10QSB 1 cp10q202.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 June 30, 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 19,451,097 shares of the Registrant's $.001 par value common stock outstanding as of August 9, 2002. CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, 2002 (Unaudited) ASSETS (Dollars in Thousands) Current Assets: Cash $ 113 Restricted cash 303 Investment in equity securities - marketable 1,097 Accounts receivables-trade, net of allowance of $380 8,892 Accounts receivable, related parties 550 Notes receivable 120 Inventory, net 2,888 Deferred tax asset - current portion 385 Other current assets 547 --------- Total Current Assets 14,895 Property, Plant and Equipment, net 17,388 Other Assets: Notes receivable, less current portion 1,993 Investments in closely held businesses 402 Deferred tax asset, less current portion 358 Other assets 111 --------- Total Assets $ 35,147 ========= Accompanying notes are an integral part of the financial statements. 2 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (continued) June 30, 2002 (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY (Dollars in Thousands) Current Liabilities: Book overdraft $ 1,080 Accounts payable, trade 7,422 Revolving credit facility 5,520 Current maturities, long-term debt 2,626 Accrued expenses 1,925 Accounts payable, related parties 144 --------- Total Current Liabilities 18,717 --------- Non-current Liabilities: Long term debt, less current maturities 7,176 Accrued environmental expenses 308 Deferred tax liability 917 --------- Total Non-current Liabilities 8,401 --------- Total Liabilities 27,118 --------- Minority Interest in Consolidated Subsidiary 722 --------- 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; 19,489,974 shares issued 19 Additional paid in capital 991 Treasury stock (28) Cumulative other comprehensive income 178 Retained earnings 5,854 --------- Total Stockholders' Equity 7,307 --------- Total Liabilities and Stockholders' Equity $ 35,147 ========= Accompanying notes are an integral part of the financial statements. 3 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the Three Months Ended June 30, 2002 and 2001 (Unaudited) (Dollars in Thousands except per share) 2002 2001 ------ ------ Sales $ 26,008 $ 28,216 Cost of sales 21,968 24,809 ------ ------ Gross profit 4,040 3,407 ------ ------ Selling, general and administrative expenses 4,124 3,511 Depreciation, depletion and amortization 471 451 ------ ------ Total operating expenses 4,595 3,962 ------ ------ Loss from operations (555) (555) ------ ------ Other Income (Expenses) Interest income 76 68 Interest expense (286) (343) Gain on sale of marketable securities and assets 1,854 4,121 Equity loss from operations of investments -- (147) Other (4) (3) ------ ------ Total other income (expenses) 1,640 3,696 ------ ------ Income before taxes and minority interest in income 1,085 3,141 Income tax benefit -- 34 Minority interest (132) -- ------ ------ Net income 953 3,175 Other comprehensive (loss) income-net of tax Foreign currency translation adjustment (3) (3) Unrecognized gain (loss) from investments- marketable securities 152 (3,063) ------ ------ Comprehensive income $ 1,102 $ 109 ====== ====== Income per share Basic and diluted $ .05 $ .17 ====== ====== Weighted average common share and common share equivalents Basic and diluted 19,393,586 19,081,792 ========== ========== Accompanying notes are an integral part of the financial statements. 4 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) For the Six Months Ended June 30, 2002 and 2001 (Unaudited) (Dollars in Thousands except per share) 2002 2001 ------ ------ Sales $ 50,521 $ 28,619 Cost of sales 42,259 25,006 ------ ------ Gross profit 8,262 3,613 ------ ------ Selling, general and administrative expenses 8,197 3,811 Depreciation, depletion and amortization 982 544 ------ ------ Total operating expenses 9,179 4,355 ------ ------ Loss from operations (917) (742) ------ ------ Other Income (Expenses) Interest income 140 68 Interest expense (625) (471) Gain on sale of marketable securities and assets 1,875 6,101 Equity loss from operations of investments -- (225) Other -- (2) ------ ------ Total other income (expenses) 1,390 5,471 ------ ------ Income before taxes and minority interest in income 473 4,729 Income tax benefit -- 34 Minority interest (131) (1) ------ ------ Net income 342 4,762 Other comprehensive (loss)income-net of tax Foreign currency translation adjustment (5) -- Unrecognized (loss) gain from investments- marketable securities (613) (6,012) ------ ------ Comprehensive (loss) $ (276) $ (1,250) ====== ====== Income per share Basic and diluted $ .02 $ .25 ====== ====== Weighted average common share and common share equivalents Basic and diluted 19,316,954 19,266,178 ========== ========== Accompanying notes are an integral part of the financial statements. 5 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2002 and 2001 (Unaudited) (Dollars in Thousands) 2002 2001 ------ ------ Cash Flows From Operating Activities: Net income $ 342 $ 4,762 Adjustments to reconcile net income to net cash used in operating activities: Depreciation, depletion and amortization 982 544 Gain on sale of assets (1,875) (6,101) Equity in losses of investees -- 225 Minority interest in income of consolidated subsidiary 131 1 Compensation cost of Common Stock issued and options issued/canceled 123 14 Increase in deferred tax asset (222) -- Increase in deferred tax liability 222 -- Changes in assets and liabilities: (Increase) decrease in assets: Accounts receivable, trade (1,232) (3,343) Inventory, net 94 (157) Other current assets (259) (49) Other assets (12) (36) Increase (decrease) in liabilities: Accounts payable, trade 481 2,074 Accrued expenses (351) (293) ------ ------ Net cash (used in) operating activities (1,576) (2,359) ------ ------ Cash Flows from Investing Activities: Net payments from related parties 301 -- Proceeds from sale of property, plant and equipment 1,100 39 Proceeds from sale of investment in closely held business 850 -- Acquisition of Meteor Enterprises, net of cash received -- (2,514) Purchase of property, plant and equipment (754) (949) Investment -- (122) Proceeds from sale of marketable securities (net) 1,160 6,193 Advances on note receivable (net) (80) -- ------ ------ Net cash provided by investing activities 2,577 2,647 ------ ------ Continued on next page Accompanying notes are an integral part of the financial statements. 6 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Six Months Ended June 30, 2002 and 2001 (Unaudited) (Dollars in Thousands) 2002 2001 ------ ------ Cash Flows from Financing Activities: Borrowings on revolving credit facilities, net $ 285 $ 1,375 Increase (decrease) in book overdraft 73 (845) Payments on long-term debt (2,001) (5,523) Proceeds from long-term debt 200 3,993 Proceeds from sale of Common Stock 6 -- Decrease in restricted cash 359 588 Retirement of Common Stock -- (136) ------ ------ Net cash (used in) financing activities (1,078) (548) ------ ------ Net decrease in cash and equivalents (77) (260) Cash and equivalents, beginning of period 190 414 ------ ------ Cash and equivalents, end of period $ 113 $ 154 ====== ====== Supplemental disclosure of cash flow information: Interest paid $ 742 $ 414 ======== ======== Taxes paid $ -- $ -- ======== ======== Supplemental disclosure of non-cash financing and investing activities: 2002 2001 ------ ------ Marketable securities reduced for sales and carrying value adjustments $ 1,936 $ 6,096 ======== ======== Note receivable exchanged for marketable securities $ 103 $ -- ======== ======== Account receivable converted to note receivable $ 31 $ -- ======== ======== Note receivable received upon sale of investment in closely held business $ 1,850 $ -- ======== ======== Accompanying notes are an integral part of the financial statements. 7 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Six Months Ended June 30, 2002 and 2001 (Unaudited) (Dollars in Thousands) Supplemental disclosure of non-cash financing and investing activities, continued: 2002 2001 ------ ------ Long-term debt reduced for assets sold/exchanged $ 2,035 $ 127 ======== ======== Long-term debt issued for property acquisition $ 1,533 $ -- ======== ======== Long-term debt issued for accounts payable $ 129 $ -- ======== ======== Common Stock retired/options canceled in exchange for assets $ 44 $ 604 ======== ======== Common Stock/options issued for services $ 79 $ 20 ======== ======== Common Stock issued for acquisition of minority interests $ 132 $ 5 ======== ======== Common Stock issued for loan closing costs $ 25 $ -- ======== ======== Marketable securities reduced for shares used as consideration for acquisition $ 170 ======== Marketable securities increased for elimination of investment in closely held business due to business combination of investee $ 1,920 ======== Long-term debt issued for the acquisition of equipment $ 193 ======== Long-term debt and accrued interest reduced in connection with acquisition $ 1,755 ======== Long-term debt issued in connection with acquisition $ 500 ======== Accompanying notes are an integral part of the financial statements. 8 CAPCO ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 NOTE 1 -- 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. 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. 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. Capco's subsidiaries are Capco Resource Corporation ("CRC"), Capco Asset Management, Inc., Capco Resources Ltd. ("CRL") (88.5% equity interest), Capco Monument LLC ("CM 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. The Company also had significant equity interests in Rocky Mountain Propane LLC ("RMP") and Meteor Industries, Inc. ("Industries"). All references herein to Capco or the Company include the consolidated results. All significant intercompany accounts and transactions have been eliminated in consolidation. 9 NOTE 1 -- BASIS OF PRESENTATION 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 June 30, 2002, the Company was in compliance with the covenants of the revolving bank credit facility. MAJOR CUSTOMER No customer accounted for more than 10% of the Company's net sales for the three months ended June 30, 2002. INVESTMENT IN EQUITY SECURITIES On May 15, 2002, the Company assigned 832,600 shares (approximately 52%) of its equity interests in Chaparral Resources, Inc. to a lender in payment of $1.4 million due to the lender. The Company recorded a gain in the amount of $142,000 on this transaction. In June 2002, the Company sold an additional 278,100 shares of its equity interests in Chaparral Resources, Inc. to provide funding for the acquisition of a producing oil and gas property. The Company recorded a gain in the amount of $156,000 from the sale. On April 30, 2002, the Company closed on the sale of its 61% equity interest in RMP. The sales price of $2.8 million was paid in $850,000 cash, $1.85 million of 12.5% preferred membership interests (included in non-current notes receivable), redeemable in five years, and $50,000 in a promissory note due January 1, 2003. In addition, certain other assets, including property and equipment were assigned to RMP, and RMP assumed $636,000 of long-term indebtedness of the Company. The Company recorded a gain in the amount of $1.6 million from the sale of its investment in RMP. PROPERTY AND EQUIPMENT On May 15, 2002, the Company closed on the sale of its interest in producing oil properties located in Kansas, realizing sales proceeds in the amount of $1.1 million. Approximately $722,000 of the sales proceeds was used to repay long-term debt and the balance was used for working capital. The Company recorded a gain in the amount of $301,000 on this transaction. 10 NOTE 1 -- BASIS OF PRESENTATION PROPERTY AND EQUIPMENT, Continued The sale of the Company's equity interest in RMP included the assignment of certain property and equipment to RMP. Land, buildings and equipment with a book value of $263,000 were included in the sale; the Company recorded a loss in the amount of $162,000 from the sale of these assets. On June 18, 2002, the Company closed on an acquisition of producing oil and gas properties. The purchase price of $1.9 million was funded by cash payments of $399,000 and the assumption of a production payable to the operator of the property in the amount of $1.5 million. Operations from the properties are scheduled to begin effective July 1, 2002. 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 adopted SFAS 144 on January 1, 2002. Adoption of SFAS No. 144 has not had a material impact to the Company's financial position or results of operations. 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. LONG-TERM DEBT During the quarter ended June 30, 2002, the Company retired indebtedness in the total amount of $3.0 million. The sale of RMP included assumption by the buyer of approximately $636,000 of indebtedness. From the sale of producing oil interests in Kansas, the Company used approximately $722,000 to retire indebtedness, and the assignment of equity interests in Chaparral Resources, Inc. were used to retire an additional $1.4 million in indebtedness. On June 18, 2002, the Company assumed a production payable in the amount of $1.5 million in connection with the acquisition of producing oil and gas properties. Revenues from the operation of the properties will be used to retire the indebtedness. 11 NOTE 1 -- BASIS OF PRESENTATION 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. During the quarter ended June 30, 2002, the Company had the following equity transactions: The Company acquired 1,500 shares of Common Stock at a cost of $1,000 to be held as Treasury Stock and issued 178,400 shares of Common Stock for additional equity interests in CRL at a cost basis of $128,000. All shares were issued at values that approximate the fair market value of the Common Stock on the dates of issuance. STOCK BASED COMPENSATION 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. During the quarter ended June 30, 2002, the Company issued warrants and options to consultants as part of their compensation for services. The Company recorded an increase to paid-in capital, and a charge to operations, in the amount of $70,000 for the value of the awards. 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. 12 NOTE 1 -- BASIS OF PRESENTATION NEW ACCOUNTING PRONOUNCEMENTS, Continued 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 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. In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. Certain reclassifications for the prior year have been made to conform to current year presentation. 13 NOTE 2 -- 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 June 30, 2002 and 2001, would have increased for 3,692,728 and 1,516,300 shares of Common Stock, respectively, if associated stock options would have had a dilutive effect. The Company's weighted average shares outstanding for the six month periods ended June 30, 2002 and 2001, would have increased for 3,874,388 and 1,508,241 shares of Common Stock, respectively, if associated stock options would have had a dilutive effect. NOTE 3 -- BUSINESS SEGMENTS During the three and six month periods ended June 30, 2002, the Company operated in three business segments: oil and gas production, convenience store operations and distribution of refined petroleum products. During the three and six month periods ended June 30, 2001, the Company operated in two business segments, oil and gas production and distribution of refined petroleum products (from May 1, 2001). 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. 14 NOTE 3 -- BUSINESS SEGMENTS, Continued Certain financial information for each segment for the three and six month periods ended June 30, 2002 and 2001, is presented below (in thousands): Three Months Six Months Ended June 30, Ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Oil and Gas Production: Net sales $ 128 $ 437 $ 396 $ 840 Gross profit 2 136 113 342 Selling, general and administrative 8 36 24 85 Depreciation and depletion 37 109 113 201 Convenience Store Operation: Net sales $ 1,324 -- $ 2,652 -- Gross profit 214 -- 430 -- Selling, general and administrative 233 -- 487 -- Depreciation 4 -- 8 -- Refined Product Distribution: Net sales $24,986 $27,779 $48,370 $27,779 Gross profit 3,877 3,271 7,834 3,271 Selling, general and administrative 3,489 2,833 7,011 2,833 Depreciation and amortization 429 341 858 341 Corporate and other: Selling, general and administrative 447 642 790 893 Depreciation 1 1 3 2 ------ ------ ----- ----- Loss from operations (555) (555) (917) (742) Reconciliation to net income: Other income (expenses) $ 1,640 $ 3,696 $ 1,390 $ 5,471 Income tax (benefit) expense -- 34 -- 34 Minority interest (132) -- (131) (1) ------ ------ ------ ------ Net income $ 953 $ 3,175 $ 342 $ 4,762 ====== ====== ====== ====== Identifiable fixed assets (net): Oil and gas production $ 5,788 $ 4,141 $ 5,788 $ 4,141 Convenience store operation 17 -- 17 -- Refined product distribution 11,363 12,893 11,363 12,893 Corporate and other 220 222 220 222 ------ ------ ------ ------ Total identifiable fixed assets $17,388 $17,256 $17,388 $17,256 ====== ====== ====== ====== 15 NOTE 4 -- 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 six months ended June 30, 2001, is presented as if the acquisition had occurred on January 1, 2001, and includes the statement of operations of Capco for the six months ended June 30, 2001, and the statement of operations of Enterprises for the four months ended April 30, 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. 16
CAPCO ENERGY, INC. AND METEOR ENTERPRISES, INC. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Six Months Ended June 30, 2001 (Dollars in Thousands, except for per share information) PRO FORMA PRO FORMA CAPCO METEOR ENTRIES CONSOLIDATED ---------- ---------- ---------- ------------ Net sales $ 28,619 $ 55,402 $ - $ 84,021 Cost of sales, excluding depreciation 25,006 49,149 - 74,155 ---------- ---------- ---------- ---------- Gross profit 3,613 6,253 - 9,866 ---------- ---------- ---------- ---------- Selling, general and administrative expenses 3,811 8,047 - 11,858 Depreciation and amortization 544 658 (114) (b) 1,088 ---------- ---------- ---------- ---------- Total operating expenses 4,355 8,705 (114) 12,946 ---------- ---------- ---------- ---------- Loss from operations (742) (2,452) 114 (3,080) ---------- ---------- ---------- ---------- Other income and (expenses) Interest income 68 170 (38) (a) 200 Interest expense (471) (531) 38 (a) (964) Other (2) (706) - (708) Gain on sale of assets 6,101 (45) - 6,056 ---------- ---------- ---------- ---------- Total other income and (expenses) 5,696 (1,112) - 4,584 ---------- ---------- ---------- ---------- Income (loss) before income taxes and minority interest 4,954 (3,564) 114 1,504 Income tax benefit 34 290 - 324 Minority interest (1) (2,080) - (2,081) Equity loss in investments (225) - - (225) ---------- ---------- ---------- ---------- Net income (loss) $ 4,762 $ (5,354) $ 114 $ (478) ========== ========== ========== =========== Income (loss) per share Basic and diluted $ 0.25 $ (0.02) ====== ======= Weighted average shares outstanding Basic and diluted 19,266,178 19,266,178 ========== ==========
17 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. RESULTS OF OPERATIONS --------------------- THREE MONTHS ENDED JUNE 30, 2002, COMPARED TO JUNE 30, 2001 OIL AND GAS PRODUCTION SEGMENT Capco's revenues from oil and gas activities were $0.1 million in 2002 compared to $0.4 million in 2001. This decrease is due to declines in product prices paid at the wellhead and production volumes. On a barrel of oil equivalent ("BOE") basis, the Company'price per BOE declined to $21.61 in 2002 from $27.45 in 2001. Total production was 5,823 BOE in 2002, compared with 15,405 BOE in 18 2001. Sale of the Buried Hills property in Kansas that closed effective May 1, 2002, and a production decline at the Caplen Field in Texas were the principal causes for the decrease in production. Capco's cost of sales were $0.1 million in 2002 and $0.3 million in 2001. Depreciation, depletion and amortization was $37,000 in 2002 and $0.1 million in 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 results of operations from the Company's oil and gas production segment. 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 in 2002 were $1.3 million, $1.1 million, $0.2 million, respectively. REFINED PRODUCT DISTRIBUTION SEGMENT Effective April 30, 2001, Capco acquired its refined product distribution segment. All references to year 2001 consist of the two months of operations included in the period subsequent to the acquisition. The Company had sales of $25.0 million in 2002, compared to $27.8 million in 2001, a $2.8 million decrease. The decrease is primarily due to lower product prices during the current period. Gross profit in 2002 and 2001 was $3.9 million and $3.3 million, respectively, an increase of $0.6 million. The increase is primarily due to higher wholesale margins. Gasoline volumes were 5.8 million gallons in 2002, compared to 4.2 million gallons in 2001, an increase of 1.6 million gallons. The volume increase is primarily due to three months of operation in 2002 compared to two months of operation in 2001. Gasoline sales were $5.6 million ($.95 per gallon) in 2002, compared to $5.1 million ($1.20 per gallon) in 2001, an increase of $0.5 million primarily due to the increase in volume offset by lower product prices during the current period. Gross profit was $0.5 million in 2002, compared to $0.4 million in 2001, an increase of $0.1 million, primarily due to the increase in volume offset by a lower margin per gallon. Gross profit per gallon of gasoline sold decreased to $.09 in 2002, from $.11 in 2001. Diesel volumes were 18.2 million gallons in 2002, and 17.5 million gallons in 2001, an increase of 0.7 million gallons due to three months of operations in 2002 compared to two months of operations in 2001, offset by sales to a major customer no longer being included in diesel sales, as the Company is now 19 charging only for the freight haul of the product. Diesel sales were $15.7 million ($.86 per gallon) in 2002, and $18.6 million ($1.06 per gallon) in 2001, a decrease of $2.9 million due to higher product prices during the previous year. Gross profit was $1.6 million in 2002, and $1.3 million in 2001, an increase of $0.3 million. Gross profit per gallon of diesel sold increased to $.09 in 2002, compared to $.08 in 2001. Grease and lubricants sales were $2.2 million in 2002, compared to $2.9 million in 2001, a decrease of $0.7 million due to higher product prices during the previous period. Gross profit was $0.5 million in 2002, compared to $0.6 million in 2001, a decrease of $0.1 million. Sales of other items, which consist of anti-freeze, chemicals, services, hardware, rental income and miscellaneous items, were $1.5 million in 2002, compared to $1.2 million in 2001, an increase of $0.3 million. Gross profit was $1.2 million in 2002, compared to $0.9 million in 2001, an increase of $0.3 million. OTHER ITEMS Selling, general and administrative ("SG&A") expenses increased to $4.1 million in 2002 from $3.5 million in 2001. The consolidation of Enterprises for the entire three-month period in 2002 resulted in an increase of $0.7 million, and the consolidation of CM LLC in 2002 resulted in an increase of $0.2 million. Included in the 2002 expenses are non-cash charges in the total amount of $0.1 million attributable to the cost of Common Stock and options to acquire Common Stock issued as compensation for services. Included in the 2001 expenses is a non-recurring charge for bad debts in the amount of $0.3 million. Interest expense was $0.3 million in both 2002 and 2001. Gain on sale of marketable securities and assets decreased to $1.9 million in 2002 from $4.1 million in 2001. Gains realized during the second quarter of 2002 consist of $0.1 million from the sale of marketable securities, net property gains in the amount of $0.1 million and a gain in the amount of $1.6 million resulting from the sale of the Company's equity interest in RMP. Gains realized in 2001 were principally attributable to the sale of marketable securities, the proceeds of which were used to provide funding for the Company's acquisition of Enterprises in April 2001. SIX MONTHS ENDED JUNE 30, 2002, COMPARED TO JUNE 30, 2001 OIL AND GAS PRODUCTION SEGMENT Capco's revenues from oil and gas activities were $0.4 million in 2002 compared to $0.8 million in 2001. This decrease is due declines in product prices paid at the wellhead and production volumes. On a barrel of oil equivalent ("BOE") basis, the Company's price per BOE declined to $19.05 in 2002 from $28.10 in 2001. Total production was 20,203 BOE in 2002, compared with 28,865 BOE in 2001. Sale of the Buried Hills property in Kansas that closed effective May 1, 2002, and a production decline at the Caplen Field in Texas were the principal causes for the decrease in production. Capco's cost of sales were $0.3 million in 2002 and $0.5 million in 2001. Depreciation, depletion and amortization was $0.1 million in 2002 and $0.2 million in 2001. 20 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 results of operations from the Company's oil and gas production segment. 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 in 2002 were $2.7 million, $2.2 million and $0.5 million, respectively. REFINED PRODUCT DISTRIBUTION SEGMENT Effective April 30, 2001, Capco acquired its refined product distribution segment. All references to year 2001 consist of the two months of operations included in the period subsequent to the acquisition. The Company had sales of $48.3 million in 2002, compared to $27.8 million in 2001, an increase of $20.5 million. The increase is primarily due to six months of operations in 2002 compared to two months of operations in 2001. Gross profit in 2002 and 2001, was $7.8 million and $3.3 million, respectively, an increase of $4.5 million. The increase is primarily due to six months of operations in 2002 compared to two months of operations in 2001. Gasoline volumes were 11.8 million gallons in 2002, compared to 4.2 million gallons in 2001, an increase of 7.6 million gallons. The volume increase is primarily due to six months of operations in 2002 compared to two months of operations in 2001. Gasoline sales were $10.1 million ($.85 per gallon) in 2002, compared to $5.1 million ($1.20 per gallon) in 2001, an increase of $5.0 million primarily due to the increase in volume offset by lower product prices during the current period. Gross profit was $1.0 million in 2002, and $0.4 million in 2001, an increase of $0.6 million, primarily due to the increase in volume offset by lower margins per gallon. Gross profit per gallon of gasoline sold decreased to $.08 in 2002, from $.11 in 2001. Diesel volumes were 38.7 million gallons in 2002, compared with 17.5 million gallons in 2001, an increase of 21.2 million gallons, due primarily to six months of operations in 2002 compared to two months of operations in 2001, offset by sales to a major customer no longer being included in diesel sales, as the Company is now charging only for the freight haul of the product. Diesel sales were $30.3 million ($.78 per gallon) in 2002, compared with $18.6 million ($1.06 per gallon) in 2001, an increase of $11.7 million due to six months of operations in 2002 compared to two months of operations in 2001. Gross profit was $3.2 million in 2002, and $1.3 million in 2001, an increase of $1.9 million. Gross profit per gallon of diesel sold was $.08 in 2002 and 2001. Grease and lubricants sales were $4.6 million in 2002, compared to $2.9 million in 2001, an increase of $1.7 million due to six months of operations in 2002 compared to two months of operations in 2001. Gross profit was $1.0 million in 2002, compared to $0.6 million in 2001, an increase of $0.4 million. 21 Sales of other items, which consist of anti-freeze, chemicals, services, hardware, rental income and miscellaneous items, were $3.4 million in 2002, compared to $1.2 million in 2001, an increase of $2.2 million. Gross profit was $2.6 million in 2002, compared to $0.9 million in 2001, an increase of $1.7 million. OTHER ITEMS Selling, general and administrative ("SG&A") expenses were $8.2 million in 2002 and $3.8 million in 2001, an increase of $4.4 million. The consolidation of Enterprises for the entire six-month period in 2002 resulted in an increase of $4.2 million, and the consolidation of CM LLC in 2002 resulted in an increase of $0.4 million. Included in the 2002 expenses are non-cash charges in the total amount of $0.1 million attributable to the cost of Common Stock and options to acquire Common Stock issued as compensation for services. Included in the 2001 expenses is a non-recurring charge for bad debts in the amount of $0.3 million. Interest expense increased to $0.6 million in 2002 from $0.5 million in 2001. This increase is principally attributable to the operations of Enterprises which were included in 2001 for only a two-month period. Gain on sale of assets decreased to $1.9 million in 2002 from $6.1 million in 2001. The Company sold a significant portion of its marketable securities portfolio in 2001, principally to provide funding for the acquisition of Enterprises. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, the Company had a working capital deficit of $3.8 million. Management plans to continue to sell its marketable securities and other assets to pay its debt and provide working capital. During the quarter ended June 30, 2002, Management sold marketable securities and paid certain debts, Management closed on the sale of its propane operations, Management closed on the sale of its producing oil and gas properties in Kansas, 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 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 used in operating activities totaled $1.6 million for the six months ended June 30, 2002, compared to cash used in operating activities of $2.4 million for the six months ended June 30, 2001. This decrease in cash used in operating activities is principally related to changes in working capital. Net cash provided by investing activities totaled $2.6 million for both the six months ended June 30, 2002, and for the six months ended June 30, 2001. Net cash used in financing activities totaled $1.1 million for the six months ended June 30, 2002, compared to cash used in financing activities of $0.6 million for the six months ended June 30, 2001. This increase in cash used in financing activities is primarily related to payments made on long-term debt. 22 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 June 30, 2002). Additionally, the Company pays a commitment fee of 0.25% of the maximum commitment. The revolving credit facility is collateralized by principally all of the Company's trade receivables and inventory. At June 30, 2002, the borrowing base was approximately $6.6 million, of which $5.5 million was borrowed against the facility and is recorded as a current liability. As of June 30, 2002, the Company was in compliance with the covenants of its revolving credit facility. The Company has various loans with banks, suppliers and individuals, which require principal payments of $2.6 million in the twelve-month period ending June 30, 2003. The Company is obligated to pay lease costs of approximately $0.7 million during the twelve-month period ending June 30, 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 each of the three month periods ended June 30, 2002 and 2001, is $0.1 million 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 June 30, 2002, would be an annual increase or decrease of approximately $55,000 in interest expense and a corresponding decrease or increase of approximately $32,000 in the Company's net income (loss) after taxes. 23 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. (a) The following exhibits are filed as part of this report: 99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None 24 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: August 19, 2002 By: /s/ Dennis R. Staal ------------------------ Dennis R. Staal, Chief Financial and Accounting Officer 25