UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 2)
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 2004
|_| 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
1726 Cole Boulevard, Suite 210
Lakewood, Colorado 80401
(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-B 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-KSB or any
amendment to this Form 10-KSB.|_|
The issuer's revenues for its most recent fiscal year were $1,304,581.
At September 30, 2004, 10,133,200 common shares (the registrant's only class of
voting stock) were outstanding. The aggregate market value of the 4,925,473
common shares of the registrant held by nonaffiliates on that date (based upon
the mean of the closing bid and asked price on the OTC Bulletin Board) was
$2,955,284.
Kestrel Energy, Inc. (the "Company") hereby amends the following Item only
as to Note 5 of its Form 10-KSB for the period ending June 30, 2004 by restating
the enumerated Item as follows:
PART II
Item 7. Financial Statements
See pages F-1 through F-19 for this information.
Item 13. Exhibits
(a) Exhibits
Exhibit No. Description
23.1 Consent of Wheeler Wasoff, P.C.
23.2 Consent of Sproule Associates Inc.
31 Certificate of Chief Executive and Principal
Financial Officer pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive and Principal
Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
2
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: June 27, 2005 By: /s/Timothy L. Hoops
------------------------------------
Timothy L. Hoops, President,
Chief Executive Officer, Principal
Financial Officer and Director
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: June 27, 2005 By: /s/Timothy L. Hoops
-----------------------------------------
Timothy L. Hoops, President,
Chief Executive Officer, Principal
Financial Officer and Director
Date: June ___, 2005 By:
-----------------------------------------
Robert J. Pett, Chairman of the Board
Date: June 27, 2005 By: /s/Kenneth W. Nickerson
-----------------------------------------
Kenneth W. Nickerson, Director
Date: June 27, 2005 By: /s/John T. Kopcheff
-----------------------------------------
John T. Kopcheff, Director
Date: June 27, 2005 By: /s/Mark A.E. Syropoulo
-----------------------------------------
Mark A. E. Syropoulo, Director
Date: June 27, 2005 By: /s/Neil T. MacLachlan
-----------------------------------------
Neil T. MacLachlan, Director
3
KESTREL ENERGY, INC.
Financial Statements
June 30, 2004 and 2003
(With Report of Independent Registered Public Accounting Firm Report Thereon)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm..............F-3
Balance Sheet........................................................F-4
Statements of Operations.............................................F-5
Statement of Stockholders Equity.....................................F-6
Statements of Cash Flows.............................................F-7
Notes to financial statements F-8 to F-19
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Kestrel Energy, Inc.
We have audited the accompanying balance sheet of Kestrel Energy, Inc. as of
June 30, 2004, and the related statements of operations, stockholders' equity
and cash flows for the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Kestrel Energy, Inc. as of June
30, 2004, and the results of its operations and its cash flows for the two years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
Wheeler Wasoff, P.C.
Denver, Colorado
September 30, 2004
F-3
KESTREL ENERGY INC.
BALANCE SHEET
June 30, 2004
Assets
Current assets
Cash and cash equivalents (note 1) $ 162,507
Accounts receivable 366,278
Other current assets 12,171
------------
Total current assets 540,956
------------
Property and equipment, at cost
Oil and gas properties, successful efforts method of
accounting (note 7 and 8)
Unproved 260,355
Proved 11,081,664
Pipeline and facilities 807,851
Furniture and equipment 54,207
------------
12,204,077
Accumulated depreciation, depletion and amortization (9,754,427)
------------
Net property and equipment 2,449,650
------------
$ 2,990,606
============
Liabilities and Stockholders' Equity
Current liabilities
Notes payable-related party (note 3) $ 650,000
Accounts payable-trade 245,198
Accrued liabilities 85,582
------------
Total current liabilities
980,780
------------
Long-term liabilities
Asset retirement obligation (note 2) 177,126
------------
Total long-term liabilities 177,126
------------
Total Liabilities 1,157,906
------------
Commitments and contingencies (notes 2 and 6)
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; 10,133,200 shares outstanding 20,562,085
Accumulated (deficit) (18,729,385)
------------
Total stockholders' equity 1,832,700
------------
$ 2,990,606
============
The accompanying notes are an integral part of the financial statements.
F-4
KESTREL ENERGY INC.
Statements of Operations
Years ended June 30, 2004 and 2003
2004 2003
Revenue
Oil and gas sales $ 1,651,796 $ 1,304,581
------------ ------------
Total revenue 1,651,796 1,304,581
------------ ------------
Costs and expenses
Lease operating expenses 733,315 644,751
Dry holes, abandoned and impaired properties 52,438 1,238,214
Exploration expenses 103,642 63,677
Depreciation, depletion and amortization 124,022 339,002
General and administrative 622,645 797,282
------------ ------------
Total costs and expenses 1,636,062 3,082,926
------------ ------------
Other income (expense)
Interest expense and financing costs (73,536) (115,690)
Gain on sale of property and equipment -- 21,538
Loss on sale of available-for-sale securities -- (575,893)
Interest income 891 1,953
Other, net 117,888 99,567
------------ ------------
Total other income (expense) 45,243 (568,525)
------------ ------------
Income (loss) before income taxes and cumulative effect of change in
accounting principle 60,977 (2,346,870)
Provision for income tax 13,000 --
Tax benefit of net operating loss carryforward (13,000) --
Cumulative effect of change in accounting principle -- 10,890
------------ ------------
Net income (loss) $ 60,977 $ (2,335,980)
============ ============
Basic earnings per share $ .01 $ (.25)
============ ============
Diluted earnings per share $ .01 $ (.25)
============ ============
Basic weighted average number of common shares outstanding 9,802,777 9,288,325
============ ============
Diluted weighted average number of common shares outstanding 9,809,256 9,288,325
============ ============
The accompanying notes are an integral part of the financial statements.
F-5
KESTREL ENERGY, INC.
Statements of Stockholders' Equity
Years ended June 30, 2004 and 2003
Common stock Accumulated other
--------------------------- Accumulated Comprehensive
Shares Amount (deficit) Income (loss)
------------ ------------ ------------ ------------
Balance July 1, 2002 9,115,200 $ 20,043,907 $(16,454,382) $ (523,358)
Common shares issued (note 4) 670,000 335,000 -- --
Warrants exercised 13,000 16,250 -- --
Less cost of warrant exercise -- (572) -- --
Realized (loss) on securities classified -- -- -- 523,358
as available for sale -- -- -- --
Net (loss) -- -- (2,335,980) --
------------ ------------ ------------ ------------
Balance June 30, 2003 9,798,200 20,394,585 (18,790,362) --
Warrants exercised 335,000 167,500 -- --
Net income -- -- 60,977 --
------------ ------------ ------------ ------------
Balance June 30, 2004 10,133,200 $ 20,562,085 $(18,729,385) $ --
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-6
KESTREL ENERGY INC.
Statements of Cash Flows
Years ended June 30, 2004 and 2003
2004 2003
------------ ------------
Cash flows from operating activities
Net income (loss) $ 60,977 $ (2,335,980)
Adjustments to reconcile net loss to net cash
used in operating activities
Cumulative effect of change in accounting principle -- (10,890)
Depreciation and depletion 124,022 339,002
Dry holes, abandoned and impaired properties -- 1,238,214
Loss on sale of available-for-sale securities -- 575,893
Gain on sale of property and equipment -- (21,538)
Debt for services and costs - related 1,584 141,594
Other -- 10,098
Changes in operating assets and liabilities, net of dispositions -- --
(Increase) in accounts receivable (11,708) (145,554)
(Increase) decrease in other current assets 6,229 (17,132)
Increase (decrease) in accounts payable - trade (184,463) 189,309
Increase (decrease) in accounts payable - related party -- (51,813)
(Decrease) in accrued liabilities 15,584 (11,270)
------------ ------------
Net cash provided (used) in operating activities 12,225 (100,067)
------------ ------------
Cash flows from investing activities
Capital expenditures (195,822) (426,162)
Proceeds from sale of securities -- 56,241
Proceeds from sales of property and equipment -- 20,017
------------ ------------
Net cash (used) provided by investing activities (195,822) (349,904)
------------ ------------
Cash flows from financing activities
Loans from related parties 50,000 940,000
Repayment of notes - related parties -- (252,651)
Repayments of borrowings -- (516,000)
Proceeds from issuance of common stock and warrants -- 351,250
Proceeds from warrant exercise 167,500 --
Payment of offering costs -- (572)
------------ ------------
Net cash provided by financing activities 217,500 522,027
------------ ------------
Net (decrease) in cash and cash equivalents 33,903 72,056
Cash and cash equivalents, beginning of year 128,604 56,548
------------ ------------
Cash and cash equivalents, end of year $ 162,507 $ 128,604
============ ============
Supplemental cash flow information - cash paid for interest $ 69,883 $ 48,287
============ ============
Supplemental disclosure of noncash investing and financing activities
Repayment of debt through securities $ -- 247,349
============ ============
Asset Retirement Obligation $ 13,791 $ 117,147
============ ============
The accompanying notes are an integral part of the financial statements.
F-7
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
(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
Louisiana, New Mexico, Oklahoma, Texas and Wyoming.
(b) Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
(c) Cash Equivalents
Cash equivalents consist of certificates of deposit. At June 30,
2004, $54,163 of the cash equivalent balance is pledged as
security in lieu of posting oil and gas performance bonds in the
state of Wyoming. The funds are restricted as to their use and
cannot be accessed by the Company without the written release by
the appropriate jurisdictional authority. For purposes of the
statements of cash flows, the Company considers all highly liquid
investments with original maturities of three months or less to be
cash equivalents.
(d) 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
successful development wells 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, depletion and amortization of capitalized costs of
proved oil and gas properties is provided on a field by field
basis using the units-of-production method based upon proved
reserves. Acquisition costs are amortized by using total proved
reserves as the denominator. Development costs are amortized using
proved developed reserves, rather than total proved reserves, as
the denominator.(See also note 2).
Pipeline and facilities are stated at original cost. Depreciation
of pipeline and facilities is provided on a straight-line basis
over the estimated useful life of the pipeline of twenty years.
Furniture and equipment are depreciated using the straight-line
method over estimated lives ranging from three to seven years.
Management periodically evaluates capitalized costs of unproved
properties and provides for impairment, if necessary, through a
charge to operations.
F-8
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
Proved oil and gas properties are assessed for impairment on a
well by well basis or a field-by-field basis where unitized. 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
no impairment for its proved oil and gas properties for the year
ended June 30, 2004 and $903,214 for the year ended June 30, 2003.
(e) Gas Balancing
The Company uses the sales method of accounting for gas balancing
of gas production, and would recognize a liability if the existing
proven reserves were not adequate to cover the current imbalance
situation.
As of June 30, 2004, the Company's gas production is in balance.
(f) Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109),
Accounting for Income Taxes. Under the asset and liability method
of SFAS 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 carry-forwards. 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
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.
(g) 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. Had compensation cost for the Company's 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 SFAS 123, the Company's net income (loss) and
income (loss) per share would have been increased to the pro forma
amounts indicated below:
F-9
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
Years ended June 30,
----------------------------------------
2004 2003
----------------- ---------------------
Net earnings (loss):
As reported $ 60,977 $ (2,335,980)
Pro forma 57,778 (2,341,995)
Basic Earnings per share:
As reported .01 (.25)
Pro forma .01 (.25)
Diluted Earnings per
share:
As reported .01 (.25)
Pro forma .01 (.25)
(h) Net earnings (loss)per Share
Basic earnings per share are computed by dividing earnings
available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per
share reflect per share amounts that would have resulted if
dilutive potential common stock had been converted to common
stock. The following reconciles amounts reported in the financial
statements.
At June 30, 2003, all outstanding options and warrants were
excluded from the computation of diluted loss per share for the
years then ended, as the effect of the assumed exercises of these
options was antidilutive.
The following is a reconciliation of the numerators and
denominators used in the calculations of basic and diluted
earnings per share for 2004:
2004
-------------------------------------------------------
Per Share
Net Income Shares Amount
---------------- ---------------- -------------
Basic earnings per share:
Net income and share $ 60,977 9,802,777 $ .01
amounts
Dilutive securities
Stock options 6,479
---------------- ---------------- -------------
Diluted earnings per share
---------------- ---------------- -------------
Net income and assumed $ 60,977 9,809,256 $ .01
share conversion
F-10
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
(i) Revenue Recognition
Sales of oil and gas production are recognized at the time of
delivery of the product to the purchaser.
(j) Translation of Foreign Currencies
Monetary items are translated at the rate of exchange in effect at
the balance sheet date. Non-monetary items are translated at average
rates in effect during the period in which they were earned or
incurred. Gains and losses resulting from the fluctuation of foreign
exchange rates have been included in the determination of income.
(k) Fair Value
The carrying amount reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued liabilities approximates
fair value because of the immediate or short-term maturity of these
financial instruments.
(l) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and accounts
receivable. The Company maintains cash accounts at three financial
institutions. The Company periodically evaluates the credit
worthiness of financial institutions, and maintains cash accounts
only in large high quality financial institutions, thereby
minimizing exposure for deposits in excess of federally insured
amounts. The Company believes that credit risk associated with cash
is remote. The Company is exposed to credit risk in the event of
nonpayment by counter parties, a significant portion of which are
concentrated in energy related industries. The creditworthiness of
customers and other counter parties is subject to continuing review.
(m) Recent Accounting Pronouncements
In June 2003, the FASB approved SFAS. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This Statement is
effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS. 150 is not
expected to have an effect on the Company's financial position.
In December 2003, the FASB issued a revised Interpretation No 46,
"Consolidation of Variable Interest Entities." The interpretation
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain types of entities.
The Company does not expect the adoption of this interpretation to
have any impact on its financial statements.
(o) Reclassification
Certain amounts in the 2003 financial statements have been
reclassified to conform to the 2004 financial statement
presentation.
(p) Segment Reporting
The Company follows SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information", which amended the requirements
for a public enterprise to report financial and descriptive
F-11
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
information about its reportable operating segments. Operating
segments, as defined in the pronouncement, are components of an
enterprise about which separate financial information is available
that is evaluated regularly by the Company in deciding how to
allocate resources and in assessing performance. The financial
information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to
allocate resources to segments. The Company operates in one segment,
oil and gas producing activities.
(q) Comprehensive Income
The Company adopted SFAS 130, "Reporting Comprehensive Income". SFAS
130 requires the reporting of comprehensive income in addition to
net income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosures of certain
financial information that historically has not been recognized in
the calculation of net income. There is no component of
comprehensive income reported for years ended June 30, 2003 or June
30, 2004.
(r) Allowance for Bad Debts
The Company considers accounts receivable to be fully collectible as
recorded as of June 30, 2004, therefore, no allowance for doubtful
accounts is required. The Company reviews the credit worthiness and
historical collection of accounts receivable in assessing whether an
allowance for doubtful accounts is required.
(2) Asset Retirement Obligations
In 2001, the Financial Accounting Standards Board (FASB) issued SFAS 143,
"Accounting for Asset Retirement Obligations." SFAS. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. This statement requires companies to record the present
value of obligations associated with the retirement of tangible long-lived
assets in the period in which it is incurred. The liability is capitalized
as part of the related long-lived asset's carrying amount. Over time,
accretion of the liability is recognized as an operating expense and the
capitalized cost is depreciated over the expected useful life of the
related asset. The Company's asset retirement obligations relate primarily
to the plugging, dismantlement, removal, site reclamation and similar
activities of its oil and gas properties. Prior to adoption of this
statement, such obligations were accrued ratably over the productive lives
of the assets through its depreciation, depletion and amortization for oil
and gas properties without recording a separate liability for such
amounts.
The transition adjustment related to adopting SFAS 143 on July 1, 2002,
was recognized as a cumulative effect of a change in accounting principle.
The cumulative effect on net income of adopting SFAS No. 143 was a net
favorable effect of $10,890. At the time of adoption, total assets
increased $117,147, and total liabilities increased $205,842. The amounts
recognized upon adoption are based upon numerous estimates and
assumptions, including future retirement costs, future recoverable
quantities of oil and gas, future inflation rates and the credit-adjusted
risk-free interest rate. Changes in asset retirement obligations during
the year were:
Asset retirement obligations as of July 1, 2003 $ 216,009
Liabilities incurred 13,791
Liabilities settled --
Revision to estimate (included in depreciation, depletion and amortization) (52,674)
---------
Asset retirement obligations as of June 30, 2004 $ 177,126
=========
F-12
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
(3) Notes Payable
On February 14, 2002, the Company borrowed $97,940 from Victoria Petroleum
N.L. ("VP") and $255,382 from Lakes Oil N.L. ("Lakes") due May 15, 2002
with interest at 8%. The loans were secured by shares of VP and seismic
data owned by the Company. As of June 30, 2002, an aggregate $294,953 had
been repaid and VP assumed the balance due to Lakes of $58,369. On May 13,
2002, VP advanced an additional $350,000 to the Company with interest at
7.5%. The loan of $350,000 was assigned to an unrelated company and
subsequent converted, including interest of $10,500, to 515,000 shares of
the Company's common stock (See Note 6b).
On August 6, 2002, the Company borrowed $500,000 from Samson Exploration
N.L. ("Samson"), due December 4, 2002,or at any other date agreed to by
the parties, with interest at 10%. The Company agreed to pay $50,000 as a
financing fee to Samson. Proceeds from the loan were used to repay the
Company's outstanding balance on its line of credit to Wells Fargo. On
February 4, 2003, the Company repaid Samson in full, including all accrued
interest and fees, with $327,143.15 in cash and the transfer of the
Company's remaining 25,000,000 shares of Victoria Petroleum N.L. common
stock, valued at $247,349.
On January 24, 2003, the Company borrowed $400,000 from R&M Oil and Gas,
Ltd., ("R&M") of which Timothy L. Hoops, one of the Company's directors
and its President and CEO, is a partner. That loan is due on January 31,
2005, bears interest at 12.5% per annum and is secured by the Company's
oil and gas interests in Grady County, Oklahoma. In the event of a default
under the terms of the R&M loan, and the sale of the collateral securing
the loan, the Company would receive any remaining proceeds after payment
to R&M of its expenses in connection with such sale(s) and any
indebtedness due and payable to R&M under the loan. The proceeds from the
R&M loan were used to retire the outstanding debt to Samson Exploration
N.L. at that time and reduce the Company's accounts payable position. The
R&M loan was approved unanimously by the Board of Directors with Mr. Hoops
abstaining.
On May 5, 2003, the Company entered into a Line of Credit Agreement with
Barry D. Lasker, the Company's former President and CEO, for a maximum
loan to the Company of $200,000. Under the terms of the agreement all
outstanding amounts were due on May 4, 2005 and bore interest at 10% per
annum. The initial proceeds of the loan consisted of $40,000 cash and the
conversion to debt of approximately $152,000 of unpaid wages and
unreimbursed business expenses owed to Mr. Lasker by the Company. The
Lasker loan was secured by the Company's oil and gas interests in Campbell
County, Wyoming. In the event of a default under the terms of the Lasker
loan, and the sale of the collateral securing the loan, the Company would
receive any remaining proceeds after payment to Mr. Lasker of his expenses
in connection with such sale(s) and the indebtedness due and payable to
him under the loan. On February 5, 2004, Mr. Lasker assigned the $200,000
Lasker Loan to Samson Exploration N.L. (a related party) and Mr. Lasker
was paid off in full. The terms and conditions of the Samson loan are a
continuance of the terms and conditions of the Lasker loan, except for the
deletion of a provision providing for acceleration upon termination of Mr.
Lasker's employment by the Company.
On June 8, 2004, the Company borrowed $50,000 from VP with an 8% interest
rate which is to be paid on repayment of the loan. This is an unsecured
loan due on demand.
(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.
F-13
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
(b) Common Stock
In June 2003, the Company completed a private placement of 335,000
units at a price of $1.00 per unit. Each unit consisted of two
common shares and one common share purchase warrant. Each of the
common share purchase warrants sold in that offering entitled the
holder to acquire an additional common share of the Company at a
price of $0.50 on or before June 18, 2004. The net proceeds of
approximately $335,000 were used for payment of the Chadron
prospect fee and for 50% of the costs to drill the Sellman-1X
exploration well, located in Dawes County, Nebraska. In June 2004,
the warrants associated with this placement were exercised and the
Company received proceeds of $167,500.
(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
Incentive Plan, no stock options are exercisable more than ten
years after the date of grant (five years after date of grant for
10% shareholders). All 36,000 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 2004 and 2003, the Board of Directors granted
options to purchase shares of common stock to the Company's
Compensation Committee pursuant to the Plan. The exercise prices
of the options are $.32 to $.33 per share for 2004 and 2003,
respectively. 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.
On December 6, 2001, the Plan was amended to increase the number
of shares reserved under the Plan to 2,233,000.
On December 5, 2002, the Plan was amended to extend the term of
the Plan for an additional ten years to December 16, 2012 .
The Company applies APB Opinion 25 and related interpretations in
accounting for its plan. 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.
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 2004 and 2003
respectively: no dividend yield for all years; expected volatility
of 232% and 97%; weighted average risk-free interest rates of
4.25% and 4.375%; and expected lives of ten years.
F-14
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
A summary of the status of the Company's fixed stock options plan
as of June 30, 2004 and 2003, and changes during the years then
ended is presented below:
2004 2003
------------------------------- -------------------------------
Weighted Weighted
average average
exercise exercise
Fixed options Shares price Shares price
-------------- -------------- -------------- --------------
Outstanding at beginning of year 1,607,984 1.40 1,693,964 $ 1.39
Granted 10,000 .32 10,000 .33
Exercised -- -- --
Cancelled -- -- --
Expired 105,133 2.19 95,980 1.13
-------------- -------------- -------------- --------------
Outstanding at end of year 1,512,851 1.34 1,607,984 $ 1.40
============== ==============
Options exercisable at year end 1,512,851 1,607,984
Weighted average fair value of options
granted during the year $ .32 $ .30
Weighted average remaining
contractual life 5.03 5.6
(5) Income Taxes
At June 30, 2004 and 2003, the income tax expense recorded in the
statements of operations consists of the following:
2004 2003
Current $ 13,000 $ --
Deferred 454,000 (1,927,000)
Use of deferred tax asset previously
fully reserved (13,000) --
Less valuation allowance (454,000) 1,927,000
------------ ------------
$ -- $ --
============ ============
At June 30, 2004 and 2003, the effective income tax rate differs from the
U.S. Federal and State statutory income tax rates due to the following:
2004 2003
Federal and state statutory income tax rate (39.0%) (39.0%)
Permanent differences 0.0% 0.0%
Change in the valuation allowance 39.0% 39.0%
------------ ------------
0.0% 0.0%
============ ============
At June 30, 2004 and 2003, the principal sources of temporary differences
resulting in deferred tax assets and liabilities are as follows:
F-15
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
2004 2003
------------ ------------
Deferred tax assets:
Net operating loss carry-forwards $ 5,094,000 4,060,000
Depletion carry forwards 273,000 282,000
Oil and gas properties -- 603,000
------------ ------------
Total deferred tax assets 5,367,000 4,945,000
Deferred liabilities:
Oil and gas properties (537,000) (569,000)
------------ ------------
Net deferred tax asset 4,830,000 4,376,000
------------ ------------
(4,830,000) (4,376,000)
Valuation allowance
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
The valuation allowance for deferred tax assets as of June 30, 2004 was
$4,830,000. The net change in the valuation allowance for the year ended
June 30, 2004 was an increase of $454,000.
At June 30, 2004, the Company had net operating loss carry-forwards of
approximately $13,240,000. The utilization of approximately $178,000 of
these carryforwards are limited to an estimated $80,000 annually. Of the
balance of the loss carryforwards, $13,062,000 is available to offset
future taxable income of the Company. If not utilized, the tax net
operating losses will expire during the period from 2004 through 2024.
(6) Lease Commitments
The Company has non-cancelable operating leases, primarily for rent of
office facilities that expire over the next five years. Rental expense for
operating leases was $45,181and $72,980 for the years ended June 30, 2004
and 2003, respectively. The Company's executive offices are located at
1726 Cole Blvd., Suite 210, Lakewood, Colorado 80401, which is comprised
of approximately 2,358 square feet, at an initial annual rate of $16.50
per square foot escalating to $17.50 per square foot over the life of the
lease.
Future minimum rental commitments under non-cancelable operating leases as
of June 30, 2004 are as follows:
Fiscal year:
2005 $ 39,988
2006 41,167
2007 3,439
-------------
$ 84,594
=============
The Company has a commitment to pay delay rentals for June 30, 2005 of
approximately $75,000 for the right to explore those properties.
(7) Disclosures About Capitalized Costs, Costs Incurred and Major Customers
Capitalized costs related to oil and gas producing activities at June 30,
2004 and 2003, are as follows:
June 30,
2004 2003
Unproved - Domestic $ 260,355 $ 215,892
Proved 11,081,664 10,918,017
------------ ------------
11,342,019 11,133,909
Accumulated depletion and impairment (9,549,716) (9,420,570)
------------ ------------
$ 1,792,303 $ 1,713,339
============ ============
F-16
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
Costs incurred in oil and gas producing activities for the years ended
June 30, 2004 and 2003 were approximately as follows:
2004 2003
------------ ------------
Unproved property acquisition costs $ 44,463 335,000
Proved property acquisition costs -- --
Development costs 149,855 83,162
Exploration costs 103,642 63,677
During fiscal 2004, the Company had three major customers. Sales to those
customers accounted for approximately 33%, 19% and 18% of fiscal 2004 oil
and gas sales. 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. During fiscal 2003, the Company had
three major customers. Sales to these customers accounted for
approximately 27%, 11% and 11% of fiscal 2003 oil and gas sales.
During fiscal 2004, the Company spent approximately $58,000 converting
proved undeveloped reserves at Hilight field (8 wells) into proved
producing reserves. During fiscal 2003, the Company spent approximately
$41,500 converting proved undeveloped reserves at Hilight field into
proved producing reserves.
(8) Information Regarding Proved Oil and Gas Reserves (Unaudited) The
information presented below regarding the Company's oil and gas reserves
were prepared by the Company's independent petroleum engineering
consultants, Sproule & Associates, Inc. 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, 2004 and 2003, are as follows:
F-17
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
2004 2003
---------------------------- ----------------------------
Oil Gas Oil Gas
(BBLS) (MCF) (BBLS) (MCF)
------------ ------------ ------------ ------------
Beginning of year 310,700 4,758,700 273,000 12,069,000
Revisions of previous
quantity estimates 76,300 77,600 43,000 (7,274,300)
Extensions, discoveries
and improved recovery -- 161,000 11,800 231,100
Sales of reserves in place -- -- -- --
Production (19,300) (255,400) (17,100) (267,100)
------------ ------------ ------------ ------------
End of year 367,700 4,741,900 310,700 4,758,700
============ ============ ============ ============
Proved developed
reserves - end of year 289,000 2,264,600 232,100 2,351,200
============ ============ ============ ============
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.
2004 2003
------------ ------------
Future cash inflows $ 41,365,000 $ 33,352,000
Future costs:
Production (8,796,000) (10,295,000)
Development (1,509,000) (1,390,000)
------------ ------------
Future net cash flows 31,060,000 21,667,000
10% discount factor (17,001,000) (11,070,000)
------------ ------------
Standardized measure of discounted
future net cash flows $ 14,059,000 $ 10,597,000
============ ============
To achieve the 2005 future cash inflows reported, the capital expenditure
of approximately $0.67 mm in fiscal 2005, $0.73 mm in fiscal 2006 and
$0.11 mm in fiscal 2007 will be required to develop existing proved
undeveloped reserves. The capital expenditure of approximately $0.67mm in
fiscal 2005 will be required to develop existing proved developed
non-producing reserves.
The principal sources of changes in the standardized measure of
discounted future net cash flows during the years ended June 30, 2004 and
2003, are as follows:
2004 2003
------------ ------------
Beginning of year $ 10,597,000 $ 8,898,000
Sales of oil and gas produced during the period,
net of production costs (913,000) (629,000)
Net change in prices and production costs -- 12,766,000
Changes in estimated future development costs (119,000) 2,910,000
Extensions, discoveries and improved recovery 498,000 628,000
Revisions of previous quantity estimates and other 3,032,700 (14,866,000)
Sales of reserves in place -- --
Purchase of reserves in place -- --
Accretion of discount 963,400 890,000
------------ ------------
End of year $ 14,059,000 $ 10,597,000
============ ============
F-18
KESTREL ENERGY INC
Notes to Financial Statements
June 30, 2004 and 2003
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 SFAS 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
carry-forwards 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.
The complete definition of proved oil and gas reserves appears at
Regulation S-X 4-10(a)(2), 17 CFR 210.4-10(a)(2). The complete definition
of proved developed oil and gas reserves appears at Regulation S-X
4-10(a)(3), 17 CFR 210.4-10(a)(3). The complete definition of proved
undeveloped reserves appears at Regulation S-X 4-10(a)(4), 17 CFR
210.4-10(a)(4).
F-19