UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2000.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______, 19___ to _______, 19___.
Commission File Number: 0-10157
CAPCO ENERGY, INC.
---------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
COLORADO 84-0846529
- ------------------------------- -----------------------
(State or Other Jurisdiction of (IRS Employer Identi-
Incorporation or Organization) fication Number)
2922 E. CHAPMAN, SUITE 202
ORANGE CALIFORNIA 92869
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Address of Principal Executive Offices
(714) 288-8230
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
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 21,303,838 shares of the Registrant's $.001 par value common stock
outstanding as of March 31, 2000.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2000
(Unaudited)
ASSETS
Current Assets:
Cash $ 19,300
Marketable Securities 7,981,777
Accounts Receivables, net 259,818
Accounts Receivables, related parties -
------------
Total Current Assets 8,260,895
------------
Property and Equipment, net 3,362,139
------------
Other Assets:
Investments 3,673,696
Other Assets 293,686
------------
Total Assets $ 15,590,416
============
Accompanying notes are an integral part of the financial statements.
2
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CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2000
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable, Trade $ 868,822
Current Maturities, Long-term Debt 3,062,048
Accrued Expenses 54,482
Dividend Payable 26,673
------------
Total Current Liabilities 4,012,025
------------
Long Term Debt, less current maturities 1,515,854
Commitments and Contingencies
Total Liabilities 5,527,879
------------
Stockholders' Equity
Preferred Stock, $1.00 par value;
Authorized 10,000,000 shares,
292,947 Shares issued and outstanding 292,947
Common Stock, $.001 par value;
Authorized 150,000,000 shares;
21,303,838 Shares issued and outstanding 21,304
Paid-In Capital 3,148,753
Cumulative Translation Adjustment 6,704
Cumulative Unrecognized Gains 7,878,467
Retained Earnings (Deficit) (1,285,638)
------------
Total Stockholders' Equity 10,062,537
------------
Total Liabilities and
Stockholders' Equity $ 15,590,416
============
Accompanying notes are an integral part of the financial statements.
3
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CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2000 and 1999
(Unaudited)
2000 1999
----------- ---------
Sales $ 85,940 $ -
Cost of Sales 145,250 -
----------- ---------
Gross Profit (59,310) -
Selling, General and Administrative
Expenses 244,909 39,662
----------- ---------
Loss from operations (304,219) (39,662)
Other Income (Expenses)
Interest Income - 524
Interest Expense ( 72,176) (99)
Gain on Sale of Assets 17,213 -
----------- ---------
Total Other Income (Expenses) ( 54,963) 425
----------- ---------
Loss before equity earnings (359,182) (39,237)
Equity Loss in Investments (519,034) -
----------- ---------
Net Loss $ (878,216) (39,237)
=========== =========
Loss per Share
Basic and Diluted $ (.05) $ (.01)
=========== =========
Average Shares Outstanding
Basic and Diluted 17,163,319 4,141,667
Accompanying notes are an integral part of the financial statements.
4
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CAPCO ENERGY, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2000 and 1999
(Unaudited)
2000 1999
----------- ------------
Cash Flow from Operating Activities:
Net(Loss) $ (878,216) $ (39,237)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 1,561 -
(Gain) on sale of assets (17,213) -
Equity loss in investments 519,034 -
Decrease (increase) in:
Accounts Receivable, (net) (477,927) (42,999)
Increase (decr.) in accounts payable 263,089 38,823
Increase (decr.) in accrued liabilities (9,594) -
Decrease (increase) other assets - (350)
----------- ------------
Net cash (used) by operating activities (599,266) (43,763)
----------- ------------
Cash Flow from Investing Activities:
Acquisition, Net of Cash 4,264
Cash proceeds from sale of property 17,212
Purchases of Property and Equipment (150,493) (23,608)
Investment in closely held business (296,149) -
----------- ------------
Net cash (used) by investing activities (425,166) (23,608)
----------- ------------
Cash Flow from Financing Activities:
Borrowings on long term debt 454,049 50,000
Sale of Stock 525,000 -
----------- ------------
Net cash provided
by financing activities 979,049 50,000
----------- ------------
Net Decrease in Cash (45,383) (17,371)
Cash, Beginning of Period 64,683 0
----------- ------------
Cash, End of Period $ 19,300 $ (17,371)
=========== ============
Accompanying notes are an integral part of the financial statements.
5
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CAPCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL DEVELOPMENT OF BUSINESS.
NATURE OF OPERATIONS
Capco Energy, Inc. ("Capco" or the "Company") is an independent energy company
engaged primarily in the acquisition, development, production for and the sale
of oil, gas and natural gas liquids. The Company's production activities are
located in the United States. Capco treats all operations as one segment of
business. The principal executive offices of the Company are located at 2922
East Chapman, suite 202, Orange, California. The Company was incorporated as
Alfa Resources, Inc. a Colorado corporation on January 6, 1981. In November
1999, the Company amended it articles of incorporation to change its name from
Alfa Resources, Inc. to Capco Energy, Inc.
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 PRESENTATION
Effective December 31, 1999, Capco acquired 100% of the outstanding capital
stock of Capco Resource Corporation ("CRC") a corporation involved in oil and
gas production. As a result, CRC's former shareholders obtained control of
Capco. For accounting purposes, this acquisition has been treated as a reverse
acquisition with CRC as the accounting acquirer. The financial statements
presented include CRC at cost since January 19, 1999, CRC's inception, and Capco
at fair market value as of December 31, 1999.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Capco and its
wholly owned subsidiary CRC. Accordingly, all references herein to Capco or the
Company include the consolidated results. All significant intercompany accounts
and transactions have been eliminated in consolidation.
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USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates with
regard to these financial statements include the estimate of proved oil and gas
reserve volumes and the related present value of estimated future net revenues
therefrom.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including accounts receivable and accounts payable and accrued
expenses, the carrying amounts approximate fair value due to their short
maturities. The amounts owed for long-term debt also approximate fair value
because current interest rates and terms offered to the Company are at current
market rates.
CONCENTRATION OF CREDIT RISK
The Company places its cash in what it believes to be credit-worthy financial
institutions. However, cash balances may exceed FDIC insured levels at various
times during the year.
PROPERTY AND EQUIPMENT
The Company follows the "full-cost" method of accounting for oil and gas
property and equipment costs. Under this method, all productive and
nonproductive costs incurred in the acquisition, exploration, and development of
oil and gas reserves are capitalized. Such costs include lease acquisitions,
geological and geophysical services, drilling, completion, equipment, and
certain general and administrative costs directly associated with acquisition,
exploration, and development activities. General and administrative costs
related to production and general overhead are expensed as incurred. No gains or
losses are recognized upon the sale or disposition of oil and gas properties,
except in transactions that involve a significant amount of reserves. The
proceeds from the sale of oil and gas properties are generally treated as a
reduction of oil and gas property costs. Fees from associated oil and gas
exploration and development partnerships, if any, will be credited to oil and
gas property costs to the extent they do not represent reimbursement of general
and administrative expenses currently charged to expense.
Such costs can be directly identified with acquisition, exploration and
development activities and do not include any costs related to production,
general corporate overhead, or similar activities.
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Future development, site restoration, and dismantlement and abandonment costs,
net of salvage values, are estimated on a property-by-property basis based on
current economic conditions and are amortized to expense as the Company's
capitalized oil and gas property costs are amortized. The Company's properties
are all onshore, and the Company expects that the salvage value of the tangible
equipment will offset any site restoration and dismantlement and abandonment
costs.
Non-oil and gas producing properties and equipment are stated at cost; major
renewals and improvements are charged to the property and equipment accounts;
while replacements, maintenance and repairs, which do not improve or extend the
lives of the respective assets, are expensed currently. At the time property and
equipment are retired or otherwise disposed of, the asset and related
accumulated depreciation accounts are relieved of the applicable amounts. Gains
or losses from retirements or sales are credited or charged to operations.
DEPRECIATION AND DEPLETION
The provision for depreciation, depletion, and amortization of oil and gas
properties is computed on the unit-of-production method. Under this method, the
Company computes the provision by multiplying the total unamortized costs of oil
and gas properties including future development, site restoration, and
dismantlement and abandonment costs, but excluding costs of unproved properties
by an overall rate determined by dividing the physical units of oil and gas
produced during the period by the total estimated units of proved oil and gas
reserves. This calculation is done on a country-by-country basis for those
countries with oil and gas production. The cost of unevaluated properties not
being amortized, to the extent there is such a cost, is assessed quarterly to
determine whether the value has been impaired below the capitalized cost. Any
impairment assessed is added to the cost of proved properties being amortized.
The costs associated with unevaluated properties relate to projects which were
undergoing exploration or development activities or in which the Company intends
to commence such activities in the future. The Company will begin to amortize
these costs when proved reserves are established or impairment is determined.
Management believes no such impairment exists at March 31, 2000.
At the end of each quarterly reporting period, the unamortized cost of oil and
gas properties, net of related deferred income taxes, is limited to the sum of
the estimated future net revenues from proved properties using current prices,
discounted at 10%, and the lower of cost or fair value of unproved properties,
adjusted for related income tax effects ("Ceiling Limitation").
The calculation of the ceiling limitation and provision for depreciation and
depletion is based on estimates of proved reserves. There are numerous
uncertainties inherent in estimating quantities of proven reserves and in
projecting the future rates of production, timing, and plan of development. The
accuracy of any reserves estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. Results of
drilling, testing, and production subsequent to the date of the estimate may
justify revision of such estimate. Accordingly, reserve estimates are often
different from the quantities of oil and gas that are ultimately recovered.
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Depreciation for non-oil and gas properties is recorded on the straight-line
method at rates based on the estimated useful lives of the assets. The estimated
useful lives are as follows:
DESCRIPTION LIVES
Equipment 3 to 20 years
INVESTMENT IN EQUITY SECURITIES
For equity securities that the Company i) does not exercise control in the
investee and ii) expects to divest within a short period of time, the Company
accounts for the investment under the provisions of Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities". For
equity investments that the Company i) exercises control in the investee and ii)
expects to hold for long term investment, the Company accounts for the
investment under the provisions of Accounting Principles Board Opinion ("APB")
No. 18 "The Equity Method of Accounting for Investments in Common Stock".
In accordance with FASB No. 115, equity securities that have readily
determinable fair values are classified as either trading or available-for-sale
securities. Securities that are bought and held principally for the purpose of
selling them in the near term (thus held for only a short period of time) the
Company classifies as trading securities and all other securities are classified
as available-for-sale. Trading and available-for-sale securities are measured at
fair value in the balance sheet. For trading securities any realized holding
gains and losses are reported in the statement of operations. For
available-for-sale securities any unrealized holding gains and losses are
reported as a separate component of stockholders' equity until realized.
In accordance with APB No. 18, under the equity method the Company records the
initial investment at cost, then reduces it by dividends and increases or
decreases it by the Company's proportionate share of the investee's net earnings
or loss.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", Long-lived assets to be held and used are analyzed for
impairment whenever events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. The Company evaluates at each balance
sheet date whether events and circumstances have occurred that indicate possible
impairment. If there are indications of impairment, the Company uses future
undiscounted cash flows of the related asset or asset grouping over the
remaining life in measuring whether the assets are recoverable. In the event
such cash flows are not expected to be sufficient to recover the recorded asset
values, the assets are written down to their estimated fair value. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value of asset less cost to sell.
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REVENUE RECOGNITION
Revenue from product sales is recognized when the product is delivered. Revenue
from services is recognized when the services are performed and billable.
STOCK BASED COMPENSATION
The Company accounts for employee stock options in accordance with APB No. 25
"Accounting for Stock Issued to Employees". Under APB 25, the Company recognizes
no compensation expense related to employee stock options, as no options are
granted at a price below market price on the date of grant.
In 1996, SFAS No. 123 "Accounting for Stock-Based Compensation", became
effective for the Company. SFAS No. 123, which prescribes the recognition of
compensation expense based on the fair value of options on the grant date,
allows companies to continue applying APB 25 if certain pro forma disclosures
are made assuming hypothetical fair value method, for which the Company uses the
Black-Scholes option-pricing model.
For non-employee stock based compensation the Company recognizes an expense in
accordance with SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant. For stock-based awards the value is
based on the market value for the stock on the date of grant and if the stock
has restrictions as to transferability a discount is provided for lack of
tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.
ENVIRONMENTAL EXPENDITURES
The Company expenses environmental expenditures related to existing conditions
resulting from past or current operations and from which no future benefit is
discernible. Expenditures, which extend the life of the related property or
mitigate or prevent future environmental contamination, are capitalized. The
Company determines and records its liability on a site-by-site basis at the time
when it is probable and can be reasonably estimated. The Company's estimated
liability is recorded net of the anticipated participation of other potentially
responsible parties in those instances where it is probable that such parties
are legally responsible and financially capable of paying their respective
shares of the relevant costs.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between the amount of
taxable income and pretax financial income and between the tax bases of assets
and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled as prescribed by
SFAS No. 109, "Accounting for Income Taxes". As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
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COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. As of March 31, 2000, the Company has no items that
represent comprehensive income and, therefore, has not included a schedule of
comprehensive income in the accompanying consolidated financial statements.
NET LOSS PER SHARE
The Company uses SFAS No. 128, "Earnings Per Share" for calculating the basic
and diluted loss per share. Basic loss per share is computed by dividing net
loss attributable to common stockholders by the weighted average number of
common shares outstanding. Diluted loss per share is computed similar to basic
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.
At March 31, 2000, the Company had no potentially dilutive shares
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at its fair value.
FAS No.133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. In June 1999, the FASB issued FAS no. 137 which defers the effective date
of FAS No. 133 to fiscal years beginning after June 15, 2000. The Company will
adopt FAS No. 133 in the first quarter of fiscal 2001, but does not expect such
adoption to materially affect its financial statement presentation.
BASIS OF PRESENTATION
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, such interim statements reflect all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial position
and the results of operations and cash flows for the interim periods presented.
The results of operations for these interim periods are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes for the year ended December 31, 1999, filed with the
Company's Form 10-KSB.
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CONTINGENCIES
The Company is subject to various federal, state and local environmental laws
and regulations. Although Company environmental policies and practices are
designed to ensure compliance with these laws and regulations, future
developments and increasingly stringent regulations could require the Company to
make additional unforeseen environmental expenditures. Environmental accruals
are routinely reviewed on an interim basis as events and developments warrant.
ACQUISITIONS
In January 2000, the Company acquired a 35% interest in Meteor Stores, Inc.
("MSI") and financed an unrelated third party's, (the current President of MSI),
acquisition of the remaining 65% interest in MSI, which is involved in operating
petroleum distribution through convenience stores. The Company paid $250,000 and
issued a note payable in the amount of $1,296,618 for the purchase of 100% of
the issued and outstanding common stock of MSI and in turn received $215,000,
consisting of $50,000 in cash and 132,000 shares of the Company's common stock
and a note receivable in the amount of $860,000 for the sale of 65% of the
issued and outstanding common stock of MSI. The note payable is collateralized
by 100% of the issued and outstanding common stock of MSI and the note
receivable is collateralized by 65% of the issued and outstanding common stock
of MSI. The sale of the 65% interest was closed in September 2000 with an
effective date of January 1, 2000. Since the sale of the 65% interest is a
highly leveraged transaction, the Company will account for the acquisition using
the equity method of accounting.
In February 2000, the Company completed its acquisition of 80% interest of the
issued and outstanding common stock of Zelcom Industries, Inc., a company
involved in Internet applications. The Company will account for the investment
under the equity method of accounting, as the Company's intent is to reduce its
ownership to below 50% by the end of the fourth quarter of 2000.
In March 2000, the Company increased its investment in CRL from approximately
9.9% to approximately 81.9% by the issuance of 12,221,558 shares of its common
stock. CRL is a holding company with a wholly owned subsidiary, Capco Asset
Management ("CAM") which had investments in publicly traded companies, as
follows: i) 1,290,000 shares of common stock, or approximately 30% interest, of
Greka Energy Corporation ("Greka"), which is in the business of oil and gas
production in the United States and Colombia, ii) 1,238,550 shares of common
stock, or approximately 33% interest, of Meteor Industries, Inc. ("Industries"),
which is in the business of petroleum marketing in the United States, and iii)
approximately 400,000 shares of common stock of Chapparal Resources, Inc.
("Chapparal"), which is in the business of oil and gas production in North
America and Kazakhstan. CRL accounts for the investments of Industries and
Chapparal under the equity method and Greka under the mark to market methods.
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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 MSI. 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the company has working capital of $4,248,870 compared to a
deficit of $1,844,920 at December 31, 1999. This change in working capital is
principally due to the acquisition of CRL and its investments. The Company
through its subsidiaries has investments in various public companies. The
majority of these investments are restricted and are not readily saleable. The
Company through its subsidiaries is also involved in litigation regarding the
investment in Greka Energy Corporation.
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Cash flows used in operations for the three months ended March 31, 2000, and
March 31, 1999, were $599,266 and $43,763 respectively. The increase in cash
used during this period is principally due to the increased loss of the company.
Cash flows used in investing activities for the three months ended March 31,
2000, were $425,166 compared to $23,608 in the prior year. This increase is
principally due to the acquisition of oil and gas properties and investments in
closely held businesses.
Cash flows provided by financing activities for the three months ended March 31,
2000, were $979,049 compared to $50,000 in the prior year. This increase is
principally due to the sale of stock and borrowings.
Capco sells most of its oil production to certain major oil companies. However,
in the event these purchasers discontinued oil purchases, Capco has made contact
with other purchasers who would purchase the oil.
The Company is responsible for any contamination of land it owns or leases.
However, the Company may have limitations on any potential contamination
liabilities due to state reimbursement programs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO MARCH 31, 1999
Capco's revenues from its oil and gas activities were $85,940 in 2000 compared
to $0 in 1999. This revenue is primarily due to production from properties
acquired in the second half of year 1999. Capco's cost of sales were $145,250 in
2000 compared to $0 in 1999. This increase is primarily due to increased
production from the recent acquisitions. Selling, general and administrative
costs were $244,909 in 2000 compared to $39,662 in 1999. This increase is
primarily related to increased activities. Total other expense was $54,963 in
2000 compared to income of $425 in 1999, principally due to increased interest
expense due to borrowings.
Net operating revenues from Capco's oil and gas production are very sensitive to
changes in the price of oil; thus it is difficult for management to predict
whether or not the Company will be profitable in the future.
EFFECT OF CHANGES IN PRICES
Changes in prices during the past few years have been a significant factor in
the oil and gas industry. The price received for the oil and gas produced by
Capco has fluctuated significantly during the last year. Changes in the price
that Capco receives for its oil and gas is set by market forces beyond Capco's
control. That uncertainty in oil and gas prices makes it more difficult for a
company like Capco to increase its oil and gas asset bases and become a
significant participant in the oil and gas industry.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Capco Resources, Ltd. v. GREKA Energy Corporation and Randeep S. Grewal (Case
No. 99-8521-R, U.S. District Court, Central District of California). In August
1999, CRL filed an action against Greka and Randeep S. Grewal, the President of
Greka, alleging that Greka breached, and Greka and Mr. Grewal made
misrepresentations in connection with, a Stock Exchange Agreement entered into
between Greka, CRL and CRL's affiliates (the "Exchange"). CRL claims that it is
entitled to $12.25 million in damages, plus interest and costs, and requests
that the court require Greka to file a registration statement for the resale of
1,290,000 shares of Greka common stock that CRL received pursuant to the
Exchange. Greka filed the case of Greka vs. CRL and Service Asset Management
Company d/b/a Penson Financial Services, Inc. d/b/a Global Hanna Trading in the
Denver Colorado District Court and obtained a temporary restraining order (Case
No. 99-CV-6006). Prior to the preliminary injunction hearing CRL removed the
case to the U.S. Federal District Court in Denver, Colorado (Civil Action No.
99-K-1814) where the cases were combined.
In August 2000, CRL entered into a settlement agreement for Greka to purchase
800,000 shares of Greka for $6.50 per share or $5,200,000 less $500,000 of
liabilities owned to Greka from CRL and affiliates, for a total of $4,700,000.
Of CRL's remaining 490,000 shares of common stock of Greka, Greka will be given
voting control over these shares through December 31, 2002. The settlement
further provides that CRL's continued ownership of 75,000 of the 490,000 shares
is contingent upon CRL's full payment of margin debt related to those shares.
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.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated February 15, 2000, 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: November 2, 2000 By: /s/ Dennis R. Staal
--------------------
Dennis R. Staal, Chief
Financial and Accounting Officer
16
