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, 2001.
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.
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(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, SUITE 202
ORANGE CALIFORNIA 92869
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Address of Principal Executive Offices
(714) 288-8230
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(Registrant's Telephone Number, Including Area Code)
N/A
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(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 19,089,792 shares of the Registrant's $.001 par value common stock
outstanding as of August 12, 2001.
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(Dollars in Thousands)
June 30,
2001
----------
Current Assets:
Cash $ 154
Restricted cash 1,180
Investment in equity securities - marketable 6,654
Accounts receivables-trade, net of
allowance of $544 14,488
Accounts receivables, related parties 106
Notes receivable 17
Notes receivable, related party 33
Inventory, net 3,747
Deferred tax asset - current portion 1,153
Other current assets 940
---------
Total Current Assets 28,472
---------
Property, Plant and Equipment, net 17,256
---------
Other Assets:
Notes receivable, net 104
Investments in equity securities-equity method 1,154
Other assets 583
---------
Total Assets $ 47,569
=========
Accompanying notes are an integral part of the financial statements.
2
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in Thousands)
June 30,
2001
----------
Current Liabilities:
Accounts payable, trade $ 9,607
Current maturities, long-term debt 4,937
Account payable, related parties 944
Book overdraft 679
Accrued expenses 1,652
Fuel taxes payable 1,271
Revolving credit facility 9,640
---------
Total Current Liabilities 28,730
---------
Noncurrent Liabilities:
Long term debt, less current maturities 6,732
Accrued expenses 20
Deferred tax liability 1,114
---------
Total Noncurrent Liabilities 7,866
---------
Total Liabilities 36,596
---------
Minority Interests in Consolidated Subsidiaries 966
---------
Commitments and Contingencies (Note 5)
Stockholders' Equity:
Preferred stock, $1.000 par value; authorized
10,000,000 shares, 292,947 shares issued
and outstanding 293
Common stock, $.001 par value;
authorized 150,000,000 shares;
19,089,792 shares issued and outstanding 19
Paid in capital 629
Cumulative other comprehensive income 2,507
Retained earnings 6,559
---------
Total Stockholders' Equity 10,007
---------
Total Liabilities and
Stockholders' Equity $ 47,569
=========
Accompanying notes are an integral part of the financial statements.
3
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 2001 and 2000
(Dollars in Thousands except per share)
2001 2000
-------- --------
Sales $ 28,229 $ 540
Cost of sales 24,822 88
-------- --------
Profit 3,407 452
-------- --------
Selling, general and administrative expenses 3,511 416
Depreciation and amortization 451 150
-------- --------
Total operating expenses 3,962 566
-------- --------
Loss from operations (555) (114)
Other Income (Expenses)
Interest income 68 21
Interest expense (342) (128)
Gain on sale of marketable securities
and assets 4,121 371
Other (3) --
-------- --------
Total Other Income (Expenses) 3,844 264
-------- --------
Income before equity earnings 3,289 150
Equity loss in investments (146) (384)
Income tax benefit 34 --
Minority interest (1) --
-------- --------
Net Income (Loss) 3,176 (234)
Other comprehensive income (loss)-net of tax
Foreign currency translation adjustment (3) --
Unrecognized gain (loss) from investments-
marketable securities (3,064) 104
-------- --------
Comprehensive income (loss) $ 109 $ (130)
======== ========
Income (loss) per share
Basic and diluted $ .17 $ (.01)
======== ========
Weighted average common share
and common share equivalents
Basic and diluted 19,081,792 21,342,413
========== ==========
Accompanying notes are an integral part of the financial statements.
4
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended June 30, 2001 and 2000
(Dollars in Thousands except per share)
2001 2000
-------- -------
Sales $ 28,642 $ 626
Cost of sales 25,029 288
-------- -------
Gross Profit 3,613 338
-------- -------
Selling, general and administrative expenses 3,811 604
Depreciation and amortization 544 152
-------- -------
Total operating expenses 4,355 756
-------- -------
Loss from operations (742) (418)
Other Income (Expenses)
Interest income 68 21
Interest expense (471) (200)
Gain on sale of assets 6,101 388
Other (2) --
-------- -------
Total Other Income (Expenses) 5,696 209
-------- -------
Income (loss) before equity earnings 4,954 (209)
Equity loss in investments (225) (903)
Income tax (benefit) 34 --
Minority interest (1) --
-------- -------
Net Income (Loss) 4,762 (1,112)
Other comprehensive income (loss)-net of tax
Foreign currency translation adjustment -- 7
Unrecognized gain (loss) from investments-
marketable securities (6,012) 7,982
-------- --------
Comprehensive income (loss) $ (1,250) $ 6,877
======== ========
Income (loss) per share
basic and diluted $ .25 $ (.06)
======== ========
Weighted average common share
and common share equivalents
basic and diluted 19,266,178 19,252,566
========== ==========
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, 2001 and 2000
(Dollars in Thousands)
2001 2000
------ ------
Cash Flows used in Operating Activities:
Net income (loss) $ 4,762 $ (1,112)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation, depletion and amortization 544 152
Gain on sale of assets (6,101) (388)
Equity losses from investments in closely
held businesses 225 903
Stock and options issued for 401(k)/services 14 --
Changes in Assets and Liabilities:
(Increase) decrease in assets:
Accounts receivable, trade (3,342) (843)
Inventory, net (157) --
Other assets (85) (6)
Increase (decrease) in liabilities:
Accounts payable, trade 2,074 442
Accrued expenses (290) 99
Taxes payable (3) --
------- --------
Net cash used in operating
activities (2,359) (753)
------- --------
Cash Flows from Investing Activities:
Cash proceeds from sale of property, plant
and equipment 39 --
Acquisition of Meteor Enterprises, net of
cash received (2,514) --
Purchase of property, plant and equipment (949) (444)
Investment (122) (271)
Proceed from sale of marketable securities
and assets 6,193 398
------- --------
Net cash provided by (used in)
investing activities 2,647 (317)
------- --------
Continued on next page
6
CAPCO ENERGY, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2001 and 2000
(Dollars in Thousands)
2001 2000
------ ------
Cash Flows from Financing Activities:
Borrowings on revolving
credit facilities, net $ 1,375 $ --
Decrease in book overdraft (845) --
Payments on long-term debt (5,523) --
Proceeds from long-term debt 3,993 539
Proceeds from sale of stock -- 525
Decrease in restricted cash 588 --
Retirement of company stock (136) --
-------- --------
Net cash (used in) provided by
financing activities (548) 1,064
-------- --------
Net decrease in cash and
equivalents (260) (6)
Cash and equivalents, beginning of period 414 65
-------- --------
Cash and equivalents, end of period $ 154 $ 59
======== ========
Accompanying notes are an integral part of the financial statements.
7
CAPCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL DEVELOPMENT OF BUSINESS.
NATURE OF OPERATIONS
Capco Energy, Inc. ("Capco" or the "Company") is an independent energy company
engaged primarily in the acquisition, development, production for and the sale
of oil, gas and natural gas liquids and the sale of refined petroleum
products. The Company's production activities are located principally in the
United States. Capco's operations consist of two segments of business: oil
and gas production and distribution of refined petroleum products. The
principal executive offices of the Company are located at 2922 East Chapman,
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 it articles of incorporation to change its name from Alfa Resources,
Inc. to Capco Energy, Inc. Capco's subsidiaries are Capco Resource
Corporation, Capco Asset Management and Capco Resources Ltd. "CRL"). Capco
also had a significant ownership in Meteor Industries, Inc.
Capco purchased Meteor Enterprises, Inc. ("MEI") from Meteor Industries, Inc.
in April 2001 (Note 3). Effective December 31, 2000, Meteor Industries, Inc.
had contributed substantially all of its assets and all of its businesses to
its wholly owned subsidiary, MEI. The significant wholly owned subsidiaries
of MEI are: Meteor Marketing, Inc., Graves Oil & Butane Co., Inc., Tri-Valley
Gas Co. and Innovative Solutions and Technologies, Inc. MEI also owns 73% of
Meteor Holdings LLC and 65% of Rocky Mountain Propane LLC ("RMP"), a
nonconsolidated subsidiary.
The Company's future financial condition and results of operations will depend
upon prices received for its oil and natural gas and the costs of finding,
acquiring, developing and producing reserves. Prices for oil and natural gas
are subject to fluctuations in response to changes in supply, market
uncertainty and a variety of other factors beyond the Company's control.
These factors include worldwide political instability (especially in the
Middle East), the foreign supply of oil and natural gas, the price of foreign
imports, the level of consumer product demand and the price and availability
of alternative fuels.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Capco and its
wholly and majority owned subsidiaries. Accordingly, all references herein to
Capco or the Company include the consolidated results. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
8
Actual results could differ from those estimates. Management used significant
estimates in determining the carrying value of its oil and gas producing
assets and the associated depreciation and depletion expense related to sales'
volumes. The significant estimates included the use of proved oil and gas
reserve volumes and the related present value of estimated future net revenues
therefrom.
PRICE LEVEL CHANGES
The prices the Company pays for gasoline and diesel products are subject to
market fluctuation and 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 results. 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term, highly liquid investments
readily convertible into cash with an original maturity of three months or
less. At times, cash balances held at financial institutions are in excess of
Federal Deposit Insurance Corporation insurance limits. The Company places
its temporary cash investments with high-credit quality financial
institutions. The Company believes no significant concentration of credit
risk exists with respect to these cash investments.
RESTRICTED CASH
The Company has revolving bank credit facilities, which require the use of
depository accounts from which collected funds are transferred to the lender.
The lender then applies these collections to the revolving credit facilities.
These accounts are controlled by the lender.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's
financial instruments, including accounts receivable, notes receivable and
accounts payable and accrued expenses, the carrying amounts approximate fair
value due to their short maturities. The amounts owed for long-term debt also
approximate fair value because current interest rates and terms offered to the
Company are at current market rates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk are cash and accounts receivable arising from its normal
business activities. The Company places its cash in what it believes to be
9
credit-worthy financial institutions. However, cash balances have exceeded
the FDIC insured levels at various times during the year. The Company
routinely assesses the financial strength of its customers and, based upon
factors surrounding the credit risk, establishes an allowance, if required,
for uncollectible accounts and, as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowance is limited.
INVESTMENT IN EQUITY SECURITIES
For equity securities that the Company i) does not exercise control in the
investee and ii) expects to divest within a short period of time, the Company
accounts for the investment under the provisions of Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
For equity investments that the Company i) exercises control in the investee
and ii) expects to hold for long term investment, the Company accounts for the
investment under the provisions of Accounting Principles Board Opinion ("APB")
No. 18 "The Equity Method of Accounting for Investments in Common Stock".
In accordance with FASB No. 115, equity securities that have readily
determinable fair values are classified as either trading or
available-for-sale securities. Securities that are bought and held principally
for the purpose of selling them in the near term (thus held for only a short
period of time) the Company classifies as trading securities and all other
securities are classified as available-for-sale. Trading and
available-for-sale securities are measured at fair value in the balance sheet.
For trading securities any realized holding gains and losses are reported in
the statement of operations. For available-for-sale securities any unrealized
holding gains and losses are reported as a separate component of stockholders'
equity until realized.
In accordance with APB No. 18, under the equity method the Company records the
initial investment at cost, then reduces it by dividends and increases or
decreases it by the Company's proportionate share of the investee's net
earnings or loss.
PROPERTY AND EQUIPMENT
The Company follows the "full-cost" method of accounting for oil and gas
property and equipment costs. Under this method, all productive and
nonproductive costs incurred in the acquisition, exploration, and development
of oil and gas reserves are capitalized. Such costs include lease
acquisitions, geological and geophysical services, drilling, completion,
equipment, and certain general and administrative costs directly associated
with acquisition, exploration, and development activities. General and
administrative costs related to production and general overhead are expensed
as incurred. No gains or losses are recognized upon the sale or disposition of
oil and gas properties, except in transactions that involves a significant
amount of reserves. The proceeds from the sale of oil and gas properties are
generally treated as a reduction of oil and gas property costs. Fees from
associated oil and gas exploration and development partnerships, if any, will
be credited to oil and gas property costs to the extent they do not represent
reimbursement of general and administrative expenses currently charged to
expense.
10
Such costs can be directly identified with acquisition, exploration and
development activities and do not include any costs related to production,
general corporate overhead, or similar activities.
Future development, site restoration, and dismantlement and abandonment costs,
net of salvage values, are estimated on a property-by-property basis based on
current economic conditions and are amortized to expense as the Company's
capitalized oil and gas property costs are amortized. The Company's
properties are all onshore, and the Company expects that the salvage value of
the tangible equipment will partially offset any site restoration and
dismantlement and abandonment costs.
Non-oil and gas producing properties and equipment are stated at cost; major
renewals and improvements are charged to the property and equipment accounts;
while replacements, maintenance and repairs, which do not improve or extend
the lives of the respective assets, are expensed currently. At the time
property and equipment are retired or otherwise disposed of, the asset and
related accumulated depreciation accounts are relieved of the applicable
amounts. Gains or losses from retirements or sales are credited or charged to
operations.
COMMON STOCK
During the quarter ended March 31, 2001, the Company had the following equity
transactions:
Issued 12,500 shares of the Company's Common Stock for the relief of $6,250 of
liabilities owned to a consultant; paid $108,138 and transferred an equity
interest in CRL at a cost basis of $8,834 for the acquisition, and
cancellation, of 143,717 shares of the Company's Common Stock; acquired for
cancellation 640,217 shares of the Company's Common Stock from SEDCO, a
related party, in exchange for an oil and gas property interest at a cost
basis of $50,220, and for 51,600 shares of marketable securities owned by the
Company with a current market value of $671,984, less indebtedness in the
amount of $126,802 related to the marketable securities.
During the quarter ended June 30, 2001, the Company had the following equity
transactions:
Paid $20,000 for the cancellation of 21,500 shares of Common Stock; issued
7,658 shares of Common Stock for an equity interest in CRL at a cost basis of
$4,863; and issued 15,000 shares of Common Stock for consulting services in
the amount of $13,500.
DEPRECIATION AND DEPLETION
The provision for depreciation and depletion of oil and gas properties is
computed on the unit-of-production method. Under this method, the Company
computes the provision by multiplying the total unamortized costs of oil and
gas properties including future development, site restoration, and
dismantlement and abandonment costs, but excluding costs of unproved
properties by an overall rate determined by dividing the physical units of oil
and gas produced during the period by the total estimated units of proved oil
and gas reserves. This calculation is done on a country-by-country basis for
those countries with oil and gas production. The cost of unevaluated
properties not being amortized, to the extent there is such a cost, is
11
assessed quarterly to determine whether the value has been impaired below the
capitalized cost. Any impairment assessed is added to the cost of proved
properties being amortized. The costs associated with unevaluated properties
relate to projects which were undergoing exploration or development activities
or in which the Company intends to commence such activities in the future.
The Company will begin to amortize these costs when proved reserves are
established or impairment is determined. Management believes no such
impairment exists at June 30, 2001.
At the end of each quarterly reporting period, the unamortized cost of oil and
gas properties, net of related deferred income taxes, is limited to the sum of
the estimated future net revenues from proved properties using current prices,
discounted at 10%, and the lower of cost or fair value of unproved properties,
adjusted for related income tax effects ("Ceiling Limitation").
The calculation of the ceiling limitation and provision for depreciation and
depletion is based on estimates of proved reserves. There are numerous
uncertainties inherent in estimating quantities of proven reserves and in
projecting the future rates of production, timing, and plan of development.
The accuracy of any reserves estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of drilling, testing, and production subsequent to the date of the
estimate may justify revision of such estimate. Accordingly, reserve
estimates are often different from the quantities of oil and gas that are
ultimately recovered.
Depreciation for non-oil and gas properties is recorded on the straight-line
method at rates based on the estimated useful lives of the assets. The
estimated useful lives are as follows:
DESCRIPTION LIVES
Buildings and Improvements 5 to 40 years
Equipment 3 to 20 years
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standard ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", long-lived assets to be held and used are analyzed
for impairment whenever events or changes in circumstances indicate that the
related carrying amounts may not be recoverable. The Company evaluates at each
balance sheet date whether events and circumstances have occurred that
indicates possible impairment. If there are indications of impairment, the
Company uses future undiscounted cash flows of the related asset or asset
grouping over the remaining life in measuring whether the assets are
recoverable. In the event such cash flows are not expected to be sufficient to
recover the recorded asset values, the assets are written down to their
estimated fair value. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value of asset less cost to sell.
REVENUE RECOGNITION
Revenue from product sales is recognized when the product is delivered.
Revenue from services is recognized when the services are performed and
billable.
12
STOCK BASED COMPENSATION
The Company accounts for employee stock options in accordance with APB No. 25
"Accounting for Stock Issued to Employees". Under APB 25, the Company
recognizes no compensation expense related to employee stock options, as no
options are granted at a price below market price on the date of grant.
In 1996, SFAS No. 123 "Accounting for Stock-Based Compensation", became
effective for the Company. SFAS No. 123, which prescribes the recognition of
compensation expense based on the fair value of options on the grant date,
allows companies to continue applying APB 25 if certain pro forma disclosures
are made assuming hypothetical fair value method, for which the Company uses
the Black-Scholes option-pricing model.
For non-employee stock based compensation the Company recognizes an expense in
accordance with SFAS No. 123 and values the equity securities based on the
fair value of the security on the date of grant. For stock-based awards the
value is based on the market value for the stock on the date of grant and if
the stock has restrictions as to transferability a discount is provided for
lack of tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.
ENVIRONMENTAL EXPENDITURES
The Company expenses environmental expenditures related to existing conditions
resulting from past or current operations and from which no future benefit is
discernible. Expenditures, which extend the life of the related property or
mitigate or prevent future environmental contamination, are capitalized. The
Company determines and records its liability on a site-by-site basis at the
time when it is probable and can be reasonably estimated. The Company's
estimated liability is recorded net of the anticipated participation of other
potentially responsible parties in those instances where it is probable that
such parties are legally responsible and financially capable of paying their
respective shares of the relevant costs.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between the amount of
taxable income and pretax financial income and between the tax bases of assets
and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements
at currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled as
prescribed by SFAS No. 109, "Accounting for Income Taxes". As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. As of June 30, 2001 and 2000, the Company has other
comprehensive income relating to foreign currency translations and
unrecognized holding gains from marketable securities classified as
available-for-sale.
13
NOTE 2 -- BASIS OF PRESENTATION
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles 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, 2000, filed with the Company's Form 10-KSB.
Certain reclassifications for the prior year have been made to conform with
current year presentation.
NEW ACCOUNTING PRONOUNCEMENT - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("FAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards
requiring that every derivative instrument be recorded on the balance sheet as
either an asset or liability measured at its fair value. FAS No. 133 also
requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. In June 1999,
the FASB issued FAS No. 137, which defers the effective date of FAS No. 133 to
fiscal years beginning after June 15, 2000. The Company adopted FAS No. 133
in the first quarter of fiscal 2001, and such adoption did not materially
affect its financial statement presentation.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("Interpretation 44"), "Accounting for Certain
Transactions Involving Stock Compensation." Interpretation 44 provides
criteria for the recognition of compensation expense in certain stock-based
compensation arrangements that are accounted for under APB Opinion No. 25,
Accounting for Stock-Based Compensation Interpretation 44 was effective July
1, 2000, with certain provisions that are effective retroactively back to
December 15, 1998 and January 12, 2000. The adoption of this statement did not
have a material impact on the Company's financial position, results of
operations or liquidity.
In December 1999, the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, which is to be applied beginning with the fourth fiscal quarter of
fiscal years beginning after December 15, 1999, to provide guidance related to
recognizing revenue in circumstances in which no specific authoritative
literature exists. The adoption of this statement did not have a material
impact on the Company's financial position, results of operations or
liquidity.
NOTE 3 -- ACQUISITION OF METEOR ENTERPRISES, INC.
Capco purchased Meteor Enterprises, Inc. from Meteor Industries, Inc. for $5.5
million and assumption of certain environmental liabilities and other
indemnities. MEI owned substantially all of Meteor Industries, Inc.'s assets
14
(see Note 1); excluded were 400,000 shares of Active IQ's common stock and
certain amounts of cash, which remained in Meteor Industries, Inc. Also, MEI
contains all of the liabilities of Meteor Industries, Inc., except those
associated with certain costs. Capco's financial statements reflect the
operations of MEI since April 30, 2001, the date of acquisition. Pro forma
information as if the transaction had taken place at the beginning of the
period is disclosed in Note 7 to these financial statements.
Effective April 30, 2001, Capco Energy, Inc. closed on its acquisition of all
of the outstanding common stock of MEI. The purchase price for the common
stock was $5.5 million paid in the form of $4.7 million cash, of which
purchaser borrowed $1.7 million and sold $3.0 million of marketable
securities, $0.3 million of Meteor Industries, Inc. common stock, and $0.5
million in a note payable to the seller. Capco had $1.7 million of debt due to
MEI, of which upon the acquisition MEI relieved Capco of the debt, so Capco
has treated the cancellation debt as reduction in the purchase price to
$3,756,000.
The acquisition of Meteor Enterprises, Inc. has been accounted for using the
purchase method of accounting and accordingly the total purchase price has
been allocated on the basis of the fair values of the assets acquired and
liabilities assumed. The components of the purchase price and its allocation
to the assets and liabilities of Meteor Enterprises, Inc. pending final
appraised value are as follows:
(dollars in thousands)
Components of purchase price:
Consideration paid $ 5,500
Notes payable, cancelled (1,744)
--------
Total purchase price $ 3,756
Allocation of purchase price:
Stockholder's equity of Meteor Enterprises, Inc. (7,767)
Increase in inventories (elimination of LIFO
reserve and adjustment to fair value) (504)
Increase in deferred income taxes (SFAS 109) 1,366
Decrease in Saba Power Project 690
--------
Fair value of net assets in excess of
Purchase price (2,459)
Allocation of negative goodwill:
Plant, property and equipment 2,325
Intangibles 134
--------
$ -0-
========
15
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 is
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 six and three month periods ended
June 30, 2001, would have increased for 1,508,241 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
and three month periods ended June 30, 2000, would have increased for 672,790
and 1,107,912 shares of Common Stock, respectively, if associated stock
options would have had a dilutive effect.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
The Company is subject to various federal, state and local environmental laws
and regulations. Although Company environmental policies and practices are
designed to ensure compliance with these laws and regulations, future
developments and increasingly stringent regulations could require the Company
to make additional unforeseen environmental expenditures. Environmental
accruals are routinely reviewed on an interim basis as events and developments
warrant.
NOTE 6 -- BUSINESS SEGMENTS
During the six months ended June 30, 2001, the Company operated in two
business segments: oil and gas production and distribution of refined
petroleum products.
The oil and gas production segment would be the typical "upstream" activities
of an energy company which would be the production and sale of oil, gas and
natural gas liquids.
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 administrative, and depletion, depreciation and
amortization as presented below:
16
Three Months Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
Oil and Gas Production:
Net sales $ 450 $ 540 $ 863 $ 626
Gross profit 136 452 342 338
Selling, general and
administrative 678 416 978 604
Depreciation, depletion
and amortization 110 150 203 152
Refined Product Distribution:
Net sales $ 27,779 $ -- $ 27,779 $ --
Gross profit 3,271 -- 3,271 --
Selling, general and
administrative 2,833 -- 2,833 --
Depreciation, depletion
and amortization 341 -- 341 --
Loss income from operations (555) (114) (742) (418)
Reconciliation to net (loss) income:
Other income (expenses) $ 3,844 $ 264 $ 5,696 $ 209
Equity loss in investments (146) (384) (225) (903)
Income tax (benefit) expense 34 -- 34 --
Minority interest (1) -- (1) --
Net (loss) income $ 3,176 $ (234) $ 4,762 $(1,112)
NOTE 7 -- PRO FORMA FINANCIAL INFORMATION (UNREVIEWED)
The accompanying pro forma information combines the activities of Capco
Energy, Inc. and Meteor Enterprises, Inc. for the periods described. The
pro forma combined statement of operations is presented as if the acquisition
had occurred on January 1, 2001.
The pro forma combined statement of operations for the six months ended June
30, 2001, includes the statement of operations of Capco Energy, Inc. for
the six months ended June 30, 2001, and the operations of Meteor Enterprises,
Inc. for the four ended April 30, 2001.
These pro forma financial statements are not necessarily indicative of future
operations or the actual results that would have occurred had the acquisition
been consummated at the beginning of the year.
The pro forma combined statement of operations should be read in conjunction
with the historical financial statements and notes thereto of Meteor
Enterprises, Inc. and of Capco Energy, Inc.
The proforma combined financial statements for the year ended December 31,
2000 are included in the Company's amended Form 8-K dated April 27, 2001.
17
Effective April 30, 2001, Capco Energy, Inc. closed on its acquisition of all
of the outstanding common stock of MEI. The purchase price for the common
stock was $5.5 million paid in the form of $4.7 million cash, of which
purchaser borrowed $1.7 million and sold $3.0 million of marketable
securities, $0.3 million of Meteor Industries, Inc. common stock, and $0.5
million in a note payable to the seller. Capco had $1,744,000 of debt due to
MEI, of which upon the acquisition MEI relieved Capco of the debt, so Capco
has treated the cancellation debt as reduction in the purchase price to
$3,756,000.
Pro Forma Entries
a. Entry to eliminate inter-company notes payable, receivables and
interest income and expense.
b. Entry to adjust depreciation expense for the reduction in fixed
assets value.
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 $ 28,642 $ 55,402 $ - $ 84,044
Cost of sales, excluding depreciation 25,029 49,149 - 74,178
---------- ---------- ---------- ----------
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
---------- ---------- ---------- ----------
Income 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) expense 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 per share
Basic and diluted $ 0.25 $ (0.02)
========== ==========
Weighted average shares outstanding
Basic and diluted 19,266,178 19,266,178
========== ==========
18
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 Meteor
Enterprises, Inc., 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
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO JUNE 30, 2000
OIL AND GAS PRODUCTION SEGMENT
Capco's revenues from oil and gas activities were $0.9 million in 2001
compared to $0.6 million in 2000. This increase is primarily due to production
from the Caplen Field in Galveston County, Texas that was acquired by the
Company in March 2000. On a barrel of oil equivalent ("BOE") basis, the
Company's total production increased to 28,865 BOE in 2001 from 22,531 BOE in
2000. The average sales price received per BOE increased to $28.10 in 2001
from $25.72 in 2000. Capco's cost of sales were $0.5 million in 2001 compared
to $0.3 million in 2000. This increase is primarily due to the increase in
production volumes and expenditures incurred in connection with well
remediation activities initiated by the Company in its efforts to increase
19
production. Selling, general and administrative ("SG&A") costs were $1.0
million in 2001 compared to $0.6 million in 2000. Personnel costs increased
$0.2 million as the Company hired additional employees for the increase in
business activity and to lessen its utilization of third party consultants.
Expenses attributable to outside services decreased $0.1 million. SG&A costs
in 2001 also include a provision for uncollectible accounts receivable in the
amount of $0.3 million. Depreciation, depletion and amortization was $0.3
million in 2001 compared to $0.2 million in 2000. This change is due to the
increases in production quantities and capital costs recorded by the Company
in its full cost pool for oil and gas properties. 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.
REFINED PRODUCT DISTRIBUTION SEGMENT
Capco's revenues from refined product distribution segment were $27.8 million
for the six months ended June 30, 2001 and $-0- in 2000. The increase is due
to the purchase of Meteor Enterprises, Inc.
Gross profit for the six months ended June 30, 2001 and 2000, was $3.3 million
and $-0-, respectively. The increase is due to the purchase of Meteor
Enterprises, Inc.
Selling, general, and administrative expenses were $2.8 million for the six
months ended June 30, 2001, compared to $-0- for the six months ended June 30,
2000. The increase is due to the purchase of Meteor Enterprises, Inc.
Depreciation and amortization for the six months ended June 30, 2001, was $0.3
million compared to $-0- for the six months ended June 30, 2000. The increase
is due to the purchase of Meteor Enterprises, Inc.
OTHER ITEMS
Interest expense increased to $0.5 million in 2001 from $0.2 million in 2000.
This increase is attributable to the increase in long term debt balances
outstanding during the respective periods. Gain on sale of assets increased
to $6.1 million in 2001 from $0.4 million in 2000 as the Company sold
marketable securities for working capital and to provide funding for its
acquisitions.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO JUNE 30, 2000
OIL AND GAS PRODUCTION SEGMENT
Capco's revenues from its oil and gas activities were $0.5 million in 2001
compared to $0.5 million in 2000. A decrease in quantities produced and sold,
was offset by an increase in the sales price of such production. On a barrel
of oil equivalent ("BOE") basis, the Company's total production decreased to
15,405 BOE in 2001 from 19,859 BOE in 2000. The average sales price received
per BOE increased to $27.45 in 2001 from $25.93 in 2000. Capco's cost of
sales were $0.3 million in 2001 compared to $0.1 million in 2000. This
increase is primarily due to expenditures incurred in connection with well
remediation activities initiated by the Company in its efforts to increase
production. In 2000, expenditures in the amount of $0.1 million were
reclassified to the Company's full cost pool. Selling, general and
20
administrative ("SG&A") costs were $0.7 million in 2001 compared to $0.4
million in 2000. Personnel costs increased as the Company hired additional
employees for the increase in business activity and to lessen its utilization
of third party consultants. Expenses attributable to outside services
decreased. SG&A costs in 2001 also include a provision for uncollectible
accounts receivable in the amount of $0.3 million. Depreciation, depletion
and amortization was $0.1 million in 2001 compared to $0.2 million in 2000.
This change is due principally to a decrease in cost depletion as a result of
the decrease in production quantities to 15,405 BOE in 2001 from 19,859 in
2000.
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.
REFINED PRODUCT DISTRIBUTION SEGMENT
Capco revenues from its refined distribution segment were $27.8 million for
the three months ended June 30, 2001 and $-0- in 2000. The increase is due to
the purchase of Meteor Enterprises, Inc.
Gross profit for the three months ended June 30, 2001 and 2000, was $3.3
million and $-0-, respectively. The increase is due to the purchase of Meteor
Enterprises, Inc.
Selling, general, and administrative expenses were $2.8 million for the three
months ended June 30, 2001, compared to $-0- for the three months ended June
30, 2000. The increase is due to the purchase of Meteor Enterprises, Inc.
Depreciation and amortization for the three months ended June 30, 2001, was
$0.2 million compared to $-0- for the three months ended June 30, 2000. The
increase is due to the purchase of Meteor Enterprises, Inc.
OTHER ITEMS
Interest expense increased to $0.3 million in 2001 from $0.1 million in 2000.
This increase is attributable to the increase in long term debt balances
outstanding during the respective periods. Gain on sale of assets increased
to $4.1 million in 2001 from $0.4 million in 2000 as the Company sold
marketable securities for working capital and to provide funding for its
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, the Company had a working capital deficit of $0.1 million.
Net cash used in operating activities totaled $2.4 million for the six months
ended June 30, 2001, compared to $0.8 million cash used in the six months
ended June 30, 2000. This increase 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 the six
months ended June 30, 2001, compared to cash used of $0.3 million for the six
months ended June 30, 2000. The increase in cash provided by investing
activities is principally related to proceeds from sale of marketable
securities.
21
Net cash used in financing activities totaled $0.6 million for the six months
ended June 30, 2001, compared to cash provided of $1.0 million for the six
months ended June 30, 2000. This decrease in cash provided by financing
activities is primarily related to payments made on the revolving credit
facility and on long-term debt.
The Company has a revolving bank credit facility with a maximum commitment of
$12.5 million, which expires on December 31, 2002. The amount available under
the revolving credit facility is a function of the sum of eligible accounts
receivable and inventory as defined by the revolving credit agreement up to
the maximum commitment. Advances requested by the Company are subject to an
interest rate of the lender's base rate plus 0.5% (6.75% and 9.25% at June 30,
2001 and June 30, 2000, respectively). Additionally, the Company pays a
commitment fee of 0.25% of the maximum commitment. The revolving credit
facility is collateralized by the Company's trade receivables and inventory.
At June 30, 2001, the borrowing base was approximately $1.0 million. $9.6
million was borrowed against the facility and is recorded as a current
liability. During the quarter the Company was out of compliance with several
debt covenants and the Company obtained waivers from the lender for
noncompliance.
The Company has various loans with banks, suppliers and individuals, which
require principal payments of $4.9 million in 2001.
The Company is obligated to pay lease costs of approximately $11.0 million in
2001 for land, building, facilities and equipment.
The Company is responsible for any contamination of land it owns or leases.
However, the Company may have limitations on any potential contamination
liabilities as well as claims for reimbursement from third parties. Included
in selling, general and administrative expenses for the three months ended
June 30, 2001 and 2000, is $67,000 and $95,000, respectively, for site
assessment, related cleanup costs and regulatory compliance.
The Company sells most of its oil production to certain major oil companies.
However, in the event these purchasers discontinued oil purchases, Capco has
made contact with other purchasers who would purchase the oil.
EFFECT OF CHANGES IN PRICES
Changes in prices during the past few years have been a significant factor in
the oil and gas industry. The price received for the oil and gas produced by
Capco has fluctuated significantly during the last year. Changes in the price
that Capco receives for its oil and gas is set by market forces beyond Capco's
control. That uncertainty in oil and gas prices makes it more difficult for a
company like Capco to increase its oil and gas asset bases and become a
significant participant in the oil and gas industry.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to interest rate changes is primarily related to its
variable rate debt issued under its $12.5 million revolving credit facility.
Because the interest rate on this facility is variable, based upon the
lender's base rate, the Company's interest expense and net income are affected
by interest rate fluctuations. If interest rates were to increase or decrease
by 100 basis points, the result, based upon the existing outstanding debt as
22
of June 30, 2001, would be an annual increase or decrease of approximately
$117,000 in interest expense and a corresponding decrease or increase of
approximately $70,000 in the Company's net income (loss) after taxes.
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) Exhibits. None.
(b) Reports on Form 8-K.
The Company filed a Form 8-K April 27, 2001, reporting the acquisition of
all the outstanding stock of Meteor Enterprises, Inc.
The Company filed an Amendment No.1 dated April 27, 2001, to the Form 8-K
dated April 27, 2001, incorporating the financial statements reported in Item
7(a).
The Company filed an Amendment No.2 dated April 27, 2001, to the Form 8-K
dated April 27,2001, amending the proforma financial information required by
Item 7(b).
23
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 14, 2001 By: /s/ Dennis R. Staal
Dennis R. Staal, Chief
Financial and Accounting Officer
24