UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual Report Pursuant to Section 1 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30: 2000 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No: 0-9261
KESTREL ENERGY, INC.
--------------------
(Exact name of registrant as specified in its charter)
State of Incorporation: Colorado I.R.S. Employer Identification No.
84-0772451
999 - 18th Street, Suite 2490
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 295-0344
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X]....... YES ........[ ] ........ NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
At August 31, 2000 7,680,000 common shares (the registrant's only class of
voting stock) were outstanding. The aggregate market value of the
4,654,369 common shares of the registrant held by nonaffiliates on that
date (based upon the mean of the closing bid and asked price on the NASDAQ
system) was $6,690,655.
TABLE OF CONTENTS
PART I 3
ITEM 1. BUSINESS. 3
General Description of Business 3
Recent Activities 3
Operations and Policies 3
Risk Factors 4
Forward-Looking Statements 6
ITEM 2. PROPERTIES 6
Oil and Gas Interests 6
Royalty Interests Under Producing Properties 7
Drilling Activities 7
Farmout Agreements 7
Oil and Gas Production, Prices and Costs 8
Customers 8
Office Facilities 8
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II 9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 9
Outstanding Shares of Common Stock 9
Stock Price 9
Dividend Policy 9
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
Liquidity and Capital Resources 10
Results of Operations 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 15
PART III 15
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 15
ITEM 11. EXECUTIVE COMPENSATION 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 15
PART IV 15
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8K 15
SIGNATURES 17
PART I
------
ITEM 1. BUSINESS.
-----------------
General Description Of Business
-------------------------------
Kestrel Energy, Inc. (the "Company") was incorporated under the laws of
the State of Colorado on November 1, 1978. The Company's principal
business at this time is the acquisition, either alone or with others, of
interests in proved developed producing oil and gas leases, and
exploratory and developmental drilling. The Company has pursued an
aggressive exploration program over the last few years, which it plans to
continue during fiscal 2001.
The Company presently owns oil and gas interests in the states of
Louisiana, New Mexico, Oklahoma, South Dakota, Texas, and Wyoming.
Recent Activities
-----------------
On May 5, 2000, the Company sold six international permits for petroleum
drilling in Western Australia and New Guinea to Victoria Petroleum USA,
Inc. ("VP/USA"), a Colorado corporation and wholly owned subsidiary of
Victoria Petroleum N.L. ("VP"), an Australian corporation and an affiliate
of the Company, in exchange for 8,250,000 shares of VP Common Stock. On
May 5, 2000, the Company, Kestrel Energy California, Inc. ("KEC"), a
wholly owned subsidiary of the Company, VP, and VP/USA entered into an
Agreement and Plan of Merger (the "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 with
and into VP/USA, with KEC as the surviving corporation.
In April 2000 the Company completed a private offering of 374,000 shares
of its common stock at $3.00 per share. Net proceeds to the Company were
$1,047,628 after offering and related expenses of $74,372. The private
placement of shares provided the Company with resources to complete the
Greens Canyon 29-2 well on the Greens Canyon Field.
During the fourth quarter of fiscal 2000, the Company completed the Greens
Canyon 29-2 well for production and finished the construction of the
Greens Canyon pipeline. As a result of the pipeline, the Company was able
to transport gas produced from the Greens Canyon wells to market for sale
in May and June.
Operations and Policies
-----------------------
The Company currently is focusing its exploration, acquisition and
development opportunities in Wyoming, specifically on the Greens Canyon
Field. However, the acquisition, development, production and sale of oil
and gas acreage are subject to many factors outside the Company's control.
These factors include worldwide and domestic economic conditions;
proximity to pipelines; existing oil and gas sales contracts on properties
being evaluated; the supply and price of oil and gas as well as other
energy forms; the regulation of prices. production, transportation and
marketing by federal and state governmental authorities; and the
availability of, and interest rates charged on, borrowed funds.
Historically, in attempting to acquire, explore and drill for oil and gas
leases, the Company has often been at a competitive disadvantage since it
had to compete with many companies and individuals with greater capital
and financial resources and larger technical staffs. The Company has in
the past sought to alleviate some of these problems by forming acquisition
joint ventures with other companies, including its affiliate, Victoria
Petroleum N.L. These joint ventures allow the Company access to more
acquisition candidates and enable the Company to share the evaluation and
other costs among the venture partners.
The Company's operations are subject to various provisions of federal,
state and local laws regarding environmental matters. The impact of these
environmental laws on the Company may necessitate significant capital
outlays, which may materially affect the earnings potential of the
Company's oil and gas business in particular, and could cause material
changes in the industry in general. The Company strongly encourages the
operators of the Company's oil and gas wells to do periodic environmental
assessments of potential liabilities. To date, the existence of
environmental laws has not materially hindered nor adversely affected the
Company's business. Please see Item 3, Legal Proceedings for a discussion
of potential environmental litigation involving the Company.
The Company has five full-time employees, including the Company's
President, Timothy L. Hoops. The Company also hires outside professional
consultants to handle certain additional aspects of the Company's
business. Management believes this type of contracting for professional
services is the most economical and practical means for the Company to
obtain such services at this time.
The Company's current focus is the exploration of new oil and gas
properties with the emphasis on opportunities generated by the Company on
acreage currently held. The Company anticipates that significant efforts
will be made to develop the Wyoming Greens Canyon Field area over the next
two years. The Company will also continue to explore for oil and gas by
participating in prospects generated by outside parties. Such prospects
are often subject to a premium, or promote, to the generating party. The
Company is willing to pay these promotes as an alternative to internally
generating all of its prospects with Company personnel or consultants. A
willingness to consider transactions brought to the Company by third
parties affords the Company a wider range of opportunities than could be
generated in-house.
Risk Factors
------------
We must continue to expand our operations
-----------------------------------------
Our long term success is ultimately dependent on our ability to expand our
revenue base through the acquisition of producing properties and, to a
much greater extent, by successful results in our exploration efforts. We
have recently made significant investments in exploration properties in
the Western Green River Basin in Wyoming. There is no assurance that
these acquisitions or other acquisitions will be as successful as
projected. All of our exploration projects are subject to failure and the
loss of our investment.
Prices of oil and natural gas fluctuate widely based on market conditions
and any decline will adversely affect our financial condition
-------------------------------------------------------------------------
Our revenues, operating results, cash flow and future rate of growth are
very dependent upon prevailing prices for oil and gas. Historically, oil
and gas prices and markets have been volatile and not predictable, and
they are likely to continue to be volatile in the future. Prices for oil
and gas are subject to wide fluctuations in response to relatively minor
changes in the supply of and demand for oil and gas, market uncertainty
and a variety of additional factors that are beyond our control,
including:
o political conditions in the Middle East;
o the supply and price of foreign oil and gas;
o the level of consumer product demand;
o the price and availability of alternative fuels;
o the effect of federal and state regulation of production and
transportation; and
o the proximity of our natural gas to pipelines and their capacity.
We must replace the reserves we produce
---------------------------------------
A substantial portion of our oil and gas properties contain proved
undeveloped reserves and probable reserves. Successful development and
production of those reserves cannot be assured. Additional drilling will
be necessary in future years both to maintain production levels and to
define the extent and recoverability of existing reserves. There is no
assurance that our present oil and gas wells will continue to produce at
current or anticipated rates of production, that development drilling will
be successful, that production of oil and gas will commence when expected,
that there will be favorable markets for oil and gas which may be produced
in the future or that production rates achieved in early periods can be
maintained.
There are many risks in drilling oil and gas wells
--------------------------------------------------
The cost of drilling, completing and operating wells is often uncertain.
Moreover, drilling may be curtailed, delayed or canceled as a result of
many factors, including title problems, weather conditions, shortages of
or delays in delivery of equipment, as well as the financial instability
of well operators, major working interest owners and well servicing
companies. Our gas wells may be shut-in for lack of a market until a gas
pipeline or gathering system with available capacity is extended into our
area. Our oil wells may have production curtailed until production
facilities and delivery arrangements are acquired or developed for them.
We face intense competition
---------------------------
The oil and natural gas industry is highly competitive. We compete with
others for property acquisitions and for opportunities to explore or to
develop and produce oil and natural gas. We have previously formed
acquisition joint ventures with several other companies, including
Victoria Petroleum N.L. and other affiliates, which have allowed us more
access to acquisition candidates and to share the evaluation costs with
them. We face strong competition from many companies and individuals with
greater capital, financial resources and larger technical staffs. We
also face strong competition in procuring services from a limited pool of
laborers, drilling service contractors and equipment vendors.
The amount of insurance we carry may not be sufficient to protect us
--------------------------------------------------------------------
We, our partners, co-venturers and well operators maintain general
liability insurance but it may not cover all future claims. If a large
claim is successfully asserted against us, we might not be covered by
insurance, or it might be covered but cause us to pay much higher
insurance premiums or a large deductible or co-payment. Furthermore,
regardless of the outcome, litigation involving our operations or even
insurance companies disputing coverage could divert management's
attentions and energies away from operations. The nature of the oil and
gas business involves a variety of operating hazards such as fires,
explosions, cratering, blow-outs, adverse weather conditions, pollution
and environmental risks, encountering formations with abnormal pressures,
and, in horizontal wellbores, the increased risk of mechanical failure and
collapsed holes, the occurrence of any of which could result in
substantial losses to us.
Our success may be dependent on our ability to retain Tim Hoops, John
Kopcheff, Bob Pett and Ira Pasternack as key personnel
-------------------------------------------------------------------------
We believe that the oil and gas exploration and development and related
management experience of our key personnel is important to our success.
The active participation in Kestrel of Timothy L. Hoops, our president,
John T. Kopcheff, vice president of International, Robert J. Pett, our
chairman, and Ira Pasternack, vice president of Exploration, is a
necessity for our continued operations. We do not have any employment
contracts with these individuals and we do not have key person life
insurance on their lives. We compete with bigger and better financed oil
and gas exploration companies for these individuals. Our future success
may depend on whether we can attract, retain and motivate highly qualified
personnel. We can't assure you that we will be able to do so.
Our reserves are uncertain
--------------------------
Estimating our proved reserves involves many uncertainties, including
factors beyond our control. Our annual report on Form 10-K for fiscal
year 2000 contains estimates of our oil and natural gas reserves and the
future cash flow to be realized from those reserves for fiscal years 2000,
1999 and 1998, as prepared by independent petroleum engineers. There are
uncertainties inherent in estimating quantities of proved oil and natural
gas reserves since petroleum engineering is not an exact science.
Estimates of commercially recoverable oil and gas reserves and of the
future net cash flows from them are based upon a number of variable
factors and assumptions including:
o historical production from the properties compared with production from
other producing properties;
o the effects of regulation by governmental agencies;
o future oil and gas prices; and
o future operating costs, severance and excise taxes, abandonment costs,
development costs and workover and remedial costs.
Governmental regulation, environmental risks and taxes could adversely
affect our oil and gas operations in the United States
-------------------------------------------------------------------------
Our oil and natural gas operations in the United States are subject to
regulation by federal and state government, including environmental laws.
To date, we have not had to expend significant resources in order to
satisfy environmental laws and regulations presently in effect. However,
compliance costs under any new laws and regulations that might be enacted
could adversely affect our business and increase the costs of planning,
designing, drilling, installing, operating and abandoning our oil and gas
wells and other facilities. Additional matters that are, or have been
from time to time, subject to governmental regulation include land tenure,
royalties, production rates, spacing, completion procedures, water
injections, utilization, the maximum price at which products could be
sold, energy taxes and the discharge of materials into the environment.
Forward-Looking Statements
--------------------------
This report contains forward-looking statements. We use words such as
"anticipate", "believe", "expect", "future", "may", "will", "should",
"plan", "intend", and similar expressions to identify forward-looking
statements. These statements are based on our beliefs and the assurances
we made using information currently available to us. Because these
statements reflect our current views concerning future events, these
statements involve risks, uncertainties and assumptions. Our actual
results could differ materially from the results discussed in the forward-
looking statements. Some, but not all, of the factors that may cause
these differences include those discussed in the risk factors in this
report. You should not place undue reliance on these forward-looking
statements. You should also remember that these statements are made only
as of the date of this report and future events may cause them to be less
likely to prove to be true.
ITEM 2. PROPERTIES.
--------------------
Oil and Gas Interests
---------------------
The following table describes the Company's leasehold interests in
developed and undeveloped oil and gas acreage at June 30, 2000:
<TABLE>
<CAPTION>
Total Total
Developed Undeveloped
Acreage (1)(2) Acreage (1)(2)
State Gross Net Gross Net
----- ----- ----- ----- -----
<S> <C> <C> <C> <C>
Louisiana 591 248 -0- -0-
New Mexico 549 227 -0- -0-
Oklahoma 2,887 353 -0- -0-
South Dakota 160 20 -0- -0-
Texas 993 62 -0- -0-
Wyoming 2,636 1,851 30,518 30,518
TOTAL 7,816 2,761 30,518 30,518
----- ----- ------ ------
Canada 640 19 -0- -0-
</TABLE>
(1) Gross acres are the total acreage involved in a single lease or group
of leases. Net acres represent the number of acres attributable to
an owner's proportionate working interest in a lease (e.g., a 50%
working interest in a lease covering 320 acres is equivalent to 160
net acres).
(2) The acreage figures are stated on the basis of applicable state oil
and gas spacing regulations.
Royalty Interests Under Producing Properties
--------------------------------------------
At June 30, 2000, the Company held overriding royalty interests ranging
from 0.013% to 9.26% in 116 producing oil and gas wells located on 6,019
gross developed acres in the United States.
Drilling Activities
-------------------
The Company has participated in drilling thirteen wells since June 30,
1999. These included two exploratory wells and eleven development wells.
All of these wells are productive. The two exploratory wells were the
Greens Canyon 27-3 and the Greens Canyon 29-2. The Greens Canyon 27-3 is
productive from the 2nd Frontier Sandstone, while the Greens Canyon 29-2
is productive from the Muddy Sandstone. The eleven development wells were
coalbed methane wells drilled on the Wagensen property.
Kestrel and its subsidiaries owned interests in net exploratory and net
development wells for the years ended June 30, 2000, 1999 and 1998 as set
forth below. This information does not include wells drilled under
farmout agreements.
<TABLE>
<CAPTION>
United States Australia
------------------------- -------------------------
6/30/00 6/30/99 6/30/98 6/30/00 6/30/99 6/30/98
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Exploratory
Wells: (1)
Dry (2) - - 2.50 - 0.06 0.02
Productive (3) 2.0 - - - 0.03 -
---- ---- ---- ---- ---- ----
2.0 - 2.50 - 0.09 0.02
==== ==== ==== ==== ==== ====
Net Development
Wells: (1)
Dry (2) - - - - - -
Productive (3) 0.84 0.25 0.88 - -
---- ---- ---- ---- ---- ----
0.84 0.25 0.88 - - -
==== ==== ==== ==== ==== ====
</TABLE>
(1) A net well is deemed to exist when the sum of fractional ownership
working interests in gross wells equals one. The number of net wells
is the sum of the fractional working interests owned in gross wells
expressed as whole numbers and fractions thereof.
(2) A dry well (hole) is a well found to be incapable of producing either
oil or natural gas in sufficient quantities to justify completion as
an oil or natural gas well.
(3) Productive wells are producing wells and wells capable of production,
including wells that are shut-in.
Farmout Agreements
------------------
Under a farmout agreement, outside parties undertake exploration
activities using prospects owned by Kestrel. This enables the Company to
participate in the exploration prospects without incurring additional
capital costs, although with a substantially reduced ownership interest in
each prospect.
During the year ended June 30, 2000, no wells were drilled under farmout
agreements.
Oil and Gas Production, Prices and Costs
----------------------------------------
As of June 30, 2000, the Company had a royalty and/or working interest in
74 gross (10.06 net) wells that produce oil only, 43 gross (9.45 net)
wells that produce gas only, and 229 (6.62 net) wells that produce both
oil and gas. All wells that produced gas are connected to pipelines.
For information concerning the Company's oil and gas production, estimated
oil and gas reserves, and estimated future cash inflows relating to proved
oil and gas reserves, see Note 8 to the financial statements included in
Item 8 of this Report. The reserve estimates for the reporting year were
prepared by Sproule Associates, an independent petroleum engineering firm.
The Company did not file any oil and gas reserve estimates with any
federal authority or agency during its fiscal year ended June 30, 2000.
For the year ended June 30, 2000, the Company's average operating cost
(including taxes and marketing) per barrel of oil equivalent (BOE)
(converting gas to oil at 6:1) was $7.98. The average operating cost per
BOE on an equivalent basis for fiscal years 1999 and 1998 was $5.46 and
$5.75, respectively. The average sales price per barrel of oil sold was
$24.78 for 2000, $10.01 for 1999, and $14.63 for 1998. The average sales
price per mcf of gas sold was $2.59 for 2000, $1.26 for 1999, and $1.78
for 1998.
Customers
---------
During fiscal year 2000, the Company had two major customers; Oxley
Petroleum, Inc. and Amoco, Inc. Sales to these customers accounted for 13%
each oil and gas sales in 2000. The Company does not believe that it is
dependent on a single customer. The Company has the option at most
properties to change purchasers if conditions so warrant.
Office Facilities
-----------------
The Company's executive offices are currently located at 999 18th Street,
Suite 2490, Denver, Colorado 80202, which is comprised of approximately
3,953 square feet, at an annual rate of $60,855. The Company's current
lease obligation expires February 28, 2003.
ITEM 3. LEGAL PROCEEDINGS.
---------------------------
In the ordinary course of conducting its business, the Company becomes
involved in litigation, administrative proceedings and governmental
investigations, including environmental matters.
The Company has received a notice letter from the U.S. Environmental
Protection Agency (EPA) that the Company is a potentially responsible
party under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (CERCLA) at the Casmalia Waste Disposal Site in
Santa Barbara County, California. The Company may be obligated to conduct
remedial investigations, feasibility studies, remediation and/or removal
of alleged releases of hazardous substances or to reimburse the EPA for
such activities.
The Company does not believe that it has any liability under CERCLA for
wastes disposed at Casmalia and believes that the EPA's notice was issued
in error. The Company has responded to the EPA, explaining that the
Company did not arrange to dispose of any waste at Casmalia. The Company's
involvement with Casmalia is limited to the purchase of assets from
another entity, which disposed of waste at Casmalia. The Company intends
to tender the defense that an indemnification given from the previous
owner of the properties at Casmalia applies, and the previous owner has
confirmed that the indemnification would apply.
The Company is unable to estimate the dollar amount of exposure to loss in
connection with the above-referenced matter; however, it has been
estimated that the ultimate site-wide clean up costs will be approximately
$271.9 million.
It is the opinion of Company's management that the outcome of these
proceedings, individually or in the aggregate, will not have a material
adverse effect on the Company's financial position, results of operations,
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------------------------------------------------------------
None.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
-------------------------------------------------------------------------
Outstanding Shares of Common Stock
----------------------------------
The Company's common stock trades over-the-counter on the NASDAQ SmallCap
Market under the symbol "KEST." At June 30, 2000 the Company had
7,680,000 shares outstanding. At June 30, 2000, the Company had
approximately 1,300 shareholders of record, although the Company believes
that there are more beneficial owners of its stock, the number of which is
unknown.
Stock Price
-----------
These quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Fiscal Year June 30, 1999 Sales Price
-----------
High Low
----- ----
<S> <C> <C>
First Quarter $1.06 $.38
Second Quarter 1.50 .46
Third Quarter 2.75 .50
Fourth Quarter 2.00 .88
Fiscal Year June 30, 2000 Sales Price
-----------
High Low
----- ----
First Quarter $3.25 $1.06
Second Quarter 3.25 2.00
Third Quarter 3.50 2.50
Fourth Quarter 3.62 1.75
</TABLE>
Dividend Policy
---------------
While there are no covenants or other aspects of any finance agreements or
Bylaws that restrict the declaration or payment of cash dividends, the
Company has not paid any dividends on its common stock and does not expect
to do so in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
---------------------------------
The summary of selected financial data for the Company for its last five
fiscal years is as follows:
<TABLE>
<CAPTION>
Years ended June 30,
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Oil and Gas
Sales $1,061,638 $632,030 $895,017 $1,278,502 $1,198,795
Total
Revenue 2,993,459 772,795 1,204,261 1,420,056 1,268,456
Net Earnings
(Loss) 943,977 (1,441,424) (2,018,692) (1,312,365) (160,231)
Basic
Earnings
(Loss) per
Share .14 (.32) (.46) (.56) (.08)
Diluted
Earnings
(Loss) Per
Share .13 (.32) (.46) (.56) (.08)
At June 30,
Total
Assets 12,270,459 4,059,234 5,560,022 7,638,626 4,115,211
Stockholders'
Equity 10,806,435 3,966,297 5,398,346 7,432,443 3,964,708
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
-------------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
Working Capital and Cash Flows: Net working capital deficit at June
30, 2000, was $748,831 compared to positive working capital of $560,207 at
June 30, 1999 and positive working capital of $3,137,982 at June 30, 1998.
The decrease in working capital of $1,309,038 for the current year was a
result of capital expenditures made by the Company to develop the Greens
Canyon Field and the related pipeline. The Company plans to fund the
working capital deficit at June 30, 2000 by drawing on its line of credit
of $600,000 at Wells Fargo Bank, formerly Norwest Banks Colorado, N.A.,
utilizing additional revenues from oil and gas sales resulting from higher
oil and gas prices, and obtaining funds from other sources as necessary.
The decrease in working capital of $2,577,775 from June 30, 1998 to 1999
was a result of operating cash flow deficiencies and capital expenditures.
Net cash provided by operating activities totaled $646,114 for fiscal 2000
as compared to cash used by operating activities of $752,395 for fiscal
1999, an increase of $1,398,509. The increase is primarily a result of
the increase in oil and gas revenues and in trade accounts payable, which
increased as a result of the Company's drilling and completing two Greens
Canyon gas wells and a pipeline to transport gas to market. Net cash used
by operating activities totaled $752,395 for fiscal year 1999 as compared
to $1,654,630 for fiscal 1998, a decrease in cash used of $902,235. The
decrease was primarily due to lower dry hole and exploration costs,
notwithstanding sharply lower oil and gas revenues.
Net cash used by investing activities was $6,432,902 in fiscal 2000 as
compared to $775,181 provided in fiscal 1999. During the fiscal year
ended June 30, 2000, $6,728,902 was used to acquire, explore and develop
proved and unproved oil and gas property interests, construct a gas
pipeline on the Greens Canyon Field, and purchase equipment. Proved
property investments included $2,937,600 to drill and complete the Greens
Canyon 27-3 well, $2,199,400 to drill and complete the Greens Canyon 29-2
well, $100,000 to finalize completion of the Poitevent #1 well, and
$470,000 to acquire additional acreage and conduct a seismic study on the
Greens Canyon Field. Approximately $25,000 was expended to continue
development in various coalbed methane wells on the Wagensen Field in
Wyoming. Additionally, the Company constructed a 17 mile gas pipeline on
the Greens Canyon Field at a cost to the Company of approximately
$772,000. Unproved property acquisitions included $202,000 to acquire
lease acreage on the Fire Hole Canyon Prospect in Wyoming and $6,500 for
the continued development of the Kaye Unit in Wyoming. The Company also
spent approximately $16,400 on computers and related software. Proceeds
from the sales of property and equipment were $296,000 for fiscal 2000 as
compared to $1,000 in the previous year. The Company received $35,000 for
its entire working interest in the Sally Persons Unit in Wyoming, and
$261,000 for the Company's entire working interests in 16 wells located on
the Porcupine leasehold in Wyoming. There were no sales of short-term
investments during fiscal 2000 as compared to sales of $2,330,831 a year
ago. Net cash provided by investing activities was $775,181 in 1999
compared to $518,091 provided in 1998.
During the fiscal year ended June 30, 1999, $1,556,650 was used to acquire
proved and unproved oil and gas property interests and equipment. Proved
property investments included $1,296,000 to acquire and develop the
Poitevent #1 and Greens Canyon Field in Wyoming, $72,000 to acquire
leasehold interests and workover an existing well on the Lake Bouef Field
in Louisiana, $24,000 to complete the CBMA 23-15 well on the Hilight Field
in Wyoming, $25,000 to acquire additional lease acreage and well equipment
on the Dines Unit #2 in Wyoming, and $2,650 to acquire well equipment on
various leases. Unproved acquisitions included $108,000 to develop and
drill the Sage #1, WA 254-P Prospect in Australia and $20,000 for the
continued development of the Kaye Unit in Wyoming. The Company also spent
$9,000 on computers, software and furniture during the fiscal year ended
June 30, 1999. During fiscal year 1999, the Company also sold short-term
investments of $2,330,831 as compared to sales of investments of
$1,078,256 in 1998. The reduction in short-term investments reflects the
Company's need for additional working capital and acquisition, exploration
and development of proved and unproved property. Proceeds from the sale
of assets amounted to $1,000 for fiscal 2000 as compared to $14,891 in
1998. The Company received $1,000 from the sale of its interest in the
Edna Dupplechain well in Louisiana.
Net cash provided by financing activities was $5,893,842 for fiscal 2000.
The Company completed three private offerings (described below) which
provided cash to the Company of $5,878,842 net of offering expenses. In
August 1999 the Company completed a private offering of 1,880,000 shares
of its common stock at $1.25 per share. Net proceeds to the Company were
$2,299,038 after offering and related expenses of $50,962. In December
1999 the Company completed a private offering of 950,000 shares of its
common stock at $2.70 per share. Net proceeds to the Company were
$2,532,176 after offering and related expenses of $32,824. In April 2000
the Company completed a private offering of 374,000 shares of its common
stock at $3.00 per share. Net proceeds to the Company were $1,047,628
after offering and related expenses of $74,372. The shares sold in the
offerings were sold to offshore purchasers in accordance with SEC
Regulation S but the Company has since registered the shares with the SEC
on Form S-3 for resale in the United States. The Company also received
$15,000 from the exercise of non-qualified stock options by Company
employees. There were no cash flows provided or used from financing
activities during fiscal 1999 as compared to cash used of $15,405 in 1998.
Stockholders' Equity: Stockholders' equity increased $6,840,138, or
172%, to $10,806,435 at June 30, 2000 as compared to $3,966,297 at June
30, 1999. The increase is attributable to the three private stock
offerings completed by the Company, the proceeds from stock option
exercises as discussed above, and the net income reported by the Company.
Debt Obligations: The Company had no long-term debt at June 30,
2000, 1999 and 1998.
Reserves and Future Cash Flows: For the fiscal year ended June 30,
2000, the Company's proved oil reserves increased approximately 100,000
bbls. to 388,000 bbls., or 35%, from 288,000 in 1999. The Company's
proved gas reserves increased 18,183 Mmcf to 24,517 Mmcf, or 287%, from
6,334 Mmcf in 1999. The increase in proved reserves is attributable to
revisions of previous quantity estimates, production, new discoveries and
extensions, and higher oil and gas prices for the fiscal year ended June
30, 2000.
The Company's undiscounted net future cash flows have been estimated by
Sproule Associates Inc., an independent petroleum engineering firm, to be
approximately $70,983,000 as of June 30, 2000. This compares to
$8,862,000 in 1999 and $4,697,000 in 1998. The increase in the current
year is the result of revisions of previous quantity estimates, new
discoveries and extensions and higher oil and gas prices.
Gas Balancing: The Company at June 30, 2000 was underproduced by
approximately 5,828 mcf. At June 30, 1999, the Company was underproduced
approximately 6,234 mcf. The Company was under produced by 13,000 mcf of
gas at June 30, 1998. These amounts are reflected in the reserves and
estimated net future cash flows.
Natural Gas Sales Contracts: The Company's gas production is
generally sold under short term contracts with pricing set on current spot
markets with adjustments for marketing and transportation costs. All
contracts are cancelable within 30-90 days notice by the Company. The
Company has no contracts that are based on a fixed natural gas price.
Net Operating Loss and Tax Credit Carryforwards: At June 30, 2000,
the Company estimated that, for United States federal income tax purposes,
it had consolidated net operating loss carryforwards of approximately
$7,833,000. The utilization of approximately $496,000 of these
carryforwards are limited to an estimated $80,000 annually. Of the
balance of the loss carryforwards, $1,885,000 is limited to the extent of
future taxable income generated by the Company's subsidiary, Victoria
Exploration, Inc., and $5,452,000 is available to offset any future
taxable income of the Company. If not utilized, the net operating loss
carryforwards will expire during the period from 2001 through 2015.
Results of Operations
---------------------
Fiscal 2000 vs. Fiscal 1999
---------------------------
Net Earnings: The Company reported net earnings of $943,977 in
fiscal 2000 compared to a loss of $1,441,424 in 1999, which was a decrease
of $2,385,401. The net earnings in fiscal 2000 is attributable to a gain
on sale of property and equipment and significantly higher oil and gas
revenues as a result of higher oil and gas prices.
Revenue: Total revenues increased in fiscal 2000 by $2,220,664, or
287%, to $2,993,459 versus $772,795 in 1999. The increase in overall
revenues was a result of higher oil and gas revenues due to higher oil and
gas prices, and higher gain on sale of property and equipment as described
more fully below.
Revenue from oil and gas sales increased $429,608, or 68%, to $1,061,638
from $632,030 a year ago. The increase in revenues was a result of higher
oil and gas prices despite lower sales volumes for oil and gas. Average
prices per barrel of oil increased 148% to $24.78 from $10.01 a year ago.
Average prices received per mcf of gas increased 106% to $2.59 from $1.26
a year ago. Sales volumes for oil decreased 18% to 19,939 from 24,319 a
year ago. Sales volumes for gas decreased 29% to 218 mmcf from 308 mmcf a
year ago.
The Company recorded gains on sale of equipment and property of $1,816,018
in 1999 versus a loss of $788 a year ago. On May 5, 2000, the Company
sold six international permits with a net book value of approximately
$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. The stock was valued at $0.0292/share and resulted in a gain on
the sale of $97,721. Also, on May 5, 2000, 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 with
and into VP/USA, with KEC as the surviving corporation. The stock was
valued at $0.292/share and resulted in a gain on sale of $1,497,208. The
Company sold its entire interest in the Sally Persons Unit, located in
Wyoming, for $35,000, which resulted in a gain on sale of $27,836.
Additionally, the Company sold its entire working interests in 16 wells
located in the Porcupine Field, Wyoming for $261,000 which resulted in a
gain on sale of $193,254.
Lease Operating Expenses: Lease operating expenses increased
$36,617, or 9%, to $449,245 from $412,628 a year ago. The increase in
lease operating expense is attributable to higher production taxes
resulting from the increase in oil and gas revenues despite lower
operating costs on various properties. Lease operating costs on a BOE
(barrel of oil equivalent) increased 46% to $7.98 from $5.46 a year ago as
a result of lower sales volumes of oil and gas.
Exploration Expenses: Exploration expenses decreased $69,761, or
15%, to $390,575 from $460,336 in 1999. The decrease in exploration
expense reflected the slower pace of the Company's exploration program
during fiscal 2000 as the Company's emphasis has been on the development
of the Greens Canyon Field. The decrease was a result of lower geological
and geophysical costs as well as lower delay rentals paid on exploration
acreage.
Dry Holes, Abandoned and Impaired Properties: Dry holes, abandoned
and impaired property costs were $25,125 in fiscal 2000 as compared to
$388,612 a year ago, a decrease of $363,487, or 94%. No dry hole costs
were recorded in fiscal 2000 versus $144,515 a year ago. The decrease in
dry hole costs reflected the Company's successful drilling efforts on the
Greens Canyon Field during the year. Abandonment costs decreased $17,857,
or 100% from a year ago. Impairment expense decreased $201,115, or 89%,
to $25,125 from $226,240 a year ago. The Company recorded impairment
expense of $25,125 related to various international permits prior to their
sale.
General and Administrative Expense: General and administrative
expenses increased $308,322, or 40%, to $1,086,551 as compared to $778,229
a year ago. The increase in general and administrative expenses is
attributable to higher company personnel costs as well as higher legal and
accounting expenses. Company personnel costs rose as a direct result of
the increase in the Company's development of the Greens Canyon Field.
Legal and accounting costs increased as a result of the Company expensing
previously incurred legal and accounting fees associated with the
potential listing of the Company's stock on the Australian Stock Exchange,
the Company's warrant dividend issue in January 2000, and the merger with
VP in May 2000.
Results of Operations
---------------------
Fiscal 1999 vs. Fiscal 1998
---------------------------
Net Earnings: The Company reported a loss of $1,441,424 in fiscal
1999 compared to a loss of $2,018,692 in 1998, a decrease of $577,268.
The decrease in loss was attributable to lower dryhole and exploration
expenses despite lower overall revenues as a result of lower oil and gas
prices.
Revenue: Total revenues decreased in fiscal 1999 by $431,466, or
36%, to $772,795 versus $1,204,261 in 1998. The decrease in overall
revenues was a result of lower oil and gas revenues due to lower oil and
gas prices, and significantly lower interest income due to the reduction
in the Company's short-term investments.
Revenue from oil and gas sales decreased $262,987, or 29%, to $632,030 in
1998 from $895,017 in 1998. The decrease in revenues was a result of
lower oil and gas prices as well as lower sales volumes for oil. Average
prices per barrel of oil decreased 32% to $10.01 in 1999 from $14.63 in
1998. Average prices received per mcf of gas decreased 29% to $1.26 in
1999 versus $1.78 in 1998. Sales volumes for oil decreased 12% to 24,319
in 1999 from 27,559 in 1998. Sales volumes for gas increased 12% to 308
mmcf in 1999 from 276 mmcf in 1998.
Lease Operating Expenses: Lease operating expenses decreased
$14,418, or 3%, to $412,628 in 1999 from $427,046 in 1998. The decrease
in lease operating expense was attributable to lower production taxes
resulting from the decline in oil and gas revenues and lower operating
costs on various properties despite higher workover costs incurred on the
Dines Unit #2. Lease operating costs on a BOE (barrel of oil equivalent)
decreased 5% to $5.46 in 1999 from $5.75 in 1998.
Exploration Expenses: Exploration expenses decreased $165,197, or
26%, to $460,336 in 1999 from $625,533 in 1998. The decrease in
exploration expense reflected the slower pace of the Company's aggressive
exploration program during fiscal 1999 due to lower oil and gas prices
throughout most of the year. The decrease was a result of lower
geological and geophysical costs as well as lower delay rentals paid on
exploration acreage.
Dry Holes, Abandoned and Impaired Properties: Dry holes, abandoned
and impaired property costs were $388,612 in fiscal 1999 as compared to
$1,211,084 in 1998, a decrease of $822,472 or 68%. Dry hole costs were
$144,515 in fiscal 1999 versus $681,046 in 1998. The Company participated
in drilling two wells that were abandoned as dry holes, the Tumuli #1, PPL
213 prospect, Papau, New Guinea in May of 1999 at an approximate cost of
$133,000 and the Melanie #1 on EP 325, Australia in July, 1998 at no cost
to the Company by virtue of a carried interest. Additional dry hole costs
of $11,515 were booked in fiscal 1999 for dry holes drilled as of June 30,
1998. The decrease in dry hole costs reflected the Company's decision not
to drill exploratory wells due to the lower oil and gas prices throughout
fiscal 1999. Abandonment costs decreased $437,171, or 96%, to $17,857 in
1999 from 1998 levels. The Company abandoned two leases in the San
Joaquin Basin which accounted for fiscal 1999 expense. Impairment expense
increased $151,230, or 202%, to $226,240 in 1999 from $75,010 in 1998.
The increase was attributable to higher impairment expense under SFAS 121,
which amounted to $176,990. The remaining impairment expense of $49,250
related to various international permits.
General and Administrative Expense: General and administrative
expenses increased $12,511, or 2%, to $778,229 in 1999 as compared to
$765,718 in 1998. The increase in general and administrative expenses was
not attributable to any particular expense category.
Recent Accounting Pronouncements: In March 2000, the Financial
Accounting Standard Board ("FASB") issued FASB Interpretation No. 44
"Accounting for Certain Transactions involving Stock Compensation - and
interpretation of APB Opinion No. 25 ("FIN 44"). This opinion provides
guidance on the accounting for certain stock option transactions and
subsequent amendments to stock option transactions. FIN 44 is effective
July 1, 2000, but certain conclusions cover specific events that occur
after either December 15, 1998 or January 12, 2000. To the extent that FIN
44 covers events occurring during the period from December 15, 1998 and
January 12, 2000, but before July 1, 2000, the effects of applying this
Interpretation are to be recognized on a prospective basis. The Company
does not expect the impact on its financial position or results of
operations to be material.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, "Revenue Recognition (SAB 101), which
provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. Subsequently, the SEC
released SAB 101B, which delayed the implementation date of SAB 101 for
registrants with fiscal years beginning between December 16, 1999 and
March 15, 2000. The Company does not expect the impact on its financial
position or results of operations to be material.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, 137, and 138, Accounting for
Derivative Instruments and Hedging Activities (Statement No. 133),
effective beginning with the first quarter of fiscal years beginning after
June 30, 2000. Statement No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
Company does not expect the impact on its financial position or results of
operations to be material.
ITEM 7A. 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.
During the current fiscal year ended June 30, 2000, the Company received
75,000,000 shares of VP Common Stock as a result of the merger and sale of
international permits discussed previously. The VP Common Stock is
recorded at cost on the Company's balance sheet under the heading
"Investment in related party". The VP shares are traded publicly on the
Australian stock exchange and the price for which the Company could sell
its shares could be higher or lower than the Company's cost.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-----------------------------------------------------
See pages F-1 through F-17 for this information.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
--------------------
Consolidated Financial Statements
June 30, 2000 and 1999
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
Kestrel Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Kestrel
Energy, Inc. and subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended June 30,
2000. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Kestrel Energy, Inc. and subsidiaries as of June 30, 2000 and 1999, and
the results of their operations and their cash flows for each of the years
in the three-year period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
--------
Denver, Colorado
September 5, 2000
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
------ ------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 502,034 $ 394,980
Accounts receivable 181,075 110,880
Related party receivable 524 60,006
Other current assets 31,560 87,278
----------- -----------
Total current assets 715,193 653,144
----------- -----------
Property and equipment, at cost:
Oil and gas properties, successful
efforts method of accounting
(note 7):
Unproved 353,027 761,101
Proved 10,933,518 5,465,748
Pipeline and facilities 772,164 -
Furniture and equipment 138,970 139,516
----------- -----------
12,197,679 6,366,365
Accumulated depreciation
and depletion (2,833,816) (2,960,275)
----------- -----------
Net property and equipment 9,363,863 3,406,090
----------- -----------
Investment in related party (note 2) 2,191,403 -
----------- -----------
$ 12,270,459 4,059,234
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 1,423,788 47,752
Related party 9,399 20,172
Accrued liabilities 30,837 25,013
----------- -----------
Total current liabilities 1,464,024 92,937
----------- -----------
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and 1999
Stockholders' equity (note 4):
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 4,456,000 shares
issued and outstanding at
June 30, 2000 and 1999,
respectively 19,044,885 13,148,724
Accumulated deficit (8,238,450) (9,182,427)
----------- -----------
Total stockholders' equity 10,806,435 3,966,297
----------- -----------
Commitments (notes 3 and 6)
$12,270,459 4,059,234
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Oil and gas sales $ 1,061,638 632,030 895,017
Gain (loss) on sale of property
and equipment 1,816,018 (788) 14,832
Interest income 50,875 76,490 202,496
Other, net 64,928 65,063 91,916
---------- ---------- ----------
Total revenue 2,993,459 772,795 1,204,261
---------- ---------- ----------
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 2000, 1999 and 1998
Costs and expenses:
Lease operating expenses 449,245 412,628 427,046
Dry holes, abandoned and
impaired properties 25,125 388,612 1,211,084
Exploration expenses 390,575 460,336 625,533
Depreciation and depletion 97,986 174,414 191,074
General and administrative 1,086,551 778,229 765,718
Interest expense - - 2,498
---------- ---------- ----------
Total costs and expenses 2,049,482 2,214,219 3,222,953
---------- ---------- ----------
Net earnings (loss) $ 943,977 (1,441,424) (2,018,692)
========== ========== ==========
Basic earnings (loss) per share $ 0.14 (0.32) (0.46)
========== ========== ==========
Diluted earnings (loss) per share $ 0.13 (0.32) (0.46)
========== ========== ==========
Weighted average number of common
shares outstanding 6,787,104 4,451,833 4,429,626
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Total
Common stock Accumulated stockholders'
Shares Amount deficit equity
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance June 30, 1997 4,414,624 $13,154,754 (5,722,311) 7,432,443
Exercise of stock
options (note 4) 32,884 44,472 - 44,472
Common shares surrendered
by officer (note 4) (16,518) (59,877) - (59,877)
Adjustment for previously
issued and unrecorded
shares (note 4) 10 - - -
Net loss - - (2,018,692) (2,018,692)
---------- ---------- ---------- ----------
Balance June 30, 1998 4,431,000 13,139,349 (7,741,003) 5,398,346
Shares issued for property 25,000 9,375 - 9,375
Net loss - - (1,441,424) (1,441,424)
---------- ---------- ---------- ----------
Balance June 30, 1999 4,456,000 13,148,724 (9,182,427) 3,966,297
Common shares issued,
net of offering costs
of $158,158 (note 4) 3,204,000 5,878,842 - 5,878,842
Exercise of stock
options (note 4) 20,000 15,000 - 15,000
Stock options issued
as compensation - 2,319 - 2,319
Net earnings - - 943,977 943,977
---------- ---------- ---------- ----------
Balance June 30, 2000 7,680,000 $ 19,044,885 (8,238,450) 10,806,435
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 943,977 (1,441,424) (2,018,692)
Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating
activities:
Depreciation and depletion 97,986 174,414 191,074
Abandoned and impaired
properties - 244,097 529,217
Loss (gain) on sale of
property and equipment (1,816,018) 788 (14,832)
Noncash compensation expense
for stock options issued 2,319 - -
Changes in operating assets
and liabilities, net of
dispositions:
(Increase) decrease in
accounts receivable (70,195) 55,688 (4,460)
(Increase) decrease in
related party receivables 59,482 333,169 (264,186)
(Increase) decrease in
other current assets 55,476 (50,388) (28,244)
Increase (decrease) in
accounts payable - trade 1,378,036 (92,237) (25,052)
Increase (decrease) in
accounts payable -
related party (10,773) 20,172 (23,972)
Increase (decrease) in
accrued liabilities 5,824 3,326 4,517
---------- ---------- ----------
Net cash provided (used)
by operating activities 646,114 (752,395) (1,654,630)
---------- ---------- ----------
Cash flows from investing
activities:
Capital expenditures (6,728,902)(1,556,650) (575,056)
Sale of short-term investments,
net - 2,330,831 1,078,256
Proceeds from sales of property
and equipment 296,000 1,000 14,891
---------- ---------- ----------
Net cash provided (used)
by investing activities (6,432,902) 775,181 518,091
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net of offering costs 5,878,842 - -
Proceeds from exercise of
stock options 15,000 - 6,250
Common stock purchased for
withholding tax - - (21,655)
---------- ---------- ----------
Net cash provided (used)
by financing activities 5,893,842 - (15,405)
---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents 107,054 22,786 (1,151,944)
Cash and cash equivalents,
beginning of year 394,980 372,194 1,524,138
---------- ---------- ----------
Cash and cash equivalents,
end of year $ 502,034 394,980 372,194
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) Organization
------------
Kestrel Energy, Inc. (the Company) was incorporated under the
laws of the State of Colorado on November 1, 1978. The
Company's principal business is the acquisition, either alone or
with others, of interests in proved developed producing oil and
gas leases, and exploratory and development drilling.
The Company presently owns oil and gas interests in the states
of California, Kansas, Louisiana, New Mexico, Oklahoma, South
Dakota, Texas, and Wyoming.
Victoria Petroleum N.L. (VP) owns 18% of the common shares of
the Company and the Company owns 15% of VP at June 30, 2000.
(b) Principles Of Consolidation
---------------------------
The consolidated financial statements include the accounts of
the Company and its subsidiaries, Victoria Exploration, Inc.
(Victoria) and Kestrel Energy California, Inc. (KEC). All
significant intercompany accounts and transactions have been
eliminated in consolidation.
(c) Estimates
---------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(d) Cash Equivalents
----------------
Cash equivalents consist of money market funds. For purposes of
the consolidated statements of cash flows, the Company considers
all highly liquid investments with original maturities of three
months or less to be cash equivalents.
(e) Property and Equipment
----------------------
The Company follows the successful efforts method of accounting
for its oil and gas activities. Accordingly, costs associated
with the acquisition, drilling and equipping of successful
exploratory wells are capitalized. Geological and geophysical
costs, delay and surface rentals and drilling costs of
unsuccessful exploratory wells are charged to expense as
incurred. Costs of drilling development wells, both successful
and unsuccessful, are capitalized. Upon the sale or retirement
of oil and gas properties, the cost thereof and the accumulated
depreciation or depletion are removed from the accounts and any
gain or loss is credited or charged to operations.
Depreciation and depletion of capitalized exploration and
development costs is computed on the units-of-production method
by individual fields as the related proved reserves are
produced. A reserve is provided for estimated future costs of
site restoration, dismantlement, and abandonment activities, net
of residual salvage value, as a component of depletion.
Pipeline facilities and equipment are stated at original cost.
Depreciation of pipeline facilities is provided on a straight-
line basis over the estimated useful life of the pipeline of
fifteen years.
Furniture and equipment are depreciated using the straight-line
method over estimated lives ranging from three to five years.
Management periodically evaluates capitalized costs of unproved
properties and provides for impairment, if necessary, through a
charge to operations.
Proved oil and gas properties are assessed for impairment on a
field-by-field basis. If the net capitalized costs of proved
properties exceeds the estimated undiscounted future net cash
flows from the property, a provision for impairment is recorded
to reduce the carrying value of the property to its estimated
fair value. The Company recorded a provision for impairment of
its proved oil and gas properties of approximately $25,000 and
$177,000 for the years ended June 30, 2000 and 1999,
respectively.
(f) Gas Balancing
-------------
The Company uses the sales method of accounting for gas
balancing of gas production. Under this method, all proceeds
from production credited to the Company are recorded as revenue
until such time as the Company has produced its share of related
reserves. Thereafter, additional amounts received are recorded
as a liability.
As of June 30, 2000 and 1999, the Company is in an under-
produced position of approximately 5,828 MCFs and 6,234 MCFs,
respectively. Accordingly, these amounts have been included in
the reserve quantities as set forth in note 8.
(g) Income Taxes
------------
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS No.
109), Accounting for Income Taxes. Under the asset and
liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted income tax rates expected to apply to taxable
income in the years in which those differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in income tax
rates is recognized in the results of operations in the period
that includes the enactment date.
(h) Stock-Based Compensation
------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123), effective for fiscal
years beginning after December 15, 1995. This statement defines
a fair value method of accounting for employee stock options and
encourages entities to adopt that method of accounting for its
stock compensation plans. SFAS 123 allows an entity to continue
to measure compensation costs for these plans using the
intrinsic value based method of accounting as prescribed in
Accounting Pronouncement Bulletin Opinion No. 25, Accounting for
Stock Issued to Employees (APB
25). The Company has elected to continue to account for its
employee stock compensation plans as prescribed under APB 25.
The pro forma disclosures of net loss and loss per share
required by SFAS 123 are included in note 2.
(i) Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per share is based on the weighted average
number of common shares outstanding during the period.
Diluted earnings (loss) per share is computed by adjusting the
weighted average number of common shares outstanding for the
dilutive effect, if any, of stock options and warrants.
The dilutive effect of outstanding stock options and warrants as
of June 30, 2000 totaling 408,174 were adjusted to the weighted
average number of common shares outstanding to obtain 7,195,278
weighted average common shares outstanding during the year ended
June 30, 2000 including the effect of dilutive securities.
Stock options totaling 40,000 for the year ended June 30, 2000
were excluded from the computation as their effect was
antidilutive. All outstanding stock options for the year ended
June 30, 1999 and 1998 were excluded from the computation as
their effect was antidilutive.
(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. The stock was valued at
$0.0292187 per share and resulted in a gain on the sale of $97,721.
The investment is recorded at cost.
Also, on May 5, 2000, 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 stock was
valued at $0.0292187 per share and resulted in a gain on the sale of
$1,497,208, based upon sales of other assets totaling $242, accounts
payable totaling $2,000, and property and equipment with a net book
value of $454,899. The investment is recorded at cost.
As a result of the above transactions, the Company owns 15% of VP at
June 30, 2000.
(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., formerly Norwest
Bank Colorado, N.A., which provides the Company a current borrowing
base of $600,000, based on reserves with interest at Norwest's prime
rate plus 2.5%. The note is due October 31, 2001, and is secured by
Deeds of Trust on various oil and gas producing properties held by
the Company. No amounts were outstanding as of June 30, 2000.
(4) STOCKHOLDERS' EQUITY
--------------------
(a) Preferred Stock
---------------
The Company is authorized to issue up to 1 million shares of $1
par value preferred stock, the rights and preferences of which
are to be determined by the Board of Directors at or prior to
the time of issuance.
(b) Common Stock
------------
During the year ended June 30, 1998, certificates for previously
issued shares of the Company's common stock, representing 20
shares were presented for transfer. Prior to presentment, such
shares had not been recorded as issued by the Company.
In September 1998, the Company acquired oil and gas properties
by issuing 25,000 shares of common stock valued at $9,375.
In August 1999, the Company completed a private offering of
1,880,000 shares of its common stock at $1.25 per share. Net
proceeds to the Company were $2,299,038 after offering and
related expenses of $50,962.
In December 1999, the Company completed a private offering of
950,000 shares of its common stock at $2.70 per share. Net
proceeds to the Company were $2,532,176 after offering and
related expenses of $32,824.
On January 18, 2000, the Board of Directors of the Company
declared a dividend distribution of 10 Warrants for every 100
shares of outstanding common stock of the Company held of record
by the shareholders at the close of business on February 4, 2000
(record date). The Warrant Certificates were only issued in
increments of 10 Warrants based upon a rounding of individual
shareholders' record holdings. No Warrants were issued to
shareholders holding less than 100 shares as of the Record Date.
Each Warrant entitles the registered holder to purchase from the
Company one share of Common Stock at a price of $3.125 per
share, subject to adjustment. The Warrants will expire on
February 4, 2001, unless redeemed earlier by the Company.
In April 2000, the Company completed a private offering of
374,000 shares of its common stock at $3.00 per share. Net
proceeds to the Company were $1,047,628 after offering and
related expenses of $74,372.
(c) Stock Option Plans
------------------
The Company has reserved 36,000 shares of its no par common
stock for key employees of the Company under its 1993 Amended
Restated Stock Incentive Plan (the Incentive Plan). Under the
terms of the Plan, no stock options are exercisable more than
ten years after the date of grant (five years after date of
grant for 10% shareholders). As of June 30, 1998, all options
had been granted under the Incentive Plan.
The Company has reserved 75,000 shares of its no par common
stock for employees, officers, directors, consultants and
advisors of the Company under its 1993 Nonqualified Stock Option
Plan (the Nonqualified Plan). Under the terms of the
Nonqualified Plan, no stock options are exercisable more than
ten years after the date of grant (five years after date of
grant for 10% shareholders).
During fiscal 1998, the Company merged the Incentive Plan and
the Nonqualified Plan into the Stock Option Plan (the Plan).
The Company has reserved 1,200,000 shares of its no par common
stock for employees, officers, directors, consultants and
advisors of the Company under the Plan. Under the terms of the
Plan, no stock options are exercisable more than ten years after
the date of grant (five years after date of grant for 10%
shareholders).
During fiscal 2000, 1999 and 1998, the Board of Directors
granted options to purchase shares of common stock to key
employees and directors pursuant to the Plan. The exercise
prices of the options range from $.50 to $3.88 per share. The
options granted are exercisable upon issuance.
On December 1, 1998, the Board of Directors reduced the number
of options outstanding and repriced certain options. The
exercise prices of the repriced options range from $1.875 to
$2.00 per share. The options are immediately exercisable.
The Company applies APB Opinion 25 and related interpretations
in accounting for its plans. Accordingly, no compensation cost
has been recognized for stock options granted at or above market
value at the date of the grant to key employees and directors.
Compensation expense of $2,319 has been recorded during fiscal
2000 for options granted below the market value, based on the
difference between the option price and the quoted market price
at the date of grant. Had compensation cost for the Company's
two stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans
consistent with the method prescribed in FASB Statement 123, the
Company's net earnings (loss) and earnings (loss) per share
would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------
2000 1999 1998
--------- ----------- -----------
<S> <C> <C> <C>
Net earnings (loss):
As reported $943,977 (1,441,424) (2,018,692)
Pro forma 305,625 (1,605,422) (2,038,934)
Earnings (loss) per share:
As reported 0.14 (0.32) (0.46)
Pro forma 0.05 (0.36) (0.46)
</TABLE>
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following assumptions used for grants in fiscal 2000, 1999 and
1998, respectively: no dividend yield for all years; expected
volatility of 129%, 137% and 93%; weighted average risk-free
interest rates of 5.86% in fiscal 2000, 5.06% in fiscal 1999 and
6.1% in fiscal 1998 for the Incentive Plan options; and expected
lives of seven years for all years.
A summary of the status of the Company's fixed stock options
plan as of June 30, 2000, 1999 and 1998, and changes during the
years then ended is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- ---------------
Weighted Weighted Weighted
average average Average
exercise exercise Exercise
Fixed options Shares price Shares price Shares Price
------------- ------ -------- ------ -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 691,758 $1.69 625,616 $2.55 648,500 $2.49
Granted 472,206 1.43 510,642 1.64 10,000 2.28
Exercised (20,000) .75 -- -- (32,884) 1.35
Cancelled -- -- (439,000) 2.94 -- --
Expired (10,000) 1.03 (5,500) 2.20 -- --
--------- ---- -------- ----- ------- -----
Outstanding at
end of year 1,133,964 1.60 691,758 1.69 625,616 2.55
========= ======== =======
Options
exercisable
at year end 1,133,964 691,758 625,616
Weighted
average
fair value
of options
granted
during the
year $1.35 $0.87 $2.01
</TABLE>
The following table summarizes information about fixed stock options
outstanding at June 30, 2000 (all of which are exercisable):
<TABLE>
<CAPTION>
Weighted
average
remaining Weighted
contractual average
Range of Number life exercise
exercise price outstanding (in years) price
----------------- ----------- ----------- --------
<S> <C> <C> <C>
$0.50 - 1.03 160,000 8.7 $0.88
1.25 - 1.38 473,706 9.5 1.37
1.88 - 2.00 422,160 5.4 1.97
2.25 - 3.00 78,098 7.3 2.50
---------
$0.50 - 3.00 1,133,964 7.7 $1.58
=========
</TABLE>
(5) INCOME TAXES
------------
At June 30, 2000 and 1999, the Company's significant deferred
tax assets are as follows:
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,055,000 3,142,000
Depletion carryforwards 188,000 175,000
Oil and gas properties,
principally due to differences
in depreciation, depletion
and impairment 10,000 99,000
----------- ----------
3,253,000 3,416,000
Deferred liabilities:
Oil and gas properties,
principally due to differences
in depreciation, depletion and
impairment (493,000) (63,000)
Investment in related parties (584,000) --
----------- ----------
(1,077,000) (63,000)
----------- ----------
Valuation allowance (2,176,000) (3,353,000)
----------- ----------
Net deferred tax assets $ -- --
=========== ==========
</TABLE>
The valuation allowance for deferred tax assets as of June 30,
2000 was $2,176,000. The net change in the valuation allowance
for the year ended June 30, 2000 was a decrease of $1,177,000.
At June 30, 2000, the Company had net operating loss
carryforwards of approximately $7,833,000. The utilization of
approximately $496,000 of these loss carryforwards is limited to
an estimated $80,000 per year as a result of a change of
ownership which occurred June 30, 1994. Of the balance of the
net operating loss carryforwards, $1,885,000 is limited to the
extent of future taxable income generated by Victoria, and
$5,452,000 is available to offset future taxable income of the
Company. If not utilized, the tax net operating losses will
expire during the period from 2001 through 2015.
Income tax expense is different from amounts computed by
applying the statutory federal income tax rate due primarily to
the change in valuation allowance for net deferred tax assets
and the expiration of tax carryforwards.
(6) LEASE COMMITMENTS
-----------------
The Company has noncancelable operating leases, primarily for
rent of office facilities that expire over the next five years.
Rental expense for operating leases was $63,683, $60,336 and
$38,793 for the years ended June 30, 2000, 1999 and 1998,
respectively.
Future minimum rental commitments under noncancelable operating
leases as of June 30, 2000 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year:
2001 $ 62,590
2002 65,886
2003 44,807
--------
$173,283
========
</TABLE>
(7) CONTINGENCIES
-------------
In the ordinary course of conducting its business, the Company
becomes involved in litigation, administrative proceedings and
governmental investigations, including environmental matters.
The Company has received a notice letter from the U.S.
Environmental Protection Agency (EPA) that the Company is a
potentially responsible party under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980
(CERCLA) at the Casmalia Waste Disposal Site in Santa Barbara
County, California. The Company may be obligated to conduct
remedial investigations, feasibility studies, remediation and/or
removal of alleged releases of hazardous substances or to
reimburse the EPA for such activities.
The Company does not believe that it has any liability under
CERCLA for wastes disposed at Casmalia and believes that the
EPA's notice was issued in error. The Company has responded to
the EPA, explaining that the Company did not arrange to dispose
of any waste at Casmalia. The Company's involvement with
Casmalia is limited to the purchase of assets from another
entity which disposed of waste at Casmalia. The Company intends
to tender the defense that an indemnification given from the
previous owner of the properties at Casmalia applies, and the
previous owner has confirmed that the indemnification would
apply.
The Company is unable to estimate the dollar amount of exposure
to loss in connection with the above-referenced matter; however,
it has been estimated that the ultimate site-wide clean up costs
will be approximately $271.9 million.
It is the opinion of Company's management that the outcome of
these proceedings, individually or in the aggregate, will not
have a material adverse effect on the Company's financial
position, results of operations or cash flows.
(8) DISCLOSURES ABOUT CAPITALIZED COSTS, COSTS INCURRED AND MAJOR
CUSTOMERS
--------------------------------------------------------------
Capitalized costs related to oil and gas producing activities
are as follows:
<TABLE>
<CAPTION>
June 30,
------------------------
2000 1999
----------- ---------
<S> <C> <C>
Unproved:
Domestic $ 353,027 593,511
Foreign -- 167,590
Proved 10,933,518 5,465,748
----------- ---------
11,286,545 6,226,849
Accumulated depletion
and impairment (2,747,285) (2,885,851)
----------- ---------
$ 8,539,260 3,340,998
=========== =========
</TABLE>
Costs incurred in oil and gas producing activities for the years
ended June 30, 2000, 1999 and 1998 were approximately as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------- --------- -------
<S> <C> <C> <C>
Unproved property
acquisition costs $ 208,827 127,557 228,000
Proved property
acquisition costs 500 2,752 --
Development costs 100,300 71,819 289,000
Exploration costs 5,631,600 1,345,487 --
</TABLE>
During fiscal 2000, the Company had two major customers. Sales
to these customers accounted for approximately 13% each of
fiscal 2000 oil and gas sales. During fiscal 1999, the Company
had three major customers. Sales to these customers accounted
for approximately 25%, 12% and 10% of fiscal 1999 oil and gas
sales. During fiscal 1998, the Company had three major
customers. Sales to these customers accounted for approximately
19%, 16% and 10% of fiscal 1998 oil and gas sales.
(9) INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED)
-------------------------------------------------------------
The information presented below regarding the Company's oil and
gas reserves were prepared by independent petroleum engineering
consultants. All reserves are located within the continental
United States.
Proved oil and gas reserves are the estimated quantities of
crude oil, natural gas and natural gas liquids which geological
and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions.
Proved developed oil and gas reserves are those expected to be
recovered through existing wells with existing equipment and
operating methods. The determination of oil and gas reserves is
highly complex and interpretive. The estimates are subject to
continuing changes as additional information becomes available.
Estimated net quantities of proved developed and undeveloped
reserves of oil and gas for the years ended June 30, 2000, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------ ------------------
Oil Gas Oil Gas Oil Gas
(BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning of
year 288,000 6,334,000 222,000 3,483,000 267,000 4,617,000
Revisions of
previous
quantity
estimates 136,000 684,000 89,000 482,000 (17,000)(1,092,000)
Extensions,
discoveries
and
improved
recovery -- 18,053,000 2,000 2,677,000 -- 234,000
Sales of
reserves
in place (16,000) (336,000) (1,000) -- -- --
Production (20,000) (218,000) (24,000) (308,000) (28,000) (276,000)
End of year 388,000 24,517,000 288,000 6,334,000 222,000 3,483,000
Proved
developed
reserves -
end of year 315,000 8,630,000 213,000 3,469,000 166,000 2,903,000
======= ========== ======= ========= ======= ==========
</TABLE>
Standardized Measure of Discounted Future
Net Cash Flows Relating to Proved Oil and Gas Reserves
------------------------------------------------------
Future net cash flows presented below are computed using year-
end prices and costs. Future corporate overhead expenses and
interest expense have not been included.
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Future cash inflows $107,497,000 16,549,000 8,593,000
Future costs:
Production (26,027,000) (6,597,000) (3,392,000)
Development (10,487,000) (1,090,000) (504,000)
Future net cash flows 70,983,000 8,862,000 4,697,000
10% discount factor (34,980,000) (4,583,000) (1,820,000)
----------- ----------- -----------
Standardized measure of
discounted future
net cash flows $36,003,000 4,279,000 2,877,000
=========== =========== ===========
</TABLE>
The principal sources of changes in the standardized measure of
discounted future net cash flows during the years ended June 30,
2000, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Beginning of year $4,279,000 2,877,000 5,207,000
Sales of oil and gas
produced during the period,
net of production costs (612,000) (219,000) (468,000)
Net change in prices and
production costs 5,988,000 216,000 (1,325,000)
Changes in estimated future
development costs (248,000) (80,000) 103,000
Extensions, discoveries and
improved recovery 22,850,000 1,656,000 96,000
Revisions of previous
quantity estimates
and other 3,510,000 (414,000) (1,257,000)
Sales of reserves in place (192,000) -- --
Purchase of reserves in place -- (45,000) --
Accretion of discount 428,000 288,000 521,000
----------- ---------- ----------
End of year $36,003,000 4,279,000 2,877,000
=========== ========== ==========
</TABLE>
The standardized measure of discounted future net cash flows
relating to proved oil and gas reserves and the changes in
standardized measure of discounted future net cash flows
relating to proved oil and gas reserves were prepared in
accordance with the provisions of Statement of Financial
Accounting Standards No. 69. Future cash inflows were computed
by applying current prices at year-end to estimated future
production. Future production and development costs are
computed by estimating the expenditures to be incurred in
developing and producing the proved oil and gas reserves at year-
end, based on year-end costs and assuming continuation of
existing economic conditions. Future income tax expenses are
calculated by applying appropriate year-end tax rates to future
pretax net cash flows relating to proved oil and gas reserves,
less the tax basis of properties involved and tax credits and
loss carryforwards relating to oil and gas producing activities.
Future net cash flows are discounted at a rate of 10% annually
to derive the standardized measure of discounted future net cash
flows. This calculation procedure does not necessarily result
in an estimate of the fair market value or the present value of
the Company's oil and gas properties.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
-------------------------------------------------------------------------
None
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-------------------------------------------------------------
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 2000 annual meeting of
shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
---------------------------------
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 2000 annual meeting of
shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
-------------------------------------------------------------------------
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 2000 annual meeting of
shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
---------------------------------------------------------
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 2000 annual meeting of
shareholders.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
-------------------------------------------------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Articles of Incorporation,
as filed with the Secretary of State of Colorado
on March 16, 1995, filed as Exhibit (3)1 to the
Annual Report on Form 10-K/A for the fiscal year
ended June 30, 1994 and incorporated herein by
reference.
3.2 Amended and Restated Bylaws, as adopted by the
Board of Directors on January 16, 1995, filed as
Exhibit (3)2 to the Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1994 and
incorporated herein by reference.
4.1 The form of common stock share certificate filed
as Exhibits 5.1 to the Registrant's Form S-2
Registration Statement (No. 2-65317) and Article
II of the Registrant's Articles of Incorporation
filed as Exhibit 4.1 thereto, as amended on March
4, 1994 and filed with the Annual Report on Form
10-K for the fiscal year ended June 30, 1994 are
incorporated herein by reference.
4.2 Warrant Agreement dated January 18, 2000 with
American Securities Transfer & Trust, Inc. filed
as Exhibit 4.1 to the Registrant's Form 8-A
Registration Statement filed January 20, 2000 and
incorporated herein by reference.
4.3 Form of Warrant Certificate filed as Exhibit 4.2
to the Registrant's Form 8-A Registration
Statement filed January 20, 2000 and incorporated
herein by reference.
10.1 Amended and Restated Incentive Stock Option Plan
as amended March 14, 1995 and filed as Exhibit
10.7 with the Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 and incorporated
herein by reference.
10.2 Kestrel Energy, Inc. Stock Option Plan as amended
January 5, 2000 and filed as Exhibit 4 to the
Registrant's Form S-8 Registration Statement (No.
333-38776) and incorporated herein by reference.
10.3 Line of Credit with Norwest Bank, Colorado
National Association dated February 21, 2000 as
Exhibit 10.1 to the Registrant's Form 10-Q for
the period ended March 31, 2000 and incorporated
herein by reference.
10.4 Articles of Merger for Kestrel Energy California,
Inc. and Victoria Petroleum USA, Inc. filed as
Exhibit 10.2 to the Registrant's Form 10-Q for
the period ended March 31, 2000 and incorporated
herein by reference.
21 Subsidiary of the Registrant
23.1 Consent of KPMG LLP
27 Financial Data Schedule
(b) Financial Statements.
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
(c) Reports on Form 8-K.
None
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
KESTREL ENERGY, INC.
--------------------
(Registrant)
Date: September 28, 2000 By: /s/ Timothy L. Hoops
---------------------------
Timothy L. Hoops, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: September 28, 2000 By: /s/ Timothy L. Hoops
---------------------------
Timothy L. Hoops, President,
Chief Executive Officer,
and Director
Date: September 28, 2000 By: /s/ Robert J. Pett
---------------------------
Robert J. Pett, Chairman of
the Board
Date: September 28, 2000 By: /s/ Mark A. Boatright
---------------------------
Mark A. Boatright, Vice
President, Finance, Chief
Financial Officer, and
Director
Date: September 28, 2000 By: /s/ Kenneth W. Nickerson
---------------------------
Kenneth W. Nickerson,
Director
Date: September 28, 2000 By: /s/ John T. Kopcheff
---------------------------
John T. Kopcheff,
Vice President
International, and Director
Date: September 28, 2000 By: /s/ Mark A. E. Syropoulo
---------------------------
Mark A. E. Syropoulo,
Director
EXHIBIT INDEX
No. Description
--- -----------
21 Subsidiary of the Registrant
23.1 Consent of KPMG LLP
27 Financial Data Schedule
All of the foregoing exhibits are filed electronically herewith.
