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 September 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.
---------------------------------------------------------------
(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 19,287,792 shares of the Registrant's $.001 par value common stock
outstanding as of November 12, 2001.
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(Dollars in Thousands)
September 30,
2001
------------
(Unaudited)
Current Assets:
Cash $ 206
Restricted cash 1,067
Investment in equity securities - marketable 4,689
Accounts receivables-trade, net of
allowance of $284 13,854
Accounts receivables, related parties 506
Notes receivable 17
Inventory, net 3,653
Deferred tax asset - current portion 1,153
Other current assets 710
---------
Total Current Assets 25,855
Property, Plant and Equipment, net 15,915
Other Assets:
Notes receivable, net 45
Investments under equity method 2,176
Other assets 739
---------
Total Assets $ 44,730
=========
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)
September 30,
2001
------------
(Unaudited)
Current Liabilities:
Accounts payable, trade $ 9,539
Revolving credit facility 8,303
Current maturities, long-term debt 4,550
Book overdraft 984
Accrued expenses 1,516
Taxes payable 1,110
Accounts payable, related parties 182
---------
Total Current Liabilities 26,184
---------
Non-current Liabilities:
Long term debt, less current maturities 8,449
Deferred tax liability 1,120
---------
Total Non-current Liabilities 9,569
---------
Total Liabilities 35,753
---------
Minority Interests in Consolidated Subsidiaries 714
---------
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, $0.001 par value;
authorized 150,000,000 shares;
19,287,792 shares issued and outstanding 19
Additional paid in capital 764
Cumulative other comprehensive income 817
Retained earnings 6,370
---------
Total Stockholders' Equity 8,263
---------
Total Liabilities and
Stockholders' Equity $ 44,730
=========
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 September 30, 2001 and 2000
(Dollars in Thousands except per share)
2001 2000
-------- --------
(Unaudited) (Unaudited)
Sales $ 38,690 $ 371
Cost of sales 33,162 97
-------- --------
Gross profit 5,528 274
-------- --------
Selling, general and administrative expenses 4,599 265
Depreciation and amortization 651 93
-------- --------
Total operating expenses 5,250 358
-------- --------
Income (loss) from operations 278 ( 84)
Other Income (Expenses)
Interest income 25 23
Interest expense (440) (147)
Gain on sale of marketable securities
and assets 95 553
Other (97) --
-------- --------
Total other income (expenses) (417) 429
-------- --------
Equity in losses of investees (4) (195)
Income tax expense (49) --
Minority interest 2 --
-------- --------
Net (loss) income (190) 150
Other comprehensive income (loss)-net of tax
Foreign currency translation adjustment 3 (43)
Unrecognized gain (loss) from investments-
marketable securities (1,693) 3,171
-------- --------
Comprehensive (loss) income $ (1,880) $ 3,278
======== ========
Income (loss) per share
Basic and diluted $ (.01) $ .01
======== ========
Weighted average common share
and common share equivalents
Basic and diluted 19,252,118 21,681,129
========== ==========
Accompanying notes are an integral part of the financial statements.
4
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended September 30, 2001 and 2000
(Dollars in Thousands except per share)
2001 2000
-------- -------
(Unaudited) (Unaudited)
Sales $ 67,332 $ 973
Cost of sales 58,191 361
-------- -------
Gross profit 9,141 612
-------- -------
Selling, general and administrative expenses 8,410 869
Depreciation and amortization 1,195 245
-------- -------
Total operating expenses 9,605 1,114
-------- -------
Loss from operations (464) (502)
Other Income (Expenses)
Interest income 93 44
Interest expense (911) (347)
Gain on sale of assets 6,196 941
Other (99) --
-------- -------
Total other income (expenses) 5,279 638
-------- -------
Equity in losses of investees (229) (1,098)
Income tax expense (15) --
Minority interest 1 --
-------- -------
Net income (loss) 4,572 (962)
Other comprehensive income (loss)-net of tax
Foreign currency translation adjustment 3 (36)
Unrecognized gain (loss) from investments-
marketable securities (7,705) 11,093
--------- --------
Comprehensive (loss) income $ (3,130) $ 10,095
========= ========
Income (loss) per share
basic and diluted $ .24 $ (.05)
========= ========
Weighted average common share
and common share equivalents
basic and diluted 19,261,440 18,596,869
========== ==========
Accompanying notes are an integral part of the financial statements.
5
CAPCO ENERGY, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2001 and 2000
(Dollars in Thousands)
2001 2000
------ ------
(Unaudited) (Unaudited)
Cash Flows used in Operating Activities:
Net income (loss) $ 4,572 $ (962)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation, depletion and amortization 1,195 245
Gain on sale of assets (6,196) (941)
Equity in losses of investees 229 1,098
Other non-cash income items 30 --
Changes in Assets and Liabilities:
(Increase) decrease in assets:
Accounts receivable, trade (2,018) (322)
Inventory, net 187 --
Other assets (38) (19)
Increase (decrease) in liabilities:
Accounts payable, trade 1,010 332
Accrued expenses (330) 511
Taxes payable 845 --
------- --------
Net cash used in operating
activities (514) (58)
------- --------
Cash Flows from Investing Activities:
Cash proceeds from sale of property, plant
and equipment 41 --
Acquisition, net of cash received (4,269) (37)
Purchase of property, plant and equipment (2,149) (503)
Investment 110 (1,203)
Proceeds from sale of marketable securities 8,125 941
Purchases of marketable securities (362) --
Payments on note receivable 220 --
------- --------
Net cash provided by (used in)
investing activities 1,716 (802)
------- --------
Continued on next page
6
CAPCO ENERGY, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the nine months ended September 30, 2001 and 2000
(Dollars in Thousands)
2001 2000
------ ------
(Unaudited) (Unaudited)
Cash Flows from Financing Activities:
Borrowings on revolving
credit facilities, net $ 43 $ --
Decrease in book overdraft (539) --
Payments on long-term debt (5,909) (609)
Proceeds from long-term debt 4,421 1,362
Proceeds from sale of stock -- 74
Decrease in restricted cash 702 --
Retirement of company stock (128) --
-------- --------
Net cash (used in) provided by
financing activities (1,410) 827
-------- --------
Net decrease in cash and
equivalents (208) (33)
Cash and equivalents, beginning of period 414 65
-------- --------
Cash and equivalents, end of period $ 206 $ 32
======== ========
Accompanying notes are an integral part of the financial statements.
7
CAPCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 three segments of business: oil and gas
production, convenience store operations and distribution of refined petroleum
products. The principal executive offices of the Company are located at 2922
East Chapman, Suite 202, Orange, California. The Company was incorporated as
Alfa Resources, Inc. a Colorado corporation on January 6, 1981. In November
1999, the Company amended its articles of incorporation to change its name from
Alfa Resources, Inc. to Capco Energy, Inc. Capco's subsidiaries are Capco
Resource Corporation ("CRC"), Capco Asset Management, Capco Resources Ltd.
("CRL") and Capco Monument LLC. Capco also had a significant ownership in Meteor
Industries, Inc. ("MII").
Capco purchased Meteor Enterprises, Inc. ("MEI") from MII in April 2001 (Note
3). Effective December 31, 2000, MII 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"), which is a non-consolidated subsidiary due to the
fact that the company has voting and control interests that are less than 51%.
The Company'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.
8
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.
These significant estimates included the use of proved oil and gas reserve
volumes and the related present value of estimated future net revenues
therefrom.
PRICE LEVEL CHANGES AND REVOLVING CREDIT FACILITY
The prices the Company pays for gasoline and diesel products are subject to
market fluctuation and are not in the control of the Company. Prices for these
products can and have fluctuated significantly. Higher product prices could have
a significant impact on the Company's borrowing capabilities due to the
generally faster timing required for payments to the Company's suppliers
compared to the timing of collection of receivables from its customers. When
necessary, the Company finances these working capital requirements through its
revolving bank credit facility. This facility contains certain financial
covenants, which are based on the Company's budgeted performance. If, as a
result of price changes or other factors, the Company is unable to meet its debt
covenants, its ability to continue to borrow under the revolving credit facility
could be limited. If that were to occur, the Company would have to make
alternative financial arrangements, which could include seeking additional debt
or equity financing which may or may not be available. As of September 30, 2001,
the Company was out of compliance with several debt covenants. As of the date of
this report the lender has not indicated they plan to call the facility for out
of compliance covenants. The Company plans to request from the lender a waiver
of all out of compliance covenants at year-end. The Company has requested the
lender to consider revising certain covenants that are out of compliance due to
the write down of certain assets related to the acquisition of MEI.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term, highly liquid investments
readily convertible into cash with an original maturity of three months or less.
RESTRICTED CASH
The Company has revolving bank credit facilities, which require the use of
depository accounts from which collected funds are transferred to the lender.
The lender then applies these collections to the revolving credit facilities.
The lender controls these accounts.
9
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 (trade and related party), notes
receivable and accounts payable (trade and related party), and accrued expenses,
the carrying amounts approximate fair value due to their short maturities. The
amounts owed for long-term debt and revolving credit facility, also approximate
fair value because current interest rates and terms offered to the Company are
at current market rates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk are cash and accounts receivable arising from its normal business
activities. The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances have exceeded the FDIC insured
levels at various times during the year. The Company routinely assesses the
financial strength of its customers and, based upon factors surrounding the
credit risk, establishes an allowance, if required, for uncollectible accounts
and, as a consequence, believes that its accounts receivable credit risk
exposure beyond such allowance is limited.
MAJOR CUSTOMER
One customer accounted for approximately 12% of the Company's net sales for the
nine months ended September 30, 2001. This customer owed the Company
approximately $1.2 million as of September 30, 2001.
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) 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.
10
PROPERTY AND EQUIPMENT
The Company follows the "full-cost" method of accounting for oil and gas
property and equipment costs. Under this method, all productive and
nonproductive costs incurred in the acquisition, exploration, and development of
oil and gas reserves are capitalized. Such costs include lease acquisitions,
geological and geophysical services, drilling, completion, equipment, and
certain general and administrative costs directly associated with acquisition,
exploration, and development activities. General and administrative costs
related to production and general overhead are expensed as incurred. No gains or
losses are recognized upon the sale or disposition of oil and gas properties,
except in transactions that involve a significant amount of reserves. The
proceeds from the sale of oil and gas properties are generally treated as a
reduction of oil and gas property costs. Fees from associated oil and gas
exploration and development partnerships, if any, will be credited to oil and
gas property costs to the extent they do not represent reimbursement of general
and administrative expenses currently charged to expense.
Such costs can be directly identified with acquisition, exploration and
development activities and do not include any costs related to production,
general corporate overhead, or similar activities.
Future development, site restoration, and dismantlement and abandonment costs,
net of salvage values, are estimated on a property-by-property basis based on
current economic conditions and are amortized to expense as the Company's
capitalized oil and gas property costs are amortized. The Company's properties
are all onshore, and the Company expects that the salvage value of the tangible
equipment will partially offset any site restoration and dismantlement and
abandonment costs.
Non-oil and gas producing properties and equipment are stated at cost; major
renewals and improvements are charged to the property and equipment accounts;
while replacements, maintenance and repairs, which do not improve or extend the
lives of the respective assets, are expensed currently. At the time property and
equipment are retired or otherwise disposed of, the asset and related
accumulated depreciation accounts are relieved of the applicable amounts. Gains
or losses from retirements or sales are credited or charged to operations.
11
DEPRECIATION AND DEPLETION
The provision for depreciation and depletion of oil and gas properties is
computed on the unit-of-production method. Under this method, the Company
computes the provision by multiplying the total unamortized costs of oil and gas
properties including future development, site restoration, and dismantlement and
abandonment costs, but excluding costs of unproved properties by an overall rate
determined by dividing the physical units of oil and gas produced during the
period by the total estimated units of proved oil and gas reserves. This
calculation is done on a country-by-country basis for those countries with oil
and gas production. The cost of unevaluated properties not being amortized, to
the extent there is such a cost, is assessed quarterly to determine whether the
value has been impaired below the capitalized cost. Any impairment assessed is
added to the cost of proved properties being amortized. The costs associated
with unevaluated properties relate to projects which were undergoing exploration
or development activities or in which the Company intends to commence such
activities in the future. The Company will begin to amortize these costs when
proved reserves are established or impairment is determined. Management believes
no such impairment exists at September 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
12
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.
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 owed 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. All shares were issued at values that approximate the
fair market value of the stock on the date of issuances.
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, which approximates the fair market value of the stock on the date of
issuance.
During the quarter ended September 30, 2001, the Company had the following
equity transactions:
Issued 198,000 shares of Common Stock for consulting services in the amount of
$135,420, which approximates the fair market value of the stock on the date of
issuance.
REVENUE RECOGNITION
Revenue from product sales is recognized when the product is delivered. Revenue
from services is recognized when the services are performed and billable.
13
STOCK BASED COMPENSATION
The Company accounts for employee stock options in accordance with APB No. 25,
"Accounting for Stock Issued to Employees". Under APB 25, the Company recognizes
no compensation expense related to employee stock options, as no options are
granted at a price below market price on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation", which prescribes the
recognition of compensation expense based on the fair value of options on the
grant date, allows companies to continue applying APB 25 if certain pro forma
disclosures are made assuming hypothetical fair value method, for which the
Company uses the Black-Scholes option-pricing model.
For non-employee stock based compensation the Company recognizes an expense in
accordance with SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant. For stock-based awards the value is
based on the market value for the stock on the date of grant and if the stock
has restrictions as to transferability a discount is provided for lack of
tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.
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 September 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.
14
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations." SFAS No. 141 supersedes Accounting Principles Board
("APB") No. 16 and requires that any business combinations initiated after June
30, 2001 be accounted for as a purchase; therefore, eliminating the
pooling-of-interest method defined in APB 16. The statement is effective for any
business combination initiated after June 30, 2001 and shall apply to all
business combinations accounted for by the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company does not expect the adoption
to have a material impact to the Company's financial position or results of
operations since the Company has not participated in such activities covered
under this pronouncement.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles."
SFAS No. 142 addresses the initial recognition, measurement and amortization of
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) and addresses the amortization
provisions for excess cost over fair value of net assets acquired or intangibles
acquired in a business combination. The statement is effective for fiscal years
beginning after December 15, 2001, and is effective July 1, 2001 for any
intangibles acquired in a business combination initiated after June 30, 2001.
The Company is evaluating any accounting effect, if any, arising from the
recently issued SFAS No. 142, "Goodwill and Other Intangibles" on the Company's
financial position or results of operations.
In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. The Company does not expect the adoption to have a material impact to
the Company's financial position or results of operations.
15
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 to
current year presentation.
NOTE 3 - ACQUISITION OF METEOR ENTERPRISES, INC.
Capco purchased MEI from MII for $5.5 million and assumption of certain
environmental liabilities and other indemnities. MEI owned substantially all of
MII's assets (see Note 1); excluded were 400,000 shares of Active IQ
Technologies, Inc.'s common stock and certain amounts of cash, which remained in
MII Also, MEI contains all of the liabilities of MII, 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 Capco borrowed $1.7
million and sold $3.0 million of marketable securities, $0.3 million of MII
common stock, and $0.5 million in a note payable to the seller. At the time of
the acquisition, Capco had $1.7 million of debt due to MEI. Upon closing of the
acquisition MEI relieved Capco of the debt. Capco has treated the cancellation
of debt as a reduction in the purchase price, resulting in a net acquisition
cost of $3.8 million.
16
The acquisition of MEI 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 MEI, 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 (negative goodwill) (2,459)
Allocation of negative goodwill:
Plant, property and equipment 2,325
Intangibles 134
--------
$ -0-
========
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 nine and three month periods ended September
30, 2001, would have increased for 1,587,448 and 1,578,986 shares of Common
Stock, respectively, if associated stock options would have had a dilutive
effect. The Company's weighted average shares outstanding for the nine and three
month periods ended September 30, 2000, would have increased for 984,310 and
1,600,362 shares of Common Stock, respectively, if associated stock options
would have had a dilutive effect.
17
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 nine months ended September 30, 2001, the Company operated in three
business segments: oil and gas production, convenience store operations and
distribution of refined petroleum products.
The oil and gas production segment would be the typical "upstream" activities of
an energy company, consisting of the production and sale of oil, gas and natural
gas liquids.
The convenience store operation consists of retail sales of gasoline and diesel
fuels and grocery items.
The distribution of refined petroleum products segment would be the typical
"downstream" activities of an energy company, excluding refining. The Company
sells diesel, gas, propane, lubricants, antifreeze and other refined products.
18
Senior management evaluates and makes operating decisions about each of these
operating segments based on a number of factors. The most significant factors
used by management in evaluating the operating performance are net sales, gross
profit, selling, general and administrative, and depletion, depreciation and
amortization as presented below:
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
(Unaudited)
Oil and Gas Production:
Net sales $ 433 $ 371 $ 1,273 $ 973
Gross profit 242 274 585 612
Selling, general and
administrative 56 68 142 189
Depreciation, depletion
and amortization 135 93 338 245
Convenience Store Operation:
Net sales $ 1,260 $ -- $ 1,260 $ --
Gross profit 179 -- 179 --
Selling, general and
Administrative 200 -- 200 --
Refined Product Distribution:
Net sales $ 37,425 $ -- $ 65,227 $ --
Gross profit 5,107 -- 8,377 --
Selling, general and
administrative 3,926 -- 6,759 --
Depreciation, depletion
and amortization 516 -- 857 --
Corporate and other:
Selling, general and
Administrative $ 417 $ 197 $ 1,309 $ 680
Income (loss) from operations 278 (84) (464) (502)
Reconciliation to net income (loss):
Other income (expenses) $ (417) $ 429 $ 5,279 $ 638
Equity in losses of investees (4) (195) (229) (1,098)
Income tax benefit (expense) (49) -- (15) --
Minority interest 2 -- 1 --
Net income (loss) $ (190) $ 150 $ 4,572 $ (962)
19
NOTE 7 -- PRO FORMA FINANCIAL INFORMATION (Unaudited)
Effective April 30, 2001, Capco Energy, Inc. closed on its acquisition of all of
the outstanding common stock of MEI, which acquisition has been accounted for
under the purchase method of accounting. The purchase price for the common stock
was $5.5 million paid in the form of $4.7 million cash, of which Capco borrowed
$1.7 million and sold $3.0 million of marketable securities, $0.3 million of MII
common stock, and $0.5 million in a note payable to the seller. At the time of
the acquisition, Capco had $1.7 million of debt due to MEI. Upon closing of the
acquisition MEI relieved Capco of the debt. Capco has treated the cancellation
of debt as a reduction in the purchase price, resulting in a net acquisition
cost of $3,756,000.
The accompanying pro forma information combines the activities of Capco Energy,
Inc. and MEI for the periods described.
The pro forma consolidated statement of operations for the nine months ended
September 30, 2001, is presented as if the acquisition had occurred on January
1, 2001, and includes the statement of operations of Capco Energy, Inc.
for the nine months ended September 30, 2001, and the operations of MEI for the
four months ended April 30, 2001.
The pro forma consolidated statement of operations for the nine months ended
September 30, 2000, is presented as if the acquisition had occurred on January
1, 2000, and includes the statements of operations of Capco Energy, Inc.
and MEI for the nine months ended September 30, 2000.
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 respective periods.
The pro forma consolidated statements of operations should be read in
conjunction with the historical financial statements and notes thereto of MEI
and of Capco Energy, Inc.
The proforma consolidated financial statements for the year ended December 31,
2000, are included in the Company's amended Form 8-K dated April 27, 2001.
Pro Forma Entries
a. Entry to eliminate inter-company interest income and expense.
b. Entry to adjust depreciation expense for the reduction in fixed assets
value.
20
CAPCO ENERGY, INC. AND
METEOR ENTERPRISES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 30, 2001
(Dollars in Thousands, except for per share information)
PRO FORMA PRO FORMA
CAPCO METEOR ENTRIES CONSOLIDATED
---------- ---------- ---------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $ 67,332 $ 55,402 $ - $ 122,734
Cost of sales, excluding depreciation 58,191 49,149 - 107,340
---------- ---------- ---------- ----------
Gross profit 9,141 6,253 - 15,394
---------- ---------- ---------- ----------
Selling, general and administrative
expenses 8,410 8,047 - 16,457
Depreciation and amortization 1,195 658 (114) (b) 1,739
---------- ---------- ---------- ----------
Total operating expenses 9,605 8,705 (114) 18,196
---------- ---------- ---------- ----------
Loss from operations (464) (2,452) 114 (2,802)
---------- ---------- ---------- ----------
Other income and (expenses)
Interest income 93 170 (38) (a) 225
Interest expense (911) (531) 38 (a) (1,404)
Other (99) (706) - (805)
Gain on sale of assets 6,196 (45) - 6,151
---------- ---------- ---------- ----------
Total other income and (expenses) 5,279 (1,112) - 4,167
---------- ---------- ---------- ----------
Income (loss) before income taxes and
minority interest 4,815 (3,564) 114 1,365
Income tax (benefit) expense (15) 290 - 275
Minority interest 1 (2,080) - (2,079)
Equity in losses of investees (229) - - (229)
---------- ---------- ---------- ----------
Net income (loss) $ 4,572 $ (5,354) $ 114 $ (668)
========== ========== ========== ==========
Income (loss) per share
Basic and diluted $ 0.24 $ (0.03)
========== ==========
Weighted average shares outstanding
Basic and diluted 19,261,440 19,261,440
========== ==========
21
CAPCO ENERGY, INC. AND
METEOR ENTERPRISES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 30, 2000
(Dollars in Thousands, except for per share information)
PRO FORMA PRO FORMA
CAPCO METEOR ENTRIES CONSOLIDATED
---------- ---------- ---------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales $ 973 $ 144,108 $ - $ 145,081
Cost of sales, excluding depreciation 361 127,438 - 127,799
---------- ---------- ---------- ----------
Gross profit 612 16,670 - 17,282
---------- ---------- ---------- ----------
Selling, general and administrative
expenses 869 13,529 - 14,398
Depreciation and amortization 245 1,780 (256) (b) 1,769
---------- ---------- ---------- ----------
Total operating expenses 1,114 15,309 (256) 16,167
---------- ---------- ---------- ----------
Income (loss) from operations (502) 1,361 256 1,115
---------- ---------- ---------- ----------
Other income and (expenses)
Interest income 44 276 (85) (a) 235
Interest expense (347) (1,095) 85 (a) (1,357)
Other (884) - (884)
Gain on sale of assets 941 6 - 947
---------- ---------- ---------- ----------
Total other income and (expenses) 638 (1,697) - (1,059)
---------- ---------- ---------- ----------
Income (loss) before income taxes and
minority interest 136 (336) 256 56
Income tax (benefit) expense - (153) - (153)
Minority interest - 368 - 368
Equity in losses of investees (1,098) - - (1,098)
---------- ---------- ---------- ----------
Net (loss) $ (962) $ (551) $ 256 $ (1,257)
========== ========== ========== ==========
Loss per share
Basic and diluted $ (0.05) $ (0.07)
========== ==========
Weighted average shares outstanding
Basic and diluted 18,596,869 18,596,869
========== ==========
22
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 that include, among others, statements concerning: the benefits expected
to result from Capco's acquisition of CRL, CRC and MEI, 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.
23
RESULTS OF OPERATIONS
- ---------------------
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SEPTEMBER 30, 2000
OIL AND GAS PRODUCTION SEGMENT
Capco's revenues from oil and gas activities were $1.3 million in 2001 compared
to $1.0 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 46,540 BOE in 2001 from 35,556 BOE in 2000. The average
sales price received per BOE increased to $26.47 in 2001 from $26.38 in 2000.
Capco's cost of sales were $0.7 million in 2001 compared to $0.4 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 production. 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.
CONVENIENCE STORE OPERATIONS
Effective August 1, 2001, the Company assumed the operations of nine convenience
stores located in New Mexico and Colorado from an affiliate. Sales, cost of
sales and general and administrative expenses during the period ended September
30, 2001, totaled $1.3 million, $1.1 million and $0.2 million, respectively.
REFINED PRODUCT DISTRIBUTION SEGMENT
Capco's revenues from refined product distribution segment were $65.2 million
for the nine months ended September 30, 2001 and $-0- in 2000. The increase is
due to the purchase of MEI.
Gross profit for the nine months ended September 30, 2001 and 2000, was $8.4
million and $-0-, respectively. The increase is due to the purchase of MEI.
Selling, general, and administrative expenses were $6.8 million for the nine
months ended September 30, 2001, compared to $-0- for the nine months ended
September 30, 2000. The increase is due to the purchase of MEI.
Depreciation and amortization for the nine months ended September 30, 2001, was
$0.9 million compared to $-0- for the nine months ended September 30, 2000. The
increase is due to the purchase of MEI.
24
OTHER ITEMS
Selling, general and administrative ("SG&A") costs were $1.3 million in 2001
compared to $0.7 million in 2000. Personnel costs increased $0.3 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
third party services decreased $0.1 million. SG&A costs in 2001 also include a
write off for uncollectible accounts receivable in the amount of $0.2 million.
Interest expense increased to $0.9 million in 2001 from $0.3 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
$6.2 million in 2001 from $0.9 million in 2000 as the Company sold marketable
securities for working capital and to provide funding for its acquisitions.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SEPTEMBER 30, 2000
OIL AND GAS PRODUCTION SEGMENT
Capco's revenues from its oil and gas activities were $0.4 million in 2001
compared to $0.4 million in 2000. On a barrel of oil equivalent ("BOE") basis,
the Company's total production increased to 17,675 BOE in 2001 from 13,025 BOE
in 2000. The average sales price received per BOE decreased to $23.81 in 2001
from $27.51 in 2000. Capco's cost of sales were $0.2 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. Depreciation, depletion and amortization was
$0.1 million in 2001 compared to $0.1 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.
CONVENIENCE STORE OPERATIONS
Effective August 1, 2001, the Company assumed operations of nine convenience
stores located in New Mexico and Colorado from an affiliate. Sales, cost of
sales and general and administrative expenses during the period ended September
30, 2001, totaled $1.3 million, $1.1 million and $0.2 million, respectively
REFINED PRODUCT DISTRIBUTION SEGMENT
Capco revenues from its refined distribution segment were $37.4 million for the
three months ended September 30, 2001 and $-0- in 2000. The increase is due to
the purchase of MEI.
Gross profit for the three months ended September 30, 2001 and 2000, was $5.1
million and $-0-, respectively. The increase is due to the purchase of MEI.
25
Selling, general, and administrative expenses were $3.9 million for the three
months ended September 30, 2001, compared to $-0- for the three months ended
September 30, 2000. The increase is due to the purchase of MEI.
Depreciation and amortization for the three months ended September 30, 2001, was
$0.5 million compared to $-0- for the three months ended September 30, 2000. The
increase is due to the purchase of MEI.
OTHER ITEMS
Selling, general and administrative ("SG&A") costs were $0.4 million in 2001
compared to $0.2 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 write off for
uncollectible accounts receivable in the amount of $0.3 million. Interest
expense increased to $0.4 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 decreased to $0.1 million
in 2001 from $0.6 million in 2000, as the Company did not sell as many
marketable securities for working capital and to provide funding for its
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company had a working capital deficit of $0.3
million.
Net cash used in operating activities totaled $0.5 million for the nine months
ended September 30, 2001, compared to $0.1 million cash used in the nine months
ended September 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 $1.7 million for the nine
months ended September 30, 2001, compared to cash used of $0.8 million for the
nine months ended September 30, 2000. The increase in cash provided by investing
activities is principally related to proceeds from sale of marketable
securities, offset by acquisitions.
Net cash used in financing activities totaled $1.4 million for the nine months
ended September 30, 2001, compared to cash provided of $.8 million for the nine
months ended September 30, 2000. This decrease in cash provided by financing
activities is primarily related to payments made on long-term debt.
26
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% (6.00% and 9.50% at September 30, 2001
and September 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 September
30, 2001, the borrowing base was approximately $9.7 million. $8.3 million was
borrowed against the facility and is recorded as a current liability. As of
September 30, 2001, the Company was out of compliance with several debt
covenants. As of the date of this report the lender has not indicated they plan
to call the facility for out of compliance covenants. The Company plans to
request from the lender a waiver of all out of compliance covenants at year-end.
The Company has requested the lender to consider revising certain covenants that
are out of compliance due to the write down of certain assets related to the
acquisition of MEI.
The Company has various loans with banks, suppliers and individuals, which
require principal payments of $4.6 million in the next year.
The Company is obligated to pay lease costs of approximately $1.0 million during
the twelve-month period ending September 30, 2002, 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 nine months ended September
30, 2001 and 2000, is $69,000 and $-0-, respectively, for site assessment,
related cleanup costs and regulatory compliance.
The Company sells most of its oil production to certain major oil companies.
However, in the event these purchasers discontinued oil purchases, Capco has
made contact with other purchasers who would purchase the oil.
EFFECT OF CHANGES IN PRICES
Changes in prices during the past few years have been a significant factor in
the oil and gas industry. The price received for the oil and gas produced by
Capco has fluctuated significantly during the last year. Changes in the price
that Capco receives for its oil and gas is set by market forces beyond Capco's
control. That uncertainty in oil and gas prices makes it more difficult for a
company like Capco to increase its oil and gas asset bases and become a
significant participant in the oil and gas industry.
27
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to interest rate changes is primarily related to its
variable rate debt issued under its $12.5 million revolving credit facility.
Because the interest rate on this facility is variable, based upon the lender's
base rate, the Company's interest expense and net income are affected by
interest rate fluctuations. If interest rates were to increase or decrease by
100 basis points, the result, based upon the existing outstanding debt as of
September 30, 2001, would be an annual increase or decrease of approximately
$130,000 in interest expense and a corresponding decrease or increase of
approximately $78,000 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.
None.
28
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: November 16, 2001 By: /s/ Dennis R. Staal
------------------------
Dennis R. Staal, Chief Financial and
Accounting Officer
29