UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 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 19,088,634 shares of the Registrant's $.001 par value common stock
outstanding as of March 31, 2001.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2001
(Unaudited)
ASSETS
Current Assets:
Cash $ 39,487
Investments in Equity Securities-
marketable securities 9,557,601
Accounts and Notes Receivable 484,901
Accounts Receivable, related parties 191,144
Deferred Tax Asset 1,738,000
----------
Total Current Assets 12,011,133
Property and Equipment, net 4,097,425
Other Assets:
Investments in Equity Securities-
equity method 1,919,950
Other Assets 272,901
----------
Total Assets $ 18,301,409
==========
Accompanying notes are an integral part of the financial statements.
1
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
March 31, 2001
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses $ 1,214,868
Current Maturities, long-term debt 4,598,993
Accounts Payable, related parties 74,000
Deferred Tax Liability 1,738,000
----------
Total Current Liabilities 7,625,861
----------
Long Term Debt, less current maturities 54,258
Minority Interest in Consolidated
Subsidiary 720,444
Commitments and Contingencies
Stockholders' Equity
Preferred Stock, $1.00 par value;
Authorized 10,000,000 shares,
292,947 Shares issued and outstanding 292,947
Common Stock, $.001 par value;
Authorized 150,000,000 shares;
19,088,634 shares issued and outstanding 19,089
Additional Paid-In Capital 630,190
Cumulative Foreign Currency
Translation Adjustment 4,218
Cumulative Unrecognized Gains 5,569,926
Retained Earnings 3,384,476
----------
Total Stockholders' Equity 9,900,846
----------
Total Liabilities and
Stockholders' Equity $ 18,301,409
==========
Accompanying notes are an integral part of the financial statements.
2
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS) AND COMPREHENSIVE (LOSS) INCOME
For the three months ended March 31, 2001 and 2000
(Unaudited)
2001 2000
----------- ---------
Sales $ 412,726 $ 85,940
Cost of Sales 206,738 199,642
---------- --------
Gross Profit (Loss) 205,988 (113,702)
Selling, General and Administrative Expenses 393,183 190,517
---------- --------
Loss from operations (187,195) (304,219)
---------- --------
Other Income (Expense)
Interest Expense (128,526) ( 72,176)
Gains on Sale of Investments-
Marketable Securities 1,979,643 17,213
Equity Loss from operations
of Investments (77,750) (519,034)
Other 1,189 -
--------- --------
Total Other Income (Expense) 1,774,556 (573,997)
--------- --------
Income (Loss) before Taxes and
Minority Interest in Income 1,587,361 (878,216)
Provision for Income Taxes - -
Less: Minority Interest in Income
of Consolidated Subsidiary (752) -
--------- --------
Net Income (Loss) 1,586,609 (878,216)
Other Comprehensive Income (Loss)-net of tax
Foreign Currency Translation Adjustment 3,326 6,704
Unrecognized (Loss) Gain from Investments-
Marketable Securities (2,948,729) 7,878,467
--------- ---------
Comprehensive (Loss) Income $(1,358,794) $7,006,955
========= =========
Net Income (Loss) per Share
Basic and Diluted $ .08 $ (.05)
========= =========
Weighted Average Shares Outstanding
Basic and Diluted 19,453,818 17,163,319
========== ==========
Accompanying notes are an integral part of the financial statements.
3
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2001 and 2000
(Unaudited)
2001 2000
--------- ----------
Cash Flows From Operating Activities:
Net Income (Loss) $ 1,586,609 $ ( 878,216)
Adjustments to reconcile net income (loss)
to net cash used in operating activities
Depreciation, depletion and amortization 92,878 1,561
Gain on sales of investments-marketable
securities (1,979,643) ( 17,213)
Gain on sale of investments-equity method ( 1,189) -
Equity loss from operations of investments 77,750 519,034
Minority interest in income of
consolidated subsidiary 752 -
Decrease in deferred tax asset 729,000 -
Decrease in deferred tax liability ( 729,000) -
Changes in assets and liabilities:
(Increase) in assets:
Accounts receivable ( 87,310) ( 477,927)
Other assets ( 266,793) -
(Decrease) increase in liabilities:
Accounts payable and accrued expenses ( 290,912) 253,495
--------- ---------
Net cash used in operating activities ( 867,858) ( 599,266)
--------- ---------
Cash Flows From Investing Activities:
Cash acquired with acquisition of subsidiary - 4,264
Net (advances) to related parties ( 102,703) -
Cash proceeds from sale of property - 17,212
Purchase of property and equipment ( 500,046) ( 150,493)
Sale of marketable securities 1,910,786 -
Purchase of marketable securities ( 104,136) -
Advances on Notes Receivable ( 90,097) -
Other 3,326 ( 296,149)
--------- ---------
Net cash provided by (used in)
investing activities 1,117,130 ( 425,166)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from long-term debt 1,186,145 454,049
Payments on long term debt (1,701,277) -
Sale of Common Stock and exercise of options - 525,000
Purchase and cancellation of Common Stock ( 108,137) -
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(continued on following page)
4
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
For the three months ended March 31, 2001 and 2000
(Unaudited)
2001 2000
--------- ----------
Net cash (used in) provided by financing
activities ( 623,269) 979,049
--------- ---------
Net Decrease in Cash ( 373,997) ( 45,383)
Cash, Beginning of Period 413,484 64,683
---------- -----------
Cash, End of Period $ 39,487 $ 19,300
========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 88,327 $ 51,794
========== ===========
Taxes paid $ - $ -
========== ===========
Accompanying notes are an integral part of the financial statements.
5
CAPCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
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. Capco treats all operations as one segment
of business. The Company's production activities are located in the United
States and Canada. Foreign operations are not significant to either consolidated
financial position or consolidated results of operations. 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.
Effective December 31, 1999, Capco acquired 100% of the outstanding capital
stock of Capco Resource Corporation ("CRC") a corporation involved in oil and
gas production in a transaction accounted for as a reverse acquisition with CRC
as the accounting acquirer. The financial statements presented include CRC at
cost since January 19, 1999, CRC's inception, and Capco at fair market value as
of December 31, 1999.
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.
6
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.
CONCENTRATION OF SALES AND PRODUCTS
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.
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.
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.
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 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 interest rates and terms offered to the Company are at current market
rates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk are cash and accounts receivable arising from its normal business
activities. The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances have exceeded the FDIC insured
levels at various times during the year. The Company routinely assesses the
financial strength of its customers and, based upon factors surrounding the
credit risk, establishes an allowance, if required, for uncollectible accounts
and, as a consequence, believes that its accounts receivable credit risk
exposure beyond such allowance is limited.
7
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 in the near term (thus held for only a short period of time) are
classified 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 gains or
losses and any unrealized holding gains and losses are reported in the statement
of operations. For available-for-sale securities any realized gains and losses
are reported in the statement of operations and 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 involve a significant amount of reserves.
The proceeds from the sale of oil and gas properties are generally treated as a
reduction of oil and gas property costs. Fees from associated oil and gas
exploration and development partnerships, if any, will be credited to oil and
gas property costs to the extent they do not represent reimbursement of general
and administrative expenses currently charged to expense.
8
In accordance with the full cost method accounting, 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.
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.
DEPRECIATION AND DEPLETION
The provision for depreciation and depletion of oil and gas properties is
computed on the unit-of-production method. Under this method, the Company
computes the provision by multiplying the total unamortized costs of oil and gas
properties including future development, site restoration, and dismantlement and
abandonment costs, but excluding costs of unproved properties by an overall rate
determined by dividing the physical units of oil and gas produced during the
period by the total estimated units of proved oil and gas reserves. This
calculation is done on a country-by-country basis for those countries with oil
and gas production. The cost of unevaluated properties not being amortized, to
the extent there is such a cost, is assessed quarterly to determine whether the
value has been impaired below the capitalized cost. The cost of any impaired
property is transferred to the balance of oil and gas properties being
amortized. The costs associated with unevaluated properties relate to projects
which were undergoing exploration or development activities or in which the
Company intends to commence such activities in the future. The Company will
begin to amortize these costs when proved reserves are established or impairment
is determined. Management believes no such impairment exists at March 31, 2001.
9
At the end of each 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 estimated useful lives ranging from three to five years
of the assets.
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 indicate 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.
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.
10
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 March 31, 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.
11
EARNINGS PER SHARE
The Company uses SFAS No. 128, "Earnings Per Share" for calculating the basic
and diluted earnings (loss) per share. Basic earnings (loss) per share are
computed by dividing net income (loss) attributable to common stockholders by
the weighted average number of common shares outstanding. Diluted earnings
(loss) per share is computed similar to basic earnings (loss) per share except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. The Company's weighted
average shares outstanding for the three month periods ended March 31, 2001 and
2000, would have increased for 1,400,000 and 204,444 shares of Common Stock,
respectively, if associated stock options would have had a dilutive effect.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
at their fair value. This statement, as amended by SFAS 137, is effective for
financial statements for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company does not expect the adoption of this standard to have
a material impact on its results of operations, financial position or cash
flows, as it currently does not engage in any derivative or hedging activities.
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.
12
SUBSEQUENT EVENTS
On April 27, 2001, the Company closed on the previously announced acquisition of
all of the existing subsidiaries and related businesses of Meteor Industries,
Inc. ("Seller"), a distributor of refined petroleum products. The purchase price
for the acquisition consisted of $5,500,000 paid in the form of $4,697,501 cash,
of which the Company borrowed $1,700,000 and sold $2,997,501 of marketable
securities; $302,499 of Meteor Industries, Inc. common stock; and $500,000 in a
note payable to the Seller. The Company has reported the acquisition in a Form
8-K filing.
In April 2001, the Company completed the refinancing of the $1,000,000 note
payable that was past due at March 31, 2001. The new credit facility bears
interest at the rate of 10%, has a maturity date of September 30, 2001, and is
collateralized by the Company's interest in producing oil and gas properties.
The credit facility includes the grant of an option to the lender, exerciseable
until April 1, 2003, to acquire 300,000 shares of the Company's equity holdings
in Chaparral Resources, Inc. at the Company's original cost, plus 10% annual
interest to the date of exercise.
13
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 prior acquisitions of CRC, CRL and CAM, and the
acquisition closed in April 2001 of the existing subsidiaries and related
businesses of Meteor Industries, Inc., such benefits 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.
14
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001 the Company had working capital of $4,385,272. This working
capital is principally due to marketable securities reduced by short-term debt
on those securities. Management believes this working capital is sufficient to
meet its needs for operating cash flow for the next year. Management plans to
sell some of its marketable securities to pay its liabilities and to fund the
cost of additional acquisitions. In April 2001, the Company closed on the
acquisition of the subsidiaries and related businesses of Meteor Industries,
Inc. The purchase price for the acquisition consisted of $5,500,000 paid in the
form of $4,697,501 cash, of which the Company borrowed $1,700,000 and sold
$2,997,501 of marketable securities; $302,499 of Meteor Industries, Inc. common
stock; and $500,000 in a note payable to the Seller.
Cash flows used in operations for the three months ended March 31, 2001, and
March 31, 2000, were $867,858 and $599,266, respectively. The increase in cash
used during the current period is principally due to decreases in accounts
payable and increases in other current assets.
Cash flows provided by investing activities for the three months ended March 31,
2001, were $1,117,130 compared to a use of $425,166 in the prior year. This
increase is principally due to sales of marketable securities offset by
purchases of property.
Cash flows used in financing activities for the three months ended March 31,
2001, were $623,269 compared to an inflow of $979,049 in the prior year. This
decrease is principally due to purchases and cancellations of Common Stock and
principal payments on long-term debt.
Capco 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.
The Company is responsible for any contamination of land it owns or leases.
Capco maintains insurance coverage that it believes is customary in the
industry, although it is not fully insured against all environmental risks.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO MARCH 31, 2000
Capco's revenues from its oil and gas activities were $ 412,726 in 2001 compared
to $85,940 in 2000. This increase in revenue is primarily due to production from
properties acquired in late 1999 and the first quarter of 2000. Capco's cost of
sales was $206,738 in 2001 compared to $199,642 in 2000. This increase is
primarily due to increased production resulting from the acquisitions in late
1999 and the first quarter of 2000. Cost of sales in 2000 included expenditures
in the amount of $54,392 attributable to well workovers and remedial operations.
Selling, general and administrative costs were $393,183 in 2001 compared to
15
$190,517 in 2000. Personnel costs increased $90,384 as the Company hired
additional employees due to the increase in business activity. Depreciation,
depletion and amortization increased $91,317 due to an increase in production
quantities and capital costs recorded by the Company in its full cost pool for
oil and gas properties. Total other income (expense) was income of $1,774,556 in
2001 compared to expense of $573,997 in 2000. The change is principally due to
gains on sale of marketable securities in the current period offset by increased
interest expense due to borrowings. The Company's proportionate share of
operating losses reported by its equity investments decreased from $519,034 in
2000 to $77,750 in 2001.
Net operating revenues from Capco's oil and gas production are very sensitive to
changes in the price of oil; thus it is difficult for management to predict
whether or not the Company will be profitable in the future.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Issuer caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAPCO ENERGY, INC.
Dated: May 15, 2001 by: /s/ Dennis R. Staal
----------------------
Dennis R. Staal, Chief
Financial and Accounting Officer
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