UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2001 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, 2001, 7,700,200 common shares (the registrant's only class
of voting stock) were outstanding. The aggregate market value of the
4,674,569 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 $5,399,127.
TABLE OF CONTENTS
PART I 3
Item 1. Business. 3
General Description of Business 3
Recent Activities 3
Operations and Policies 4
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 8
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 10
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 13
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk. 15
Item 8. Financial Statements and Supplementary Data. 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 15
PART III 16
Item 10. Directors and Executive Officers of
the Registrant. 16
Item 11. Executive Compensation. 16
Item 12. Security Ownership of Certain Beneficial
Owners and Management. 16
Item 13. Certain Relationships and Related Transactions. 16
PART IV 16
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. 16
SIGNATURES 18
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 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 presently owns oil and gas interests in the states of
Louisiana, New Mexico, Oklahoma, South Dakota, Texas, and Wyoming.
RECENT ACTIVITIES
In September 2001, the Company announced the appointment of Barry D.
Lasker as President, Chief Executive Officer and Director. Mr. Lasker
brings to the Company 20 years of experience in the oil and gas industry.
Timothy L. Hoops, former President and Chief Executive Officer, will
remain on the Board of Directors and will provide consulting services to
the Company on a contract basis.
On June 22, 2001, ( the effective date), the Company filed Articles of
Merger of Victoria Exploration, Inc. into Kestrel Energy, Inc. pursuant to
Section 7-111-104 of the Colorado Revised Statutes. In accordance with the
Articles of Merger, on the effective date, Victoria Exploration, Inc.
ceased to exist and Kestrel Energy, Inc. became the surviving corporation.
Up until June 22, 2001, the consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Victoria
Exploration, Inc. All significant intercompany accounts and transactions
have been eliminated in consolidation.
In May 2001, the Company restructured its line of credit agreement with
Wells Fargo Bank West. Under the prior terms the Company had a borrowing
base of $2,000,000 with interest paid monthly. The new agreement lowered
the borrowing base to $1,400,000 and required the Company to reduce the
principal balance on the line of credit to $1,400,000 by October 2001 with
interest on the outstanding balance paid monthly. As of October 15, 2001,
the principal balance is $1,455,000.
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 wells on 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 mitigate 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, environmental laws have
not materially hindered nor adversely affected the Company's business.
Please see Item 3, Legal Proceedings, however, for a discussion of
potential environmental litigation involving the Company.
The Company has four full-time employees, including the Company's
President, Barry D. Lasker. 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.
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
will need to continue to raise capital to make additional acquisitions and
to make further investments in our current portfolio of exploration
properties. We have recently made significant investments in exploration
properties in the Western Green River Basin in Wyoming. There is no
assurance that any of these acquisitions or other acquisitions will be as
successful as originally projected. In fact, while we have already had
some measure of success with these acquisitions, we have also had some
disappointments. 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 the strength of the United States and global economy;
o political conditions in the Middle East and elsewhere;
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 BARRY LASKER, 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 the Company of our new president, Barry
Lasker, 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 carry 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 cannot 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 2001 contains estimates of our oil and natural gas reserves and the
future cash flow to be realized from those reserves for fiscal years 2001,
2000 and 1999, 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 prospectus 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
prospectus. 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 prospectus 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, 2001:
TOTAL TOTAL
Developed Acreage (1) (2) Undeveloped Acreage (1) (2)
STATE Gross Net Gross Net
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 1,852 36,214 36,214
----- ----- ------ ------
TOTAL 7,816 2,762 36,214 36,214
Canada 640 19 -0- -0-
(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, 2001, the Company held overriding royalty interests ranging
from 0.013% to 9.26% in 124 producing oil and gas wells located on 6,019
gross developed acres in the United States.
DRILLING ACTIVITIES
The Company participated in drilling eight wells since June 30, 2000. All
eight wells were development wells including the Turner 1-23 and 3-14
wells on the Amber leasehold in Wyoming and six coal bed methane wells in
Campbell County, Wyoming.
Kestrel Energy, Inc. owned interests in net exploratory and net
development wells for the years ended June 30, 2001, 2000 and 1999 as set
forth below. This information does not include wells drilled under
farmout agreements.
UNITED STATES
6/30/01 6/30/00 6/30/99
------- ------- -------
Net Exploratory Wells: (1)
Dry (2) - - -
Productive (3) - 2.0 -
----- ----- ----
- 2.0 -
===== ===== =====
Net Development Wells: (1)
Dry (2) - - -
Productive (3) 1.76 0.84 0.25
----- ----- -----
1.76 0.84 0.25
===== ===== =====
AUSTRALIA
6/30/01 6/30/00 6/30/99
------- ------- -------
Net Exploratory Wells: (1)
Dry (2) - - 0.06
Productive (3) - - 0.03
----- ----- -----
- - 0.09
===== ===== =====
Net Development Wells: (1)
Dry (2) - - -
Productive (3) - - -
----- ----- -----
- - -
===== ===== =====
(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, 2001, no wells were drilled under farmout
agreements.
OIL AND GAS PRODUCTION, PRICES AND COSTS
As of June 30, 2001, the Company had a royalty and/or working interest in
74 gross (10.06 net) wells that produce oil only, 51 gross (11.21 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 consolidated 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, 2001.
For the year ended June 30, 2001, the Company's average operating cost
(including taxes and marketing) per barrel of oil equivalent (BOE)
(converting gas to oil at 6:1) was $11.96. The average operating cost per
BOE on an equivalent basis for fiscal years 2000 and 1999 was $7.98 and
$5.46, respectively. The average sales price per barrel of oil sold was
$28.18 for 2001, $24.78 for 2000, and $10.01 for 1999. The average sales
price per mcf of gas sold was $4.75 for 2001, $2.59 for 2000, and $1.26
for 1999.
CUSTOMERS
During fiscal year 2001, the Company had two major customers: Kaiser
Francis Oil Company and Duke Energy. Sales to these customers accounted
for 26% and 15%, respectfully, of oil and gas sales in 2001. 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 located at 999 18th Street, Suite
2490, Denver, Colorado 80202, which is comprised of approximately 3,953
square feet, at an annual rate of $73,900. 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.
In May of 2000, the Company received a notice letter from the U.S.
Environmental Protection Agency (EPA) stating that the Company is a
potentially responsible party under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA")
for the Casmalia Waste Disposal Site in Santa Barbara County, California.
If the Company is ultimately determined to be a responsible party, it 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 defend allegations of its responsibility, if any, and will also rely
upon an indemnification given by the previous owner of the properties at
Casmalia, which previous owner has confirmed that the indemnification
would apply to any such allegations.
The Company is unable to estimate the dollar amount of exposure to loss in
connection with the above-referenced matter; however, the ultimate site-
wide clean up costs, which could be borne by the persons or entities found
to be responsible parties, have been estimated at 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, 2001, the Company had
7,700,200 shares outstanding. At June 30, 2001, 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.
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
Fiscal Year June 30, 2001 SALES PRICE
High Low
----- ----
First Quarter $3.43 $1.38
Second Quarter 2.41 1.56
Third Quarter 2.00 1.06
Fourth Quarter 1.89 .75
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:
Years ended June 30,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Oil and Gas Sales$2,195,819 $1,061,638 $632,030 $895,017 $1,278,502
Total Revenue 2,328,958 2,993,459 772,795 1,204,261 1,420,056
Net Earnings (Loss) (104,371) 943,977 (1,441,424)(2,018,692) (1,312,365)
Basic Earnings
(Loss) per Share (.01) .14 (.32) (.46)
(.56)
Diluted Earnings
(Loss) Per Share (.01) .13 (.32) (.46)
(.56)
At June 30,
Total Assets 12,911,302 12,270,459 4,059,234 5,560,022 7,638,626
Stockholders'
Equity 10,756,633 10,806,435 3,966,297 5,398,346 7,432,443
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, 2001, was $1,750,853 compared to a working capital deficit of $748,831
at June 30, 2000 and positive working capital of $560,207 at June 30,
1999. The decrease in working capital of $1,002,021 resulted from short
term borrowings on the Company's line of credit which allowed the Company
to re-complete the Greens Canyon 27-3 well and to fund the drilling of
eight development wells in Wyoming. The Company restructured the line of
credit with Wells Fargo Bank in May 2001 and anticipates renewing that
line by October 31, 2001.
The decrease in working capital was $1,309,038 for the year 2000, largely
the result of capital expenditures made by the Company to develop the
Greens Canyon Field and the related pipeline. The Company funded its
working capital deficit at June 30, 2000 by drawing on the line of credit
at Wells Fargo Bank, and utilizing additional revenues from oil and gas
sales resulting from higher oil and gas prices.
Net cash used by operating activities was $994,010 for fiscal 2001 as
compared to cash provided of $646,114 in fiscal 2000, a decrease of
$1,640,124. The decrease in operating cash flows is primarily
attributable to the reduction of accounts payable from fiscal 2000 levels.
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, a change of $1,398,509. The change was 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 investing activities was $1,270,999 in fiscal 2001 as
compared to $6,432,902 in fiscal 2000. For the year ended June 30, 2001,
$1,384,692 was used to acquire and develop proved and unproved oil and gas
interests, finish the gas pipeline and purchase equipment. Proved
property expenditures included the re-completion of the Greens Canyon 27-3
at an approximate cost of $538,000, the balance of the completion of the
Poitevent #1 and Greens Canyon 29-2 wells for $139,000, the drilling and
completion of the Turner 1-23 and 3-14 wells in Wyoming at a cost of
$579,000, the $50,000 drilling and completion of six coal bed methane
wells in Wyoming and the acquisition of additional acreage and analysis of
seismic studies on various properties for $24,000. The Company also
finished its gas pipeline for $36,000 and purchased office equipment and
computers for $5,000. Unproved property acquisitions included $14,000 to
acquire various lease acreage on the Brown Ranch Prospect in Wyoming. The
Company received $22,597 from the sale of shallow rights on the Oxbow
Prospect in Wyoming and sale of a submersible pump on the Pierce Unit.
The Company also wrote off its investment in a joint venture in Farpura,
recording a loss to the Company of $9,878. The Company also received
$91,096 from the sale of 3,000,000 Victoria Petroleum, NL shares during
the fiscal year ended June 30, 2001. The shares were acquired in May 2000
as part of the merger agreement between the Company and Victoria
Petroleum, NL. The sale resulted in a gain of $3,440. The unrealized
gain or loss on the Company's investment in Victoria Petroleum, NL shares
is recorded as Other Accumulated Comprehensive Income on the Company's
balance sheet as of June 30, 2001.
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 in
fiscal 1999.
Net cash provided by financing activities was $1,882,000 for fiscal 2001
versus $5,893,842 a year ago. The cash provided during fiscal 2001 came
from the Company's line of credit with Wells Fargo Bank. Under the terms
of the agreement, the Company has a revolving line of credit with a
borrowing base of $1,400,000. The Company restructured the line of credit
with Wells Fargo Bank in May 2001, which requires the Company to make
scheduled principal payments to reduce the amount outstanding to
$1,400,000 by the October 31, 2001 due date. The funds were used to
existing accounts payable and capital expenditures.
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.
STOCKHOLDERS' EQUITY: Stockholders' equity decreased $49,802 to
$10,756,633 from $10,806,435 a year ago. The decrease is a result of the
net loss for the year offset by common shares issued to third parties of
$24,800, director compensation from stock options of $3,338, and
unrealized gain on securities of $26,431.
DEBT OBLIGATIONS: The Company had no long-term debt at June 30, 2001,
2000 and 1999.
RESERVES AND FUTURE CASH FLOWS: For the fiscal year ended June 30, 2001,
the Company's proved oil reserves decreased approximately 32,000 bbls. to
356,000 bbls., or 8%, from 388,000 in 2000. The Company's proved gas
reserves decreased 11,133 Mmcf to 13,384 Mmcf, or 45%, from 24,517 Mmcf
in 1999. The decrease in proved reserves is attributable to revisions of
previous quantity estimates, production, new discoveries and extensions,
and lower oil and gas prices for the fiscal year ended June 30, 2001.
The Company's undiscounted net future cash flows have been estimated by
Sproule Associates Inc., an independent petroleum engineering firm, to be
approximately $27,647,000 as of June 30, 2001. This compares to
$70,983,000 in 2000 and $8,862,000 in 1999. The decrease in the current
year is the result of revisions of previous quantity estimates, new
discoveries and extensions and lower oil and gas prices.
GAS BALANCING: The Company at June 30, 2001 was under-produced by
approximately 22,245 Mcf. 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. 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, 2001, the
Company estimated that, for United States federal income tax purposes, it
had consolidated net operating loss carryforwards of approximately
$9,171,000. The utilization of approximately $496,000 of these
carryforwards are limited to an estimated $80,000 annually. Of the
balance of the loss carryforwards, $1,497,000 is limited to the extent of
future taxable income generated by the Company's subsidiary, Victoria
Exploration, Inc., and $7,178,000 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 2002 through 2021.
RESULTS OF OPERATIONS
FISCAL 2001 VS. FISCAL 2000
NET EARNINGS: The Company reported a net loss of $104,371 in fiscal 2001
compared to net earnings of $943,977 in 2000, which was a decrease of
$1,048,348. The net loss in fiscal 2001 is attributable to higher
abandonment and impaired expenses, higher depreciation and depletion
expenses and higher interest expense despite significantly higher oil and
gas revenues.
REVENUE: Total revenues decreased in fiscal 2001 by $664,501, or
22%, to $2,328,958 versus $2,993,459 in 2000. The decrease in revenues
was a result of substantially lower gain on sale of assets which declined
$1,799,859. Excluding a $1,594,929 gain on one-time sale of assets to an
affiliate for shares of the affiliate's stock in fiscal 2000, year over
year revenues were up $930,428. This increase in revenues was a result of
significantly higher oil and gas revenues as discussed below.
Revenue from oil and gas sales increased $1,134,181, or 107%, to
$2,195,819 from $1,061,638 a year ago. The increase in revenues was a
result of higher oil and gas prices despite lower sales volumes for oil.
Average prices per barrel of oil increased 14% to $28.18 from $24.78 a
year ago. Average prices received per Mcf of gas increased 83% to $4.75
from $2.59 a year ago. Sales volumes for oil decreased 6% to 18,688 from
19,939 a year ago. Sales volumes for gas increased 61% to 350 Mmcf from
218 Mmcf a year ago. The increase in gas volumes can be attributed to the
completion of the Turner 1-23 and 3-14 wells and the coal bed methane
wells.
The Company recorded gain on sale of property and equipment of $16,159.
The Company sold the shallow rights on the Oxbow Prospect for $7,972 and
sold a submersible pump on the Pierce Unit for $14,625 and wrote off its
cost of $9,878 in an international joint venture which dissolved in fiscal
2001. The Company also sold 3,000,000 shares of common stock of Victoria
Petroleum, NL in the fourth quarter of fiscal 2001. The common stock was
acquired as part of the merger with Victoria Petroleum, NL in May of 2000.
The Company received $91,096 in proceeds from the sale and recorded a gain
of $3,440.
Other income rose $46,213 to $111,141 from $64,928 a year ago. The
increase is attributable to overhead charges to a related party for the
use of the Company's office space and personnel.
LEASE OPERATING EXPENSES: Lease operating expenses increased
$471,447, or 105%, to $920,692 from $449,245 a year ago. The caption
"Lease Operating Expenses" includes not only the direct costs of operating
a well, but workover costs and production taxes. Direct lease expense
increased 100% to $575,296 from $287,956 a year ago. Workover costs
increased 180% to $151,390 from $53,993 last year. Production taxes
increased 81% to $194,006 from $107,296 a year ago. The increase in
direct lease expenses is attributable to the addition of eight new wells,
initial expenses on the Greens Canyon wells and higher lease expenses on
the Pierce and Grady Units in Wyoming. The increase in workover expenses
is attributable to the workover conducted on the Pierce Unit in Wyoming
and the Burditt #1 well in Texas. The increase in production taxes was a
result of higher oil and gas revenues and higher gas volumes. Lease
operating costs on a BOE (barrel of oil equivalent) increased 50% to
$11.96 from $7.98 a year ago.
EXPLORATION EXPENSES: Exploration expenses decreased $289,444, or
74%, to $101,131 from $390,575 in 2000. The decrease in exploration
expense reflected the slower pace of the Company's exploration program
during fiscal 2001 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 $101,459 in fiscal 2001 as compared to
$25,125 a year ago, an increase of $76,334, or 304%. No dry hole costs
were recorded for fiscal 2001 or 2000. Abandonment costs increased 100%
to $29,000 for fiscal 2001. The Company abandoned the Pinon Ridge
Prospect in Colorado. Impairment expenses increased $47,334 or 188% to
$72,459 from $25,125 a year ago. The impairment was a result of the
anaylsis of the Company's properties as required by SFAS 121.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative
expenses decreased $187,499, or 17%, to $898,430 as compared to $1,086,551
a year ago. The decrease in general and administrative expenses is
attributable to lower company personnel costs as well as lower legal and
accounting expenses. The Company continues to review ways to reduce
overhead expenses as a result of the current oil and gas pricing
structure.
INTEREST EXPENSE: Interest expense totaled $126,907 for the fiscal
year ended June 30, 2001. The interest is attributable to the line of
credit the Company has with Wells Fargo Bank.
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 was 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 in 1999. 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 in 1999.
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 in
1999. Sales volumes for gas decreased 29% to 218 Mmcf from 308 Mmcf in
1999.
The Company recorded gains on sale of equipment and property of $1,816,018
in 2000 versus a loss of $788 in 1999. 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 share 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 in 1999. 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 in 1999 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 in 1999, a decrease of $363,487, or 94%. No dry hole costs were
recorded in fiscal 2000 versus $144,515 in 1999. The decrease in dry hole
costs reflected the Company's successful drilling efforts on the Greens
Canyon Field during fiscal 2000. Abandonment costs decreased $17,857, or
100% from fiscal 1999. Impairment expense decreased $201,115, or 89%, to
$25,125 from $226,240 in 1999. 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
in 1999. 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.
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 foreign currencies.
During the 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 above. (See Management's Discussion and
Analysis-Results of Operations--Fiscal 2000 vs. Fiscal 1999.) The
investment in VP Common Stock is classified as available-for-sale. Net
unrealized gains and losses on the investment are recorded to other
comprehensive income or loss. At June 30, 2001 the unrealized gain on the
investment was $26,431. The Common Stock of VP was trading for $.058
cents per share in Australian dollars as of June 30, 2001. The Company
applies the exchange rate between the U.S. dollar and Australian dollar as
quoted in the Wall Street Journal. On June 30, 2001, the exchange rate in
dollar terms was $.5101 which resulted in a U.S. dollar share price of
$.0296 cents per share. The Company sold 3,000,000 shares of VP Stock in
June 2001 which provided $91,096 in proceeds to the Company and a
corresponding gain on sale of $3,440 was recorded.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See pages F-1 through F-17 for this information.
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 2001 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 2001 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 2001 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 2001 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
December 19, 2000 and January 3, 2001 and filed as
Exhibit 4 to the Registrant's Form S-8 Registration
Statement (No. 333-68086) 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.
10.5
Letter Amendment to Wells Fargo Bank West, N.A.
Agreement dated September 27, 2000 filed as Exhibit 10
to the Registrant's Form 10-Q for the period ended
September 30, 2000 and incorporated herein by
reference.
10.6
Articles of Merger for Victoria Exploration, Inc.
23.1 Consent of KPMG LLP
(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: October 15, 2001 By: /s/ Barry D. Lasker
Barry D. Lasker, 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: October 15, 2001 By: /s/ Barry D. Lasker
Barry D. Lasker, President,
Chief Executive Officer,
Principal Executive Officer,
and Director
Date: October 15, 2001 By: /s/ Robert J. Pett
Robert J. Pett, Chairman of the
Board
Date: October 15, 2001 By: /s/ Mark A. Boatright
Vice President - Finance,
Principal Financial and Accounting
Officer
Date: October 15, 2001 By: /s/ Kenneth W. Nickerson
Kenneth W. Nickerson, Director
Date: October 15, 2001 By: /s/ John T. Kopcheff
John T. Kopcheff, Vice President
International, and Director
Date: October 15, 2001 By: /s/ Mark A. E. Syropoulo
Mark A. E. Syropoulo, Director
Date: October 15, 2001 By: /s/ Timothy L. Hoops
Timothy L. Hoops, Director
Date: October 15, 2001 By: /s/ Neil T. MacLachlan
Neil T. MacLachlan, Director
Kestrel Energy, Inc.
AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 2001 and 2000
(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, 2001 and 2000, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for each of the years in the three-
year period ended June 30, 2001. 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, 2001 and 2000, and
the results of their operations and their cash flows for each of the years
in the three-year period ended June 30, 2001, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Denver, Colorado
September 14, 2001
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2001 and 2000
ASSETS 2001 2000
----- -----
Current assets:
Cash and cash equivalents $ 119,025 $ 502,034
Accounts receivable 278,834 181,075
Related party receivable - 524
Other current assets 5,957 31,560
-------------- --------------
Total current assets 403,816 715,193
-------------- --------------
Property and equipment, at cost:
Oil and gas properties, successful
efforts method of accounting (note 8):
Unproved 217,941 353,027
Proved 12,398,775 10,933,518
Pipeline and facilities 807,851 772,164
Furniture and equipment 143,724 138,970
-------------- --------------
13,568,291 12,197,679
Accumulated depreciation and depletion (3,190,983) (2,833,816)
-------------- --------------
Net property and equipment 10,377,308 9,363,863
-------------- --------------
Investment in related party (note 2) 2,130,178 2,191,403
-------------- --------------
$ 12,911,302 $ 12,270,459
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 121,464 1,419,429
Related party 26,397 9,399
Accrued liabilities 124,808 35,196
Line of credit, bank (note 3) 1,882,000 -
-------------- --------------
Total current liabilities 2,154,669 1,464,024
-------------- --------------
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;
7,700,200 and 7,680,000 shares
issued and outstanding at
June 30, 2001 and 2000, respectively 19,073,023 19,044,885
Accumulated other comprehensive income 26,431 -
Accumulated deficit (8,342,821) (8,238,450)
-------------- --------------
Total stockholders' equity 10,756,633 10,806,435
-------------- --------------
Commitments (notes 3 and 6)
$ 12,911,302 $ 12,270,459
============== ==============
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Years ended June 30, 2001, 2000 and 1999
2001 2000 1999
----- ----- -----
Revenue:
Oil and gas sales $ 2,195,819 1,061,638 632,030
Gain (loss) on sale of
property and equipment 12,719 1,816,018 (788)
Gain on sale of
available-for-sale securities 3,440 - -
Interest income 5,839 50,875 76,490
Other, net 111,141 64,928 65,063
----------- ----------- -----------
Total revenue 2,328,958 2,993,459 772,795
----------- ----------- -----------
Costs and expenses:
Lease operating expenses 920,692 449,245 412,628
Dry holes, abandoned and
impaired properties 101,459 25,125 388,612
Exploration expenses 101,131 390,575 460,336
Depreciation and depletion 284,710 97,986 174,414
General and administrative 898,430 1,086,551 778,229
Interest expense 126,907 - -
------------ ----------- -----------
Total costs and
expenses 2,433,329 2,049,482 2,214,219
------------ ----------- -----------
Net earnings (loss) (104,371) 943,977 (1,441,424)
Other comprehensive
income (loss) -
unrealized gain (loss)
from available-for-sale
securities 26,431 - -
------------ ----------- -----------
Comprehensive income
(loss) $ (77,940) 943,977 (1,441,424)
============ =========== ===========
Basic earnings (loss)
per share $ (.01) 0.14 (0.32)
============ =========== ===========
Diluted earnings (loss)
per share $ (0.01) 0.13 (0.32)
============ =========== ===========
Weighted average number of
common shares outstanding 7,684,110 6,787,104 4,451,833
============ =========== ===========
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2001, 2000 and 1999
COMMON STOCK ACCUMULATED
SHARES AMOUNT DEFICIT
------ ------ -----------
Balance June 30, 1998 4,431,000 $ 13,139,349 (7,741,003)
Shares issued for property 25,000 9,375 -
Net loss - - (1,441,424)
------------ ------------- ------------
Balance June 30, 1999 4,456,000 13,148,724 (9,182,427)
Common shares issued,
net of offering costs
of $158,158 (note 4) 3,204,000 5,878,842 -
Exercise of stock options
(note 4) 20,000 15,000 -
Stock options issued as
compensation - 2,319 -
Net earnings - - 943,977
------------ ------------ ------------
Balance June 30, 2000 7,680,000 19,044,885 (8,238,450)
Adjustment for previously
issued and unrecorded
shares (note 4) 200 - -
Common shares issued (note 4) 20,000 24,800 -
Stock options issued as
compensation - 3,338 -
Unrealized gain on securities
classified as available for sale - - -
Net loss - - (104,371)
------------ ------------ -----------
Balance June 30, 2001 7,700,200 $ 19,073,023 (8,342,821)
============ ============ ===========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
---------------- -------------
Balance June 30, 1998 - 5,398,346
Shares issued for property - 9,375
Net loss - (1,441,424)
------------ ------------
Balance June 30, 1999 - 3,966,297
Common shares issued, net of offering
costs of $158,158 (note 4) - 5,878,842
Exercise of stock options (note 4) - 15,000
Stock options issued as compensation - 2,319
Net earnings - 943,977
------------ ------------
Balance June 30, 2000 - 10,806,435
Adjustment for previously issued
and unrecorded shares (note 4) - -
Common shares issued (note 4) - 24,800
Stock options issued as compensation - 3,338
Unrealized gain on securities classified
as available for sale 26,431 26,431
Net loss - (104,371)
------------ ------------
Balance June 30, 2001 26,431 10,756,633
============ ============
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2001, 2000 and 1999
2001 2000 1999
-------- -------- --------
Cash flows from operating
activities:
Net earnings (loss) $ (104,371) 943,977 (1,441,424)
Adjustments to reconcile
net income (loss) to
net cash provided (used)
by operating activities:
Depreciation and
depletion 284,710 97,986 174,414
Abandoned and
impaired properties 101,459 - 244,097
Gain on sale of
available-for-sale
securities (3,440) - -
Loss (gain) on sale of
property and equipment (12,719) (1,816,018) 788
Noncash compensation
expense for stock
options issued 3,338 2,319 -
Changes in operating assets
and liabilities, net of
dispositions:
(Increase) decrease in
accounts receivable (97,759) (70,195) 55,688
(Increase) decrease in
related party receivables 524 59,482 333,169
(Increase) decrease in
other current assets 25,603 55,476 (50,388)
Increase (decrease) in
accounts payable -
trade (1,297,965) 1,378,036 (92,237)
Increase (decrease) in
accounts payable -
related party 16,998 (10,773) 20,172
Increase (decrease) in
accrued liabilities 89,612 5,824 3,326
------------ ------------ ------------
Net cash provided
(used) by operating
activities (994,010) 646,114 (752,395)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (1,384,692) (6,728,902) (1,556,650)
Proceeds from sale
of securities 91,096 - 2,330,831
Proceeds from sales of property
and equipment 22,597 296,000 1,000
------------ ------------ ------------
Net cash provided
(used) by investing
activities (1,270,999) (6,432,902) 775,181
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from line
of credit 1,882,000 - -
Proceeds from issuance of common
stock, net of offering costs - 5,878,842 -
Proceeds from exercise
of stock options - 15,000 -
------------ ------------ -----------
Net cash provided
by financing
activities 1,882,000 5,893,842 -
------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents (383,009) 107,054 22,786
Cash and cash equivalents,
beginning of year 502,034 394,980 372,194
------------ ----------- ------------
Cash and cash equivalents,
end of year $ 119,025 502,034 394,980
============ =========== ============
Supplemental cash flow
information -- cash paid
for interest $ 113,084 - -
============ =========== ============
Supplemental disclosure of noncash
investing activities:
Common stock issued for property
and equipment $ 24,800 - -
============ =========== ============
Unrealized holding gain on
available-for-sale
securities $ 26,431 - -
============ =========== ============
See accompanying notes to consolidated financial statements.
KESTREL ENERGY, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(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, 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
Up until June 22, 2001, the consolidated financial statements
included the accounts of the Company and its wholly-owned
subsidiary, Victoria Exploration, Inc. (Victoria). All
significant intercompany accounts and transactions have been
eliminated in consolidation.
On June 22, 2001 (the Effective Date), the Company filed Articles
of Merger of Victoria Exploration, Inc. into Kestrel Energy, Inc.
pursuant to Section 7-111-104 of the Colorado Revised Statutes.
In accordance with the agreement, on the Effective Date, Victoria
ceased to exist and Kestrel Energy, Inc. became the surviving
corporation.
(c)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.
(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 oil and gas properties
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 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.
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 $101,000 and
$25,000 for the years ended June 30, 2001 and 2000, 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, 2001 and 2000, the Company is in an under-produced
position of approximately 22,245 MCFs and 5,828 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 following sets forth the calculation of basic and diluted
earnings (loss) per common share for the years ended June 30:
2001 (1) 2000 (2) 1999 (3)
------- ------- -------
Net earnings (loss) $ (104,371) 943,977 (1,441,424)
========== ========= =========
Weighted average common
shares outstanding during
the period 7,684,110 6,787,104 4,451,833
Add dilutive effects of -
employee options -- -- 408,174
---------- ---------- ----------
Weighted average common
shares outstanding during
the period including the
effects of dilutive
securities 7,684,110 7,195,278 4,451,833
=========== ========= ==========
Basic earnings (loss) per
common share $ (0.01) 0.14 (0.32)
=========== ========= ==========
Diluted earnings (loss) per
common share $ (0.01) 0.13 (0.32)
=========== ========= ==========
(1) At the computation of diluted loss per share for the year
ended June 30, 2001. The effect of the assumed exercises of
these options was antidilutive.
(2) At June 30, 2000, options to purchase 40,000 shares of common
stock at prices ranging from $8.38 to $25.00 per share were
outstanding, but were not included in the computation of
diluted earnings per share for the year ended June 30, 2000.
The exercise prices of these options were greater than the
average market price of the common shares.
(3) At June 30, 1999, all outstanding options were excluded from
the computation of diluted loss per share for the year ended
June 30, 1999. The effect of the assumed exercises of these
options was antidilutive.
(j)Recently Issued Accounting Standards and Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS
No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS and approved for issuance SFAS No. 143,
ACCOUNTING FOR ASSET RETIREMENT ALLOCATIONS. SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations initiated or completed after June 30, 2001.
SFAS No. 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must be
recognized and reported apart from goodwill. The adoption of SFAS
No. 141 as of July 1, 2001 will have no impact on Kestrel's 2001
financial statements.
SFAS No. 142 requires that goodwill no longer be amortized, but
instead tested for impairment at least annually in accordance with
the provisions of SFAS No. 142. Any goodwill and any intangible
asset determined to have an indefinite useful life that are
acquired in a purchase business combination completed after June
30, 2001 will not be amortized, but will be evaluated for
impairment in accordance with the appropriate existing accounting
literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of SFAS No. 142. The adoption of
SFAS No. 142 will have no impact on Kestrel's 2001 financial
statements.
SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in
which it is incurred and a corresponding increase in the carrying
amount of the related long-lived asset and is effective for fiscal
years beginning after June 15, 2002. The Company is currently
assessing the impact SFAS No. 143 will have on its financial
condition and results of operations.
(k)Reclassification
Certain amounts in the 2000 financial statements have been
reclassified to conform to the 2001 financial statement
presentation.
(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 $0.029
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 $0.029 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, 2001.
(3) Line of Credit
On February 21, 2000, the Company entered into a $2,000,000 Line of
Credit agreement with Wells Fargo Bank, formerly Norwest Banks
Colorado, N.A., which provided the Company with an initial borrowing
base of $600,000, based on reserves with interest at Wells Fargo's
prime rate plus 2.5%. On September 27, 2000, the Company and Wells
Fargo amended the Line of Credit Agreement to provide the Company with
a borrowing base of $2,000,000 and reduced the interest rate to 1.5%
over the Wells Fargo prime rate. On May 31, 2001, Wells Fargo reduced
the borrowing base to $1,400,000. As a result of the reduction to the
borrowing base, the Company is required to make scheduled principal
payments to reduce the amount outstanding to $1,400,000 by October 31,
2001, the maturity date of the line of credit. The line of credit is
secured by Deeds of Trust on various oil and gas producing properties
held by the Company. As of June 30, 2001, $1,882,000 was outstanding
on the line of credit.
(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
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 entitled 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 were to expire on February 4,
2001. On January 24, 2001 the Board of Directors reduced the
exercise price to $2.50 and extended the exercise period to
September 4, 2002.
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.
In April 2001, the Company paid $6,000 and issued 20,000 shares of
its common stock at $1.24 per share to an unrelated third party in
exchange for geophysical data.
During 2001, certificates for previously issued shares of the
Company's common stock, representing 200 shares were presented for
transfer. Prior to presentment, such shares had not been recorded
as issued by the Company.
(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). As of June 30, 1998, 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 2001, 2000 and 1999, 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 $3.00 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 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.
Compensation expense of $3,338 and $2,319 has been recorded during
fiscal 2001 and 2000, respectively, 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:
Years ended June 30,
------------------------------------------
2001 2000 1999
--------- -------- -------
Net earnings (loss):
As reported $(104,371) 943,977 (1,441,424)
Pro forma (346,240) 305,625 (1,605,422)
Earnings (loss)
per share:
As reported $ (0.01) 0.14 (0.32)
Pro forma (0.05) 0.05 (0.36)
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 2001, 2000 and
1999, respectively: no dividend yield for all years; expected
volatility of 146%, 129% and 137%; weighted average risk-free
interest rates of 5.36% in fiscal 2001, 5.86% in fiscal 2000 and
5.06% in fiscal 1999; 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, 2001, 2000 and 1999, and changes during the years
then ended is presented below:
2001 2000
----------------------- -------------------
Weighted Weighted
average average
exercise exercise
Fixed options Shares price Shares price
----------------- --------- ---------- ------------------
Outstanding at
beginning of
year 1,333,964 $ 1.60 691,758 $ 1.69
Granted 135,000 1.85 472,206 1.43
Exercised -- -- (20,000) .75
Cancelled -- -- -- --
Expired (120,000) 2.14 (10,000) 1.03
--------- ---------- --------- ---------
Outstanding
at end
of year 1,148.964 $ 1.58 1,133,964 $ 1.69
========== ========= ========= =========
Options exercisable
at year end 1,123,964 1,133,964
Weighted average
fair value of
options granted
during the year $ 1.79 $ 1.35
1999
----------------------------------
Weighted
average
exercise
Shares price
---------- ----------
Outstanding at
beginning of
year
625,616 $ 2.55
Granted 510,642 1.64
Exercised --- ---
Cancelled (439,000) 2.94
Expired (,500) 2.20
---------- ---------
Outstanding at end
of year 691,758 $ 1.69
==========
Options exercisable
at end of year 691,758
Weighted average
fair value of
options granted
during the year $ 0.87
The following table summarizes information about fixed stock
options outstanding at June 30, 2001 (of which 1,123,964 are
exercisable):
Weighted
average
Range of remaining Weighted
exercise Number contractual average
price outstanding life (in years)exercise price
$0.50 - 1.10 165,000 7.8 $ 0.89
1.25 - 1.38 483,706 7.7 1.37
1.88 - 2.08 470,258 4.4 1.97
2.25 - 3.00 30,000 3.5 2.76
$0.50 - 3.00 1,148,964 6.3 $ 1.58
(5) INCOME TAXES
At June 30, 2001 and 2000, the Company's significant deferred tax
assets and liabilities are as follows:
2001 2000
---------- -------
Deferred tax assets:
Net operating loss carryforwards $ 3,383,000 3,055,000
Depletion carryforwards 225,000 188,000
Oil and gas properties, principally
due to differences in depreciation,
depletion and impairment 30,000 10,000
---------- ----------
3,638,000 3,253,000
Deferred liabilities:
Oil and gas properties, principally
due to differences in depreciation,
depletion and impairment (564,000) (493,000)
Investment in related parties - (584,000)
---------- ----------
Valuation allowance (3,074,000) (2,176,000)
---------- ----------
Net deferred tax assets $ - -
The valuation allowance for deferred tax assets as of June 30, 2001
was $3,074,000. The net change in the valuation allowance for the
year ended June 30, 2001 was an increase of $898,000.
At June 30, 2001, the Company had net operating loss carryforwards of
approximately $9,171,000. 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,
$1,497,000 is limited to the extent of future taxable income generated
by Victoria, and $7,178,000 is available to offset future taxable
income of the Company. If not utilized, the tax net operating losses
will expire during the period from 2002 through 2021.
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 $73,903, $63,683 and $60,336 for the
years ended June 30, 2001, 2000 and 1999, respectively.
Future minimum rental commitments under noncancelable operating leases
as of June 30, 2001 are as follows:
Fiscal year:
2002 $ 67,655
2003 46,736
2004 1,929
----------
$ 116,320
==========
(7) CONTINGENCIES
In the ordinary course of conducting its business, the Company becomes
involved in litigation, administrative proceedings and governmental
investigations, including environmental matters.
In May 2000, the Company received a notice letter from the U.S.
Environmental Protection Agency (EPA) stating 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. If the Company is ultimately determined to be a
responsible party, it 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 defend allegations of its responsibility, if any,
and will also reply upon an indemnification given by the previous
owner of the properties at Casmalia, which previous owner has
confirmed that the indemnification would apply to any such
allegations.
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 the 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:
June 30,
--------------------------------
2001 2000
------------- ------------
Unproved - Domestic $ 217,941 353,027
Proved 12,398,775 10,933,518
------------ ------------
12,616,716 11,286,545
Accumulated depletion
and impairment (3,039,413) (2,747,285)
------------ ------------
$ 9,577,303 8,539,260
============ ============
Costs incurred in oil and gas producing activities for the years ended
June 30, 2001, 2000 and 1999 were approximately as follows:
2001 2000 1999
------ ----- -----
Unproved property acquisition
costs $ 13,557 208,827 127,557
Proved property acquisition
costs 38,594 500 2,752
Development costs 523,668 100,300 71,819
Exploration costs 654,035 5,631,600 1,345,487
During fiscal 2001, the Company had two major customers. Sales to
these customers accounted for approximately 26% and 15% of fiscal 2001
oil and gas sales. 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.
(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, 2001, 2000 and 1999 are as
follows:
2001 2000
---- ----
Oil Gas Oil Gas
(BBLS) (MCF) (BBLS) (MCF)
------ ------ ----- -----
Beginning of year 388,000 24,517,000 288,000 6,334,000
Revisions of previous
quantity estimates (13,000)(12,739,000) 136,000 684,00
Extensions, discoveries
and improved recovery - 1,956,000 - 18,053,000
Sales of reserves in place - - (16,000) (336,000)
Production (19,000) (350,000) (20,000) (218,000)
--------- ---------- --------- ----------
End of year 356,000 13,384,000 388,000 24,517,000
========= ========== ========= ==========
Proved developed reserves
- end of year 283,000 6,189,000 315,000 8,630,000
========= ========== ========= ==========