-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DdTlgTi+LTxKyqBrUbAJYNEqLl3PtrrHk0jENRH2Wmx/0Ka9R2iiDJdVxUx6E9ss YczYkL/NTeG6g9WX46bUQA== 0001090002-03-000199.txt : 20030821 0001090002-03-000199.hdr.sgml : 20030821 20030821151328 ACCESSION NUMBER: 0001090002-03-000199 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030821 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPCO ENERGY INC CENTRAL INDEX KEY: 0000354767 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 840846529 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10157 FILM NUMBER: 03860079 BUSINESS ADDRESS: STREET 1: 1401 BLAKE STREET STREET 2: SUITE 200 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3035721135 MAIL ADDRESS: STREET 1: 1401 BLAKE STREET STREET 2: SUITE 200 CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: ALFA RESOURCES INC DATE OF NAME CHANGE: 19920703 10QSB 1 cp10q203.txt QUARTERLY REPORT ON FORM 10-QSB FOR QUARTER ENDING JUNE 30, 2003 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, 2003 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) 1401 BLAKE STREET, SUITE 100 DENVER, COLORADO 80202 -------------------------------------- Address of Principal Executive Offices (303) 572-1135 -------------------------------------------------- (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 19,272,777 shares of the Registrant's $.001 par value common stock outstanding as of August 7, 2003. PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 2003 (Unaudited) ASSETS (Dollars in Thousands) Current Assets: Cash $ 10 Investment in equity securities - marketable 128 Accounts receivable-trade, net of allowance of $48 149 Accounts receivable, related parties 51 Deferred tax asset 30 Other current assets 17 ------ Total Current Assets 385 Oil and gas properties, using full cost accounting, less accumulated depreciation and depletion of $1,552 4,897 Other Assets: Assets held for sale (note 2) 16,785 Land 214 Deferred tax asset 66 Other assets 27 ------ Total Assets $ 22,374 ====== Accompanying notes are an integral part of the consolidated financial statements. 2 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (continued) JUNE 30, 2003 (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY (Dollars in Thousands) Current Liabilities: Accounts payable, trade $ 702 Current maturities, long-term debt, including a related party 567 Accounts payable, related parties 95 Accrued expenses 510 Deposit on sale 300 ------- Total Current Liabilities 2,174 ------- Non-current Liabilities: Long term debt, less current maturities 84 Deferred tax liability 96 ------- Total Non-current Liabilities 180 Liabilities attributable to assets held for sale (note 2) 15,521 Deferred gain attributable to business under contract for sale, net of taxes (note 3) 181 Minority Interest in Consolidated Subsidiary 356 ------- Total Liabilities 18,412 ------- Commitments and Contingencies -- Stockholders' Equity: Preferred stock, $1.00 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; 19,574,554 shares issued 20 Additional paid in capital 1,327 Treasury stock, 301,777 shares, at cost (127) Cumulative other comprehensive income (21) Retained earnings 2,470 ------- Total Stockholders' Equity 3,962 ------- Total Liabilities and Stockholders' Equity $ 22,374 ======= Accompanying notes are an integral part of the consolidated financial statements. 3 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the Three Months ended June 30, 2003 and 2002 (Unaudited) (As restated-see Note 1) (Dollars in Thousands except per share) 2003 2002 -------- -------- (restated) Sales $ 846 $ 128 Cost of sales 286 126 ------- ------- Gross profit 560 2 ------- ------- General and administrative expenses 330 456 Depreciation, depletion and amortization 187 38 ------- ------- Total operating expenses 517 494 ------- ------- Income (loss) from operations 43 (492) Other Income (Expenses): Interest expense (34) (45) (Losses) gains on sales of investments- marketable securities (1) 254 Holding gains (losses)-marketable securities 49 (65) Gain on sale of oil and gas property -- 299 Loss on acquisitions of minority interest (76) Other -- -- ------- ------- Income (loss) from continuing operations before taxes and minority interest 57 (125) Provision for income taxes -- -- Minority interest in loss of consolidated subsidiary 1 (132) ------- ------- Income (loss) from continuing operations 58 (257) Discontinued operations: (note 2) Loss from operations of business transferred under contractual obligation during the year 2002 (net of applicable income tax benefit of $ -0-) -- (244) (Loss) income from operations of business transferred under contractual obligation in April 2003 (net of applicable income tax benefit of $ -0-) (442) 1,454 (Continued on Next Page) Accompanying notes are an integral part of the consolidated financial statements. 4 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the Three Months ended June 30, 2003 and 2002 (Unaudited) (As restated-see Note 1) (Dollars in Thousands except per share) (continued) 2003 2002 ------ ------ (restated) Net (loss) income (384) 953 ------- ------- Other comprehensive loss-net of tax Foreign currency translation adjustment (10) (3) Unrealized loss from investments- marketable securities -- 153 ------- ------- (10) 150 ------- ------- Less: minority interest in comprehensive loss of consolidated subsidiary 1 (23) ------- ------- Comprehensive (loss) income $ (393) $ 1,080 ======= ======= Earnings per share, basic and diluted: Income (loss) from continuing operations $ -- $ (0.01) (Loss) income from discontinued operations, including business transferred under contractual obligation (0.02) 0.06 ------- ------- Net loss $ (0.02) $ 0.05 ======= ======= Weighted average common share and common share equivalents Basic and diluted 19,272,634 19,316,954 ========== ========== Accompanying notes are an integral part of the consolidated financial statements. 5 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the Six Months ended June 30, 2003 and 2002 (Unaudited) (As restated-see Note 1) (Dollars in Thousands except per share) 2003 2002 -------- -------- (restated) Sales $ 1,535 $ 396 Cost of sales 617 283 ------- ------- Gross profit 918 113 ------- ------- General and administrative expenses 683 815 Depreciation, depletion and amortization 322 116 ------- ------- Total operating expenses 1,005 931 ------- ------- Loss from operations (87) (818) Other Income (Expenses): Interest expense (76) (174) (Losses) gains on sales of investments- marketable securities (12) 278 Holding gains (losses)- marketable securities 78 (66) Gain on sale of oil and gas property 299 Loss on acquisitions of minority interest 100 (81) ------- ------ Income (loss) from continuing operations before taxes and minority interest 3 (562) Provision for income taxes -- -- Minority interest in loss (income) of consolidated subsidiary 2 (131) ------- ------- Income (loss) from continuing operations 5 (693) Discontinued operations: (note 2) Loss from operations of business transferred under contractual obligation during the year 2002 (net of applicable income tax benefit of $ -0-) -- (340) (Loss) income from operations of business transferred under contractual obligation in April 2003 (net of applicable income tax benefit of $ -0-) (959) 1,375 (Continued on Next Page) Accompanying notes are an integral part of the consolidated financial statements. 6 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the Six Months ended June 30, 2003 and 2002 (Unaudited) (As restated-see Note 1) (Dollars in Thousands except per share) (continued) 2003 2002 ------ ------ (restated) Net (loss) income (954) 342 ------- ------- Other comprehensive loss-net of tax Foreign currency translation adjustment (18) (5) Unrealized loss from investments- marketable securities -- (612) ------- ------- (18) (617) ------- ------- Less: minority interest in comprehensive loss (income) of consolidated subsidiary 2 (23) ------- ------- Comprehensive loss $ (970) $ (298) ======= ======= Earnings per share, basic and diluted: Income (loss) from continuing operations $ -- $ (0.03) (Loss) income from discontinued operations, including businesses transferred under contractual obligations (0.05) 0.05 ------- ------- Net (loss) income $ (0.05) $ 0.02 ======= ======= Weighted average common share and common share equivalents Basic and diluted 19,275,706 19,316,954 ========== ========== Accompanying notes are an integral part of the consolidated financial statements. 7 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2003 and 2002 (Unaudited) (Dollars in Thousands) 2003 2002 ------ ------ Cash Flows From Continuing Operating Activities: Net (loss) income $ (954) $ 342 Adjustments to reconcile net (loss) income to net cash used in operating activities: Net loss (income) from discontinued operations 959 (1,035) Depreciation, depletion and amortization 322 116 Gain on sale of oil and gas property -- (299) Losses (gains) on sales of investments- marketable securities 12 (278) Holding (gains) losses - marketable securities (78) 66 Loss on acquisitions of minority interest -- 81 Minority interest in (loss) income of consolidated subsidiary 2 131 Compensation cost resulting from grant of options to acquire Common Stock 38 70 Compensation cost resulting from sale of interest in oil and gas property -- 44 Compensation cost of Common Stock/Treasury Stock -- 9 Decrease (increase) in deferred tax asset 78 (110) (Decrease) increase in deferred tax liability (78) 110 Changes in assets and liabilities: (Increase) decrease in assets: Accounts receivable-trade (73) 243 Other current assets 30 -- Other assets 85 (55) Increase (decrease) in liabilities: Accounts payable (160) (215) Accrued expenses 93 (234) ------ ------ Net cash provide by (used in) continuing operating activities 276 (1,014) ------ ------ Cash Flows From Discontinued Operating Activities: Net (loss) income (959) 1,035 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, depletion and amortization 390 866 Loss (gain) on sale of assets 147 (1,445) Decrease (increase) in deferred tax asset 214 (111) (Decrease) increase in deferred tax liability (214) 111 (Continued on Next Page) Accompanying notes are an integral part of the consolidated financial statements. 8 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2003 and 2002 (Unaudited) (Dollars in Thousands) (continued) 2003 2002 ------ ------ Changes in assets and liabilities: (Increase) decrease in assets: Accounts receivable-trade 13 (1,476) Inventory 1,114 94 Other current assets (402) (259) Other assets (89) 43 Increase (decrease) in liabilities: Accounts payable 521 697 Accrued expenses (19) (147) Taxes payable (388) 30 ------ ------ Net cash provided by (used in) discontinued operating activities 328 (562) ------ ------ Net cash provided by (used in) all operating activities 604 (1,576) ------ ------ Cash Flows From Continuing Investing Activities Deposit received for sale of subsidiary equity interest 300 -- Net advances from related parties 585 271 Equity contribution to subsidiary (400) -- Proceeds from sale of property and equipment -- 1,099 Capital expenditures for oil and gas property (39) (477) Proceeds from sale of marketable securities 63 1,567 Purchase of marketable securities (2) (408) Notes receivable loans -- (103) ------ ------ Net cash provided by continuing investing activities 507 1,949 ------ ------ Cash Flows From Discontinued Investing Activities: Cash applicable to assets held for sale 7 (81) Net (advances) repayments with related parties (305) 30 Cash proceeds from sale of equity investment 766 850 Cash proceeds from sale of property 27 -- Cash proceeds from equity contribution 400 -- Purchase of property and equipment -- (275) Notes receivable payments, net 25 23 ------ ------ Net cash provided by discontinued investing activities 920 547 ------ ------ Net cash provided by all investing activities 1,427 2,496 ------ ------ (Continued on Next Page) Accompanying notes are an integral part of the consolidated financial statements. 9 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2003 and 2002 (Unaudited) (Dollars in Thousands) (continued) 2003 2002 ------ ------ Cash Flows From Continuing Financing Activities: Proceeds from long-term debt -- 200 Payment on long term debt (772) (1,203) Sale of Common Stock and exercise of options -- 6 Purchase of Common Stock (3) -- ------ ------ Net cash used in continuing financing activities (775) (997) ------ ------ Cash Flows from Discontinued Financing Activities: Net (payments) advances on revolver (593) 285 Increase in book overdraft 58 74 Payment on long term debt (401) (799) (Decrease) increase in restricted cash (312) 359 ------ ------ Net cash used in discontinued financing activities (1,248) (81) ------ ------ Net cash used in all financing activities (2,023) (1,078) ------ ------ Net increase (decrease) in cash 8 (158) Cash, beginning of period 2 190 ------ ------ Cash, end of period $ 10 $ 32 ====== ====== Supplemental disclosure of cash flow information for continuing operations: Interest paid $ 59 $ 288 ====== ====== Taxes paid $ -- $ -- ====== ====== Supplemental disclosure of cash flow information for discontinued operations: Interest paid $ 344 $ 454 ====== ====== Taxes paid $ -- $ -- ====== ====== (Continued on Next Page) Accompanying notes are an integral part of the consolidated financial statements. 10 CAPCO ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2003 and 2002 (Unaudited) (Dollars in Thousands) (continued) 2003 2002 ------ ------ Supplemental disclosure of non-cash financing and investing activities for continuing operations: Marketable securities reduced for carrying value adjustments $ 1,936 ====== Note receivable exchanged for marketable securities $ 103 ====== Notes receivable received as consideration for sale of investment in subsidiary $ 2,200 $ -- ====== ====== Long-term debt reduced for assets sold/exchanged $ 1,399 ====== Long-term debt issued for property acquisition $ 1,533 ====== Long-term debt issued for accounts payable $ 129 ====== Common Stock retired in exchange for assets $ 44 ====== Common Stock/options issued for services $ 79 ====== Common Stock issued for acquisition of minority interests $ 132 ====== Treasury Stock issued in settlement of liability $ 25 ====== Supplemental disclosure of non-cash financing and investing activities for discontinued operations: Account receivable converted to note receivable $ 31 ====== Note receivable received upon sale of investment in closely held business $ 1,850 ====== Note receivable and account receivable provided as proceeds in connection with sale of preferred membership interests $ 349 $ -- ====== ====== Long-term debt and accrued expenses reduced for property sold/exchanged $ 975 $ 636 ====== ====== Accompanying notes are an integral part of the consolidated financial statements. 11 CAPCO ENERGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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, 2002, 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, including investments in the equity securities of other public companies involved in similar activities. The Company's production activities are located principally in the United States of America. Foreign operations are not significant to either consolidated financial position or consolidated results of operations. Capco's operations consist of one segment of business, oil and gas production. The principal executive offices of the Company are located at 1401 Blake Street, Suite 100, Denver, Colorado 80202. 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. 12 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has had recurring losses and negative cash flows from operations in each of the last two fiscal years, and negative working capital as of June 30, 2003. The Company is party to certain lending agreements either as obligor or guarantor, for which the Company is either in default or in violation of debt covenants, and the lenders have not provided waivers. These factors raise substantial doubt about the Company's ability to continue as a going concern. Without realization of additional capital, it would be unlikely for the Company to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue its existence. The Company has already taken steps to improve its operating income and satisfy its working capital requirements. 1. Producing property acquisitions in Michigan and Louisiana that closed in the second half of year 2002 are providing positive cash flow, most notably the acquisition in Michigan, where 100% of the net cash flow is being used to retire indebtedness that was incurred when the property was acquired. From the time that the property was acquired in June 2002 to June 30, 2003, the acquisition debt was reduced by approximately $1,303,000, to a balance of $25,000 at June 30, 2003. It is anticipated that the remaining indebtedness will be paid in full during the third quarter of year 2003, after which the net cash flow will be paid to the Company. 2. In November 2002, the Company's wholly-owned oil and gas production subsidiary, Jovian Energy, Inc., filed an initial registration statement for the purpose of registering for sale 20% of that company's equity securities in a public offering, on a best-efforts, all-or-none basis. In July 2003, the Company's Board of Directors authorized the withdrawal of the registration statement due to a pending acquisition that could not be undertaken while the registration filing was in process. 3. In October 2002, the Company's board of directors authorized management to pursue a plan that would result in the divestiture of its petroleum products marketing and convenience store operation segments, operations that have been reported as discontinued operations in the accompanying financial statements. 4. In December 2002, an agreement was reached for the sale of principally all of the Company's assets in the state of New Mexico. Consideration for this transaction consisted primarily of the assumption by the buyer of approximately $4.5 million of indebtedness related to the assets. 13 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued 5. In March 2003, a company owned by the Company's Chief Executive Officer submitted a proposal to acquire the remaining business interests designated for divestiture for total cash consideration of $2.5 million, plus other consideration. The Company's board of directors accepted the proposal, subject to the receipt of a fairness opinion that was received in August 2003. The sale closed in April 2003 at which time the Company had received a nonrefundable deposit in the amount of $300,000, 4,000,000 shares of common stock of Network Fueling Corp., a 7% promissory note in the amount of $1.0 million due October 31, 2003, and a second 7% promissory note in the amount of $1.2 million due April 30, 2004. In addition, the purchaser provided 3,000,000 shares of the Company's Common Stock as security for payment of the two promissory notes. 6. In July 2003, the Company announced that it had entered into an agreement to acquire as much as 50% of a $108 million acquisition package consisting of producing oil and gas leases, pipelines and gathering systems, gas plants and undeveloped leasehold interests. Closing of the acquisition is scheduled for later this year. The Company's participation in the acquisition will be determined by its capital contribution, expected to consist of bank financing and equity funding, when the acquisition is closed. In connection with some of the transactions described above, the Company is considering the availability of equity and/or debt financing opportunities, although no decisions have been reached in this regard at this time. Management believes that an increase in cash flow from (1) existing properties, and (2) properties to be acquired during the year 2003, coupled with proceeds from the sales of business segments designated for divestiture, will enable the Company to meet its working capital requirements. BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of Capco and its wholly and majority owned subsidiaries. All references herein to Capco or the Company include the consolidated results. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company's subsidiaries are Jovian Energy, Inc. ("Jovian"), formerly named Capco Resource Corporation, and its subsidiaries, Capco Asset Management, Inc. ("CAM") and Capco Resources Ltd. ("CRL") (88.9% equity interest). Effective January 1, 2003, the Company agreed to sell Meteor Enterprises, Inc. ("Enterprises"), including all of that company's subsidiaries. Significant subsidiaries of Enterprises include Meteor Marketing, Inc. ("Marketing"), and Graves Oil & Butane Co., Inc. ("Graves"). The results of operations of Enterprises for the three and six month periods ended June 30, 2003 and 2002, are reported as discontinued operations. PRICE LEVEL CHANGES AND REVOLVING CREDIT FACILITY The prices Marketing pays for gasoline and diesel products are subject to market fluctuation and are not in the control of Marketing. Prices for these products can and have fluctuated significantly. Higher product prices could have a significant impact on Marketing's borrowing capabilities due to the generally faster timing required for payments to Marketing's suppliers compared to the timing of collection of receivables from its customers. When necessary, Marketing finances these working capital requirements through its revolving bank credit agreement. This agreement contains certain financial covenants, which are based on Marketing's budgeted performance. 14 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued If, as a result of price changes or other factors, Marketing is unable to meet its debt covenants, its ability to continue to borrow under the revolving credit agreement could be limited. If that were to occur, Marketing 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, 2003, Marketing was out of compliance with several covenants contained in the agreement. Marketing did not obtain a waiver from the lender for noncompliance at June 30, 2003. MAJOR CUSTOMERS One customer accounted for 80% of the Company's net sales for the three months ended June 30, 2003. Three customers accounted for 55%, 26% and 17%, respectively, of the Company's net sales for the three months ended June 30, 2002. Three customers accounted for 46%, 21% and 14%, respectively, of the Company's accounts receivable at June 30, 2003. LONG-TERM DEBT During the quarter ended June 30, 2003, the Company retired indebtedness in the total amount of $361,000 from net cash flow provided by the oil and gas properties acquired in June 2002. COMMON STOCK During the quarter ended June 30, 2003, the Company had the following equity transactions: The Company sold 1,300 shares of Treasury Stock, realizing proceeds of $400. STOCK BASED COMPENSATION During the quarter ended June 30, 2003, the Company granted to employees and directors 1.9 million options to acquire Common Stock at an exercise price of $0.25, which price was in excess of market price on the date of grant. The options vested immediately and are exercisable over a period of five years from date of grant. Had compensation cost been determined based on the fair value at grant dates for stock option awards consistent with SFAS 123 and SFAS 148, the Company's net (loss) income for the three and six month periods ended June 30, 2003 and 2002, would have been adjusted to the pro forma amounts indicated below (in thousands): Three Months Six Months Ended June 30, Ended June 30, 2003 2002 2003 2002 ------ ------ ------ ------ Net (loss) income: As reported $ (384) $ 953 $ (954) $ 342 Compensation recognized under SFAS 123 $ (373) $ (20) $ (390) $ (41) Proforma $ (757) $ 933 $(1,344) $ 301 15 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued The pro forma compensation expense based on the fair value of the options is estimated on the grant date using the Black-Scholes options-pricing model with the following assumptions used for grants in 2003: no dividends; expected lives of 4.9 years; expected volatility of 11.9%; and risk free rate of return of 2.27%. The weighted average fair value of the purchase rights granted in 2003 was $0.19. There were no options granted during the six month period ended June 30, 2002. Compensation expense recognized under SFAS 123 for the three and six month periods ended June 30, 2002, is attributable to the portion of options granted in prior periods that vested in 2002. NEW ACCOUNTING PRONOUNCEMENTS 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. Adoption of SFAS No. 142 did not 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. Adoption of this statement did not have a material impact to the Company's financial position or results of operations. In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Adoption of this statement did not have a material impact to the Company's financial position or results of operations. 16 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued In October 2002, the FASB issued Statement No. 147, "Acquisitions of Certain Financial Institutions-an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9", which removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition, this Statement amends SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. The requirements relating to acquisitions of financial institutions are effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. The adoption of this Statement did not have a material impact to the Company's financial position or results of operations as the Company has not engaged in either of these activities. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure", which amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of Statement 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of this statement did not have a material impact on the Company's financial position or results of operations as the Company has not elected to change to the fair value based method of accounting for stock-based employee compensation. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." Interpretation 46 changes the criteria by which one company includes another entity in its consolidated financial statements. Previously, the criteria were based on control through voting interest. Interpretation 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A company that consolidates a variable interest entity is called the primary beneficiary of that entity. The consolidation requirements of Interpretation 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. 17 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Subject to certain exceptions, this statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003, and all provisions of this statement should be applied prospectively. The Company does not expect the adoption of SFAS No. 149 to have an impact on its consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires that those instruments be classified as liabilities in statements of financial position. In addition to its requirements for the classification and measurement of financial instruments in its scope, SFAS No. 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities, all of whose shares are mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of SFAS No. 150 to have an impact on its consolidated financial statements. RESTATEMENT As of March 31, 2000, a change was made to the Company's reporting of the components of comprehensive income (loss) (cumulative foreign currency translation adjustment and cumulative unrealized gains (losses) from marketable securities) to reflect participation of minority interest holders, wherever applicable, in the components of comprehensive income (loss). The change had no effect on net income, or earnings per share, as previously reported for the six and three month periods ended June 30, 2002. The effect of the restatement to the statements of comprehensive income (loss) for the three and six month periods ended June 30, 2002, is as follows (in thousands): As Previously Reported As Restated -------- ----------- Three months ended June 30, 2002 $ 1,102 $ 1,080 Six months ended June 30, 2002 $ (276) $ (298) Certain reclassifications for the prior year have been made to conform to current year presentation. 18 NOTE 2 -- ASSETS HELD FOR SALE In October 2002, the Company's Board of Directors directed management to sell all assets and liabilities of the petroleum marketing operations, including the convenience stores operations. In December 2002, the Company closed on the sale of assets located in the state of New Mexico (see Note 3). In March 2003, the Company received a proposal from Sedco, Inc. ("Sedco"), a private company owned by Ilyas Chaudhary, the Company's Chief Executive Officer, to acquire Enterprises, except for 4.0 million shares of Enterprises' equity ownership in Network Fueling Corp. ("NFC"), at a cash price of $2.5 million, effective January 1, 2003. The Company's Board of Directors accepted the proposal, subject to the receipt of a fairness opinion that was received in August 2003. The sale closed in April 2003 at which time the Company had received a nonrefundable deposit in the amount of $300,000, a 7% promissory note in the amount of $1.0 million due October 31, 2003, and a second 7% promissory note in the amount of $1.2 millio due April 30, 2004. In addition, Sedco provided 3,000,000 shares of the Company's Common Stock as security for payment of the two promissory notes. Due to the substantial risk of loss to the Company attributable to the sale at June 30, 2003, the Company has continued to account for this plan to dispose of the petroleum marketing operation by classifying the underlying assets and liabilities on the Balance Sheet as "Assets held for sale" and "Liabilities attributable to assets held for sale". The historical operations of the business operations subject to the disposition have been presented in the statements of operations and statements of cash flows as discontinued operations. The cash deposit of $300,000 and the two notes receivables in the aggregate amount of $2.2 million dollars are classified as a deposit in the Company's financial statements at June 30, 2003. Assets and liabilities held for sale at June 30, 2003, consisted of the following (in thousands): Assets: Current assets $ 10,185 Property, plant and equipment, net of accumulated depreciation of $1,599 5,379 Other assets 1,221 ------- Total assets $ 16,785 ======= Liabilities: Current liabilities $ 13,717 Long term liabilities 1,804 ------- Total liabilities $ 15,521 ======= Included in current assets are accounts receivable and inventories in the amount of $6.5 million and $1.9 million, respectively, a portion of which collateralize Marketing's revolving credit facility. 19 NOTE 2 -- ASSETS HELD FOR SALE, Continued In January 2003, Marketing closed on the sale of its preferred membership interests ("interests") in Rocky Mountain Propane LLC. Total consideration of $1.1 million consisted of (1) a cash payment in the amount of $766,000, (2) an 8% promissory note in the amount of $199,000 due January 2006, and (3) a cash retention in the amount of $150,000 to be paid upon the delivery of asset title transfer documents resulting from Marketing's sale of Propane in April 2002. The carrying value of the interests had been adjusted at December 31, 2002, to equal the anticipated proceeds. Current liabilities include accounts payable and the outstanding debt under the revolving credit facility ("Agreement") in the amount of $6.4 million and $5.6 million, respectively. On March 3, 2003, Marketing and the lender, without waiving any of the remedies available to it under the default provisions of the Agreement, executed an amendment to the Agreement that included the following changes: extension of the maturity date to May 31, 2003 (which was subsequently extended to September 5, 2003); determination of borrowing base redefined, including a scheduled reduction in the accounts receivable advance rate; implementation of default rate of interest of an additional 2% per annum, effective January 1, 2003; requirement for an unconditional, unlimited guaranty executed by Ilyas Chaudhary, Chief Executive Officer; payment of facility fees in the amount of $13,000; and the receipt of a Contribution Agreement executed by Ilyas Chaudhary, the Company, Enterprises and Marketing, acknowledging that a cash equity contribution of not less than $500,000 will be made to Marketing on or before April 15, 2003. The Contribution Agreement requires that the cash equity contribution of $500,000 be paid directly to the lender for application against the outstanding loan balance of the revolving loan. As of June 30, 2003, a total of $400,000 had been funded to the lender for the equity contribution to Marketing. The amount available under the revolving credit facility ("borrowing base") is a function of the sum of eligible accounts receivable and inventory as defined by the Agreement. At June 30, 2003, the borrowing base was approximately $5.6 million. Advances under the facility are subject to the lender's default interest rate (8.75% at June 30, 2003). Additionally, Marketing pays an annual commitment fee of 0.25% of the maximum commitment. The terms of the Agreement contain, among other provisions, requirements for maintaining certain net worth, minimum earnings after taxes, minimum debt service coverage, and other financial ratios and specific limits on additional indebtedness, equity financing, liens and merger activity. During the three-month period ended June 30, 2003, and at June 30, 2003, Marketing was out of compliance with several covenants contained in the Agreement. Marketing did not obtain a waiver from the lender for noncompliance at June 30, 2003. Included in current liabilities and long-term liabilities is term debt in the amount of $1.7 million. The Company is a guarantor of a portion of indebtedness that was included in the sale of its propane distribution operation in April 2002, and the lender has yet to release the Company from the guarantee and execute transfer documents regarding an asset that collateralized the debt. As a result, the Company has included in its balance sheet at June 30, 2003, under the captions "Assets held for sale" and "Liabilities attributable to assets held for sale" the amount of $500,000 to reflect the underlying asset value and outstanding debt balance at June 30, 2003, applicable to this transfer. 20 NOTE 2 -- ASSETS HELD FOR SALE, Continued Summarized below are the results of discontinued operations for the three and six month periods ended June 30, 2003 and 2002. Year 2002 includes the operating results of the operations that were sold during the year 2002 (in thousands): Three Months Six Months Ended June 30, Ended June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Sales $16,488 $25,880 $38,040 $50,125 Gross profit $ 2,999 $ 4,038 $ 6,552 $ 8,149 Loss from operations $ (186) $ (65) $ (549) $ (100) Net loss from operations $ (442) $ 1,210 $ (959) $ 1,035 NOTE 3 -- BUSINESSES UNDER CONTRACT FOR SALE Effective December 31, 2002, the Company entered into an agreement to sell Graves and Capco Monument LLC, subsidiaries whose assets, consisting principally of land, buildings and equipment, were primarily located in the state of New Mexico, at a sales price of $10,000 cash. The assets of Graves were utilized in the distribution of refined petroleum products. The convenience store business consisted of two store locations that were in operation in Albuquerque and Farmington, New Mexico. The Company agreed to continue to operate the businesses for a period of time subsequent to the date of sale to allow the buyer time to make separate credit arrangements with lenders and suppliers, and to negotiate for the removal of the Company as the guarantor of a significant portion of the indebtedness assumed by the buyer. At June 30, 2003, approximately $3.9 million of indebtedness was owed to one lender, and the Company was in default on the indebtedness at the time of sale. Remedies available to the lender include declaring the entire note balances, including accrued and unpaid interest, immediately due and payable, foreclosing on the pledged security, which includes land, buildings, and equipment, and collecting on any guarantees. Discussions have been held with the lender, but no settlement has been reached at this time. The sales transaction resulted in a gain to the Company in the amount of $181,000; however, due to the significant risk still assumed by the Company in the form of the loan guarantees, the gain has been deferred until such time that the risk has either been significantly reduced or eliminated. The Company has evaluated the exposure relating to the debt guarantees and has determined that there is sufficient value in the underlying assets so that the Company will not incur a loss from this disposal, and, therefore, has not recorded a provision for any loss contingency. The Company is a guarantor of vehicle financing contracts that were executed by Enterprises in 2003 prior to management's decision to sell that company. Financing contracts in the total amount of approximately $1.0 million were outstanding as of June 30, 2003. 21 NOTE 4 -- 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, 2003 and 2002, would have increased for 2,652,429 and 3,692,728 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, 2003 and 2002, would have increased for 2,768,272 and 3,874,388 shares of Common Stock, respectively, if associated stock options would have had a dilutive effect. The options did not have a dilutive effect for the periods presented as the market price of the Company's Common Stock exceeded the respective exercise prices of the options. Under the treasury method of calculating the additional shares outstanding, the effect would have been antidilutive. NOTE 5 -- BUSINESS SEGMENTS During the three and six month periods ended June 30, 2003 and 2002, the Company operated in one business segment: acquisition, exploration, development, and production of oil and gas reserves, including investments in the equity securities of other public companies involved in similar activities. The Company's headquarters and most of its operations are located in the United States of America. A summary of the Company's revenues and long-lived assets by geographic area is as follows (in thousands): United Canada States Total -------- -------- ------- Sales: Three months ended June 30, 2003 $ -- $ 846 $ 846 ====== ====== ====== Three months ended June 30, 2002 $ 1 $ 127 $ 128 ====== ====== ====== Six months ended June 30, 2003 $ -- $ 1,535 $ 1,535 ====== ====== ====== Six months ended June 30, 2002 $ 3 $ 393 $ 396 ====== ====== ====== At June 30, 2003: Oil and gas properties (net) $ -- $ 4,897 $ 4,897 ====== ====== ====== Land $ 214 $ -- $ 214 ====== ====== ====== Other property and equipment (net) $ -- $ -- $ -- ====== ====== ====== 22 NOTE 6 - SUBSEQUENT EVENTS In October 2002, the Company's Board of Directors approved a plan to raise capital from an initial public offering of 20% of the Company's equity ownership of its oil and gas producing subsidiary. The initial registration statement for the offering was filed in November 2002. In July 2003, the Company's Board of Directors authorized the withdrawal of the registration statement due to a pending acquisition that could not be undertaken while the registration filing was in process. Marketing is a borrower under the terms of a revolving Credit and Security Agreement ("Agreement") that was scheduled to expire on June 30, 2003. The maturity date of the Agreement was subsequently extended to September 5, 2003. 23 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 divestiture of its petroleum marketing operations, including decreased expenses and expenditures that are expected to be realized by Capco as a result of the divestiture, 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: declines in the market prices for oil and gas and adverse changes in the regulatory environment affecting Capco. Capco or persons acting on its or their behalf should consider cautionary statements contained or referred to in this report in connection with any subsequent written or oral forward-looking statements that may be issued. 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, 2003, COMPARED TO JUNE 30, 2002 Capco's revenues from oil and gas activities were $0.8 million in 2003 compared to $0.1 million in 2002. This increase is due to increases in product prices paid at the wellhead and production volumes. On a barrel of oil equivalent ("BOE") basis, the Company's price per BOE increased to $29.65 in 2003 from $21.98 in 2002, resulting in an increase in revenue of $47,000. Total production was 28,500 BOE in 2003, compared with 5,800 BOE in 2002, resulting in an increase in revenue of $0.7 million. Production from the Michigan properties acquired in June 2002 totaled 23,000 BOE in 2003; sale of the Buried Hills property in Kansas in May 2002 resulted in a comparative production decrease of 2,800 BOE in 2003. 24 Capco's cost of sales increased to $0.3 million in 2003 from $0.1 million in 2002, due principally to the increase in production volumes from 5,800 BOE in 2002 to 28,500 BOE in 2003. 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. General and administrative expenses were $0.3 million in 2003 and $0.5 million in 2002. The decrease is due to the closing of field offices in 2002, and the cost savings realized from relocation of the Company's administrative office from Orange, California to Denver, Colorado in February 2003. Depreciation, depletion and amortization was $0.2 million in 2003 and $38,000 in 2002. This change is attributable to the increase in production volumes in 2003 and the addition of the cost of the Michigan acquisition to the full cost pool in 2002. Interest expense decreased to $34,000 in 2003 from $45,000 in 2002, due principally to a reduction in outstanding debt balances during the respective periods. Gains (losses) from sales of marketable securities, including unrealized holding gains (losses), decreased to a gain of $48,000 in 2003 from a gain of $0.2 million in 2002, as the Company had liquidated a significant portion of it marketable securities portfolio in prior periods. SIX MONTHS ENDED JUNE 30, 2003, COMPARED TO JUNE 30, 2002 Capco's revenues from oil and gas activities were $1.5 million in 2003 compared to $0.4 million in 2002. This increase is due to increases in product prices paid at the wellhead and production volumes. On a barrel of oil equivalent ("BOE") basis, the Company's price per BOE increased to $31.46 in 2003 from $19.05 in 2002, resulting in an increase in revenue of $0.2 million. Total production was 48,700 BOE in 2003, compared with 20,200 BOE in 2002, resulting in an increase in revenue of $0.9 million. Production from the Michigan properties acquired in June 2002 totaled 38,600 BOE in 2003; sale of the Buried Hills property in Kansas in May 2002 resulted in a comparative production decrease of 9,700 BOE in 2003. Capco's cost of sales increased to $0.6 million in 2003 from $0.3 million in 2002, due principally to the increase in production volumes from 20,200 BOE in 2002 to 48,700 BOE in 2003. 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. General and administrative expenses were $0.7 million in 2003 and $0.8 million in 2002. The decrease is due to the closing of field offices in 2002, and the cost savings realized from relocation of the Company's administrative office from Orange, California to Denver, Colorado in February 2003. Depreciation, depletion and amortization was $0.3 million in 2003 and $0.1 million 2002. This change is attributable to the increase in production volumes in 2003 and the addition of the cost of the Michigan acquisition to the full cost pool in 2002. 25 Interest expense decreased to $76,000 in 2003 from $0.2 million in 2002, due principally to a reduction in the average balance of interest-bearing indebtedness from $2.6 million in 2002 to $1.0 million in 2003. Gains (losses) from sales of marketable securities, including unrealized holding gains (losses), decreased to a gain of $66,000 in 2003 from a gain of $0.2 million in 2002, as the Company had liquidated a significant portion of it marketable securities portfolio in prior periods. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2003, the Company had a working capital deficit of $1.8 million. Included in this deficit is a non refundable cash deposit in the amount of $0.3 million which the Company received in connection with the sale of it equity interest in Enterprises. Exclusive of the cash deposit, the Company's working capital deficit decreased from $2.0 million at March 31, 2003, to $1.5 million at June 30, 2003, due principally to the repayment of an obligation incurred in connection with a producing property acquisition in 2002. It is estimated that the balance remaining on this obligation will be paid in full during the third quarter of year 2003, after which the net cash flow will be paid to the Company. Management of the Company has implemented plans and initiated actions in an effort to reduce the working capital deficit. These actions include the following: 1. Producing property acquisitions in Michigan and Louisiana that closed in the second half of year 2002 are providing positive cash flow, most notably the acquisition in Michigan, where 100% of the net cash flow is being used to retire indebtedness that was incurred when the property was acquired. From the time that the property was acquired in June 2002 to June 30, 2003, the acquisition debt was reduced by approximately $1.3 million, to a balance of $25,000 at June 30, 2003. It is anticipated that the remaining indebtedness will be paid in full during the third quarter of year 2003, after which the net cash flow will be paid to the Company. 2. In November 2002, the Company's wholly-owned oil and gas production subsidiary, Jovian Energy, Inc., filed an initial registration statement for the purpose of registering for sale 20% of that company's equity securities in a public offering, on a best-efforts, all-or-none basis. In July 2003, the Company's Board of Directors authorized the withdrawal of the registration statement due to a pending acquisition that could not be undertaken while the registration filing was in process. 3. In October 2002, the Company's board of directors authorized management to pursue a plan that would result in the divestiture of its petroleum products marketing and convenience store operation segments, operations that have been reported as discontinued operations in the accompanying financial statements. 4. In December 2002, an agreement was reached for the sale of principally all of the Company's assets in the state of New Mexico. Consideration for this transaction consisted primarily of the assumption by the buyer of approximately $4.5 million of indebtedness related to the assets. 26 5. In March 2003, a company owned by the Company's Chief Executive Officer submitted a proposal to acquire the remaining business interests designated for divestiture for total cash consideration of $2.5 million, plus other consideration. The Company's board of directors accepted the proposal, subject to the receipt of a fairness opinion that was received in August 2003. The sale closed in April 2003 at which time the Company had received a nonrefundable deposit in the amount of $300,000, 4,000,000 shares of common stock of Network Fueling Corp., a 7% promissory note in the amount of $1.0 million due October 31, 2003, and a second 7% promissory note in the amount of $1.2 million due April 30, 2004. In addition, the purchaser provided 3,000,000 shares of the Company's Common Stock as security for payment of the two promissory notes. 6. In July 2003, the Company announced that it had entered into an agreement to acquire as much as 50% of a $108 million acquisition package consisting of producing oil and gas leases, pipelines and gathering systems, gas plants and undeveloped leasehold interests. Closing of the acquisition is scheduled for later this year. The Company's participation in the acquisition will be determined by its capital contribution, expected to consist of bank financing and equity funding, when the acquisition is closed. In connection with some of the transactions described above, the Company is considering the availability of equity and/or debt financing opportunities, although no decisions have been reached in this regard at this time. CONTINUING OPERARTIONS Net cash provided by operating activities totaled $0.3 million for the six months ended June 30, 2003, compared to cash used in operating activities of $1.0 million for the six months ended June 30, 2002. In 2003, net loss, adjusted for reconciling items, provided a cash inflow of $0.3 million. Changes in assets and liabilities in 2003 resulted in a cash outflow of $25,000. In 2002, net income, adjusted for reconciling items, resulted in a cash outflow of $0.8 million. Changes in assets and liabilities resulted in a cash outflow of $0.3 million. Net cash provided by investing activities totaled $0.5 million for the six months ended June 30, 2003, and $1.9 million for the six months ended June 30, 2002. Net advances from related parties in the amount of $0.6 million, were the principal sources of cash inflow in 2003. Proceeds from the sales of oil and gas property and marketable securities, less the cost of related capital expenditures and purchases, provided cash inflows of $0.6 million and $1.1 million, respectively, in 2002. Net cash used in financing activities totaled $0.8 million for the six months ended June 30, 2003, and $1.0 million for the six months ended June 30, 2002. Payments on long term debt resulted in the cash outflows in both periods. The Company has various loans which require principal payments of $0.6 million during the twelve month period ending June 30, 2004. 27 The Company is obligated to pay operating lease costs of approximately $24,000 during the twelve month period ending June 30, 2004 for land and facilities. The Company is responsible for any contamination of land it owns or leases. However, there may be limitations on any potential contamination liabilities as well as claims for reimbursement from third parties. 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 at terms standard in the industry. DISCONTINUED OPERATIONS Net cash provided by operating activities totaled $0.3 million for the six months ended June 30, 2003, compared to cash used in operating activities of $0.6 million for the six months ended June 30, 2002. In 2003, net loss, adjusted for reconciling items, resulted in a cash outflow of $0.4 million. Changes in assets and liabilities in 2003 provided a cash inflow of $0.7 million. In 2002, net income, adjusted for reconciling items, provided a cash inflow of $0.4 million. Changes in assets and liabilities resulted in a cash outflow of $1.0 million. Net cash provided by investing activities totaled $0.9 million for the six months ended June 30, 2003, and $0.5 million for the six months ended June 30, 2002. Proceeds from the sale of an equity investment of $0.8 million and an equity contribution of $0.4 million were the principal sources of cash inflow in 2003. Proceeds from the sale of an equity investment of $0.9 million was the principal source of cash inflow in 2002. Net cash used in financing activities totaled $1.2 million for the six months ended June 30, 2003, and $0.1 million for the six months ended June 30, 2002. Payments on the revolving credit facility and on long term debt resulted in the cash outflows in 2003. In 2002, payments on long term debt in the amount of $0.8 million were reduced by borrowings on the revolver and an increase in restricted cash. Enterprises has various loans which require principal payments of $0.5 million during the twelve month period ending June 30, 2004. Enterprises is obligated to pay operating lease costs of approximately $0.4 million during the twelve month period ending June 30, 2004. 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. 28 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, intangible assets, recovery of oil and gas reserves, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of the Company's financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily allowance for doubtful accounts, the discounted value of recoverable oil and gas reserves, accruals for environmental remediation expenditures, and the recognition and classification of net operating loss carryforwards between current and long-term assets. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002. Item 3: CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 (the "1934 Act") is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the "SEC"). Those disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Company's management, including its principal executive and principal accounting officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based upon the evaluation of those controls and procedures performed as of June 30, 2003, the Company's management, with the participation of its chief executive officer and chief accounting officer, concluded that the Company's disclosure controls and procedures were adequate. The Company has implemented a process designed by, or under the supervision of, its principal executive and principal accounting officers, or persons performing similar functions, and effected by the Company's board of directors, management or other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company's assets; (2) provide 29 reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. The Company's management, with the participation of its chief executive officer and chief accounting officer, has determined that there has been no change in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings. On June 19, 2003, the Company reported on two complaints filed in the District Court, City and County of Denver, Colorado, naming Meteor Marketing, Inc. and certain subsidiaries of Meteor Marketing, Inc. (collectively, Marketing) as defendants. Both complaints were filed seeking payment of certain obligations owed by Marketing. Marketing has reached agreement with both complainants, with each party agreeing to forestall any further action against Marketing for so long as Marketing maintains compliance with scheduled payment arrangements. At August 15, 2003, Marketing was in compliance with the agreed upon payment arrangements. 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. 30 Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as part of this report: 31.1(a) and (b) Rule 13a-14(a)/15d-14(a) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 (a) and (b) Section 1350 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished but not filed for purposes of the Securities Exchange Act of 1934) . (b) Reports on Form 8-K Current Report on Form 8-K dated May 16, 2003, which reported events under Item 2, Acquisition or Disposition of Assets, and Item 7, Financial Statements and Exhibits. Current Report on Form 8-K dated June 19, 2003, which reported events under Item 5, Other Events. 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 21, 2003 By: /s/ Ilyas Chaudhary ------------------------ Ilyas Chaudhary, Chief Executive Officer 31 EX-31.1A 3 cpex311a.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.1 (a) CERTIFICATION PURSUANT TO RULE 13a 14(a)/15D-14(a) and SECTION 302 OF THE SARBANES-OXLEY ACT I, Ilyas Chaudhary, the President and Chief Executive Officer of Capco Energy, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Capco Energy, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 21, 2003 /s/ Ilyas Chaudhary - ----------------------------- Ilyas Chaudhary President and Chief Executive Officer EX-31.1B 4 cpex311b.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.1 (b) CERTIFICATION PURSUANT TO RULE 13a 14(a)/15D-14(a) and SECTION 302 OF THE SARBANES-OXLEY ACT I, Walton C. Vance, the Chief Accounting Officer of Capco Energy, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Capco Energy, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 21, 2003 /s/ Walton C. Vance - ----------------------------- Walton C. Vance Chief Accounting Officer EX-32.1A 5 cpex321a.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.1 (a) CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CAPCO ENERGY, INC. (the "Company") on Form 10QSB for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ilyas Chaudhary, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Ilyas Chaudhary - ------------------- Ilyas Chaudhary President, Chief Executive Officer and Chief Financial Officer August 21, 2003 EX-32.1B 6 cpex321b.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.1 (b) CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CAPCO ENERGY, INC. (the "Company") on Form 10QSB for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Walton C. Vance, President and Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Walton C. Vance - ------------------- Walton C. Vance Chief Accounting Officer August 21, 2003 -----END PRIVACY-ENHANCED MESSAGE-----