
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND
2000
(Unaudited)
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (754,357) $ (133,771)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Dry holes, abandoned and
impaired properties 2,050 -
Loss on sale of available-for-sale
securities 220,531 -
Depreciation and depletion 117,775 67,302
Non cash compensation expense - 3,338
(Increase) decrease in accounts
receivable 124,168 (54,162)
(Increase) decrease in due from
related party (6,003) (32,727)
(Increase) decrease in other
current assets - 3,342
Increase (decrease) in accounts
payable, trade 203,769 (970,569)
Increase (decrease) in accounts
payable, related party (26,397) 20,093
Increase (decrease) in accrued
liabilities (26,629) 23,372
------------ ------------
Net cash used in operating
activities (145,093) (1,073,782)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition
of properties (75,096) (727,647)
Proceeds from sale of securities 360,921 -
------------ ------------
Net cash provided by (used in)
investing activities 285,825 (727,647)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from related party 350,000 -
Net borrowings (payments) on
line of credit (526,000) 1,384,500
------------ ------------
Net cash provided by (used in)
financing activities (176,000) 1,384,500
------------ ------------
Net decrease in cash and cash
equivalents (35,268) (416,929)
Cash and cash equivalents at the
beginning of the period 119,025 502,034
------------ ------------
Cash and cash equivalents at the
end of the period $ 83,757 $ 85,105
============ ============
Cash paid for interest $ 76,618 $ 38,903
============ ============
See accompanying notes to financial statements.
KESTREL ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
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, 2001.
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, 2001,
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.
2. Investment in Related Party
The investment in Victoria Petroleum, NL ("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, 2001, the unrealized loss on the investment was
$565,738. As of June 30, 2001, there was an unrealized gain on the
investment of $26,431. The Company has sold shares subsequent to
June 30, 2001, which resulted in cash proceeds of $360,921 and a loss
on sale of $220,531. As of December 31, 2001, the Company owns
52,100,000 shares of VP.
3. Line of Credit
On February 21, 2000, the Company entered into a Line of Credit
agreement with Wells Fargo Bank West N.A., which provided the Company
a 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 prime. On May 31, 2001, Wells Fargo reduced the borrowing base
to $1,400,000. As a result of the reduction to the borrowing base,
the Company was required to make scheduled principal payments to
reduce the amount outstanding to $1,400,000 by October 31, 2001, the
maturity date of the line of credit. The line of credit is secured
by Deeds of Trust on various oil and gas producing properties held by
the Company. The Company reduced the outstanding balance to
$1,396,000 by October 31, 2001. The Company finalized the
restructuring of the line of credit with Wells Fargo in November
2001, which calls for principal payments of $1,340,000 by October 31,
2002. As of December 31, 2001, $1,356,000 was outstanding on the
line of credit and all payments were current.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had a working capital deficit of
$1,879,029. This compares to the Company's working capital deficit of
$1,750,853 as of June 30, 2001. The increase in working capital deficit
of $128,176 was a result of the loss from operations offset by proceeds
from the sale of securities, collection of accounts receivable and an
increase in trade accounts payable. The Company was required to pay Wells
Fargo Bank $526,000 in principal payments on the line of credit during the
period, which the Company funded in part by borrowing $350,000 from
Victoria Petroleum, NL, an affiliated company ("VP"). In order for the
Company to fund its working capital deficit, possible steps could include
the sale of securities, sale of non-core oil and gas properties, sale of
shares of the Company's common stock, and further reductions of general
and administrative expenses.
Net cash used by operating activities was $145,093 for the six months
ended December 31, 2001, a decrease of $928,689 over cash used by
operations of $1,073,782 for the same period in 2000. A year ago, the
Company used its available cash resources to pay existing accounts payable
which accounts for the decrease in cash used for the six month period
ended December 31, 2001. Accounts receivable decreased $124,168, or
44.5%, to $154,666 during the period as compared to an increase of $54,162
a year ago. The decrease in accounts receivable was attributable to lower
oil and gas revenues as a result of lower oil and gas prices received
during the period. Accounts payable increased $203,769, or 168%, to
$325,233 during the period versus a decrease of $970,569, or 68%, during
the same period a year ago. The increase in payables reflects the
Company's liquidity problems during this period of lower oil and gas
prices. Accrued liabilities decreased $26,628, or 21%, to $98,179 versus
an increase of $20,093 in 2000. Accounts payable related party decreased
$26,397, or 100%, as the Company, through overhead charges, repaid the
advances from an affiliated Company. The Company, as a result of the
overhead charges, now has a receivable of $6,003. The Company has billed
approximately $16,200 per quarter for overhead and personnel.
Net cash provided from investing activities was $285,825 for the six
months ended December 31, 2001, versus cash used of $727,647 for the same
period in 2000. The increase of $1,013,472 resulted from the sale of
shares of VP Common Stock during the period, which generated $360,921 in
proceeds and lower capital expenditures. The Company recognized a loss of
$220,531 on the sales. Capital expenditures for the period ended December
31, 2001 of $75,096 included $2,600 for office equipment, $3,300 for
equipment on the Greens Canyon 29-2 well in Wyoming, approximately $47,800
for continued development of various coalbed methane wells in Wyoming, and
$22,500 for well equipment on the Pierce Unit in Wyoming.
Cash used by financing activities totaled $176,000 for the six months
ended December 31, 2001 versus cash provided of $1,384,500 a year ago.
The Company made $526,000 in principal payments to Wells Fargo Bank
pursuant to the line of credit agreement of May 2001. Due to the
reduction in oil and gas revenues during the first half of fiscal 2002
from levels realized in the third and fourth quarters of fiscal 2001, the
Company was advanced $350,000 from Victoria Petroleum, NL, an affiliated
company ("VP"), to provide additional working capital. The Company and VP
do not have a formal agreement currently in place regarding this advance.
The Company anticipates making interest only payments on the advance at a
market rate of interest until such time as the Company can increase its
cash flow to repay the advances. The Company and VP are currently
discussing a formalization of the terms of repayment of this advance.
RESULTS OF OPERATIONS
The Company reported a loss of ($514,490), or 7 cents per share, for the
three month period ended December 31, 2001. This compares with a loss of
$65,244, or 1 cent per share, for the same period a year ago. The higher
loss in the current period is the result of lower oil and gas revenues
from year ago levels and the loss on the sale of available securities
incurred during the quarter.
The Company's revenues for the three months ended December 31, 2001 were
$6,378 compared to $462,044 during the same period of 2000, a decrease of
$455,666. Excluding the loss on sale of securities, total revenues were
$232,898 as compared to $462,044 a year ago. The decrease in revenues was
a result of lower oil and gas revenues. Revenues from oil and gas sales
were $214,219 for the three months ended December 31, 2001, a decrease of
$226,371, or 51%, as compared to $440,590 for the same period in 2000.
The decrease in oil and gas revenues is attributable to lower oil and gas
prices as compared to a year ago. Other income for the three months ended
December 31, 2001 decreased $2,693, or 13%, to $18,663 from $21,356 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 recorded a loss of $226,520 on sale of securities as a result of
the sale of shares of VP Common Stock during the quarter. See Note 2 to
the financial statements.
The Company's total revenues for the six month period ended December 31,
2001 were $411,783 as compared to $831,604 during the same period in 2000,
a decrease of $419,821, or 50%. Excluding loss on sale of securities of
$220,531, total revenues decreased $199,290 to $632,314 from year ago
levels. Revenue from oil and gas sales was $567,712 for the six months
ended December 31, 2001, a decrease of $225,558, or 28%, as compared to
sales of $793,270 a year ago. The decrease in oil and gas sales was
attributable to significantly lower oil and gas prices despite higher gas
production from the Greens Canyon properties and the two Turner wells
completed last year. Other income increased $26,604, or 74%, to $62,532
versus $35,928 a year ago. This increase was attributable to the sale of
tubing on the McEntire lease in Kansas for $24,900. As noted above, the
Company also recorded a loss on the sale of available securities of
$220,531, which resulted from the sale of shares of VP Common Stock during
the period.
The Company's total expenses for the second quarter ended December 31,
2001 decreased $6,420, or 1%, to $520,868 as compared to $527,288 a year
ago. The decrease in overall expenses is primarily due to lower general
and administrative 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, 2001 increased
$200,765, or 21%, to $1,166,140 versus $965,375 a year ago. The increase
in overall expenses is a result of higher production, exploration, and
interest expense despite lower general and administrative expenses.
Production and operating expenses for the three month period decreased
$12,971, or 7%, to $169,698 versus $182,669 for the same period a year
ago. The decrease in operating expenses for the period was not related to
any specific property, but lower production taxes were incurred as a
result of lower oil and gas revenues.
For the six months ended December 31, 2001, production and operating
expenses rose $86,183, or 28%, to $390,893 as compared to $304,710 a year
ago. The increase in production and operating expenses was primarily due
to higher lease operating expenses on various wells, including the
Burditt, Cab Hughes, Pierce Unit, Grady Unit, Kaye Unit, Wagenson
Waterflood, and the Turner 1-23 and 3-14 wells. These wells had lower
lease operating expense in the year ago period for various reasons. In
particular, the Pierce and Kaye Units were shut in a year ago and the
Turner wells and the Wagenson Waterflood did not yet exist.
Exploration expenses for the quarter ended December 31, 2001 increased
$38,674, or 134%, to $67,632 from $28,958 a year ago. The increase in
costs incurred for the quarter reflect delay rentals paid to maintain
leasehold interests and higher engineering costs.
For the six months ended December 31, 2001, exploration expenses increased
$57,716, or 102%, to $114,164 versus $56,448 a year ago. The increase in
exploration expenses is a result of higher engineering and geological and
geophysical costs.
Dry holes, abandoned and impaired properties expense for the second
quarter was $1,492, which reflected the write-off of several leases no
longer held by the Company.
Dry holes, abandoned and impaired properties expense for the six months
ended December 31, 2001 was $29,209, which reflects the abandonment costs
incurred on the McEntire lease in Kansas of $27,717. These costs were
largely offset by the sale of tubing on the lease of $24,900 as noted
above.
Depletion expense for the three months ended December 31, 2001 was $59,208
versus $36,066 a year ago.
Depletion expense for the six months ended December 31, 2001 was $117,775
versus $67,302 a year ago. The increase in depletion for both the three
and six month periods ending December 31, 2001 is attributable to higher
capitalized costs on the Greens Canyon and Turner wells.
General and administrative costs for the three months ended December 31,
2001 decreased $51,380, or 21%, to $197,604 as compared to $248,984 for
the same period a year ago. The decrease in expenses was not attributable
to any particular expense category, but reflects the Company's commitment
to reduce expenses during this period of lower oil and gas revenues.
The Company's general and administrative expenses for the six months ended
December 31, 2001 decreased $47,707, or 10%, to $450,305 from $498,012.
Interest expense for the three month period ended December 31, 2001
decreased $5,377, or 18%, to $25,234 from $30,611 a year ago. The
decrease is attributable to lower interest rates being charged the Company
on approximately the same loan balance.
For the six months ended December 31, 2001, interest expense rose $24,891
to $63,794 from $38,903 a year ago. The increase reflects a higher loan
balance during this six month period versus a year ago notwithstanding the
impact of generally lower interest rates.
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, 2001, the Company owns 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 6, 2001, in Denver, Colorado, the Company's
shareholders elected Barry D. Lasker, 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, 2002, and an amendment to the
Company's stock option plan to increase the number of shares
reserved under the plan to 2,233,000 from 1,850,000.
There were 7,700,200 shares of the Company's Common
Stock issued and outstanding, of which 7,700,200 were entitled
to vote at the meeting. Of that number, 3,943,548 were present
in person or by proxy at the meeting. With respect to the
election of directors, the votes were as follows: Mr. Lasker -
3,939,928 in favor, 3,620 withheld; Mr. Hoops - 3,939,888 in
favor, 3,620 withheld; Mr. Pett - 3,939,928 in favor, 3,620
withheld; Mr. Kopcheff - 3,939,928 in favor, 3,620 withheld; Mr.
Nickerson - 3,939,928 in favor, 3,620 withheld; Mr. Syropoulo -
3,939,928 in favor, 3,620 withheld; and Mr. MacLachlan -
3,939,928 in favor, 3,620 withheld. The selection of KPMG LLP
received a vote of 3,941,118 shares for, 810 against and 1,620
abstaining. The amendment to the stock option plan was
approved, with 3,889,700 shares for, 51,886 against and 1,962
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
10.1 Stock Option Plan as of December 6, 2001
*10.2 Wells Fargo Term Loan Agreement
(b) Reports on Form 8-K
A report on Form 8-K dated December 6, 2001
under Item 9 was filed with the Commission on
December 7, 2001.
* To be filed by amendment
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 19, 2002 /s/BARRY D. LASKER
Barry D. Lasker
President, Principal Executive Officer,
and Director
Date: February 19, 2002 /s/MARK A. BOATRIGHT
Mark A. Boatright
Vice President - Finance,
Principal Financial and Accounting
Officer