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, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______, 19___ to _______, 19___.
Commission File Number: 0-10157
CAPCO ENERGY, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
COLORADO 84-0846529
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(State or Other Jurisdiction of (IRS Employer Identi-
Incorporation or Organization) fication Number)
2922 E. CHAPMAN AVENUE, 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 19,236,797 shares of the Registrant's $.001 par value common stock
outstanding as of November 6, 2002.
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2002
(Unaudited)
ASSETS
(Dollars in Thousands)
Current Assets:
Cash $ 17
Restricted cash 1,061
Investment in equity securities - marketable 490
Accounts receivables-trade, net of
allowance of $390 8,477
Accounts receivable, related parties 504
Notes receivable 88
Inventory, net 2,957
Deferred tax asset - current portion 333
Other current assets 534
---------
Total Current Assets 14,461
Property, Plant and Equipment, net 16,317
Other Assets:
Notes receivable, less current portion 1,982
Investments in closely held businesses 402
Deferred tax asset, less current portion 550
Other assets 298
---------
Total Assets $ 34,010
=========
Accompanying notes are an integral part of the financial statements.
2
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
September 30, 2002
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Current Liabilities:
Book overdraft $ 809
Accounts payable, trade 7,001
Revolving credit facility 7,004
Current maturities, long-term debt 2,510
Accrued expenses 1,685
Accounts payable, related parties 106
---------
Total Current Liabilities 19,115
---------
Non-current Liabilities:
Long term debt, less current maturities 6,530
Accrued environmental expenses 308
Deferred tax liability 1,057
---------
Total Non-current Liabilities 7,895
---------
Total Liabilities 27,010
---------
Minority Interest in Consolidated Subsidiary 388
---------
Commitments and Contingencies (Note 4) --
Stockholders' Equity:
Preferred stock, $1.000 par value; authorized
10,000,000 shares, 292,947 shares issued
and outstanding 293
Common stock, $0.001 par value;
authorized 150,000,000 shares;
19,489,974 shares issued 19
Additional paid in capital 1,320
Treasury stock (253,177 shares, at cost) (117)
Cumulative other comprehensive income 4
Retained earnings 5,093
---------
Total Stockholders' Equity 6,612
---------
Total Liabilities and
Stockholders' Equity $ 34,010
=========
Accompanying notes are an integral part of the financial statements.
3
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three Months Ended September 30, 2002 and 2001
(Unaudited)
(Dollars in Thousands except per share)
2002 2001
------ ------
Sales $ 26,732 $ 38,690
Cost of sales 22,580 33,162
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Gross profit 4,152 5,528
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Selling, general and administrative expenses 4,038 4,599
Depreciation, depletion and amortization 555 651
------ ------
Total operating expenses 4,593 5,250
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(Loss) income from operations (441) 278
------ ------
Other Income (Expenses)
Interest income 68 25
Interest expense (282) (440)
(Loss) gain on sale of marketable
securities and assets (111) 95
Equity loss from operations of investments -- (4)
Other -- (97)
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Total other income (expenses) (325) (421)
------ ------
Loss before taxes and minority
interest in income (766) (143)
Income tax expense -- (49)
Minority interest 5 2
------ ------
Net loss (761) (190)
Other comprehensive (loss) income-net of tax
Foreign currency translation adjustment 4 3
Unrecognized gain (loss) from investments-
marketable securities (178) (1,693)
------ ------
Comprehensive loss $ (935) $ (1,880)
====== ======
Loss per share
Basic and diluted $ (.04) $ (.01)
====== ======
Weighted average common share
and common share equivalents
Basic and diluted 19,273,927 19,252,118
========== ==========
Accompanying notes are an integral part of the financial statements.
4
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(Dollars in Thousands except per share)
2002 2001
------ ------
Sales $ 77,253 $ 67,332
Cost of sales 64,839 58,191
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Gross profit 12,414 9,141
------ ------
Selling, general and administrative expenses 12,235 8,410
Depreciation, depletion and amortization 1,537 1,195
------ ------
Total operating expenses 13,772 9,605
------ ------
Loss from operations (1,358) (464)
------ ------
Other Income (Expenses)
Interest income 208 93
Interest expense (907) (911)
Gain on sale of marketable
securities and assets 1,764 6,196
Equity loss from operations of investments -- (229)
Other -- (99)
------ ------
Total other income (expenses) 1,065 5,050
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(Loss) income before taxes and minority
interest in income (293) 4,586
Income tax expense -- (15)
Minority interest (126) 1
------ ------
Net (loss) income (419) 4,572
Other comprehensive (loss)income-net of tax
Foreign currency translation adjustment (1) 3
Unrecognized (loss) gain from investments-
marketable securities (791) (7,705)
------ ------
Comprehensive loss $ (1,211) $ (3,130)
====== ======
(Loss) income per share
Basic and diluted $ (.02) $ .24
====== ======
Weighted average common share
and common share equivalents
Basic and diluted 19,302,454 19,261,440
========== ==========
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, 2002 and 2001
(Unaudited)
(Dollars in Thousands)
2002 2001
------ ------
Cash Flows From Operating Activities:
Net (loss) income $ (419) $ 4,572
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation, depletion and amortization 1,537 1,195
Gain on sale of assets (1,764) (6,196)
Equity in losses of investees -- 229
Minority interest in income (loss) of
consolidated subsidiary 126 (1)
Compensation cost of Common Stock issued
and options issued/canceled 123 123
Other -- (2)
(Increase) decrease in deferred tax asset (362) 1,314
Increase (decrease)in deferred tax liability 362 (1,353)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable, trade (617) (2,018)
Inventory, net 25 187
Other current assets (245) 189
Other assets 39 (227)
Increase (decrease) in liabilities:
Accounts payable, trade 65 1,010
Accrued expenses (592) 515
------ ------
Net cash (used in) operating
activities (1,722) (463)
------ ------
Cash Flows from Investing Activities:
Net payments from (advances to)
related parties 312 (51)
Proceeds from sale of property, plant
and equipment 1,215 41
Proceeds from sale of investment in
closely held business 850 --
Acquisition of Meteor Enterprises, net of
cash received -- (4,269)
Purchase of property, plant and equipment (946) (2,149)
Investment -- 110
Proceeds from sale of marketable securities 1,873 8,125
Purchases of marketable securities (446) (362)
Payments on note receivable 63 220
Advances on note receivable (net) (103) --
------ ------
Net cash provided by investing activities 2,818 1,665
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Continued on next page
Accompanying notes are an integral part of the financial statements.
6
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(Dollars in Thousands)
2002 2001
------ ------
Cash Flows from Financing Activities:
Borrowings on revolving
credit facilities, net $ 1,769 $ 43
Decrease in book overdraft (197) (539)
Payments on long-term debt (2,964) (5,909)
Proceeds from long-term debt 606 4,421
Proceeds from sale of Common Stock 5 --
(Increase) decrease in restricted cash (399) 702
Retirement of Common Stock (89) (128)
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Net cash (used in) financing activities (1,269) (1,410)
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Net decrease in cash and equivalents (173) (208)
Cash and equivalents, beginning of period 190 414
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Cash and equivalents, end of period $ 17 $ 206
====== ======
Supplemental disclosure of cash flow information:
Interest paid $ 986 $ 790
======== ========
Taxes paid $ -- $ --
======== ========
Supplemental disclosure of non-cash financing and investing activities:
Marketable securities reduced for sales and
carrying value adjustments $ 2,159 $ 7,705
======== ========
Note receivable exchanged for marketable
securities $ 103 $ --
======== ========
Account receivable converted to note receivable $ 31 $ --
======== ========
Note receivable received upon sale of
investment in closely held business $ 1,850 $ --
======== ========
Accompanying notes are an integral part of the financial statements.
7
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(Dollars in Thousands)
Supplemental disclosure of non-cash financing and investing activities,
continued:
2002 2001
------ ------
Long-term debt reduced for assets
sold/exchanged $ 2,035 $ 127
======== ========
Long-term debt issued in connection with
acquisition of accounts receivable and
property $ 1,328 $ --
======== ========
Long-term debt issued for accounts payable $ 129 $ --
======== ========
Common Stock retired/options canceled
in exchange for assets $ 44 $ 604
======== ========
Common Stock/options issued for services $ 79 $ 149
======== ========
Common Stock issued for acquisition of
minority interests $ 132 $ 11
======== ========
Common Stock issued for loan closing costs $ 25 $ --
======== ========
Marketable securities reduced for shares
used as consideration for acquisition $ 170
========
Marketable securities increased for elimination
of investment in closely held business due
to business combination of investee $ 1,920
========
Net assets acquired in settlement of affiliate
receivable $ 19
========
Long-term debt issued for the acquisition
of land, equipment and investment in
closely held business $ 1,673
========
Long-term debt and accrued interest reduced
in connection with acquisition $ 1,755
========
Long-term debt issued in connection with
acquisition $ 500
========
Accompanying notes are an integral part of the financial statements.
8
CAPCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
NOTE 1 -- BASIS OF PRESENTATION
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, such interim statements reflect all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial position
and the results of operations and cash flows for the interim periods presented.
The results of operations for these interim periods are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes for the year ended December 31, 2001, filed with the
Company's Form 10-KSB.
NATURE OF OPERATIONS
Capco Energy, Inc. ("Capco" or the "Company") is an independent energy company
engaged primarily in the acquisition, development, production for and the sale
of oil, gas and natural gas liquids and the sale of refined petroleum products.
The Company's production activities are located principally in the United
States. Capco's operations consist of three segments of business: oil and gas
production, convenience store operations and distribution of refined petroleum
products. The principal executive offices of the Company are located at 2922
East Chapman Avenue, Suite 202, Orange, California. The Company was incorporated
as Alfa Resources, Inc. a Colorado corporation on January 6, 1981. In November
1999, the Company amended its articles of incorporation to change its name from
Alfa Resources, Inc. to Capco Energy, Inc.
The Company's future financial condition and results of operations will depend
upon prices received for its oil and natural gas and the costs of finding,
acquiring, developing and producing reserves. Prices for oil and natural gas are
subject to fluctuations in response to changes in supply, market uncertainty and
a variety of other factors beyond the Company's control. These factors include
worldwide political instability (especially in the Middle East), the foreign
supply of oil and natural gas, the price of foreign imports, the level of
consumer product demand and the price and availability of alternative fuels.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Capco and its
wholly and majority owned subsidiaries. Capco's subsidiaries are Capco Resource
Corporation ("CRC"), Capco Asset Management, Inc., Capco Resources Ltd. ("CRL")
(88.5% equity interest), Capco Monument LLC ("CM LLC") and Meteor Enterprises,
Inc. ("Enterprises"). The significant wholly owned subsidiaries of Enterprises
are: Meteor Marketing, Inc., Graves Oil & Butane Co., Inc., Tri-Valley Gas Co.
and Innovative Solutions and Technologies, Inc. Enterprises also owns 73% of
Meteor Holdings LLC. The Company also had significant equity interests in Rocky
Mountain Propane LLC ("RMP") and Meteor Industries, Inc. ("Industries"). All
references herein to Capco or the Company include the consolidated results. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
9
NOTE 1 -- BASIS OF PRESENTATION, Continued
PRICE LEVEL CHANGES AND REVOLVING CREDIT FACILITY
The prices the Company pays for gasoline and diesel products are subject to
market fluctuation and are not in the control of the Company. Prices for these
products can and have fluctuated significantly. Higher product prices could have
a significant impact on the Company's borrowing capabilities due to the
generally faster timing required for payments to the Company's suppliers
compared to the timing of collection of receivables from its customers. When
necessary, the Company finances these working capital requirements through its
revolving bank credit facility. This facility contains certain financial
covenants, which are based on the Company's budgeted performance. If, as a
result of price changes or other factors, the Company is unable to meet its debt
covenants, its ability to continue to borrow under the revolving credit facility
could be limited. If that were to occur, the Company would have to make
alternative financial arrangements, which could include seeking additional debt
or equity financing which may or may not be available. As of June 30, 2002, the
Company was in compliance with the covenants of the revolving bank credit
facility.
MAJOR CUSTOMER
No customer accounted for more than 10% of the Company's net sales for the three
months ended September 30, 2002.
INVESTMENT IN EQUITY SECURITIES
On May 15, 2002, the Company assigned 832,600 shares (approximately 52%) of its
equity interests in Chaparral Resources, Inc. to a lender in payment of $1.4
million due to the lender. The Company recorded a gain in the amount of $142,000
on this transaction.
In June 2002, the Company sold an additional 278,100 shares of its equity
interests in Chaparral Resources, Inc. to provide funding for the acquisition of
a producing oil and gas property. The Company recorded a gain in the amount of
$156,000 from the sale.
On April 30, 2002, the Company closed on the sale of its 61% equity interest in
RMP. The sales price of $2.8 million was paid in $850,000 cash, $1.85 million of
12.5% preferred membership interests (included in non-current notes receivable),
redeemable in five years, and $50,000 in a promissory note due January 1, 2003.
In addition, certain other assets, including property and equipment were
assigned to RMP, and RMP assumed $636,000 of long-term indebtedness of the
Company. The Company recorded a gain in the amount of $1.6 million from the sale
of its investment in RMP.
PROPERTY AND EQUIPMENT
On May 15, 2002, the Company closed on the sale of its interest in producing oil
properties located in Kansas, realizing sales proceeds in the amount of $1.1
million. Approximately $722,000 of the sales proceeds was used to repay
long-term debt and the balance was used for working capital. The Company
recorded a gain in the amount of $301,000 on this transaction.
10
NOTE 1 -- BASIS OF PRESENTATION, Continued
PROPERTY AND EQUIPMENT, Continued
The sale of the Company's equity interest in RMP included the assignment of
certain property and equipment to RMP. Land, buildings and equipment with a book
value of $263,000 were included in the sale; the Company recorded a loss in the
amount of $162,000 from the sale of these assets.
On June 18, 2002, the Company closed on an acquisition of producing oil and gas
properties and related accounts receivable at a total cost of $1.7 million
(adjusted for post-closing settlements). Approximately $439,999 of the
acquisition cost was allocated to accounts receivable and the remainder, $1.3
million, was allocated to producing oil and gas property. Funding for the
acquisition consisted of cash payments in the total amount of $399,000 and the
assumption of a production payable to the operator of the property in the amount
of $1.3 million. Operations from the properties began July 1, 2002.
IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable and is measured by a comparison of the
carrying amount of an asset to undiscounted future net cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment charge is recognized for the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. SFAS 144 requires companies to separately report discontinued operations
and extends that reporting to a component of an entity that either has been
disposed of (by sales, abandonment or in a distribution to owners) or is
classified as held for sale. Assets to be disclosed are reported at the lower of
the carrying amount or fair value less costs to sell. The Company adopted SFAS
144 on January 1, 2002. Adoption of SFAS No. 144 has not had a material impact
to the Company's financial position or results of operations. The provisions of
this statement for assets held for sale or other disposal generally are required
to be applied prospectively after the adoption date to newly initiated disposal
activities and, therefore, will depend on future actions initiated by
management. As a result, management cannot determine the potential effects that
adoption of SFAS 144 will have on the Company's consolidated financial
statements with respect to future disposal decisions, if any.
LONG-TERM DEBT
During the quarter ended September 30, 2002, the Company retired indebtedness in
the total amount of $573,000. Net cash flow in the amount of $227,000 from the
oil and gas properties acquired in June 2002 was used to reduce the production
payable. Other scheduled payments in the total amount of $346,000 were paid
during the period.
The production payable assumed by the Company in June 2002 in the original
amount of $1.5 million was subsequently reduced to $1.3 million as a result of
post closing settlement adjustments.
11
NOTE 1 -- BASIS OF PRESENTATION, Continued
LONG-TERM DEBT, Continued
Scheduled principal and interest payments in the amount of $80,000 that were due
to be paid to a lender on September 15, 2002, were not paid by the Company,
constituting an Event of Default under the loan agreements. Remedies available
to the lender, following the issuance of a Notice of Default and the lapse of
cure periods as specified in the loan agreements, include declaring the entire
note balances ($2.6 million at September 30, 2002) immediately due and payable,
foreclosing on the pledged security, which includes land, buildings, and
equipment, and collecting on any guarantees. Discussions have been held with the
lender and, as of this date, the lender has only requested that payment be made.
The Company intends to submit a payment plan to the lender that would provide
for the payment of the past due amounts, and certain penalties, before the end
of the calendar year.
COMMON STOCK
During the quarter ended March 31, 2002, the Company had the following equity
transactions:
The Company sold 1,000 shares of Common Stock from treasury, realizing proceeds
of $1,000; issued 11,123 shares of Common Stock from treasury to employees,
recording a charge to operations in the amount of $9,000; issued 5,000 shares of
Common Stock upon the exercise of options, realizing proceeds of $5,000; issued
4,000 shares of Common Stock for an equity interest in CRL at a cost basis of
$3,000; and issued 25,000 shares of Common Stock for loan closing fees at a cost
of $25,000. All shares were issued at values that approximate the fair market
value of the Common Stock on the dates of issuance.
During the quarter ended June 30, 2002, the Company had the following equity
transactions:
The Company acquired 1,500 shares of Common Stock at a cost of $1,000 to be held
as Treasury Stock and issued 178,400 shares of Common Stock for additional
equity interests in CRL at a cost basis of $128,000. All shares were issued at
values that approximate the fair market value of the Common Stock on the dates
of issuance.
During the quarter ended September 30, 2002, the Company had the following
equity transactions:
The Company acquired 214,300 shares of Common Stock at a cost of $89,000 to be
held as Treasury Stock.
STOCK BASED COMPENSATION
During the quarter ended March 31, 2002, vested options underlying 34,064 shares
of Common Stock were exchanged with the Company for interests in producing oil
and gas properties. The Company recorded a reduction to the carrying value of
oil and gas properties, and a charge to operations, in the amount of $44,000 in
connection with this transaction.
During the quarter ended June 30, 2002, the Company issued warrants and options
to consultants as part of their compensation for services. The Company recorded
an increase to paid-in capital, and a charge to operations, in the amount of
$70,000 for the value of the awards.
12
NOTE 1 -- BASIS OF PRESENTATION, Continued
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations." SFAS No. 141 supersedes Accounting Principles Board
("APB") No. 16 and requires that any business combinations initiated after June
30, 2001 be accounted for as a purchase; therefore, eliminating the
pooling-of-interest method defined in APB 16. The statement is effective for any
business combination initiated after June 30, 2001 and shall apply to all
business combinations accounted for by the purchase method for which the date of
acquisition is July 1, 2001 or later. Adoption of SFAS No. 141 has not had a
material impact to the Company's financial position or results of operations
since the Company has not participated in such activities covered under this
pronouncement.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles."
SFAS No. 142 addresses the initial recognition, measurement and amortization of
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) and addresses the amortization
provisions for excess cost over fair value of net assets acquired or intangibles
acquired in a business combination. The statement is effective for fiscal years
beginning after December 15, 2001, and is effective July 1, 2001 for any
intangibles acquired in a business combination initiated after June 30, 2001.
Adoption of SFAS No. 142 has not had a material impact to the Company's
financial position or results of operations since the Company has not
participated in such activities covered under this pronouncement.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires companies to record the fair value of a liability
for asset retirement obligations in the period in which they are incurred. The
statement applies to a company's legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
13
NOTE 1 -- BASIS OF PRESENTATION, Continued
NEW ACCOUNTING PRONOUNCEMENTS, Continued
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.
Certain reclassifications for the prior year have been made to conform to
current year presentation.
NOTE 2 -- EARNINGS PER SHARE
The Company uses SFAS No. 128, "Earnings Per Share" for calculating the basic
and diluted earnings (loss) per share. Basic earnings (loss) per share are
computed by dividing net income (loss) attributable to common stockholders by
the weighted average number of common shares outstanding. Diluted earnings
(loss) per share is computed similar to basic earnings (loss) per share except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. The Company's weighted
average shares outstanding for the three month periods ended September 30, 2002
and 2001, would have increased for 3,195,615 and 1,078,986 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 month
periods ended September 30, 2002 and 2001, would have increased for 3,648,593
and 1,087,448 shares of Common Stock, respectively, if associated stock options
would have had a dilutive effect.
NOTE 3 -- BUSINESS SEGMENTS
During the three and nine month periods ended September 30, 2002, the Company
operated in three business segments: oil and gas production, convenience store
operations and distribution of refined petroleum products. During the three and
nine month periods ended September 30, 2001, the Company operated in three
business segments, oil and gas production, convenience store operations (from
August 1, 2001), and distribution of refined petroleum products (from May 1,
2001).
The oil and gas production segment would be the typical "upstream" activities of
an energy company, consisting of the production and sale of oil, gas and natural
gas liquids.
The convenience store operation consists of retail sales of gasoline and diesel
fuels and grocery items.
The distribution of refined petroleum products segment would be the typical
"downstream" activities of an energy company, excluding refining. The Company
sells diesel, gas, propane, lubricants, antifreeze and other refined products.
14
NOTE 3 -- BUSINESS SEGMENTS, Continued
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.
Certain financial information for each segment for the three and nine month
periods ended September 30, 2002 and 2001, is presented below (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Oil and Gas Production:
Net sales $ 477 $ 433 $ 873 $ 1,273
Gross profit 266 242 379 585
Selling, general and
administrative 54 128 218 341
Depreciation and depletion 120 135 233 335
Convenience Store Operation:
Net sales $ 1,106 $ 1,260 $ 3,758 $ 1,260
Gross profit 128 179 558 179
Selling, general and
administrative 149 200 636 200
Depreciation 4 -- 12 --
Refined Product Distribution:
Net sales $25,467 $37,448 $73,837 $65,227
Gross profit 3,778 5,107 11,612 8,377
Selling, general and
administrative 3,611 3,926 10,622 6,759
Depreciation and amortization 429 516 1,287 857
Corporate and other:
Selling, general and
administrative $ 244 $ 344 $ 894 $ 1,110
Depreciation 2 1 5 3
------ ------ ----- -----
(Loss) income from operations (441) 278 (1,358) (464)
Reconciliation to net income:
Other income (expenses) $ (325) $ (421) $ 1,065 $ 5,050
Income tax benefit (expense) -- (49) -- (15)
Minority interest 5 2 (126) 1
------ ------ ------ ------
Net (loss) income $ (761) $ (190) $ (419) $ 4,572
====== ====== ====== ======
Identifiable fixed assets (net):
Oil and gas production $ 5,118 $ 4,210 $ 5,118 $ 4,210
Convenience store operation 13 30 13 30
Refined product distribution 10,967 11,451 10,967 11,451
Corporate and other 219 224 219 224
------ ------ ------ ------
Total identifiable fixed assets $16,317 $15,915 $16,317 $15,915
====== ====== ====== ======
15
NOTE 4 -- PRO FORMA FINANCIAL INFORMATION
Effective April 30, 2001, the Company closed on its acquisition of all of the
outstanding common stock of Enterprises, which acquisition has been accounted
for under the purchase method of accounting. The purchase price for the common
stock was $5.6 million paid in the form of $4.8 million cash, of which the
Company borrowed $1.8 million and sold $3.0 million of marketable securities,
$0.3 million of Industries common stock, and $0.5 million in a note payable to
the seller. At the time of the acquisition, the Company had $1.8 million of debt
due to Enterprises. Upon closing of the acquisition Enterprises relieved the
Company of the debt. Capco has treated the cancellation of debt as a reduction
in the purchase price, resulting in a net acquisition cost of $3.8 million.
The accompanying pro forma consolidated statement of operations for the 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 for the
nine months ended September 30, 2001, and the statement of operations of
Enterprises for the four months ended April 30, 2001.
The pro forma financial statement is not necessarily indicative of future
operations or the actual results that would have occurred had the acquisition
been consummated at the beginning of the period.
The pro forma consolidated statement of operations should be read in conjunction
with the historical financial statements and notes thereto of Enterprises and of
Capco.
The proforma consolidated financial statements for the year ended December 31,
2001, are included in the Company's annual report, Form 10-KSB, for the year
ended December 31, 2001.
Pro Forma Entries
a. Entry to eliminate inter-company interest income and expense.
b. Entry to adjust depreciation expense for the reduction in fixed assets
value.
16
CAPCO ENERGY, INC. AND
METEOR ENTERPRISES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2001
(Dollars in Thousands, except for per share information)
PRO FORMA PRO FORMA
CAPCO METEOR ENTRIES CONSOLIDATED
---------- ---------- ---------- ------------
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 loss in investments (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
========== ==========
17
NOTE 5 - SUBSEQUENT EVENTS
In October 2002, the Company's Board of Directors approved a plan to raise
capital from an initial public offering of 20% of the Company's equity ownership
of its oil and gas producing subsidiary. The registration statement for the
offering was filed in November 2002. It is anticipated that closing of offering
will take place in the first quarter of 2003. Net proceeds from the offering,
estimated to be $2.9 million, will be used for oil and gas property
acquisitions, well remediation programs and working capital.
Subsequent to September 30, 2002, the Company effected transactions to dispose
of the Preferred Interests ("Interests") in Rocky Mountain Propane, LLC. The
Interests are reported in the Company's balance sheet at September 30, 2002, at
their face amount of $1.8 million. In October 2002, $0.2 million of such
interests were assigned to the former chief operating officer of the Company's
refined product distribution segment in connection with the termination of his
employment with the Company, and in November 2002, agreement was reached to sell
the remaining $1.6 million of Interests for cash consideration of $1.1 million.
Closing of the sale is scheduled to take place in January 2003, subject to the
availability of funds by the purchaser of the Interests.
18
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 that include, among others, statements concerning: the benefits expected
to result from Capco's acquisition of CRL, CRC and Enterprises, including
synergies in the form of increased revenues, decreased expenses and avoiding
expenses and expenditures that are expected to be realized by Capco as a result
of the acquisitions, and other statements of: expectations, anticipations,
beliefs, estimations, projections, and other similar matters that are not
historical facts, including such matters as: future capital, development and
exploration expenditures (including the amount and nature thereof), drilling of
wells, reserve estimates (including estimates of future net revenues associated
with such reserves and the present value of such future net revenues), future
production of oil and gas, repayment of debt, business strategies, and expansion
and growth of business operations.
These statements are based on certain assumptions and analyses made by the
management of Capco in light of past experience and perception of: historical
trends, current conditions, expected future developments, and other factors that
the management of Capco believes are appropriate under the circumstances. Capco
cautions the reader that these forward-looking statements are subject to risks
and uncertainties, including those associated with: the financial environment,
the regulatory environment, and trend projections, that could cause actual
events or results to differ materially from those expressed or implied by the
statements. Such risks and uncertainties include those risks and uncertainties
identified below.
Significant factors that could prevent Capco from achieving its stated goals
include: the failure by Capco to integrate the respective operations of Capco
and its acquisitions or to achieve the synergies expected from the acquisitions,
declines in the market prices for oil and gas, increase in refined product
prices, and adverse changes in the regulatory environment affecting Capco. The
cautionary statements contained or referred to in this report should be
considered in connection with any subsequent written or oral forward-looking
statements that may be issued by Capco or persons acting on its or their behalf.
Capco undertakes no obligation to release publicly any revisions to any
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO SEPTEMBER 30, 2001
OIL AND GAS PRODUCTION SEGMENT
Capco's revenues from oil and gas activities were $0.5 million in 2002 compared
to $0.4 million in 2001. This increase is due to a decline in product prices
paid at the wellhead offset by an increase in production volumes. On a barrel of
oil equivalent ("BOE") basis, the Company's price per BOE declined to $21.21 in
19
2002 from $23.81 in 2001, resulting in a decrease in revenue of $46,000. Total
production was 22,505 BOE in 2002, compared with 17,675 BOE in 2001, resulting
in an increase in revenue of $102,000. Production from the Michigan properties
acquired in June 2002 totaled 17,400 BOE during the quarter; sale of the Buried
Hills property in Kansas in May 2002 and production declines at the Caplen Field
in Texas resulted in comparative decreases in production of 13,500 BOE during
the quarter.
Capco's cost of sales were $0.2 million in 2002 and in 2001. Depreciation,
depletion and amortization was $0.1 million in 2002 and $0.1 million in 2001.
Net operating revenues from Capco's oil and gas production are very sensitive to
changes in the price of oil; thus it is difficult for management to predict
results of operations from the Company's oil and gas production segment.
CONVENIENCE STORE OPERATION SEGMENT
Effective August 1, 2001, the Company assumed the operations of seven
convenience stores located in New Mexico and Colorado from an affiliate. In
October 2001, one store location was sold; in May 2002, two stores were closed
due to unprofitable operations. Sales were $1.1 million in 2002 compared to $1.3
million in 2001. The decrease is due principally to the reduction in store
locations and decreases in retail gasoline prices and quantities sold. Cost of
sales decreased to $1.0 million in 2002 from $1.1 million in 2001 due
principally to a reduction in gasoline purchases.
REFINED PRODUCT DISTRIBUTION SEGMENT
The Company had sales of $25.5 million in 2002, compared to $37.4 million in
2001, a decrease of $11.9 million. The decrease is due to declines in sales
quantities and in the sales price of diesel fuel, as discussed below.
Gross profit in 2002 and 2001 was $3.8 million and $5.1 million, respectively.
The decrease is primarily due to the decrease in sales revenue.
Gasoline volumes were 5.6 million gallons in 2002, compared to 6.6 million
gallons in 2001, a decrease of 1.0 million gallons. The decrease is due
principally to the restructuring of certain customer sales agreements to include
only hauling charges for the delivery of product, and exclude product sales.
Gasoline sales were $5.9 million ($1.06 per gallon) in 2002, compared to $6.8
million ($1.03 per gallon) in 2001, a decrease of $0.9 million due to the
decrease in sales volume offset by higher product prices in the current period.
Gross profit was $0.5 million ($0.10 per gallon)in 2002, compared to $0.7
million ($0.11 per gallon) in 2001, a decrease of $0.2 million, due to the
decreases in volume and margin.
Diesel volumes were 17.6 million gallons in 2002, and 25.5 million gallons in
2001, a decrease of 7.9 million gallons due primarily to sales to a major
customer no longer being included in diesel sales, as the Company is now
charging only for the freight haul of the product. Diesel sales were $15.9
million ($0.90 per gallon) in 2002, and $24.9 million ($0.98 per gallon) in
20
2001, a decrease of $9.0 million due to the decreases in sales volumes and sales
prices. Gross profit was $1.5 million ($0.08 per gallon) in 2002, and $2.3
million ($0.09) in 2001, a decrease of $0.8 million, due to the decreases in
volume and margin.
Grease and lubricants sales were $2.1 million in 2002, compared to $3.7 million
in 2001, a decrease of $1.6 million due principally to a reduction in sales
volumes in the current period. Gross profit was $0.5 million in 2002, compared
to $0.6 million in 2001, a decrease of $0.1 million.
Sales of other items, which consist of anti-freeze, chemicals, services,
hardware, rental income and miscellaneous items, were $1.6 million in 2002,
compared to $2.0 million in 2001, a decrease of $0.4 million. Gross profit was
$1.3 million in 2002, compared to $1.4 million in 2001, a decrease of $0.1
million.
OTHER ITEMS
Selling, general and administrative ("SG&A") expenses decreased to $4.0 million
in 2002 from $4.6 million in 2001. The decrease is attributable to a cost
containment program implemented in all segments of the Company's operations,
including a reduction in the number of employees. Interest expense decreased to
$0.3 million in 2002 from $0.4 million in 2001, due principally to a reduction
in interest-bearing indebtedness in 2002. Sales of marketable securities and
assets resulted in a loss of $0.1 million in 2002, compared with a gain of $0.1
million in 2001. The decrease was due principally to a decline in market value
in 2002 of the Company's portfolio of marketable securities.
NINE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO SEPTEMBER 30, 2001
OIL AND GAS PRODUCTION SEGMENT
Capco's revenues from oil and gas activities were $0.9 million in 2002 compared
to $1.3 million in 2001. This decrease is due to declines in product prices paid
at the wellhead and production volumes. On a barrel of oil equivalent ("BOE")
basis, the Company's price per BOE declined to $20.19 in 2002 from
$26.47 in 2001, resulting in a decrease in revenue of $0.3 million. Total
production was 42,707 BOE in 2002, compared with 46,540 BOE in 2001, resulting
in a decrease in revenue of $0.1 million. Production from the Michigan
properties acquired in June 2002 totaled 17,400 BOE; sale of the Buried Hills
property in Kansas in May 2002 and production declines at the Caplen Field in
Texas resulted in a comparative decrease in production of 19,494 BOE in 2002.
Capco's cost of sales were $0.5 million in 2002 and $0.7 million in 2001. The
decrease is due principally to well remediation programs that were applied to
producing properties in Texas and Kansas in 2001 in an effort to increase
production from the properties. Depreciation, depletion and amortization was
$0.2 million in 2002 and $0.3 million in 2001.
Net operating revenues from Capco's oil and gas production are very sensitive to
changes in the price of oil; thus it is difficult for management to predict
results of operations from the Company's oil and gas production segment.
21
CONVENIENCE STORE OPERATION SEGMENT
Effective August 1, 2001, the Company assumed the operations of seven
convenience stores located in New Mexico and Colorado from an affiliate. In
October 2001, one store location was sold; in May 2002, two stores were closed
due to unprofitable operations. Sales were $3.8 million in 2002 compared to $1.3
million in 2001 and cost of sales was $3.2 million in 2002 compared with $1.1
million in 2001. The increases in sales and cost of sales are due principally to
nine months of operations reported in 2002 versus two months of operations
reported in 2001.
REFINED PRODUCT DISTRIBUTION SEGMENT
Effective April 30, 2001, Capco acquired its refined product distribution
segment. All references to year 2001 consist of the five months of operations
included in the period subsequent to the acquisition.
The Company had sales of $73.8 million in 2002, compared to $65.2 million in
2001. The increase is due to increased sales volumes in 2002, offset by a
decrease in sales prices, as discussed below.
Gross profit in 2002 and 2001, was $11.6 million and $8.4 million, respectively.
The increase is primarily due to nine months of operations in 2002 compared to
five months of operations in 2001.
Gasoline volumes were 17.7 million gallons in 2002, compared to 10.8 million
gallons in 2001, an increase of 6.9 million gallons. The volume increase is
primarily due to nine months of operations in 2002 compared to five months of
operations in 2001. Gasoline sales were $16.0 million ($0.90 per gallon) in
2002, compared to $11.9 million ($1.10 per gallon) in 2001, an increase of $4.1
million primarily due to the increase in volume offset by lower sales prices
during the current period. Gross profit was $1.5 million ($0.09 per gallon) in
2002, and $1.2 million ($0.11 per gallon) in 2001, an increase of $0.3 million,
primarily due to the increase in volume offset by lower margins per gallon.
Diesel volumes were 56.4 million gallons in 2002, compared with 43.0 million
gallons in 2001, an increase of 13.4 million gallons, due primarily to nine
months of operations in 2002 compared to five months of operations in 2001,
offset by sales to a major customer no longer being included in diesel sales, as
the Company is now charging only for the freight haul of the product. Diesel
sales were $46.2 million ($0.82 per gallon) in 2002, compared with $43.5 million
($1.01 per gallon) in 2001, an increase of $2.7 million due to the increase in
sales volume offset by the decrease in sales price. Gross profit was $4.7
million ($0.08 per gallon) in 2002, and $3.6 million ($0.08 per gallon) in 2001,
an increase of $1.1 million, due primarily to the increase in volume.
Grease and lubricants sales were $6.7 million in 2002 and in 2001. Gross profit
was $1.5 million in 2002, compared to $1.2 million in 2001, an increase of $0.3
million.
22
Sales of other items, which consist of anti-freeze, chemicals, services,
hardware, rental income and miscellaneous items, were $5.1 million in 2002,
compared to $3.2 million in 2001, an increase of $1.9 million. Gross profit was
$3.9 million in 2002, compared to $2.4 million in 2001, an increase of $1.5
million.
OTHER ITEMS
Selling, general and administrative ("SG&A") expenses were $12.2 million in 2002
and $8.4 million in 2001. The consolidations of Enterprises and CM LLC for the
entire nine-month period in 2002 resulted in SG&A increases of $3.9 million and
$0.4 million, respectively. Included in the 2002 expenses are non-cash charges
in the total amount of $0.1 million attributable to the cost of Common Stock and
options to acquire Common Stock issued as compensation for services. Included in
the 2001 expenses is a non-recurring charge for bad debts in the amount of $0.3
million. Interest expense was $0.9 million in 2002 and $0.9 million in 2001.
Gain on sale of marketable securities and assets decreased to $1.8 million in
2002 from $6.2 million in 2001. The Company sold a significant portion of its
marketable securities portfolio in 2001, principally to provide funding for the
acquisition of Enterprises.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Company had a working capital deficit of $4.7
million. Management plans to continue to sell its marketable securities and
other assets to pay its debt and provide working capital. During the quarter
ended September 30, 2002, management continued its previously reported plans to
market for sale certain non core assets such as undeveloped land and other real
estate, the proceeds of which will be used to reduce debt, and management has
reduced its administrative staff and expenses. In October 2002, the Company's
Board of Directors approved a plan to raise capital from an initial public
offering of 20% of the Company's equity ownership of its subsidiary that is
engaged in oil and gas producing activities. Net proceeds from the offering,
estimated to be $2.9 million, will be used for oil and gas property
acquisitions, well remediation programs and working capital.
Net cash used in operating activities totaled $1.7 million for the nine months
ended September 30, 2002, compared to cash used in operating activities of $0.5
million for the nine months ended September 30, 2001. This increase in cash used
in operating activities is due principally to changes in working capital.
Net cash provided by investing activities totaled $2.8 million for the nine
months ended September 30, 2002, and $1.7 million for the nine months ended
September 30, 2001. Proceeds, net of related purchases, from the sale of
marketable securities and assets totaled $2.5 million in 2002. In 2001, proceeds
from the sale of marketable securities and assets, less related purchases and
the acquisition of Enterprises, totaled $1.4 million.
Net cash used in financing activities totaled $1.3 million for the nine months
ended September 30, 2002, compared to cash used in financing activities of $1.4
million for the nine months ended September 30, 2001. Changes in the revolving
credit facility and related account balances in 2002 resulted in a net cash
inflow of $1.2 million; in 2001 such changes accounted for a net cash inflow of
$0.2 million. Payments on long-term debt, less proceeds from long-term debt,
resulted in a net cash outflow of $2.4 million in 2002; in 2001 such activity
resulted in a net cash outflow of $1.5 million.
23
The Company has a revolving bank credit facility with a maximum commitment of
$12.5 million, which expires on December 31, 2002. The amount available under
the revolving credit facility is a function of the sum of eligible accounts
receivable and inventory as defined by the revolving credit agreement up to the
maximum commitment. Advances requested by the Company are subject to an interest
rate of the lender's base rate plus 0.5% (4.75% at September 30, 2002).
Additionally, the Company pays a commitment fee of 0.25% of the maximum
commitment. The revolving credit facility is collateralized by principally all
of the Company's trade receivables and inventory. At September 30, 2002, the
borrowing base was approximately $7.7 million, of which $7.0 million was
borrowed against the facility and is recorded as a current liability. As of
September 30, 2002, the Company was in compliance with the covenants of its
revolving credit facility.
The Company has various loans with banks, suppliers and individuals, which
require principal payments of $2.5 million in the twelve-month period ending
September 30, 2003. Scheduled principal and interest payments in the amount of
$80,000 that were due to be paid to a lender on September 15, 2002, were not
paid by the Company, constituting an Event of Default under the loan agreements.
Remedies available to the lender, following the issuance of a Notice of Default
and the lapse of cure periods as specified in the loan agreements, include
declaring the entire note balances ($2.6 million at September 30, 2002)
immediately due and payable, foreclosing on the pledged security, which includes
land, buildings, and equipment, and collecting on any guarantees. Discussions
have been held with the lender and, as of this date, the lender has only
requested that payment be made. The Company intends to submit a payment plan to
the lender that would provide for the payment of the past due amounts, and
certain penalties, before the end of the calendar year.
The Company is obligated to pay lease costs of approximately $0.9 million during
the twelve-month period ending September 30, 2003, for land, building,
facilities and equipment.
The Company is responsible for any contamination of land it owns or leases.
However, the Company may have limitations on any potential contamination
liabilities as well as claims for reimbursement from third parties. Included in
selling, general and administrative expenses for each of the three month periods
ended September 30, 2002 and 2001, is $0.1 million for site assessment, related
cleanup costs and regulatory compliance.
The Company sells most of its oil production to certain major oil companies.
However, in the event these purchasers discontinued oil purchases, Capco has
made contact with other purchasers who would purchase the oil.
EFFECT OF CHANGES IN PRICES
Changes in prices during the past few years have been a significant factor in
the oil and gas industry. The price received for the oil and gas produced by
Capco has fluctuated significantly during the last year. Changes in the price
that Capco receives for its oil and gas is set by market forces beyond Capco's
control. That uncertainty in oil and gas prices makes it more difficult for a
company like Capco to increase its oil and gas asset bases and become a
significant participant in the oil and gas industry.
24
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, intangible assets, recovery of oil and gas reserves,
financing operations, and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. The most
significant accounting estimates inherent in the preparation of the Company's
financial statements include estimates as to the appropriate carrying value of
certain assets and liabilities which are not readily apparent from other
sources, primarily allowance for doubtful accounts, the discounted value of
recoverable oil and gas reserves, accruals for environmental remediation
expenditures, and the recognition and classification of net operating loss
carryforwards between current and long-term assets. These accounting policies
are described at relevant sections in this discussion and analysis and in the
notes to the consolidated financial statements included in our Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2001.
Item 3: CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (the "Certifying
Officers") are responsible for establishing and maintaining disclosure controls
and procedures for the Company.
The Certifying Officers have designed such disclosure controls and procedures to
ensure that material information is made known to them, particularly during the
period in which this report was prepared.
The Certifying Officers have evaluated the effectiveness of the Company's
disclosure controls and procedures within 90 days of the date of this report and
believe that the Company's disclosure controls and procedures are effective
based on the required evaluation. There have been no significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
99.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
26
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 19, 2002 By: /s/ W. Gene Webb
------------------------
W. Gene Webb, Chief Financial and
Accounting Officer
27
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ilyas Chaudhary, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Capco Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Ilyas Chaudhary
-----------------------
Ilyas Chaudhary
Chief Executive Officer
28
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, W. Gene Webb, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Capco Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ W. Gene Webb
-----------------------
W. Gene Webb
Chief Financial Officer
29