SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended SEPTEMBER 30, 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 September 30,
2001: 7,700,200
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KESTREL ENERGY, INC.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------
Balance Sheets as of September 30, 2001
and June 30, 2001 (Unaudited) 3
Statements of Operations for the Three
Months Ended September 30, 2001 and 2000
(Unaudited) 4
Statements of Cash Flows for the Three
Months Ended September 30, 2001 and 2000
(Unaudited) 5-6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
------ Financial Condition and Results of
Operations 8
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 SEPTEMBER 30, 2001 AND JUNE 30, 2001
(Unaudited)
September 30, June 30,
ASSETS 2001 2001
-------------------------- -------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 102,737 $ 119,025
Accounts receivable 222,671 278,834
Other assets 5,957 5,957
------------ ------------
Total current assets 331,365 403,816
------------ ------------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, successful
efforts method of accounting:
Unproved 217,384 217,941
Proved 12,458,552 12,398,775
Pipeline and facilities 807,851 807,851
Furniture and equipment 145,176 143,724
------------ ------------
13,628,963 13,568,291
Accumulated depreciation and
depletion (3,249,552) (3,190,983)
------------ ------------
Net property and equipment 10,379,411 10,377,308
------------ ------------
Investment in related party 1,250,316 2,130,178
------------ ------------
$ 11,961,092 $ 12,911,302
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade $ 294,396 $ 121,464
Related party 10,197 26,397
Accrued liabilities 100,641 124,808
Line of credit, bank 1,455,000 1,882,000
Advance from related party 350,000 -
------------ ------------
Total current liabilities 2,210,234 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 issued and outstanding at
September 30, 2001 and June 30, 2001 19,073,023 19,073,023
Accumulated deficit (8,582,688) (8,342,821)
Accumulated other comprehensive
(loss) income (739,477) 26,431
------------ ------------
Total stockholders' equity 9,570,858 10,756,633
------------ ------------
$ 11,961,092 $ 12,911,302
============ ============
See accompanying notes to financial statements.
KESTREL ENERGY, INC.
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000
(Unaudited)
2000 2001
------------ -----------
REVENUE:
Oil and gas sales $ 353,493 $ 352,680
Interest 2,054 2,308
Other income 43,869 14,572
Gain on sale of available-for-sale
securities 5,989 -
------------ -----------
TOTAL REVENUES 405,405 369,560
------------ -----------
COSTS AND EXPENSES:
Production and operating expenses 221,195 122,041
Dry holes, abandoned and impaired
properties 27,717 -
Exploration expenses 46,532 27,490
Depreciation and depletion 58,567 31,236
General and administrative 252,701 249,028
Interest expense 38,560 8,292
------------ ------------
TOTAL COSTS AND EXPENSES 645,272 438,087
------------ ------------
NET LOSS (239,867) ( 68,527)
Other comprehensive loss -
unrealized loss from available-for-sale
securities (739,477) (514,000)
------------ -----------
Comprehensive loss $ (979,344) $ (582,527)
============ ===========
NET LOSS PER COMMON SHARE $ (0.03) $ (0.01)
============ ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 7,700,200 7,680,000
============ ==========
See accompanying notes to financial statements.
KESTREL ENERGY, INC.
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000
(Unaudited)
2000 2001
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (239,867) $ (68,527)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Dry holes, abandoned and impaired
properties 557 -
Gain on sale of available for sale
securities (5,989) -
Depreciation and depletion 58,567 31,236
Non cash compensation expense - 3,338
(Increase) decrease in accounts
receivable relating to operations 56,163 (1,278)
(Increase) decrease in due from related
party - 524
(Increase) decrease in other current
assets - 5,179
Increase (decrease) in accounts
payable, trade 172,932 (865,084)
Increase (decrease) in accounts
payable, related party (16,200) 42,609
Increase (decrease) in accrued
liabilities (24,167) 21,917
------------- ------------
Net cash provided by (used in)
operating activities 1,996 (830,086)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures/acquisition
of properties (61,229) (131,655)
Proceeds from sale of securities 119,945 -
------------- -----------
Net cash provided by (used in)
investing activities 58,716 (131,655)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from related party 350,000 -
Net borrowings (payments) on
line of credit (427,000) 600,000
------------ -----------
Net cash provided by
(used in) financing activities (77,000) 600,000
------------ -----------
Net decrease in cash and cash
equivalents (16,288) (361,741)
Cash and cash equivalents at the
beginning of the period 119,025 502,034
------------ -----------
Cash and cash equivalents at the
end of the period $ 102,737 $ 140,293
============ ===========
See accompanying notes to financial statements.
KESTREL ENERGY, INC.
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000, CONTINUED
(Unaudited)
2000 2001
------------ -----------
SELECTED NON CASH ACTIVITIES:
Total property acquisitions $ - $ 394,155
Accounts payable and accrued
expenses used to acquire property - (262,500)
------------ ------------
Net cash used to acquire property $ - $ 131,655
============ ============
Cash paid for interest $ 42,143 $ 8,292
============ ============
Unrealized loss on
available-for-sale securities $ (739,477) $ (514,000)
============ ============
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 consolidated 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 September 30,
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 September 30, 2001, the unrealized loss on the investment was
$739,477. As of June 30, 2001, there was an unrealized gain on the
investment of $26,431. The Company sold 3,900,000 shares in July
2001 which resulted in cash proceeds of $119,943 and a gain on sale
of $5,989. As of September 30, 2001, the Company owns 68,100,000
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. As of September 30, 2001, $1,455,000 was outstanding on
the line of credit. The Company reduced the outstanding balance to
$1,396,000 as of October 31, 2001. Wells Fargo has granted the
Company an extension to November 30, 2001 to restructure the line of
credit. The Company and Wells Fargo are currently determining the
payment schedule and expect to finalize the restructuring by November
30, 2001.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company had a working capital deficit of
$1,878,869. 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 $128,016 was a result of the loss from operations for the first quarter
ended September 30, 2001. The Company's revenues from oil and gas sales
declined sharply from fiscal fourth quarter 2001 as both oil and gas
prices declined. The Company was required to pay Wells Fargo Bank
$427,000 in principal payments on the line of credit during the quarter,
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, additional shares of VP Common Stock
held by the Company will be liquidated as possible on an on-going basis.
Additional steps could include a sale of existing properties, sale of
shares of the Company's common stock, and further reductions of general
and administrative expenses.
Net cash provided by operating activities was $1,996 for the three months
ended September 30, 2001, an increase of $832,082 over cash used by
operations of $830,086 for the same period in 2000. Operating cash flow
increased due to an increase in accounts payable despite an operating loss
for the period. Accounts receivable decreased $56,163, or 20%, to
$222,671 during the period as compared to an increase of $1,278 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 quarter. Accounts payable increased $172,932, or 142%, to $294,396
during the period versus a decrease of $865,084, or 61%, 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 $24,167, or 19%, to $100,641 versus an
increase of $21,917 (net of $262,500 used to acquire property) in 2000.
Accounts payable related party decreased $16,200, or 61%, to $10,197. The
decrease reflects the overhead charged to the related party for office
space and personnel during the period.
Net cash provided from investing activities was $58,716 for the quarter
ended September 30, 2001, versus cash used of $131,655 for the same period
in 2000. The increase resulted from the sale of 3,900,000 shares of VP
Common Stock during the quarter, which generated $119,945 in proceeds. The
Company recognized a gain of $5,989 on the sale. Capital expenditures for
the period ended September 30, 2001 of $61,229 included $1,450 for office
equipment, $3,300 for equipment on the Greens Canyon 29-2 well in Wyoming,
approximately $34,000 for continued development of various coalbed methane
wells in Wyoming, and $22,479 for well equipment on the Pierce Unit in
Wyoming.
Cash used by financing activities totaled $77,000 for the three months
ended September 30, 2001 versus cash provided of $600,000 a year ago. The
Company made $427,000 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 quarter 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 the advance repayment.
RESULTS OF OPERATIONS
FIRST QUARTER RESULTS
The Company reported a loss of $239,867, or 3 cents per share, for the
three month period ended September 30, 2001. This compares with a loss of
$68,527, or 1 cent per share, for the same period a year ago. The
increased loss in the current period is a result of higher overall
expenses versus a year ago, despite slightly higher total revenues.
The Company's revenues for the three months ended September 30, 2001 were
$405,405 compared to $369,560 during the same period of 2000, an increase
of $35,845, or 10%. Revenues from oil and gas sales were $353,493 for the
quarter ended September 30, 2001, an increase of $813 as compared to
$352,680 for the same period in 2000. The increase in oil and gas
revenues is attributable to higher gas volumes compared to a year ago
despite slightly lower oil and gas prices. Other income increased
$29,297, or 201%, to $43,869 versus $14,572 for the same period a year
ago. The increase was attributed to the sale of tubing on the McEntire
lease in Kansas for $24,900 and higher overhead charges to a related party
for use of the Company's office space and personnel. The Company recorded
a $5,989 gain on sale of securities as result of the sale of 3,900,000
shares of VP Common Stock in July 2001. See Footnote 2 to the financial
statements.
The Company's total expenses increased $207,185, or 47%, to $645,272 as
compared to $438,087 a year ago. The increase in overall expenses is
attributable to higher lease operating expense, abandonment costs,
depletion, and exploration expense as discussed below.
Production and operating expenses increased $99,154, or 81%, to $221,195
versus $122,041 for the same period 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. The wells listed above had minor lease operating
expense in the year ago period for various reasons. The Pierce and Kaye
Units were shut in a year ago. The Turner wells and the Wagenson
Waterflood were not in existence a year ago. Several other wells also
incurred higher lease operating expenses during the first quarter but
those increases were not individually material. The wells listed above
accounted for approximately $93,000 of the increase versus September 2000.
Dry holes, abandoned and impaired properties expense was $27,717 for the
three months ended September 30, 2001. The Company incurred $27,717 of
abandonment expense on the McEntire lease in Kansas. These costs were
offset by the sale of tubing on the leases of $24,900 as noted above.
Exploration expenses increased $19,042, or 69%, to $46,532 from $27,490 a
year ago. The increase is attributable to higher engineering expenses and
higher geological and geophysical expenses.
General and administrative costs increased $3,673, or 1%, to $252,701 as
compared to $249,028 for the same period a year ago. The increase in
expenses is not attributable to any particular expense item.
Interest expense increased $30,268 to $38,560 from $8,292 a year ago. The
increase in interest expense is due to the interest paid on the
outstanding balance of the Company's line of credit.
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. The
Company no longer has currency exchange risk relating to its own
operations, as it no longer participates in international drilling. As of
September 30, 2001, the Company owns 68,100,000 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. At September 30, 2001, the unrealized loss on the
investment was $739,447. The Common Stock of VP was trading for $.036
cents per share in Australian dollars as of September 30, 2001. The
Company applies the exchange rate between the U.S. dollar and Australian
dollar as quoted in the Wall Street Journal. On September 30, 2001, the
exchange rate in dollar terms was $.51 which resulted in a U.S. dollar
share price of $.01836 cents per share.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
KESTREL ENERGY, INC.
---------------------------
(Registrant)
Date: November 14, 2001 /s/BARRY D. LASKER
--------------------------- ---------------------------
Barry D. Lasker
President and Chief Executive
Officer
Date: November 14, 2001 /s/MARK A. BOATRIGHT
--------------------------- ---------------------------
Mark A. Boatright
Vice President - Finance,
Principal Financial and Accounting
Officer