UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______, 19___ to _______, 19___.
Commission File Number: 0-10157
CAPCO ENERGY, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
COLORADO 84-0846529
-------------------------------- -----------------------
(State or Other Jurisdiction of (IRS Employer Identi-
Incorporation or Organization) fication Number)
1401 BLAKE STREET, SUITE 100
DENVER, COLORADO 80202
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Address of Principal Executive Offices
(303) 572-1135
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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 19,272,777 shares of the Registrant's $.001 par value common stock
outstanding as of August 7, 2003.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
(Unaudited)
ASSETS
(Dollars in Thousands)
Current Assets:
Cash $ 10
Investment in equity securities - marketable 128
Accounts receivable-trade, net of
allowance of $48 149
Accounts receivable, related parties 51
Deferred tax asset 30
Other current assets 17
------
Total Current Assets 385
Oil and gas properties, using full cost accounting,
less accumulated depreciation and depletion of $1,552 4,897
Other Assets:
Assets held for sale (note 2) 16,785
Land 214
Deferred tax asset 66
Other assets 27
------
Total Assets $ 22,374
======
Accompanying notes are an integral part of the consolidated financial
statements.
2
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
JUNE 30, 2003
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Current Liabilities:
Accounts payable, trade $ 702
Current maturities, long-term debt, including a
related party 567
Accounts payable, related parties 95
Accrued expenses 510
Deposit on sale 300
-------
Total Current Liabilities 2,174
-------
Non-current Liabilities:
Long term debt, less current maturities 84
Deferred tax liability 96
-------
Total Non-current Liabilities 180
Liabilities attributable to assets held for sale (note 2) 15,521
Deferred gain attributable to business under contract
for sale, net of taxes (note 3) 181
Minority Interest in Consolidated Subsidiary 356
-------
Total Liabilities 18,412
-------
Commitments and Contingencies --
Stockholders' Equity:
Preferred stock, $1.00 par value; authorized
10,000,000 shares, 292,947 shares issued
and outstanding 293
Common stock, $0.001 par value;
authorized 150,000,000 shares;
19,574,554 shares issued 20
Additional paid in capital 1,327
Treasury stock, 301,777 shares, at cost (127)
Cumulative other comprehensive income (21)
Retained earnings 2,470
-------
Total Stockholders' Equity 3,962
-------
Total Liabilities and
Stockholders' Equity $ 22,374
=======
Accompanying notes are an integral part of the consolidated financial
statements.
3
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three Months ended June 30, 2003 and 2002
(Unaudited)
(As restated-see Note 1)
(Dollars in Thousands except per share)
2003 2002
-------- --------
(restated)
Sales $ 846 $ 128
Cost of sales 286 126
------- -------
Gross profit 560 2
------- -------
General and administrative expenses 330 456
Depreciation, depletion and amortization 187 38
------- -------
Total operating expenses 517 494
------- -------
Income (loss) from operations 43 (492)
Other Income (Expenses):
Interest expense (34) (45)
(Losses) gains on sales of investments-
marketable securities (1) 254
Holding gains (losses)-marketable securities 49 (65)
Gain on sale of oil and gas property -- 299
Loss on acquisitions of minority interest (76)
Other -- --
------- -------
Income (loss) from continuing operations
before taxes and minority interest 57 (125)
Provision for income taxes -- --
Minority interest in loss of consolidated
subsidiary 1 (132)
------- -------
Income (loss) from continuing operations 58 (257)
Discontinued operations: (note 2)
Loss from operations of business transferred
under contractual obligation during
the year 2002 (net of applicable income tax
benefit of $ -0-) -- (244)
(Loss) income from operations of business
transferred under contractual
obligation in April 2003 (net of
applicable income tax benefit of $ -0-) (442) 1,454
(Continued on Next Page)
Accompanying notes are an integral part of the consolidated financial
statements.
4
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three Months ended June 30, 2003 and 2002
(Unaudited)
(As restated-see Note 1)
(Dollars in Thousands except per share)
(continued)
2003 2002
------ ------
(restated)
Net (loss) income (384) 953
------- -------
Other comprehensive loss-net of tax
Foreign currency translation adjustment (10) (3)
Unrealized loss from investments-
marketable securities -- 153
------- -------
(10) 150
------- -------
Less: minority interest in comprehensive
loss of consolidated subsidiary 1 (23)
------- -------
Comprehensive (loss) income $ (393) $ 1,080
======= =======
Earnings per share, basic and diluted:
Income (loss) from continuing operations $ -- $ (0.01)
(Loss) income from discontinued operations,
including business transferred under
contractual obligation (0.02) 0.06
------- -------
Net loss $ (0.02) $ 0.05
======= =======
Weighted average common share
and common share equivalents
Basic and diluted 19,272,634 19,316,954
========== ==========
Accompanying notes are an integral part of the consolidated financial
statements.
5
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Six Months ended June 30, 2003 and 2002
(Unaudited)
(As restated-see Note 1)
(Dollars in Thousands except per share)
2003 2002
-------- --------
(restated)
Sales $ 1,535 $ 396
Cost of sales 617 283
------- -------
Gross profit 918 113
------- -------
General and administrative expenses 683 815
Depreciation, depletion and amortization 322 116
------- -------
Total operating expenses 1,005 931
------- -------
Loss from operations (87) (818)
Other Income (Expenses):
Interest expense (76) (174)
(Losses) gains on sales of investments-
marketable securities (12) 278
Holding gains (losses)- marketable securities 78 (66)
Gain on sale of oil and gas property 299
Loss on acquisitions of minority interest 100 (81)
------- ------
Income (loss) from continuing operations
before taxes and minority interest 3 (562)
Provision for income taxes -- --
Minority interest in loss (income) of
consolidated subsidiary 2 (131)
------- -------
Income (loss) from continuing operations 5 (693)
Discontinued operations: (note 2)
Loss from operations of business transferred
under contractual obligation during
the year 2002 (net of applicable income tax
benefit of $ -0-) -- (340)
(Loss) income from operations of business
transferred under contractual obligation
in April 2003 (net of applicable income
tax benefit of $ -0-) (959) 1,375
(Continued on Next Page)
Accompanying notes are an integral part of the consolidated financial
statements.
6
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Six Months ended June 30, 2003 and 2002
(Unaudited)
(As restated-see Note 1)
(Dollars in Thousands except per share)
(continued)
2003 2002
------ ------
(restated)
Net (loss) income (954) 342
------- -------
Other comprehensive loss-net of tax
Foreign currency translation adjustment (18) (5)
Unrealized loss from investments-
marketable securities -- (612)
------- -------
(18) (617)
------- -------
Less: minority interest in comprehensive
loss (income) of consolidated subsidiary 2 (23)
------- -------
Comprehensive loss $ (970) $ (298)
======= =======
Earnings per share, basic and diluted:
Income (loss) from continuing operations $ -- $ (0.03)
(Loss) income from discontinued operations,
including businesses transferred under
contractual obligations (0.05) 0.05
------- -------
Net (loss) income $ (0.05) $ 0.02
======= =======
Weighted average common share
and common share equivalents
Basic and diluted 19,275,706 19,316,954
========== ==========
Accompanying notes are an integral part of the consolidated financial
statements.
7
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
(Dollars in Thousands)
2003 2002
------ ------
Cash Flows From Continuing Operating Activities:
Net (loss) income $ (954) $ 342
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Net loss (income) from discontinued operations 959 (1,035)
Depreciation, depletion and amortization 322 116
Gain on sale of oil and gas property -- (299)
Losses (gains) on sales of investments-
marketable securities 12 (278)
Holding (gains) losses - marketable securities (78) 66
Loss on acquisitions of minority interest -- 81
Minority interest in (loss) income of
consolidated subsidiary 2 131
Compensation cost resulting from grant of
options to acquire Common Stock 38 70
Compensation cost resulting from sale of
interest in oil and gas property -- 44
Compensation cost of Common Stock/Treasury
Stock -- 9
Decrease (increase) in deferred tax asset 78 (110)
(Decrease) increase in deferred tax liability (78) 110
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable-trade (73) 243
Other current assets 30 --
Other assets 85 (55)
Increase (decrease) in liabilities:
Accounts payable (160) (215)
Accrued expenses 93 (234)
------ ------
Net cash provide by (used in) continuing
operating activities 276 (1,014)
------ ------
Cash Flows From Discontinued Operating Activities:
Net (loss) income (959) 1,035
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, depletion and amortization 390 866
Loss (gain) on sale of assets 147 (1,445)
Decrease (increase) in deferred tax asset 214 (111)
(Decrease) increase in deferred tax liability (214) 111
(Continued on Next Page)
Accompanying notes are an integral part of the consolidated financial
statements.
8
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
(Dollars in Thousands)
(continued)
2003 2002
------ ------
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable-trade 13 (1,476)
Inventory 1,114 94
Other current assets (402) (259)
Other assets (89) 43
Increase (decrease) in liabilities:
Accounts payable 521 697
Accrued expenses (19) (147)
Taxes payable (388) 30
------ ------
Net cash provided by (used in) discontinued
operating activities 328 (562)
------ ------
Net cash provided by (used in) all operating
activities 604 (1,576)
------ ------
Cash Flows From Continuing Investing Activities
Deposit received for sale of subsidiary equity
interest 300 --
Net advances from related parties 585 271
Equity contribution to subsidiary (400) --
Proceeds from sale of property and equipment -- 1,099
Capital expenditures for oil and gas property (39) (477)
Proceeds from sale of marketable securities 63 1,567
Purchase of marketable securities (2) (408)
Notes receivable loans -- (103)
------ ------
Net cash provided by continuing investing activities 507 1,949
------ ------
Cash Flows From Discontinued Investing Activities:
Cash applicable to assets held for sale 7 (81)
Net (advances) repayments with related parties (305) 30
Cash proceeds from sale of equity investment 766 850
Cash proceeds from sale of property 27 --
Cash proceeds from equity contribution 400 --
Purchase of property and equipment -- (275)
Notes receivable payments, net 25 23
------ ------
Net cash provided by discontinued investing
activities 920 547
------ ------
Net cash provided by all investing activities 1,427 2,496
------ ------
(Continued on Next Page)
Accompanying notes are an integral part of the consolidated financial
statements.
9
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
(Dollars in Thousands)
(continued)
2003 2002
------ ------
Cash Flows From Continuing Financing Activities:
Proceeds from long-term debt -- 200
Payment on long term debt (772) (1,203)
Sale of Common Stock and exercise of options -- 6
Purchase of Common Stock (3) --
------ ------
Net cash used in continuing financing activities (775) (997)
------ ------
Cash Flows from Discontinued Financing Activities:
Net (payments) advances on revolver (593) 285
Increase in book overdraft 58 74
Payment on long term debt (401) (799)
(Decrease) increase in restricted cash (312) 359
------ ------
Net cash used in discontinued financing
activities (1,248) (81)
------ ------
Net cash used in all financing activities (2,023) (1,078)
------ ------
Net increase (decrease) in cash 8 (158)
Cash, beginning of period 2 190
------ ------
Cash, end of period $ 10 $ 32
====== ======
Supplemental disclosure of cash flow information for continuing operations:
Interest paid $ 59 $ 288
====== ======
Taxes paid $ -- $ --
====== ======
Supplemental disclosure of cash flow information for discontinued operations:
Interest paid $ 344 $ 454
====== ======
Taxes paid $ -- $ --
====== ======
(Continued on Next Page)
Accompanying notes are an integral part of the consolidated financial
statements.
10
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
(Dollars in Thousands)
(continued)
2003 2002
------ ------
Supplemental disclosure of non-cash financing and investing activities for
continuing operations:
Marketable securities reduced for carrying
value adjustments $ 1,936
======
Note receivable exchanged for marketable securities $ 103
======
Notes receivable received as consideration
for sale of investment in subsidiary $ 2,200 $ --
====== ======
Long-term debt reduced for assets sold/exchanged $ 1,399
======
Long-term debt issued for property acquisition $ 1,533
======
Long-term debt issued for accounts payable $ 129
======
Common Stock retired in exchange for assets $ 44
======
Common Stock/options issued for services $ 79
======
Common Stock issued for acquisition of
minority interests $ 132
======
Treasury Stock issued in settlement of liability $ 25
======
Supplemental disclosure of non-cash financing and investing activities for
discontinued operations:
Account receivable converted to note receivable $ 31
======
Note receivable received upon sale of investment
in closely held business $ 1,850
======
Note receivable and account receivable provided as
proceeds in connection with sale of preferred
membership interests $ 349 $ --
====== ======
Long-term debt and accrued expenses reduced for
property sold/exchanged $ 975 $ 636
====== ======
Accompanying notes are an integral part of the consolidated financial
statements.
11
CAPCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, such interim statements reflect all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial position
and the results of operations and cash flows for the interim periods presented.
The results of operations for these interim periods are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes for the year ended December 31, 2002, filed with the
Company's Form 10-KSB.
NATURE OF OPERATIONS
Capco Energy, Inc. ("Capco" or the "Company") is an independent energy company
engaged primarily in the acquisition, development, production for and the sale
of oil, gas and natural gas liquids, including investments in the equity
securities of other public companies involved in similar activities. The
Company's production activities are located principally in the United States of
America. Foreign operations are not significant to either consolidated financial
position or consolidated results of operations. Capco's operations consist of
one segment of business, oil and gas production. The principal executive offices
of the Company are located at 1401 Blake Street, Suite 100, Denver, Colorado
80202. The Company was incorporated as Alfa Resources, Inc. a Colorado
corporation on January 6, 1981. In November 1999, the Company amended its
articles of incorporation to change its name from Alfa Resources, Inc. to Capco
Energy, Inc.
The Company's future financial condition and results of operations will depend
upon prices received for its oil and natural gas and the costs of finding,
acquiring, developing and producing reserves. Prices for oil and natural gas are
subject to fluctuations in response to changes in supply, market uncertainty and
a variety of other factors beyond the Company's control. These factors include
worldwide political instability (especially in the Middle East), the foreign
supply of oil and natural gas, the price of foreign imports, the level of
consumer product demand and the price and availability of alternative fuels.
12
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has had recurring losses and negative cash flows from operations in each
of the last two fiscal years, and negative working capital as of June 30, 2003.
The Company is party to certain lending agreements either as obligor or
guarantor, for which the Company is either in default or in violation of debt
covenants, and the lenders have not provided waivers. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Without realization of additional capital, it would be unlikely for the Company
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts, or amounts and classification of liabilities that might be necessary
should the Company be unable to continue its existence.
The Company has already taken steps to improve its operating income and satisfy
its working capital requirements.
1. Producing property acquisitions in Michigan and Louisiana that closed in
the second half of year 2002 are providing positive cash flow, most notably
the acquisition in Michigan, where 100% of the net cash flow is being used
to retire indebtedness that was incurred when the property was acquired.
From the time that the property was acquired in June 2002 to June 30, 2003,
the acquisition debt was reduced by approximately $1,303,000, to a balance
of $25,000 at June 30, 2003. It is anticipated that the remaining
indebtedness will be paid in full during the third quarter of year 2003,
after which the net cash flow will be paid to the Company.
2. In November 2002, the Company's wholly-owned oil and gas production
subsidiary, Jovian Energy, Inc., filed an initial registration statement
for the purpose of registering for sale 20% of that company's equity
securities in a public offering, on a best-efforts, all-or-none basis. In
July 2003, the Company's Board of Directors authorized the withdrawal of
the registration statement due to a pending acquisition that could not be
undertaken while the registration filing was in process.
3. In October 2002, the Company's board of directors authorized management to
pursue a plan that would result in the divestiture of its petroleum
products marketing and convenience store operation segments, operations
that have been reported as discontinued operations in the accompanying
financial statements.
4. In December 2002, an agreement was reached for the sale of principally all
of the Company's assets in the state of New Mexico. Consideration for this
transaction consisted primarily of the assumption by the buyer of
approximately $4.5 million of indebtedness related to the assets.
13
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
5. In March 2003, a company owned by the Company's Chief Executive Officer
submitted a proposal to acquire the remaining business interests designated
for divestiture for total cash consideration of $2.5 million, plus other
consideration. The Company's board of directors accepted the proposal,
subject to the receipt of a fairness opinion that was received in August
2003. The sale closed in April 2003 at which time the Company had received
a nonrefundable deposit in the amount of $300,000, 4,000,000 shares of
common stock of Network Fueling Corp., a 7% promissory note in the amount
of $1.0 million due October 31, 2003, and a second 7% promissory note in
the amount of $1.2 million due April 30, 2004. In addition, the purchaser
provided 3,000,000 shares of the Company's Common Stock as security for
payment of the two promissory notes.
6. In July 2003, the Company announced that it had entered into an agreement
to acquire as much as 50% of a $108 million acquisition package consisting
of producing oil and gas leases, pipelines and gathering systems, gas
plants and undeveloped leasehold interests. Closing of the acquisition is
scheduled for later this year. The Company's participation in the
acquisition will be determined by its capital contribution, expected to
consist of bank financing and equity funding, when the acquisition is
closed.
In connection with some of the transactions described above, the Company is
considering the availability of equity and/or debt financing opportunities,
although no decisions have been reached in this regard at this time.
Management believes that an increase in cash flow from (1) existing properties,
and (2) properties to be acquired during the year 2003, coupled with proceeds
from the sales of business segments designated for divestiture, will enable the
Company to meet its working capital requirements.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Capco and its
wholly and majority owned subsidiaries. All references herein to Capco or the
Company include the consolidated results. All significant intercompany accounts
and transactions have been eliminated in consolidation. The Company's
subsidiaries are Jovian Energy, Inc. ("Jovian"), formerly named Capco Resource
Corporation, and its subsidiaries, Capco Asset Management, Inc. ("CAM") and
Capco Resources Ltd. ("CRL") (88.9% equity interest). Effective January 1, 2003,
the Company agreed to sell Meteor Enterprises, Inc. ("Enterprises"), including
all of that company's subsidiaries. Significant subsidiaries of Enterprises
include Meteor Marketing, Inc. ("Marketing"), and Graves Oil & Butane Co., Inc.
("Graves"). The results of operations of Enterprises for the three and six month
periods ended June 30, 2003 and 2002, are reported as discontinued operations.
PRICE LEVEL CHANGES AND REVOLVING CREDIT FACILITY
The prices Marketing pays for gasoline and diesel products are subject to market
fluctuation and are not in the control of Marketing. Prices for these products
can and have fluctuated significantly. Higher product prices could have a
significant impact on Marketing's borrowing capabilities due to the generally
faster timing required for payments to Marketing's suppliers compared to the
timing of collection of receivables from its customers. When necessary,
Marketing finances these working capital requirements through its revolving bank
credit agreement. This agreement contains certain financial covenants, which are
based on Marketing's budgeted performance.
14
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
If, as a result of price changes or other factors, Marketing is unable to meet
its debt covenants, its ability to continue to borrow under the revolving credit
agreement could be limited. If that were to occur, Marketing would have to make
alternative financial arrangements, which could include seeking additional debt
or equity financing which may or may not be available. As of June 30, 2003,
Marketing was out of compliance with several covenants contained in the
agreement. Marketing did not obtain a waiver from the lender for noncompliance
at June 30, 2003.
MAJOR CUSTOMERS
One customer accounted for 80% of the Company's net sales for the three months
ended June 30, 2003. Three customers accounted for 55%, 26% and 17%,
respectively, of the Company's net sales for the three months ended June 30,
2002. Three customers accounted for 46%, 21% and 14%, respectively, of the
Company's accounts receivable at June 30, 2003.
LONG-TERM DEBT
During the quarter ended June 30, 2003, the Company retired indebtedness in the
total amount of $361,000 from net cash flow provided by the oil and gas
properties acquired in June 2002.
COMMON STOCK
During the quarter ended June 30, 2003, the Company had the following equity
transactions:
The Company sold 1,300 shares of Treasury Stock, realizing proceeds of $400.
STOCK BASED COMPENSATION
During the quarter ended June 30, 2003, the Company granted to employees and
directors 1.9 million options to acquire Common Stock at an exercise price of
$0.25, which price was in excess of market price on the date of grant. The
options vested immediately and are exercisable over a period of five years from
date of grant.
Had compensation cost been determined based on the fair value at grant dates
for stock option awards consistent with SFAS 123 and SFAS 148, the Company's
net (loss) income for the three and six month periods ended June 30, 2003 and
2002, would have been adjusted to the pro forma amounts indicated below (in
thousands):
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------ ------ ------ ------
Net (loss) income:
As reported $ (384) $ 953 $ (954) $ 342
Compensation recognized
under SFAS 123 $ (373) $ (20) $ (390) $ (41)
Proforma $ (757) $ 933 $(1,344) $ 301
15
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
The pro forma compensation expense based on the fair value of the options is
estimated on the grant date using the Black-Scholes options-pricing model with
the following assumptions used for grants in 2003: no dividends; expected
lives of 4.9 years; expected volatility of 11.9%; and risk free rate of return
of 2.27%. The weighted average fair value of the purchase rights granted in
2003 was $0.19. There were no options granted during the six month period
ended June 30, 2002. Compensation expense recognized under SFAS 123 for the
three and six month periods ended June 30, 2002, is attributable to the portion
of options granted in prior periods that vested in 2002.
NEW ACCOUNTING PRONOUNCEMENTS
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires companies to record the fair value of a liability
for asset retirement obligations in the period in which they are incurred. The
statement applies to a company's legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. Adoption of SFAS No. 142 did not have a material impact to
the Company's financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. Adoption of this statement did not have a material impact to the
Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. Adoption
of this statement did not have a material impact to the Company's financial
position or results of operations.
16
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
In October 2002, the FASB issued Statement No. 147, "Acquisitions of Certain
Financial Institutions-an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9", which removes acquisitions of financial institutions from
the scope of both Statement 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with Statements No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition,
this Statement amends SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
The requirements relating to acquisitions of financial institutions are
effective for acquisitions for which the date of acquisition is on or after
October 1, 2002. The provisions related to accounting for the impairment or
disposal of certain long-term customer-relationship intangible assets are
effective on October 1, 2002. The adoption of this Statement did not have a
material impact to the Company's financial position or results of operations as
the Company has not engaged in either of these activities.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of Statement
148 are effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The adoption of this
statement did not have a material impact on the Company's financial position or
results of operations as the Company has not elected to change to the fair value
based method of accounting for stock-based employee compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company includes another entity in its consolidated financial statements.
Previously, the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not expect the
adoption to have a material impact to the Company's financial position or
results of operations.
17
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". Subject
to certain exceptions, this statement is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003, and all provisions of this statement should be applied
prospectively. The Company does not expect the adoption of SFAS No. 149 to have
an impact on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity and requires that those
instruments be classified as liabilities in statements of financial position. In
addition to its requirements for the classification and measurement of financial
instruments in its scope, SFAS No. 150 also requires disclosures about
alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. Most of the guidance
in SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not expect
the adoption of SFAS No. 150 to have an impact on its consolidated financial
statements.
RESTATEMENT
As of March 31, 2000, a change was made to the Company's reporting of the
components of comprehensive income (loss) (cumulative foreign currency
translation adjustment and cumulative unrealized gains (losses) from marketable
securities) to reflect participation of minority interest holders, wherever
applicable, in the components of comprehensive income (loss). The change had no
effect on net income, or earnings per share, as previously reported for the six
and three month periods ended June 30, 2002. The effect of the restatement to
the statements of comprehensive income (loss) for the three and six month
periods ended June 30, 2002, is as follows (in thousands):
As Previously
Reported As Restated
-------- -----------
Three months ended June 30, 2002 $ 1,102 $ 1,080
Six months ended June 30, 2002 $ (276) $ (298)
Certain reclassifications for the prior year have been made to conform to
current year presentation.
18
NOTE 2 -- ASSETS HELD FOR SALE
In October 2002, the Company's Board of Directors directed management to sell
all assets and liabilities of the petroleum marketing operations, including the
convenience stores operations. In December 2002, the Company closed on the sale
of assets located in the state of New Mexico (see Note 3).
In March 2003, the Company received a proposal from Sedco, Inc. ("Sedco"), a
private company owned by Ilyas Chaudhary, the Company's Chief Executive Officer,
to acquire Enterprises, except for 4.0 million shares of Enterprises' equity
ownership in Network Fueling Corp. ("NFC"), at a cash price of $2.5 million,
effective January 1, 2003. The Company's Board of Directors accepted the
proposal, subject to the receipt of a fairness opinion that was received in
August 2003. The sale closed in April 2003 at which time the Company had
received a nonrefundable deposit in the amount of $300,000, a 7% promissory note
in the amount of $1.0 million due October 31, 2003, and a second 7% promissory
note in the amount of $1.2 millio due April 30, 2004. In addition, Sedco
provided 3,000,000 shares of the Company's Common Stock as security for payment
of the two promissory notes.
Due to the substantial risk of loss to the Company attributable to the sale at
June 30, 2003, the Company has continued to account for this plan to dispose of
the petroleum marketing operation by classifying the underlying assets and
liabilities on the Balance Sheet as "Assets held for sale" and "Liabilities
attributable to assets held for sale". The historical operations of the business
operations subject to the disposition have been presented in the statements of
operations and statements of cash flows as discontinued operations.
The cash deposit of $300,000 and the two notes receivables in the aggregate
amount of $2.2 million dollars are classified as a deposit in the Company's
financial statements at June 30, 2003.
Assets and liabilities held for sale at June 30, 2003, consisted of the
following (in thousands):
Assets:
Current assets $ 10,185
Property, plant and equipment,
net of accumulated depreciation of $1,599 5,379
Other assets 1,221
-------
Total assets $ 16,785
=======
Liabilities:
Current liabilities $ 13,717
Long term liabilities 1,804
-------
Total liabilities $ 15,521
=======
Included in current assets are accounts receivable and inventories in the amount
of $6.5 million and $1.9 million, respectively, a portion of which collateralize
Marketing's revolving credit facility.
19
NOTE 2 -- ASSETS HELD FOR SALE, Continued
In January 2003, Marketing closed on the sale of its preferred membership
interests ("interests") in Rocky Mountain Propane LLC. Total consideration of
$1.1 million consisted of (1) a cash payment in the amount of $766,000, (2) an
8% promissory note in the amount of $199,000 due January 2006, and (3) a cash
retention in the amount of $150,000 to be paid upon the delivery of asset title
transfer documents resulting from Marketing's sale of Propane in April 2002. The
carrying value of the interests had been adjusted at December 31, 2002, to equal
the anticipated proceeds.
Current liabilities include accounts payable and the outstanding debt under the
revolving credit facility ("Agreement") in the amount of $6.4 million and $5.6
million, respectively. On March 3, 2003, Marketing and the lender, without
waiving any of the remedies available to it under the default provisions of the
Agreement, executed an amendment to the Agreement that included the following
changes: extension of the maturity date to May 31, 2003 (which was subsequently
extended to September 5, 2003); determination of borrowing base redefined,
including a scheduled reduction in the accounts receivable advance rate;
implementation of default rate of interest of an additional 2% per annum,
effective January 1, 2003; requirement for an unconditional, unlimited guaranty
executed by Ilyas Chaudhary, Chief Executive Officer; payment of facility fees
in the amount of $13,000; and the receipt of a Contribution Agreement executed
by Ilyas Chaudhary, the Company, Enterprises and Marketing, acknowledging that a
cash equity contribution of not less than $500,000 will be made to Marketing on
or before April 15, 2003. The Contribution Agreement requires that the cash
equity contribution of $500,000 be paid directly to the lender for application
against the outstanding loan balance of the revolving loan. As of June 30, 2003,
a total of $400,000 had been funded to the lender for the equity contribution to
Marketing. The amount available under the revolving credit facility ("borrowing
base") is a function of the sum of eligible accounts receivable and inventory as
defined by the Agreement. At June 30, 2003, the borrowing base was approximately
$5.6 million. Advances under the facility are subject to the lender's default
interest rate (8.75% at June 30, 2003). Additionally, Marketing pays an annual
commitment fee of 0.25% of the maximum commitment.
The terms of the Agreement contain, among other provisions, requirements for
maintaining certain net worth, minimum earnings after taxes, minimum debt
service coverage, and other financial ratios and specific limits on additional
indebtedness, equity financing, liens and merger activity. During the
three-month period ended June 30, 2003, and at June 30, 2003, Marketing was out
of compliance with several covenants contained in the Agreement. Marketing did
not obtain a waiver from the lender for noncompliance at June 30, 2003.
Included in current liabilities and long-term liabilities is term debt in the
amount of $1.7 million.
The Company is a guarantor of a portion of indebtedness that was included in the
sale of its propane distribution operation in April 2002, and the lender has yet
to release the Company from the guarantee and execute transfer documents
regarding an asset that collateralized the debt. As a result, the Company has
included in its balance sheet at June 30, 2003, under the captions "Assets held
for sale" and "Liabilities attributable to assets held for sale" the amount of
$500,000 to reflect the underlying asset value and outstanding debt balance at
June 30, 2003, applicable to this transfer.
20
NOTE 2 -- ASSETS HELD FOR SALE, Continued
Summarized below are the results of discontinued operations for the three and
six month periods ended June 30, 2003 and 2002. Year 2002 includes the operating
results of the operations that were sold during the year 2002 (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Sales $16,488 $25,880 $38,040 $50,125
Gross profit $ 2,999 $ 4,038 $ 6,552 $ 8,149
Loss from operations $ (186) $ (65) $ (549) $ (100)
Net loss from operations $ (442) $ 1,210 $ (959) $ 1,035
NOTE 3 -- BUSINESSES UNDER CONTRACT FOR SALE
Effective December 31, 2002, the Company entered into an agreement to sell
Graves and Capco Monument LLC, subsidiaries whose assets, consisting principally
of land, buildings and equipment, were primarily located in the state of New
Mexico, at a sales price of $10,000 cash. The assets of Graves were utilized in
the distribution of refined petroleum products. The convenience store business
consisted of two store locations that were in operation in Albuquerque and
Farmington, New Mexico.
The Company agreed to continue to operate the businesses for a period of time
subsequent to the date of sale to allow the buyer time to make separate credit
arrangements with lenders and suppliers, and to negotiate for the removal of the
Company as the guarantor of a significant portion of the indebtedness assumed by
the buyer. At June 30, 2003, approximately $3.9 million of indebtedness was owed
to one lender, and the Company was in default on the indebtedness at the time of
sale. Remedies available to the lender include declaring the entire note
balances, including accrued and unpaid interest, immediately due and payable,
foreclosing on the pledged security, which includes land, buildings, and
equipment, and collecting on any guarantees. Discussions have been held with the
lender, but no settlement has been reached at this time. The sales transaction
resulted in a gain to the Company in the amount of $181,000; however, due to the
significant risk still assumed by the Company in the form of the loan
guarantees, the gain has been deferred until such time that the risk has either
been significantly reduced or eliminated.
The Company has evaluated the exposure relating to the debt guarantees and has
determined that there is sufficient value in the underlying assets so that the
Company will not incur a loss from this disposal, and, therefore, has not
recorded a provision for any loss contingency.
The Company is a guarantor of vehicle financing contracts that were executed by
Enterprises in 2003 prior to management's decision to sell that company.
Financing contracts in the total amount of approximately $1.0 million were
outstanding as of June 30, 2003.
21
NOTE 4 -- EARNINGS PER SHARE
The Company uses SFAS No. 128, "Earnings Per Share" for calculating the basic
and diluted earnings (loss) per share. Basic earnings (loss) per share are
computed by dividing net income (loss) attributable to common stockholders by
the weighted average number of common shares outstanding. Diluted earnings
(loss) per share is computed similar to basic earnings (loss) per share except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. The Company's weighted
average shares outstanding for the three month periods ended June 30, 2003 and
2002, would have increased for 2,652,429 and 3,692,728 shares of Common Stock,
respectively, if associated stock options would have had a dilutive effect. The
Company's weighted average shares outstanding for the six month periods ended
June 30, 2003 and 2002, would have increased for 2,768,272 and 3,874,388 shares
of Common Stock, respectively, if associated stock options would have had a
dilutive effect. The options did not have a dilutive effect for the periods
presented as the market price of the Company's Common Stock exceeded the
respective exercise prices of the options. Under the treasury method of
calculating the additional shares outstanding, the effect would have been
antidilutive.
NOTE 5 -- BUSINESS SEGMENTS
During the three and six month periods ended June 30, 2003 and 2002, the Company
operated in one business segment: acquisition, exploration, development, and
production of oil and gas reserves, including investments in the equity
securities of other public companies involved in similar activities. The
Company's headquarters and most of its operations are located in the United
States of America. A summary of the Company's revenues and long-lived assets by
geographic area is as follows (in thousands):
United
Canada States Total
-------- -------- -------
Sales:
Three months ended June 30, 2003 $ -- $ 846 $ 846
====== ====== ======
Three months ended June 30, 2002 $ 1 $ 127 $ 128
====== ====== ======
Six months ended June 30, 2003 $ -- $ 1,535 $ 1,535
====== ====== ======
Six months ended June 30, 2002 $ 3 $ 393 $ 396
====== ====== ======
At June 30, 2003:
Oil and gas properties (net) $ -- $ 4,897 $ 4,897
====== ====== ======
Land $ 214 $ -- $ 214
====== ====== ======
Other property and equipment (net) $ -- $ -- $ --
====== ====== ======
22
NOTE 6 - SUBSEQUENT EVENTS
In October 2002, the Company's Board of Directors approved a plan to raise
capital from an initial public offering of 20% of the Company's equity ownership
of its oil and gas producing subsidiary. The initial registration statement for
the offering was filed in November 2002. In July 2003, the Company's Board of
Directors authorized the withdrawal of the registration statement due to a
pending acquisition that could not be undertaken while the registration filing
was in process.
Marketing is a borrower under the terms of a revolving Credit and Security
Agreement ("Agreement") that was scheduled to expire on June 30, 2003. The
maturity date of the Agreement was subsequently extended to September 5, 2003.
23
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 that include, among others, statements concerning: the benefits expected
to result from Capco's divestiture of its petroleum marketing operations,
including decreased expenses and expenditures that are expected to be realized
by Capco as a result of the divestiture, and other statements of: expectations,
anticipations, beliefs, estimations, projections, and other similar matters that
are not historical facts, including such matters as: future capital, development
and exploration expenditures (including the amount and nature thereof), drilling
of wells, reserve estimates (including estimates of future net revenues
associated with such reserves and the present value of such future net
revenues), future production of oil and gas, repayment of debt, business
strategies, and expansion and growth of business operations.
These statements are based on certain assumptions and analyses made by the
management of Capco in light of past experience and perception of: historical
trends, current conditions, expected future developments, and other factors that
the management of Capco believes are appropriate under the circumstances. Capco
cautions the reader that these forward-looking statements are subject to risks
and uncertainties, including those associated with: the financial environment,
the regulatory environment, and trend projections, that could cause actual
events or results to differ materially from those expressed or implied by the
statements. Such risks and uncertainties include those risks and uncertainties
identified below.
Significant factors that could prevent Capco from achieving its stated goals
include: declines in the market prices for oil and gas and adverse changes in
the regulatory environment affecting Capco. Capco or persons acting on its or
their behalf should consider cautionary statements contained or referred to in
this report in connection with any subsequent written or oral forward-looking
statements that may be issued. Capco undertakes no obligation to release
publicly any revisions to any forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 2003, COMPARED TO JUNE 30, 2002
Capco's revenues from oil and gas activities were $0.8 million in 2003 compared
to $0.1 million in 2002. This increase is due to increases in product prices
paid at the wellhead and production volumes. On a barrel of oil equivalent
("BOE") basis, the Company's price per BOE increased to $29.65 in 2003 from
$21.98 in 2002, resulting in an increase in revenue of $47,000. Total production
was 28,500 BOE in 2003, compared with 5,800 BOE in 2002, resulting in an
increase in revenue of $0.7 million. Production from the Michigan properties
acquired in June 2002 totaled 23,000 BOE in 2003; sale of the Buried Hills
property in Kansas in May 2002 resulted in a comparative production decrease of
2,800 BOE in 2003.
24
Capco's cost of sales increased to $0.3 million in 2003 from $0.1 million in
2002, due principally to the increase in production volumes from 5,800 BOE in
2002 to 28,500 BOE in 2003.
Net operating revenues from Capco's oil and gas production are very sensitive to
changes in the price of oil; thus it is difficult for management to predict
whether or not the Company will be profitable in the future.
General and administrative expenses were $0.3 million in 2003 and $0.5 million
in 2002. The decrease is due to the closing of field offices in 2002, and the
cost savings realized from relocation of the Company's administrative office
from Orange, California to Denver, Colorado in February 2003.
Depreciation, depletion and amortization was $0.2 million in 2003 and $38,000 in
2002. This change is attributable to the increase in production volumes in 2003
and the addition of the cost of the Michigan acquisition to the full cost pool
in 2002.
Interest expense decreased to $34,000 in 2003 from $45,000 in 2002, due
principally to a reduction in outstanding debt balances during the respective
periods. Gains (losses) from sales of marketable securities, including
unrealized holding gains (losses), decreased to a gain of $48,000 in 2003 from a
gain of $0.2 million in 2002, as the Company had liquidated a significant
portion of it marketable securities portfolio in prior periods.
SIX MONTHS ENDED JUNE 30, 2003, COMPARED TO JUNE 30, 2002
Capco's revenues from oil and gas activities were $1.5 million in 2003 compared
to $0.4 million in 2002. This increase is due to increases in product prices
paid at the wellhead and production volumes. On a barrel of oil equivalent
("BOE") basis, the Company's price per BOE increased to $31.46 in 2003 from
$19.05 in 2002, resulting in an increase in revenue of $0.2 million. Total
production was 48,700 BOE in 2003, compared with 20,200 BOE in 2002, resulting
in an increase in revenue of $0.9 million. Production from the Michigan
properties acquired in June 2002 totaled 38,600 BOE in 2003; sale of the Buried
Hills property in Kansas in May 2002 resulted in a comparative production
decrease of 9,700 BOE in 2003.
Capco's cost of sales increased to $0.6 million in 2003 from $0.3 million in
2002, due principally to the increase in production volumes from 20,200 BOE in
2002 to 48,700 BOE in 2003.
Net operating revenues from Capco's oil and gas production are very sensitive to
changes in the price of oil; thus it is difficult for management to predict
whether or not the Company will be profitable in the future.
General and administrative expenses were $0.7 million in 2003 and $0.8 million
in 2002. The decrease is due to the closing of field offices in 2002, and the
cost savings realized from relocation of the Company's administrative office
from Orange, California to Denver, Colorado in February 2003.
Depreciation, depletion and amortization was $0.3 million in 2003 and $0.1
million 2002. This change is attributable to the increase in production volumes
in 2003 and the addition of the cost of the Michigan acquisition to the full
cost pool in 2002.
25
Interest expense decreased to $76,000 in 2003 from $0.2 million in 2002, due
principally to a reduction in the average balance of interest-bearing
indebtedness from $2.6 million in 2002 to $1.0 million in 2003. Gains (losses)
from sales of marketable securities, including unrealized holding gains
(losses), decreased to a gain of $66,000 in 2003 from a gain of $0.2 million in
2002, as the Company had liquidated a significant portion of it marketable
securities portfolio in prior periods.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had a working capital deficit of $1.8 million.
Included in this deficit is a non refundable cash deposit in the amount of $0.3
million which the Company received in connection with the sale of it equity
interest in Enterprises. Exclusive of the cash deposit, the Company's working
capital deficit decreased from $2.0 million at March 31, 2003, to $1.5 million
at June 30, 2003, due principally to the repayment of an obligation incurred in
connection with a producing property acquisition in 2002. It is estimated that
the balance remaining on this obligation will be paid in full during the third
quarter of year 2003, after which the net cash flow will be paid to the Company.
Management of the Company has implemented plans and initiated actions in an
effort to reduce the working capital deficit. These actions include the
following:
1. Producing property acquisitions in Michigan and Louisiana that closed in
the second half of year 2002 are providing positive cash flow, most notably
the acquisition in Michigan, where 100% of the net cash flow is being used
to retire indebtedness that was incurred when the property was acquired.
From the time that the property was acquired in June 2002 to June 30, 2003,
the acquisition debt was reduced by approximately $1.3 million, to a
balance of $25,000 at June 30, 2003. It is anticipated that the remaining
indebtedness will be paid in full during the third quarter of year 2003,
after which the net cash flow will be paid to the Company.
2. In November 2002, the Company's wholly-owned oil and gas production
subsidiary, Jovian Energy, Inc., filed an initial registration statement
for the purpose of registering for sale 20% of that company's equity
securities in a public offering, on a best-efforts, all-or-none basis. In
July 2003, the Company's Board of Directors authorized the withdrawal of
the registration statement due to a pending acquisition that could not be
undertaken while the registration filing was in process.
3. In October 2002, the Company's board of directors authorized management to
pursue a plan that would result in the divestiture of its petroleum
products marketing and convenience store operation segments, operations
that have been reported as discontinued operations in the accompanying
financial statements.
4. In December 2002, an agreement was reached for the sale of principally all
of the Company's assets in the state of New Mexico. Consideration for this
transaction consisted primarily of the assumption by the buyer of
approximately $4.5 million of indebtedness related to the assets.
26
5. In March 2003, a company owned by the Company's Chief Executive Officer
submitted a proposal to acquire the remaining business interests designated
for divestiture for total cash consideration of $2.5 million, plus other
consideration. The Company's board of directors accepted the proposal,
subject to the receipt of a fairness opinion that was received in August
2003.
The sale closed in April 2003 at which time the Company had received a
nonrefundable deposit in the amount of $300,000, 4,000,000 shares of common
stock of Network Fueling Corp., a 7% promissory note in the amount of $1.0
million due October 31, 2003, and a second 7% promissory note in the amount
of $1.2 million due April 30, 2004. In addition, the purchaser provided
3,000,000 shares of the Company's Common Stock as security for payment of
the two promissory notes.
6. In July 2003, the Company announced that it had entered into an agreement
to acquire as much as 50% of a $108 million acquisition package consisting
of producing oil and gas leases, pipelines and gathering systems, gas
plants and undeveloped leasehold interests. Closing of the acquisition is
scheduled for later this year. The Company's participation in the
acquisition will be determined by its capital contribution, expected to
consist of bank financing and equity funding, when the acquisition is
closed.
In connection with some of the transactions described above, the Company is
considering the availability of equity and/or debt financing opportunities,
although no decisions have been reached in this regard at this time.
CONTINUING OPERARTIONS
Net cash provided by operating activities totaled $0.3 million for the six
months ended June 30, 2003, compared to cash used in operating activities of
$1.0 million for the six months ended June 30, 2002. In 2003, net loss, adjusted
for reconciling items, provided a cash inflow of $0.3 million. Changes in assets
and liabilities in 2003 resulted in a cash outflow of $25,000. In 2002, net
income, adjusted for reconciling items, resulted in a cash outflow of $0.8
million. Changes in assets and liabilities resulted in a cash outflow of $0.3
million.
Net cash provided by investing activities totaled $0.5 million for the six
months ended June 30, 2003, and $1.9 million for the six months ended June 30,
2002. Net advances from related parties in the amount of $0.6 million, were the
principal sources of cash inflow in 2003. Proceeds from the sales of oil and gas
property and marketable securities, less the cost of related capital
expenditures and purchases, provided cash inflows of $0.6 million and $1.1
million, respectively, in 2002.
Net cash used in financing activities totaled $0.8 million for the six months
ended June 30, 2003, and $1.0 million for the six months ended June 30, 2002.
Payments on long term debt resulted in the cash outflows in both periods.
The Company has various loans which require principal payments of $0.6 million
during the twelve month period ending June 30, 2004.
27
The Company is obligated to pay operating lease costs of approximately $24,000
during the twelve month period ending June 30, 2004 for land and facilities.
The Company is responsible for any contamination of land it owns or leases.
However, there may be limitations on any potential contamination liabilities as
well as claims for reimbursement from third parties.
The Company sells most of its oil production to certain major oil companies.
However, in the event these purchasers discontinued oil purchases, Capco has
made contact with other purchasers who would purchase the oil at terms standard
in the industry.
DISCONTINUED OPERATIONS
Net cash provided by operating activities totaled $0.3 million for the six
months ended June 30, 2003, compared to cash used in operating activities of
$0.6 million for the six months ended June 30, 2002. In 2003, net loss, adjusted
for reconciling items, resulted in a cash outflow of $0.4 million. Changes in
assets and liabilities in 2003 provided a cash inflow of $0.7 million. In 2002,
net income, adjusted for reconciling items, provided a cash inflow of $0.4
million. Changes in assets and liabilities resulted in a cash outflow of $1.0
million.
Net cash provided by investing activities totaled $0.9 million for the six
months ended June 30, 2003, and $0.5 million for the six months ended June 30,
2002. Proceeds from the sale of an equity investment of $0.8 million and an
equity contribution of $0.4 million were the principal sources of cash inflow in
2003. Proceeds from the sale of an equity investment of $0.9 million was the
principal source of cash inflow in 2002.
Net cash used in financing activities totaled $1.2 million for the six months
ended June 30, 2003, and $0.1 million for the six months ended June 30, 2002.
Payments on the revolving credit facility and on long term debt resulted in the
cash outflows in 2003. In 2002, payments on long term debt in the amount of $0.8
million were reduced by borrowings on the revolver and an increase in restricted
cash.
Enterprises has various loans which require principal payments of $0.5 million
during the twelve month period ending June 30, 2004.
Enterprises is obligated to pay operating lease costs of approximately $0.4
million during the twelve month period ending June 30, 2004.
EFFECT OF CHANGES IN PRICES
Changes in prices during the past few years have been a significant factor in
the oil and gas industry. The price received for the oil and gas produced by
Capco has fluctuated significantly during the last year. Changes in the price
that Capco receives for its oil and gas is set by market forces beyond Capco's
control. That uncertainty in oil and gas prices makes it more difficult for a
company like Capco to increase its oil and gas asset bases and become a
significant participant in the oil and gas industry.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, intangible assets, recovery of oil and gas reserves,
financing operations, and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. The most
significant accounting estimates inherent in the preparation of the Company's
financial statements include estimates as to the appropriate carrying value of
certain assets and liabilities which are not readily apparent from other
sources, primarily allowance for doubtful accounts, the discounted value of
recoverable oil and gas reserves, accruals for environmental remediation
expenditures, and the recognition and classification of net operating loss
carryforwards between current and long-term assets. These accounting policies
are described at relevant sections in this discussion and analysis and in the
notes to the consolidated financial statements included in our Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2002.
Item 3: CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 (the "1934 Act") is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission (the "SEC").
Those disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the 1934 Act is
accumulated and communicated to the Company's management, including its
principal executive and principal accounting officers, or persons performing
similar functions, as appropriate, to allow timely decisions regarding required
disclosure. Based upon the evaluation of those controls and procedures performed
as of June 30, 2003, the Company's management, with the participation of its
chief executive officer and chief accounting officer, concluded that the
Company's disclosure controls and procedures were adequate.
The Company has implemented a process designed by, or under the supervision
of, its principal executive and principal accounting officers, or persons
performing similar functions, and effected by the Company's board of directors,
management or other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that: (1) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of the Company's assets; (2) provide
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reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that the Company's receipts and expenditures are
being made only in accordance with authorizations of the Company's management
and directors; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.
The Company's management, with the participation of its chief executive officer
and chief accounting officer, has determined that there has been no change in
the Company's internal control over financial reporting that occurred during the
Company's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On June 19, 2003, the Company reported on two complaints filed in the
District Court, City and County of Denver, Colorado, naming Meteor Marketing,
Inc. and certain subsidiaries of Meteor Marketing, Inc. (collectively,
Marketing) as defendants. Both complaints were filed seeking payment of certain
obligations owed by Marketing. Marketing has reached agreement with both
complainants, with each party agreeing to forestall any further action against
Marketing for so long as Marketing maintains compliance with scheduled payment
arrangements. At August 15, 2003, Marketing was in compliance with the agreed
upon payment arrangements.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
31.1(a) and (b) Rule 13a-14(a)/15d-14(a) Certifications pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 (a) and (b) Section 1350 Certifications pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (furnished but not filed for purposes of
the Securities Exchange Act of 1934) .
(b) Reports on Form 8-K
Current Report on Form 8-K dated May 16, 2003, which reported events
under Item 2, Acquisition or Disposition of Assets, and Item 7, Financial
Statements and Exhibits.
Current Report on Form 8-K dated June 19, 2003, which reported events
under Item 5, Other Events.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Issuer caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAPCO ENERGY, INC.
Dated: August 21, 2003 By: /s/ Ilyas Chaudhary
------------------------
Ilyas Chaudhary, Chief Executive Officer
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