10QSB 1 capq102.txt QUARTERLY REPORT ON FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2002. OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _______, 19___ to _______, 19___. Commission File Number: 0-10157 CAPCO ENERGY, INC. --------------------------------------------------------------- (Exact Name of Small Business Issuer as Specified in its Charter) COLORADO 84-0846529 -------------------------------- ----------------------- (State or Other Jurisdiction of (IRS Employer Identi- Incorporation or Organization) fication Number) 2922 E. CHAPMAN AVENUE, SUITE 202 ORANGE CALIFORNIA 92869 -------------------------------------- Address of Principal Executive Offices (714) 288-8230 -------------------------------------------------- (Registrant's Telephone Number, Including Area Code) N/A -------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Issuer was required to file such reports), and 2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No There were 19,413,097 shares of the Registrant's $.001 par value common stock outstanding as of May 9, 2002. CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET March 31, 2002 (Unaudited) ASSETS (Dollars in Thousands) Current Assets: Cash $ 149 Restricted cash 574 Investment in equity securities - marketable 2,602 Accounts receivables-trade, net of allowance of $379 9,401 Accounts receivables, related parties 475 Notes receivable 232 Inventory, net 2,991 Deferred tax asset - current portion 369 Other current assets 659 --------- Total Current Assets 17,452 Property, Plant and Equipment, net 16,807 Other Assets: Notes receivable, net 144 Investments in closely held businesses 2,131 Deferred tax asset 228 Other assets 239 --------- Total Assets $ 37,001 ========= Accompanying notes are an integral part of the financial statements. 2 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (continued) March 31, 2002 (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY (Dollars in Thousands) Current Liabilities: Accounts payable, trade $ 9,246 Revolving credit facility 5,950 Current maturities, long-term debt 4,693 Book overdraft 532 Accrued expenses 1,832 Taxes payable 607 --------- Total Current Liabilities 22,860 --------- Non-current Liabilities: Long term debt, less current maturities 6,416 Accrued environmental expenses 308 Deferred tax liability 771 --------- Total Non-current Liabilities 7,495 --------- Total Liabilities 30,355 --------- Minority Interests in Consolidated Subsidiaries 639 --------- Commitments and Contingencies (Note 4) -- Stockholders' Equity: Preferred stock, $1.000 par value; authorized 10,000,000 shares, 292,947 shares issued and outstanding 293 Common stock, $0.001 par value; authorized 150,000,000 shares; 19,311,574 shares issued 19 Additional paid in capital 792 Treasury stock (27) Cumulative other comprehensive income 29 Retained earnings 4,901 --------- Total Stockholders' Equity 6,007 --------- Total Liabilities and Stockholders' Equity $ 37,001 ========= Accompanying notes are an integral part of the financial statements. 3 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) For the Three Months Ended March 31, 2002 and 2001 (Unaudited) (Dollars in Thousands except per share) 2002 2001 ------ ------ Sales $ 24,513 $ 403 Cost of sales 20,291 197 ------ ------ Gross profit 4,222 206 ------ ------ Selling, general and administrative expenses 4,073 300 Depreciation, depletion and amortization 511 93 ------ ------ Total operating expenses 4,584 393 ------ ------ Loss from operations (362) (187) ------ ------ Other Income (Expenses) Interest income 64 -- Interest expense (339) (128) Gain on sale of marketable securities and assets 21 1,980 Equity loss from operations of investments -- (78) Other 4 1 ------ ------ Total other income (expenses) (250) 1,775 ------ ------ (Loss) income before taxes and minority interest in income (612) 1,588 Income tax expense -- -- Minority interest 1 (1) ------ ------ Net (loss) income (611) 1,587 Other comprehensive (loss)income-net of tax Foreign currency translation adjustment (2) 3 Unrecognized (loss) gain from investments- marketable securities (765) (2,949) ------ ------ Comprehensive (loss) $ (1,378) $ (1,359) ====== ====== Income (loss) per share Basic and diluted $ (.03) $ .08 ====== ====== Weighted average common share and common share equivalents Basic and diluted 19,239,470 19,453,818 ========== ========== Accompanying notes are an integral part of the financial statements. 4 CAPCO ENERGY, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2002 and 2001 (Unaudited) (Dollars in Thousands) 2002 2001 ------ ------ Cash Flows From Operating Activities: Net (loss) income $ (611) $ 1,587 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation, depletion and amortization 511 93 Gain on sale of assets (21) (1,980) Equity in losses of investees -- 78 Minority interest in (loss) income of consolidated subsidiary (1) 1 Compensation cost of Common Stock issued and options canceled 54 6 Other 2 -- (Increase) decrease in deferred tax asset (76) 729 Increase (decrease) in deferred tax liability 76 (729) Changes in assets and liabilities: (Increase) decrease in assets: Accounts receivable, trade (1,710) (88) Inventory, net (9) -- Other assets (511) (267) Increase (decrease) in liabilities: Accounts payable 2,179 132 Accrued expenses 76 (430) Taxes payable 86 -- ------- -------- Net cash provided by (used in) operating activities 45 (868) ------- -------- Cash Flows from Investing Activities: Net payments from (advances to) related parties 25 (103) Purchase of property, plant and equipment (net) (172) (500) Proceeds from sale of marketable securities (net) 607 1,807 Advances on note receivable (121) (90) Other -- 3 ------- -------- Net cash provided by investing activities 339 1,117 ------- -------- Continued on next page 5 CAPCO ENERGY, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Three Months Ended March 31, 2002 and 2001 (Unaudited) (Dollars in Thousands) 2002 2001 ------ ------ Cash Flows from Financing Activities: Borrowings on revolving credit facilities, net $ 716 $ -- Decrease in book overdraft (474) -- Payments on long-term debt (961) (1,701) Proceeds from long-term debt 200 1,186 Proceeds from sale of stock 6 -- Decrease in restricted cash 88 -- Retirement of Common Stock -- (108) -------- -------- Net cash (used in) financing activities (425) (623) -------- -------- Net decrease in cash and equivalents (41) (374) Cash and equivalents, beginning of period 190 413 -------- -------- Cash and equivalents, end of period $ 149 $ 39 ======== ======== Supplemental disclosure of cash flow information: Interest paid $ 291 $ 88 ======== ======== Taxes paid $ -- $ -- ======== ======== Supplemental disclosure of non-cash financing and investing activities: Marketable securities reduced for sales and carrying value adjustments $ 765 $ 3,046 ======== ======== Long-term debt reduced for assets sold/exchanged $ 105 $ 127 ======== ======== Common Stock retired/options canceled in exchange for assets $ 44 $ 604 ======== ======== Common Stock issued for services $ 9 $ 6 ======== ======== Common Stock issued for acquisition of minority interest $ 3 $ -- ======== ======== Common Stock issued for loan closing costs $ 25 $ -- ======== ======== Accompanying notes are an integral part of the financial statements. 6 CAPCO ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL DEVELOPMENT OF BUSINESS. NATURE OF OPERATIONS Capco Energy, Inc. ("Capco" or the "Company") is an independent energy company engaged primarily in the acquisition, development, production for and the sale of oil, gas and natural gas liquids and the sale of refined petroleum products. The Company's production activities are located principally in the United States. Capco's operations consist of three segments of business: oil and gas production, convenience store operations and distribution of refined petroleum products. The principal executive offices of the Company are located at 2922 East Chapman Avenue, Suite 202, Orange, California. The Company was incorporated as Alfa Resources, Inc. a Colorado corporation on January 6, 1981. In November 1999, the Company amended its articles of incorporation to change its name from Alfa Resources, Inc. to Capco Energy, Inc. Capco's subsidiaries are Capco Resource Corporation ("CRC"), Capco Asset Management, Inc., Capco Resources Ltd. ("CRL"), Capco Monument LLC and Meteor Enterprises, Inc. ("Enterprises"). The significant wholly owned subsidiaries of Enterprises are: Meteor Marketing, Inc., Graves Oil & Butane Co., Inc., Tri-Valley Gas Co. and Innovative Solutions and Technologies, Inc. Enterprises also owns 73% of Meteor Holdings LLC and 61% of Rocky Mountain Propane LLC ("RMP"), which is a non-consolidated subsidiary due to the fact that the company has voting and control interests that are less than 51%. The Company also had a significant equity interest in Meteor Industries, Inc. ("Industries"). The Company's future financial condition and results of operations will depend upon prices received for its oil and natural gas and the costs of finding, acquiring, developing and producing reserves. Prices for oil and natural gas are subject to fluctuations in response to changes in supply, market uncertainty and a variety of other factors beyond the Company's control. These factors include worldwide political instability (especially in the Middle East), the foreign supply of oil and natural gas, the price of foreign imports, the level of consumer product demand and the price and availability of alternative fuels. BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of Capco and its wholly and majority owned subsidiaries. Accordingly, all references herein to Capco or the Company include the consolidated results. All significant intercompany accounts and transactions have been eliminated in consolidation. 7 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued USE OF 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. Management used significant estimates in determining the carrying value of its oil and gas producing assets and the associated depreciation and depletion expense related to sales' volumes. These significant estimates included the use of proved oil and gas reserve volumes and the related present value of estimated future net revenues therefrom. PRICE LEVEL CHANGES AND REVOLVING CREDIT FACILITY The prices the Company pays for gasoline and diesel products are subject to market fluctuation and are not in the control of the Company. Prices for these products can and have fluctuated significantly. Higher product prices could have a significant impact on the Company's borrowing capabilities due to the generally faster timing required for payments to the Company's suppliers compared to the timing of collection of receivables from its customers. When necessary, the Company finances these working capital requirements through its revolving bank credit facility. This facility contains certain financial covenants, which are based on the Company's budgeted performance. If, as a result of price changes or other factors, the Company is unable to meet its debt covenants, its ability to continue to borrow under the revolving credit facility could be limited. If that were to occur, the Company would have to make alternative financial arrangements, which could include seeking additional debt or equity financing which may or may not be available. As of March 31, 2002, the Company was out of compliance with its timely reporting covenant. As of the date of this report the lender has not indicated they plan to call the facility for the out of compliance covenant. The Company plans to request from the lender a waiver of any out of compliance covenants that may exist at year-end. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term, highly liquid investments readily convertible into cash with an original maturity of three months or less. RESTRICTED CASH The Company has revolving bank credit facilities, which require the use of depository accounts from which collected funds are transferred to the lender. The lender then applies these collections to the revolving credit facilities. The lender controls these accounts. 8 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FAIR VALUE OF FINANCIAL INSTRUMENTS The Company measures its financial assets and liabilities in accordance with accounting principles generally accepted in the United States of America. For certain of the Company's financial instruments, including accounts receivable (trade and related party), notes receivable and accounts payable (trade and related party), and accrued expenses, the carrying amounts approximate fair value due to their short maturities. The amounts owed for long-term debt and revolving credit facility, also approximate fair value because current interest rates and terms offered to the Company are at current market rates. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk are cash and accounts receivable arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. However, cash balances have exceeded the FDIC insured levels at various times during the year. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited. MAJOR CUSTOMER One customer accounted for approximately 15% of the Company's net sales for the three months ended March 31, 2002. This customer owed the Company approximately $1.0 million as of March 31, 2002. INVESTMENT IN EQUITY SECURITIES For equity securities that the Company i) does not exercise control in the investee and ii) expects to divest within a short period of time, the Company accounts for the investment under the provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". In accordance with FASB No. 115, equity securities that have readily determinable fair values are classified as either trading or available-for-sale securities. Securities that are bought and held principally for the purpose of selling in the near term (thus held for only a short period of time) the Company classifies as trading securities and all other securities are classified as available-for-sale. Trading and available-for-sale securities are measured at fair value in the balance sheet. For trading securities any realized holding gains and losses are reported in the statement of operations. For available-for-sale securities any unrealized holding gains and losses are reported as a separate component of stockholders' equity until realized. For equity investments that the Company i) exercises control in the investee and ii) expects to hold for long term investment, the Company accounts for the investment under the provisions of Accounting Principles Board Opinion ("APB") No. 18, "The Equity Method of Accounting for Investments in Common Stock". In accordance with APB No. 18, under the equity method the Company records the initial investment at cost, then reduces it by dividends and increases or decreases it by the Company's proportionate share of the investee's net earnings or loss. 9 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PROPERTY AND EQUIPMENT The Company follows the "full-cost" method of accounting for oil and gas property and equipment costs. Under this method, all productive and nonproductive costs incurred in the acquisition, exploration, and development of oil and gas reserves are capitalized. Such costs include lease acquisitions, geological and geophysical services, drilling, completion, equipment, and certain general and administrative costs directly associated with acquisition, exploration, and development activities. General and administrative costs related to production and general overhead are expensed as incurred. No gains or losses are recognized upon the sale or disposition of oil and gas properties, except in transactions that involve a significant amount of reserves. The proceeds from the sale of oil and gas properties are generally treated as a reduction of oil and gas property costs. Fees from associated oil and gas exploration and development partnerships, if any, will be credited to oil and gas property costs to the extent they do not represent reimbursement of general and administrative expenses currently charged to expense. Such costs can be directly identified with acquisition, exploration and development activities and do not include any costs related to production, general corporate overhead, or similar activities. Future development, site restoration, and dismantlement and abandonment costs, net of salvage values, are estimated on a property-by-property basis based on current economic conditions and are amortized to expense as the Company's capitalized oil and gas property costs are amortized. The Company's properties are all onshore, and the Company expects that the salvage value of the tangible equipment will partially offset any site restoration and dismantlement and abandonment costs. Non-oil and gas producing properties and equipment are stated at cost; major renewals and improvements are charged to the property and equipment accounts; while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed currently. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to operations. 10 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DEPRECIATION AND DEPLETION The provision for depreciation and depletion of oil and gas properties is computed on the unit-of-production method. Under this method, the Company computes the provision by multiplying the total unamortized costs of oil and gas properties including future development, site restoration, and dismantlement and abandonment costs, but excluding costs of unproved properties by an overall rate determined by dividing the physical units of oil and gas produced during the period by the total estimated units of proved oil and gas reserves. This calculation is done on a country-by-country basis for those countries with oil and gas production. The cost of unevaluated properties not being amortized, to the extent there is such a cost, is assessed quarterly to determine whether the value has been impaired below the capitalized cost. Any impairment assessed is added to the cost of proved properties being amortized. The costs associated with unevaluated properties relate to projects which were undergoing exploration or development activities or in which the Company intends to commence such activities in the future. The Company will begin to amortize these costs when proved reserves are established or impairment is determined. Management believes no such impairment exists at March 31, 2002. At the end of each quarterly reporting period, the unamortized cost of oil and gas properties, net of related deferred income taxes, is limited to the sum of the estimated future net revenues from proved properties using current prices, discounted at 10%, and the lower of cost or fair value of unproved properties, adjusted for related income tax effects ("Ceiling Limitation"). The calculation of the ceiling limitation and provision for depreciation and depletion is based on estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proven reserves and in projecting the future rates of production, timing, and plan of development. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing, and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. Depreciation for non-oil and gas properties is recorded on the straight-line method at rates based on the estimated useful lives of the assets. The estimated useful lives are as follows: DESCRIPTION LIVES Buildings and Improvements 5 to 40 years Equipment 3 to 20 years 11 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES IMPAIRMENT OF LONG-LIVED ASSETS In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable and is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sales, abandonment or in a distribution to owners) or is classified as held for sale. Assets to be disclosed are reported at the lower of the carrying amount or fair value less costs to sell. The Company has adopted SFAS 144 on January 1, 2002. The provisions of this statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities and, therefore, will depend on future actions initiated by management. As a result, management cannot determine the potential effects that adoption of SFAS 144 will have on the Company's consolidated financial statements with respect to future disposal decisions, if any. COMMON STOCK During the quarter ended March 31, 2002, the Company had the following equity transactions: The Company sold 1,000 shares of Common Stock from treasury, realizing proceeds of $1,000; issued 11,123 shares of Common Stock from treasury to employees, recording a charge to operations in the amount of $9,000; issued 5,000 shares of Common Stock upon the exercise of options, realizing proceeds of $5,000; issued 4,000 shares of Common Stock for an equity interest in CRL at a cost basis of $3,000; and issued 25,000 shares of Common Stock for loan closing fees at a cost of $25,000. All shares were issued at values that approximate the fair market value of the Common Stock on the dates of issuance. REVENUE RECOGNITION Revenue from product sales is recognized when the product is delivered. Revenue from services is recognized when the services are performed and billable. 12 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES STOCK BASED COMPENSATION The Company accounts for employee stock options in accordance with APB No. 25, "Accounting for Stock Issued to Employees". Under APB 25, the Company recognizes no compensation expense related to employee stock options, as no options are granted at a price below market price on the date of grant. SFAS No. 123, "Accounting for Stock-Based Compensation", which prescribes the recognition of compensation expense based on the fair value of options on the grant date, allows companies to continue applying APB 25 if certain pro forma disclosures are made assuming hypothetical fair value method, for which the Company uses the Black-Scholes option-pricing model. For non-employee stock based compensation the Company recognizes an expense in accordance with SFAS No. 123 and values the equity securities based on the fair value of the security on the date of grant. For stock-based awards the value is based on the market value for the stock on the date of grant and if the stock has restrictions as to transferability a discount is provided for lack of tradability. Stock option awards are valued using the Black-Scholes option-pricing model. During the quarter ended March 31, 2002, vested options underlying 34,064 shares of Common Stock were exchanged with the Company for interests in producing oil and gas properties. The Company recorded a reduction to the carrying value of oil and gas properties, and a charge to operations, in the amount of $44,000 in connection with this transaction. ENVIRONMENTAL EXPENDITURES The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no future benefit is discernible. Expenditures, which extend the life of the related property or mitigate or prevent future environmental contamination, are capitalized. The Company determines and records its liability on a site-by-site basis at the time when it is probable and can be reasonably estimated. The Company's estimated liability is recorded net of the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. INCOME TAXES Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed by SFAS No. 109, "Accounting for Income Taxes". As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. 13 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income" establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As of March 31, 2002 and 2001, the Company has other comprehensive income relating to foreign currency translations and unrecognized holding gains from marketable securities classified as available-for-sale. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations." SFAS No. 141 supersedes Accounting Principles Board ("APB") No. 16 and requires that any business combinations initiated after June 30, 2001 be accounted for as a purchase; therefore, eliminating the pooling-of-interest method defined in APB 16. The statement is effective for any business combination initiated after June 30, 2001 and shall apply to all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001 or later. Adoption of SFAS No. 141 has not had a material impact to the Company's financial position or results of operations since the Company has not participated in such activities covered under this pronouncement. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles." SFAS No. 142 addresses the initial recognition, measurement and amortization of intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) and addresses the amortization provisions for excess cost over fair value of net assets acquired or intangibles acquired in a business combination. The statement is effective for fiscal years beginning after December 15, 2001, and is effective July 1, 2001 for any intangibles acquired in a business combination initiated after June 30, 2001. Adoption of SFAS No. 142 has not had a material impact to the Company's financial position or results of operations since the Company has not participated in such activities covered under this pronouncement. In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires companies to record the fair value of a liability for asset retirement obligations in the period in which they are incurred. The statement applies to a company's legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, and development or through the normal operation of a long-lived asset. When a liability is initially recorded, the company would capitalize the cost, thereby increasing the carrying amount of the related asset. The capitalized asset retirement cost is depreciated over the life of the respective asset while the liability is accreted to its present value. Upon settlement of the liability, the obligation is settled at its recorded amount or the company incurs a gain or loss. The statement is effective for fiscal years beginning after June 30, 2002. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. 14 NOTE 2 -- BASIS OF PRESENTATION These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, such interim statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for these interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2001, filed with the Company's Form 10-KSB. Certain reclassifications for the prior year have been made to conform to current year presentation. NOTE 3 - EARNINGS PER SHARE The Company uses SFAS No. 128, "Earnings Per Share" for calculating the basic and diluted earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company's weighted average shares outstanding for the three month periods ended March 31, 2002 and 2001, would have increased for 4,055,936 and 1,566,667 shares of Common Stock, respectively, if associated stock options would have had a dilutive effect. 16 NOTE 4 -- COMMITMENTS AND CONTINGENCIES The Company is subject to various federal, state and local environmental laws and regulations. Although Company environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent regulations could require the Company to make additional unforeseen environmental expenditures. Environmental accruals are routinely reviewed on an interim basis as events and developments warrant. NOTE 5 -- BUSINESS SEGMENTS During the three months ended March 31, 2002, the Company operated in three business segments: oil and gas production, convenience store operations and distribution of refined petroleum products. During the three months ended March 31, 2001, the Company operated in only one business segment, oil and gas production. The oil and gas production segment would be the typical "upstream" activities of an energy company, consisting of the production and sale of oil, gas and natural gas liquids. The convenience store operation consists of retail sales of gasoline and diesel fuels and grocery items. The distribution of refined petroleum products segment would be the typical "downstream" activities of an energy company, excluding refining. The Company sells diesel, gas, propane, lubricants, antifreeze and other refined products. Senior management evaluates and makes operating decisions about each of these operating segments based on a number of factors. The most significant factors used by management in evaluating the operating performance are net sales, gross profit, selling, general and administrative, and depletion, depreciation and amortization. 17 NOTE 5 -- BUSINESS SEGMENTS, Continued Certain financial information for each segment for the three month periods ended March 31, 2002 and 2001, is presented below (in thousands): 2002 2001 ------ ------ Oil and Gas Production: Net sales $ 268 $ 403 Gross profit 111 206 Selling, general and administrative 16 49 Depreciation and depletion 76 92 Convenience Store Operation: Net sales $ 1,328 -- Gross profit 216 -- Selling, general and administrative 254 -- Depreciation 4 -- Refined Product Distribution: Net sales $23,384 -- Gross profit 3,958 -- Selling, general and administrative 3,522 -- Depreciation and amortization 429 -- Corporate and other: Selling, general and administrative 343 251 Depreciation 2 1 ------ ------ Loss from operations (361) (187) Reconciliation to net income (loss): Other income (expenses) (251) 1,853 Equity in losses of investees -- (78) Minority interest 1 (1) ------ ------ Net (loss) income $ (611) $ 1,587 ====== ====== Identifiable fixed assets (net): Oil and gas production $ 4,688 $ 3,875 Convenience store operation 21 -- Refined product distribution 11,876 -- Corporate and other 222 222 ------ ------ Total identifiable fixed assets $16,807 $ 4,097 ====== ====== 18 NOTE 6 -- PRO FORMA FINANCIAL INFORMATION Effective April 30, 2001, the Company closed on its acquisition of all of the outstanding common stock of Enterprises, which acquisition has been accounted for under the purchase method of accounting. The purchase price for the common stock was $5.6 million paid in the form of $4.8 million cash, of which the Company borrowed $1.8 million and sold $3.0 million of marketable securities, $0.3 million of Industries common stock, and $0.5 million in a note payable to the seller. At the time of the acquisition, the Company had $1.8 million of debt due to Enterprises. Upon closing of the acquisition Enterprises relieved the Company of the debt. Capco has treated the cancellation of debt as a reduction in the purchase price, resulting in a net acquisition cost of $3.8 million. The accompanying pro forma consolidated statement of operations for the three months ended March 31, 2001, is presented as if the acquisition had occurred on January 1, 2001, and includes the statements of operations of Capco and Enterprises for the three months ended March 31, 2001. The pro forma financial statement is not necessarily indicative of future operations or the actual results that would have occurred had the acquisition been consummated at the beginning of the period. The pro forma consolidated statement of operations should be read in conjunction with the historical financial statements and notes thereto of Enterprises and of Capco. The proforma consolidated financial statements for the year ended December 31, 2001, are included in the Company's annual report, Form 10-KSB, for the year ended December 31, 2001. Pro Forma Entries a. Entry to eliminate inter-company interest income and expense. b. Entry to adjust depreciation expense for the reduction in fixed assets value. 19
CAPCO ENERGY, INC. AND METEOR ENTERPRISES, INC. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Three Months Ended March 31, 2001 (Dollars in Thousands, except for per share information) PRO FORMA PRO FORMA CAPCO METEOR ENTRIES CONSOLIDATED ------- ------- ---------- ------------ Net sales $ 403 $ 42,067 $ -- $ 42,470 Cost of sales, excluding depreciation 197 37,325 -- 37,522 ------ ------- ------ ------- Gross profit 206 4,742 -- 4,948 ------ ------- ------ ------- Selling, general and administrative expenses 300 4,819 -- 5,119 Depreciation, depletion and amortization 93 527 (86) (b) 534 ------ ------- ------ ------- Total operating expenses 393 5,346 (86) 5,653 ------ ------- ------ ------- Loss from operations (187) (604) 86 (705) ------ ------- ------ ------- Other income (expenses) Interest income -- 141 (28) (a) 113 Interest expense (128) (346) 28 (a) (446) Gain on sale of assets 1,980 7 -- 1,987 Equity loss from operations of investments (78) 158 -- 80 Other 1 (18) -- (17) ------ ------- ------ ------- Total other income (expenses) 1,775 (58) -- 1,717 ------ ------- ------ ------- Income (loss) before income taxes and minority interest 1,588 (662) 86 1,012 Income tax (expense) benefit -- 226 -- 226 Minority interest (1) (3,795) -- (3,796) ------ ------- ------ ------- Net income (loss) $ 1,587 $ (4,231) $ 86 $ (2,558) ====== ======= ====== ======= Income (loss) per share Basic and diluted $ 0.08 $ (0.13) ====== ======= Weighted average shares outstanding Basic and diluted 19,453,818 19,453,818 ========== ==========
20 NOTE 7 - SUBSEQUENT EVENTS In February 2002, the Company signed a Letter of Intent for the sale of its 61% equity interest in RMP. The sales price of $2.8 million is to be paid in $900,000 cash and $1.85 million of 12.5% preferred membership interests, redeemable in five years, and $50,000 in a promissory note due January 1, 2003. In addition, RMP will assume certain long-term indebtedness of the Company, which, at March 31, 2002, amounted to $531,000. Closing of the sale took place on April 30, 2002. Included in the Company's long-term debt are promissory notes in the aggregate amount of $1.7 million which matured for payment in June and September 2001, and were not paid. The Company has been in discussion with the lenders and, on May 1, 2002, the lenders and the Company entered into a agreement for the repayment of the entire indebtedness. Under the agreement, the Company will repay $500,000 in cash and provide the lenders with approximately 52% of the Company's equity securities of Chaparral Resources, Inc. Closing of the transaction took place on May 15, 2002. In April 2002, the Company signed a Purchase and Sale Agreement providing for the sale of its entire interest in the Buried Hills oil property in Kansas. Proceeds from the sale of approximately $1.1 million will be used for working capital purposes and for the repayment of certain long-term debt. Closing of the sale took place on May 15, 2002. 21 Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that include, among others, statements concerning: the benefits expected to result from Capco's acquisition of CRL, CRC and Enterprises, including synergies in the form of increased revenues, decreased expenses and avoiding expenses and expenditures that are expected to be realized by Capco as a result of the acquisitions, and other statements of: expectations, anticipations, beliefs, estimations, projections, and other similar matters that are not historical facts, including such matters as: future capital, development and exploration expenditures (including the amount and nature thereof), drilling of wells, reserve estimates (including estimates of future net revenues associated with such reserves and the present value of such future net revenues), future production of oil and gas, repayment of debt, business strategies, and expansion and growth of business operations. These statements are based on certain assumptions and analyses made by the management of Capco in light of: past experience and perception of: historical trends, current conditions, expected future developments, and other factors that the management of Capco believes are appropriate under the circumstances. Capco cautions the reader that these forward-looking statements are subject to risks and uncertainties, including those associated with: the financial environment, the regulatory environment, and trend projections, that could cause actual events or results to differ materially from those expressed or implied by the statements. Such risks and uncertainties include those risks and uncertainties identified below. Significant factors that could prevent Capco from achieving its stated goals include: the failure by Capco to integrate the respective operations of Capco and its acquisitions or to achieve the synergies expected from the acquisitions, declines in the market prices for oil and gas, increase in refined product prices, and adverse changes in the regulatory environment affecting Capco. The cautionary statements contained or referred to in this report should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by Capco or persons acting on its or their behalf. Capco undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 22 RESULTS OF OPERATIONS --------------------- THREE MONTHS ENDED MARCH 31, 2002, COMPARED TO MARCH 31, 2001 OIL AND GAS PRODUCTION SEGMENT Capco's revenues from oil and gas activities were $0.3 million in 2002 compared to $0.4 million in 2001. This decrease is due to a decline in product prices paid at the wellhead. On a barrel of oil equivalent ("BOE") basis, the Company's price per BOE declined to $18.99 in 2002 from $27.37 in 2001. Total production was 14,380 BOE in 2002, compared with 13,460 BOE in 2001. Capco's cost of sales were $0.2 million in both 2002 and 2001. Depreciation, depletion and amortization was $0.1 million in both 2002 and 2001. Net operating revenues from Capco's oil and gas production are very sensitive to changes in the price of oil; thus it is difficult for management to predict whether or not the Company will be profitable in the future. CONVENIENCE STORE OPERATIONS Effective August 1, 2001, the Company assumed the operations of seven convenience stores located in New Mexico and Colorado from an affiliate. Sales, cost of sales, and general and administrative expenses during the period ended March 31, 2002, totaled $1.3 million, $1.1 million, and $0.2 million, respectively. REFINED PRODUCT DISTRIBUTION SEGMENT Effective April 30, 2001, Capco acquired its refined product distribution segment. Net sales, gross profit, selling, general and administrative expenses, and depreciation and amortization expenses during the period ended March 31, 2002, were $23.4 million, $4.0 million, $3.5 million, and $0.4 million, respectively. OTHER ITEMS Selling, general and administrative ("SG&A") costs were $0.3 million in both 2002 and 2001. Interest expense increased to $0.3 million in 2002 from $0.1 million in 2001. This increase is attributable to the increase in long-term debt balances outstanding during the respective periods. Gain on sale of assets decreased to $21,000 in 2002 from $2.0 million in 2001. The Company sold 23 marketable securities for working capital and to provide funding for its acquisitions, realizing gross proceeds in the amount of $0.8 million ($2.56 per share sold) in 2002 and $2.5 million ($8.68 per share sold) in 2001. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2002, the Company had a working capital deficit of $5.4 million. Management plans to continue to sell its marketable securities and other assets to pay its debt and provide working capital. Subsequent to March 31, 2002, Management has sold marketable securities and paid certain debts, Management has closed on the sale of its propane operations, Management closed on the sale of its producing oil and gas properties in Kansas on May 15, 2002, realizing proceeds of approximately $1.1 million which were used for working capital and to retire debt, Management has listed with real estate brokers certain non core assets such as undeveloped land and other real estate, the proceeds of which will be used to reduce debt, Management has settled $1.9 million in debt and accrued expenses by paying $500,000 in cash and 832,606 shares of the Company's equity securities of Chaparral Resources, Inc., Management has consolidated its petroleum marketing segment's accounting and administrative functions, and Management has reduced its administrative staff. Net cash provided by operating activities totaled $45,000 for the three months ended March 31, 2002, compared to cash used in operating activities of $0.9 million for the three months ended March 31, 2001. This increase in cash provided by operating activities is principally related to changes in working capital. Net cash provided by investing activities totaled $0.3 million for the three months ended March 31, 2002, compared to cash provided by investing activities of $1.1 million for the three months ended March 31, 2001. The decrease in cash provided by investing activities is principally related to a decline in proceeds from sale of marketable securities. Net cash used in financing activities totaled $0.4 million for the three months ended March 31, 2002, compared to cash used in financing activities of $0.6 million for the three months ended March 31, 2001. This decrease in cash used in financing activities is primarily related to payments made on long-term debt. The Company has a revolving bank credit facility with a maximum commitment of $12.5 million, which expires on December 31, 2002. The amount available under the revolving credit facility is a function of the sum of eligible accounts receivable and inventory as defined by the revolving credit agreement up to the maximum commitment. Advances requested by the Company are subject to an interest rate of the lender's base rate plus 0.5% (4.75% at March 31, 2002). Additionally, the Company pays a commitment fee of 0.25% of the maximum commitment. The revolving credit facility is collateralized by the Company's trade receivables and inventory. At March 31, 2002, the borrowing base was 24 approximately $6.6 million, of which $6.0 million was borrowed against the facility and is recorded as a current liability. As of March 31, 2002, the Company was out of compliance with its timely reporting covenant, and did not request a waiver from the lender for the out of compliance covenant. As of the date of this report the lender has not indicated they plan to call the facility for the out of compliance covenant. The Company plans to request from the lender a waiver of any out of compliance covenants that may exist at year-end. The Company has various loans with banks, suppliers and individuals, which require principal payments of $4.7 million in the twelve-month period ending March 31, 2003. The Company is obligated to pay lease costs of approximately $0.8 million during the twelve-month period ending March 31, 2003, for land, building, facilities and equipment. The Company is responsible for any contamination of land it owns or leases. However, the Company may have limitations on any potential contamination liabilities as well as claims for reimbursement from third parties. Included in selling, general and administrative expenses for the three month periods ended March 31, 2002 and 2001, is $0.1 million and $-0-, respectively, for site assessment, related cleanup costs and regulatory compliance. The Company sells most of its oil production to certain major oil companies. However, in the event these purchasers discontinued oil purchases, Capco has made contact with other purchasers who would purchase the oil. EFFECT OF CHANGES IN PRICES Changes in prices during the past few years have been a significant factor in the oil and gas industry. The price received for the oil and gas produced by Capco has fluctuated significantly during the last year. Changes in the price that Capco receives for its oil and gas is set by market forces beyond Capco's control. That uncertainty in oil and gas prices makes it more difficult for a company like Capco to increase its oil and gas asset bases and become a significant participant in the oil and gas industry. Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to interest rate changes is primarily related to its variable rate debt issued under its $12.5 million revolving credit facility. Because the interest rate on this facility is variable, based upon the lender's base rate, the Company's interest expense and net income are affected by interest rate fluctuations. If interest rates were to increase or decrease by 100 basis points, the result, based upon the existing outstanding debt as of March 31, 2002, would be an annual increase or decrease of approximately $83,000 in interest expense and a corresponding decrease or increase of approximately $50,000 in the Company's net income (loss) after taxes. 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. None. 26 SIGNATURES In accordance with the requirements of the Exchange Act, the Issuer caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPCO ENERGY, INC. Dated: May 17, 2002 By: /s/ Dennis R. Staal ------------------------ Dennis R. Staal, Chief Financial and Accounting Officer 27