UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______, 20___ to _______, 20___.
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
Incorporation or Organization) Identification Number)
5555 SAN FELIPE, SUITE 725
HOUSTON, TEXAS 77056
Address of Principal Executive Offices
(713) 622-5550
(Registrant's Telephone Number, Including Area Code)
---------------------------------------------------
(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 117,280,769 shares of the Registrant's $.001 par value common stock
outstanding as of May 31, 2005.
This Form 10-QSB/A is being filed to report two amendments to our quarterly
report for the period ended March 31, 2005 ("Report"), which was originally
filed on June 13, 2005. The first amendment is to include the Balance Sheet at
December 31, 2004, in the Report, along with the interim period Balance Sheet.
The second amendment is that we have revised the presentation of revenues, costs
and expenses on the consolidated statement of operations. The accounts that
previously comprised sales and cost of sales are now reported separately on the
consolidated statement of operations. The revision had no effect on net (loss)
income as previously reported in the Report.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 and December 31, 2004
ASSETS
(Dollars in Thousands)
March 31, December 31,
2005 2004
(Unaudited)
Current Assets:
Cash $ 1,491 $ 1,805
Marketable securities 399 --
Accounts receivable-trade, net of
allowance of $46 and $45, respectively 757 482
Notes receivable, including a related party -- 981
Deposits on property acquisitions 5,936 --
Deferred tax asset 27 27
Other current assets 237 538
------------ ------------
Total Current Assets 8,847 3,833
Oil and gas properties, using full cost accounting,
less accumulated depreciation and depletion of $2,103
and $1,727, respectively 14,412 9,197
Other Assets:
Assets attributable to businesses under contract
for sale 4,063 4,063
Other property, less accumulated depreciation of $82
and $70, respectively 687 649
Accounts receivable, related parties -- 14
Other assets 673 344
------------ ------------
Total Assets $ 28,682 $ 18,100
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
2
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
MARCH 31, 2005 and December 31, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in Thousands)
March 31, December 31,
2005 2004
(Unaudited)
Current Liabilities:
Accounts payable, trade $ 3,263 $ 1,330
Notes payable 6,646 762
Current maturities, long-term debt, including a
related party 711 637
Accrued expenses 896 1,174
------------ ------------
Total Current Liabilities 11,516 3,903
------------ ------------
Non-current Liabilities:
Long term debt, less current maturities 346 515
Convertible promissory notes, net 1,562 1,516
Asset retirement obligations 2,217 2,193
Long term liabilities 361 361
Deferred tax liability 27 27
------------ ------------
Total Non-current Liabilities 4,513 4,612
------------ ------------
Liabilities attributable to businesses under contract
for sale 4,346 4,346
------------ ------------
Total Liabilities 20,375 12,861
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock, $0.001 par value;
authorized 150,000,000 shares;
113,792,762 and 101,023,476 shares issued 114
101
Additional paid in capital 6,575 3,074
Treasury stock, 1,267,708 shares, at cost (138) (138)
Retained earnings 1,756 2,202
------------ ------------
Total Stockholders' Equity 8,307 5,239
------------ ------------
Total Liabilities and
Stockholders' Equity $ 28,682 $ 18,100
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2005 and 2004
(Unaudited)
(Dollars in Thousands except per share)
2005 2004
------------- -------------
Operating revenues:
Oil and gas sales $ 796 $ 1,274
Gas gathering, marketing and processing -- 61
Oil field services 292 29
------------- -------------
Total operating revenues 1,088 1,364
------------- -------------
Operating costs and expenses:
Oil and gas production lifting costs 371 411
Production taxes 51 139
Gas gathering, marketing and processing costs 52 152
Oil field services 265 --
Depreciation, depletion and amortization 412 167
General and administrative 290 279
------------- -------------
Total operating costs and expenses 1,441 1,148
------------- -------------
Operating (loss) profit (353) 216
Other Income (Expenses):
Interest income 12 3
Interest expense (105) (67)
Losses on sales of investments-
marketable securities -- (63)
Holding losses-marketable securities -- (1)
------------- -------------
(Loss) income from continuing operations
before taxes and minority interest (446) 88
Provision for income taxes -- --
------------- -------------
Net (loss) income $ (446) $ 88
============= =============
Earnings per share-basic:
Net (loss) income $ -- $ --
============= =============
Earnings per share-diluted:
Net (loss) income $ -- $ --
============= =============
Weighted average common share and common share equivalents:
Basic 99,769,935 94,855,729
============= =============
Diluted 108,943,268 101,505,837
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
4
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2005 and 2004
(Unaudited)
(Dollars in Thousands)
2005 2004
------------ ------------
Cash Flows From Operating Activities:
Net (loss) income $ (446) $ 88
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation, depletion and accretion 412 167
Losses on sales of investments-marketable
securities -- 63
Holding losses-marketable securities -- 1
Amortization of deferred loan costs and
beneficial conversion feature 21 --
Decrease in deferred tax asset -- 116
Decrease in deferred tax liability -- (116)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable-trade (276) (165)
Other current assets (99) (3)
Increase (decrease) in liabilities:
Accounts payable 1,945 228
Accrued expenses -- 152
------------ ------------
Net cash provided by operating activities 1,557 531
------------ ------------
Cash Flows From Investing Activities:
Decrease in related party accounts (2) (70)
Capital expenditures for oil and gas property (5,591) (86)
Deposits for property acquisitions (5,536) --
Expenditures for other property and assets (50) (148)
Purchase of marketable securities (397) --
Collection of notes receivable 981 --
Deposits for bond collateral (262) --
Proceeds from sale of marketable securities -- 129
------------ ------------
Net cash used in investing activities (10,857) (175)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from notes payable 6,036 --
Proceeds from long-term debt -- 120
Payments on long term debt (95) (423)
Payments on notes payable (152) --
Payment on long term liabilities -- (19)
Sale of Common Stock 3,197 --
------------ ------------
Net cash provided by (used in)
financing activities 8,986 (322)
------------ ------------
(Continued on next page)
The accompanying notes are an integral part of the consolidated financial
statements.
5
CAPCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2005 and 2004
(Unaudited)
(Dollars in Thousands)
(continued)
2005 2004
------------ ------------
Net (decrease) increase in cash (314) 34
Cash, beginning of period 1,805 35
------------ ------------
Cash, end of period $ 1,491 $ 69
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 96 $ 67
============ ============
Taxes paid $ -- $ --
============ ============
Supplemental disclosure of non-cash financing and investing activities:
Common Stock issued in settlement of liabilities $ 286 $ 30
============ ============
Common Stock issued for conversion of
promissory note $ 30 $ --
============ ============
Paid in capital provided as equity component of
debt financing $ -- $ 21
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
6
CAPCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Capco Energy, Inc. ("Capco" or the "Company") is an independent energy company
engaged primarily in the acquisition, exploration, development, production and
sale of oil, gas and natural gas liquids. The Company's production activities
are located in the United States of America. Effective December 31, 2003, the
Company divested of its oil and gas interests in Canada which were 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 5555
San Felipe, Suite 725, Houston, Texas 77056. The Company was incorporated as
Alfa Resources, Inc. a Colorado corporation on January 6, 1981. In November
1999, the Company amended its articles of incorporation to change its name from
Alfa Resources, Inc. to Capco Energy, Inc.
The Company's future financial condition and results of operations will depend
upon prices received for its oil and natural gas and the costs of finding,
acquiring, developing and producing reserves. Prices for oil and natural gas are
subject to fluctuations in response to changes in supply, market uncertainty and
a variety of other factors beyond the Company's control. These factors include
worldwide political instability (especially in the Middle East), the foreign
supply of oil and natural gas, the price of foreign imports, the level of
consumer product demand and the price and availability of alternative fuels.
BASIS OF 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, 2004, filed with the
Company's Form 10-KSB.
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
significant subsidiaries in the year 2005 include Capco Offshore, Inc. and
Packard Gas Company.
7
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
MAJOR CUSTOMERS
One customer accounted for 65% of the Company's oil and gas sales for the three
months ended March 31, 2005, and two customers accounted for 56% and 33%,
respectively, of the Company's oil and gas sales for the three months ended
March 31, 2004. Three customers accounted for 27%, 12% and 11%, respectively, of
the Company's accounts receivable at March 31, 2005.
OIL AND GAS PROPERTY
During the quarter ended March 31, 2005, the Company incurred expenditures of
approximately $5.6 million in its oil and gas acquisition, exploration and
development activities. Of this amount, $5.1 million was attributable to the
drilling of an exploratory well in Outer Continental Shelf ("OCS") Galveston
Block 297. At March 31, 2005, drilling operations were still in progress on the
well. The cost incurred as of March 31, 2005, was excluded from the full cost
pool for purposes of determining cost depletion for the current period as the
outcome of the drilling activity was not known (see Note 6 - Subsequent Events).
The Company also incurred expenditures of $0.1 million in connection with the
development of the properties located in Creek County, Oklahoma, which were
acquired in October 2004, and $0.3 million on the Brazos Field located in
offshore Matagorda County, Texas.
The Company charged a total of $0.1 million of in-house and third party general
and administrative charges to the full cost pool as a result of time and
expenses incurred during the quarter ended March 31, 2005, in its efforts to
acquire and develop additional oil and gas reserves.
On February 7, 2005, the Company executed an Amended Memorandum of Terms with an
unrelated private investor (the "Investor") that provided the terms whereby the
Investor would invest up to $7.5 million in oil and gas property interests owned
by the Company. The properties effected by the transaction included three wells
in the Company-operated Brazos Field in the Texas Gulf Coast, the exploratory
well at OCS Galveston Block 297 and a pending acquisition of producing
properties in OCS High Island Block 196. In addition, the Investor holds an
option to participate in a planned workover on a well in the Brazos Field, and
agreed to fund future capital requirements for the applicable properties in
amounts and at times determined by mutual agreement of Capco and the Investor.
Closing of the transaction is scheduled to occur at the time that the Investor
receives approval to own offshore leases from the Minerals Management Service
("MMS"). In addition to the acquired property interests, the Investor is to
receive warrants to purchase shares of the Company's Common Stock. The number of
warrants will be determined based on the trading price of the Common Stock at
the date of closing.
The Investor paid $1.5 million to the Company for a portion of Capco's interests
in the wells in the Brazos Field and the exploratory well being drilled at OCS
Galveston Block 297.
On February 10, 2005, Capco announced the purchase of producing properties in
OCS High Island Block 196 at a cost of $2.5 million. Additionally, bonds in the
total amount of $3.5 million were posted with the MMS. Funding for the
acquisition, including bond deposits, was provided by the Investor, who will
initially own the entire acquired interest. Capco will operate the property.
8
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
OIL AND GAS PROPERTY, Continued
In addition to the fundings described above the Investor had previously advanced
$0.4 million to Capco in December 2004 for a deposit that was made in connection
with the acquisition of the OCS High Island Block 196 property. In total the
fundings amounted to $6.4 million. This amount is documented as a bridge loan
that is to remain in effect until the Investor receives owner approval from the
MMS and the property interests are assigned by Capco to the Investor. In
addition to the Investor's acquired interests in several of Capco's properties,
the Company has provided the Investor with additional security interests in a
majority of the Company's unencumbered assets. The security will be released
when the assignments become effective (see Note 6 - Subsequent Events).
On March 15, 2005, the Company entered into an agreement for the acquisition of
producing properties located in St. Bernard Parish, Louisiana, and Chandeleur
Area, OCS Blocks 27, 29 and 30, and funded a $1.0 million cash deposit with the
seller of the properties. The acquisition closed on May 4, 2005, at a cost of
approximately $12.1 million, after adjustment for net revenue credits from the
effective date to the closing date and after credit for the $1.0 million cash
deposit. Substantially all of the funds required at closing were paid by the
Investor (see Note 6 - Subsequent Events).
All of the operating cash flow attributable to the property interests discussed
above will accrue to the Investor, until such time that the Investor has
received reimbursement of all invested funds, plus a stated return on the
invested funds ("Payout"). At Payout, Capco will earn a two-thirds interest in
the future net operating cash flow to be derived from the property interests,
and have an option to acquire the remaining one-third interest from the
Investor. The Investor also has an option to sell the property interests to the
Company (see Note 6 - Subsequent Events).
NOTES PAYABLE AND LONG-TERM DEBT
During the quarter ended March 31, 2005, the Company retired a total of $0.3
million of notes payable and long-term debt. Payments on long-term debt in the
original amount of $1.0 million and two notes payable totaled $246,000. A holder
of a convertible promissory note in the amount of $30,000 elected to convert the
note to 150,000 shares of Common Stock.
In addition, as described above, a private investor ("Investor") provided
funding in the amount of $6.0 million to acquire interests in Company-owned oil
and gas producing properties and for an acquisition that closed during the
current interim period. This amount, coupled with $0.4 million that had been
advanced in December 2004, was documented as a bridge loan at March 31, 2005,
pending owner approval by the MMS in order for certain of the acquired property
interests to be assigned to the Investor.
COMMON STOCK
During the quarter ended March 31, 2005, the Company had the following equity
transactions:
The Company issued 125,000 shares of Common Stock upon the exercise of options,
realizing proceeds of $22,000.
9
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
COMMON STOCK, Continued
The Company issued 1,074,286 shares of restricted Common Stock to settle
liabilities reported as of the end of the prior fiscal year in the total amount
of $213,000. Included in these amounts were 1.0 million shares issued in
settlement of an obligation for the acquisition of a property at a recorded cost
of $200,000.
The Company issued 420,000 shares of Common Stock under its 1999 Incentive
Option Plan for compensation in the amount of $73,500 which had been reported as
a liability as of the end of the prior fiscal year.
The Company issued 150,000 shares of restricted Common Stock upon the election
by a holder of a convertible promissory note in the amount of $30,000, to
convert the note into Common Stock.
The Company issued 1.0 million shares of restricted Common Stock to an
individual, realizing proceeds of $175,000.
On March 10, 2005, the Company entered into a Securities Purchase Agreement with
certain accredited investors with respect to a private placement under
Regulation D, issuing 10.0 million shares of restricted Common Stock and
warrants for 5.0 million shares of Common Stock for proceeds of $3.0 million.
The warrants are exercisable for a period of five years from date of issue at a
price of $0.45 per share of Common Stock. No underwriter discounts or
commissions were paid in connection with the transaction.
On March 8, 2005, the Company's Board of Directors approved an amendment to the
Articles of Incorporation of the Company to increase the number of shares
authorized to be issued by the Company from 150,000,000 to 500,000,000 shares of
Common Stock. The amendment is subject to approval by the Company's shareholders
at its annual meeting, scheduled for June 2005.
STOCK BASED COMPENSATION
During the quarters ended March 31, 2005 and 2004, the Company did not grant any
stock option awards. In addition, there were no outstanding stock option awards
granted in prior periods for which a portion of such grants vested in the first
quarter of either 2005 or 2004. Accordingly, there is no compensation cost
attributable to stock based compensation for the interim periods.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2005, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 107 ("SAB 107"). The interpretations in SAB
107 express views of the staff regarding the interaction between Statement of
Financial Accounting Standards Statement No. 123 (revised 2004), "Share-Based
Payment" ("Statement 123(R)") and certain SEC rules and regulations and provide
the staff's views regarding the valuation of share-based payment arrangements
for public companies. In particular SAB 107 provides guidance related to
share-based payment transactions with nonemployees, the transition from public
entity status, valuation methods (including assumptions such as expected
volatility and expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, first-time adoption of
Statement 123(R) in an interim period, capitalization of compensation cost
related to share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of Statement 123(R),
the modification of employee share options prior to adoption of Statement 123(R)
and disclosures in Management's Discussion and Analysis subsequent to adoption
of Statement 123(R).
10
RECLASSIFICATION
Certain amounts have been reclassified in the prior year to be consistent with
the classification as of March 31, 2005.
NOTE 2 - DISCONTINUED OPERATIONS
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, a subsidiary whose business interests consisted
principally of the marketing of petroleum products. The Company received a cash
purchase price of $1.75 million and recorded the sale of the business interests,
effective September 30, 2003, recording a loss of $730,000 for the disposal of
the discontinued business interests.
The Company is guarantor of certain obligations of Enterprises and its
subsidiaries in the aggregate amount of $1.1 million at March 31, 2005. The
obligations consist of vendor trade accounts, and real estate and equipment
purchases. Management believes that there is sufficient underlying collateral
value in the related assets to significantly reduce the potential loss, if any,
to the Company.
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. The sales transaction resulted in a gain to the Company in the amount
of $182,000; however, due to the significant risk still assumed by the Company
in the form of the loan guarantees, the gain was deferred until such time that
the risk had either been significantly reduced or eliminated.
Beginning in the year 2003, the buyer marketed the real estate for sale, and
certain properties have been sold and the remaining properties are listed for
sale. A portion of the proceeds available from the property sales have been used
to reduce the outstanding debt assumed by the buyer. Effective September 30,
2003, the Company re-evaluated the exposure relating to the debt guarantees.
While management believed that there was sufficient value in the underlying
assets such that the Company would not incur a loss from this disposal, the
Company believed that the disposal no longer met the criteria to be recorded as
a divestiture of a subsidiary for accounting purposes. Accordingly, the decision
was made at September 30, 2003, to restore the assets and liabilities
attributable to the businesses that were sold to the Balance Sheet to be
reported as "Assets attributable to businesses under contract for sale" and
"Liabilities attributable to businesses under contract for sale".
The Company further evaluated the exposure relating to the debt guarantees as of
December 31, 2003, and determined that there was not sufficient value in the
underlying assets such that the Company would, in all likelihood, incur a loss
from this disposal. It was estimated that the liabilities which are guaranteed
11
NOTE 3 - BUSINESSES UNDER CONTRACT FOR SALE, Continued
by the Company exceeded the underlying net assets by approximately $333,000. The
Company accounted for this deficit by eliminating the deferred gain of $182,000
that was recorded at December 31, 2002, and by recording a charge to year 2003
operations in the amount of $151,000.
The former subsidiary has been in default on the indebtedness since 2003.
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, and in December 2004, the parties
entered into a Pay-Off Agreement ("Agreement"), which provided for the
following: the outstanding amount of debt owed was reduced from $3.9 million to
$2.7 million by application of proceeds from properties sold and a discount
given by the lender, scheduled monthly payments were to be made for the period
February 15, 2005, to June 15, 2005, with the balance owing at June 30, 2005,
$2.6 million, to be paid at that date ("Date of Closing"). Alternatively, by
making a payment of $1.0 million on or before May 31, 2005, the Date of Closing
would be extended for a period of ninety (90) days. The $1.0 million payment was
not made on or before May 31, 2005, and accordingly, the Date of Closing was not
extended. As a further condition of the Agreement, the buyer deposited into an
escrow account ten million shares of the Company's Common Stock. In the event
that debt payments are not made in accordance with the terms of the Agreement,
the lender has the right to proceed to collect the unpaid indebtedness based on
the original amount owed and has the right to liquidate the Common Stock in
escrow in addition to seeking other remedies available to it to collect the
outstanding balance. In March 2005, proceeds in the amount of $95,000 from the
sale of a property were utilized as an additional principal payment to the
lender.
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 numerator is increased by the amount of interest expense attributable
to the convertible promissory notes payable and 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. On a diluted basis, the number of shares outstanding for
the three month period ended March 31, 2005, have been increased for 9,173,333
shares of Common Stock, determined under the "if converted" method, due to the
outstanding convertible promissory notes during the period. Under the treasury
method of calculating additional shares outstanding, the Company's weighted
average shares outstanding for the three month period ended March 31, 2005,
would have been increased for 10,320,891 shares of Common Stock if associated
stock options and warrants would have had a dilutive effect. Due to the net loss
reported by the Company, the effect of including shares attributable to stock
options and warrants would have been antidilutive. On a diluted basis, under the
treasury method of calculating the additional shares outstanding, the Company's
weighted average number of shares outstanding for the three month period ended
March 31, 2004, have been increased for 6,505,053 shares of Common Stock as
associated stock options have a dilutive effect on net income. Additionally, the
number of shares outstanding for the three month period ended March 31, 2004,
have been increased for 145,055 shares of Common Stock, determined under the "if
converted" method, due to the issuance of convertible promissory notes during
the period.
12
NOTE 5 - BUSINESS SEGMENTS
During the three month periods ended March 31, 2005 and 2004, the Company
operated in one business segment: acquisition, exploration, development, and
production of oil and gas reserves. The Company's headquarters and all of its
operations are located in the United States of America. A summary of the
Company's revenues and long-lived assets is as follows (in thousands):
Three Months Ended March 31,
2005 2004
------- -------
Operating revenues $ 1,088 $ 1,364
======= =======
At March 31, 2005:
Oil and gas properties (net) $14,412
=======
Other property and equipment (net) $ 687
=======
NOTE 6 - SUBSEQUENT EVENTS
On May 4, 2005, the Company closed on the acquisition of producing properties
located in St. Bernard Parish, Louisiana, and Chandeleur Area, OCS Blocks 27, 29
and 30. The acquired property interests, with working interests ranging from 14%
to 100%, include 11 producing wells and approximately 13,300 gross acres. The
contract acquisition price of $20.0 million was reduced to a closing cost of
$12.1 million, after adjustment for net revenue credits for the period from the
effective date to the closing date and for a cash deposit of $1.0 million paid
by the Company. Substantially all of the funds required at closing were paid by
the Company's joint venture partner in the acquisition as discussed below.
On May 4, 2005, the Company closed on a joint venture arrangement with Hoactzin
Partners, L.P., ("Hoactzin") an oil and gas investment affiliate of New York
based investment firm Dolphin Asset Management Corp. The Company contributed to
the joint venture the properties acquired in Louisiana that same date, its
interests in High Island Block 196 which were acquired in February 2005, a
portion of its interests in producing wells in the Brazos Field in Texas state
waters, and a portion of its interest in the OCS Galveston Block 297 well on
which drilling operations were in progress at that date.
Hoactzin had previously provided funding in the amount of $4.9 million for the
acquisition of the High Island Block 196 property and had also advanced $1.5
million for the pending acquisition of other property interests from the
Company. The total indebtedness of $6.4 million owed by the Company to Hoactzin
as of March 31, 2005, was eliminated by the Company's contribution of the
underlying property interests to the joint venture.
The joint venture arrangement is governed under the terms of a Management
Agreement between the parties. Hoactzin will own and retain all cash flow from
the properties until their investment is repaid ("Repayment Date"), at which
time the Company will receive a management fee equal to 66.7% of the net cash
flow from the properties. The Company has the option to purchase the property
interests from Hoactzin at any time after the one-year anniversary of the
Repayment Date, and Hoactzin has the option to sell its property interests to
the Company at any time after the two-year anniversary of the Repayment Date.
The option prices are based on formulas specified in the Management Agreement.
As of May 4, 2005, Hoactzin had invested a total of $18.4 million under this
arrangement.
13
NOTE 6 - SUBSEQUENT EVENTS, Continued
In connection with the closing of the joint venture arrangement with Hoactzin,
the Company issued a series of common stock purchase warrants ("Warrants") to
Hoactzin. The Warrants are exercisable into a total of 24,226,181 shares of the
Company's Common Stock at initial exercise prices ranging from $0.176 to $0.30,
subject to adjustment pursuant to the anti-dilution provisions set forth in the
Warrants, and expire five (5) years from date of issuance. The Warrants may be
exercised upon payment of cash, exchanged for the Company's Common Stock, or
applied as a credit against the Aggregate Investment Amount, as that term is
defined in the agreements.
On May 10, 2005, the Company entered into a Securities Purchase Agreement with
certain accredited investors with respect to a private placement under
Regulation D of 4.0 million shares of Common Stock and purchase warrants for 2.0
million shares of Common Stock for a total purchase price of $1.2 million. The
warrants are exercisable for a period of five years from date of issue at a
price of $0.45 per share of Common Stock. No underwriter discounts or
commissions were paid in connection with the transaction. Capco intends to use
the proceeds of the offering for working capital.
On May 16, 2005, the Company announced that it had recommended to its joint
interest partners in the OCS Galveston Block 297 well that the well be plugged
and abandoned. The well had been drilled to its target depth and tested for the
presence of hydrocarbons, but in the opinion of management, the test results did
not warrant a completion attempt. The total cost of the well at that time
approximated $8.9 million, an increase of $3.7 million from the cost incurred as
of March 31, 2005. In accordance with the terms of the joint interest
participation agreement, Capco received, in May, cash payments in the amount of
$1.2 million from certain joint interest partners as reimbursement for a portion
of the drilling costs incurred by the Company. Advance payments from other joint
interest partners in the amount of $1.5 million that were reported as current
liabilities at March 31, 2005, will be reclassified as a reduction against the
initial drilling costs incurred by the Company. As a result, the well cost
attributable to the Company's ownership interest has increased approximately
$0.7 million since March 31, 2005. Capco has also notified its insurance carrier
that it intends to file a claim in the amount of approximately $5.0 million for
recovery of certain costs incurred as a result of the events that caused the
well to be sidetracked and re-drilled. Any insurance proceeds received by Capco
will reduce the Company's net cost of the well and will be used for working
capital, although it is not known at this time if the claim will be sustained,
or in what amount.
14
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: 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, adverse changes in the
regulatory environment affecting Capco, the inability to dispose of real
property at prices sufficient enough to liquidate associated indebtedness, the
inherent risks involved in the evaluation of properties targeted for
acquisition, the Company's dependence on key personnel, the availability of
capital resources at terms acceptable to the Company, the uncertainty of
estimates of proved reserves and future net cash flows, the risk and related
cost of replacing produced reserves, the high risk in exploratory drilling and
competition. Capco or persons acting on its or their behalf should consider the
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 MARCH 31, 2005, COMPARED TO MARCH 31, 2004
Capco's revenues from oil and gas sales were $.8 million in 2005 compared to
$1.3 million in 2004. On a barrel of oil equivalent ("BOE") basis, the price
paid at the wellhead for the Company's production increased from $30.77 in 2004
to $34.78 in 2005, resulting in an increase in total oil and gas revenue of $0.2
million. A decrease in production volumes from 41,385 BOE in 2004 to 22,900 BOE
in 2005 resulted in a decrease in total oil and gas revenue of $0.6 million.
This net decrease is due principally to the loss of oil and gas revenue in the
amount of $0.8 million attributable to properties located in Alabama, Louisiana,
Michigan and Montana that were sold by the Company in the last quarter of year
2004. Increases in production volumes and prices on the Brazos Field located in
offshore Matagorda County, Texas resulted in an increase in oil and gas revenue
in 2005 of $0.3 million. Revenues from gas gathering, marketing and processing
and oil field services increased from $0.1 million in 2004 to $0.3 million in
2005, due to an increase in oil field services in the Brazos Field.
15
Capco's oil and gas production lifting costs were $0.4 million in both 2005 and
2004. Production taxes were $.1 million in both 2005 and 2004. Gas gathering,
marketing and processing costs decreased from $0.2 million in 2004 to $0.1
million in 2005. Operating expenses attributable to the producing properties
that were sold in the last quarter of year 2004 amounted to $0.3 million in the
first quarter of that year. Operating expenses on the Company's other producing
properties increased $0.2 million in 2005 over the same period in 2004 due
principally in an increase in production levels at the Company's Brazos Field.
Expenses attributable to oil field services increased from $-0- in 2004 to $0.3
million in 2005, due to operations in the Brazos Field. Depreciation, depletion
and amortization was $0.4 million in 2005 and $0.2 million in 2004. This change
is due principally to the decrease in proved reserves from 3.5 million BOE at
January 1, 2004, to 0.9 million BOE at January 1, 2005, as a result of property
dispositions and revisions to estimated recoverable reserves at the end of year
2004. General and administrative expenses were $0.3 million in both 2005 and
2004.
Operating revenues from Capco's oil and gas production are very sensitive to
changes in the price of oil, while operating costs and expenses are not as
sensitive to changes in price; thus it is difficult for management to predict
whether or not the Company will be profitable in the future.
Interest expense increased to $0.1 million in 2005 from $67,000 in 2004, due to
the private placements of convertible notes payable in the total amount of $1.7
million that closed in June and September 2004, and the issuance of long-term
debt in the amount of $1.0 million in December 2004.
Capco's production, revenue and operating expenses decreased significantly in
year 2005 from the same period in 2004 due to the sale of non-operated
properties in the last quarter of year 2004. However, the Company's available
cash flow was not significantly affected by these dispositions as most of the
net cash flow from the properties was utilized for debt service. At the time of
sale, the significant property interests were burdened by debt in the amount of
$3.1 million. It was estimated at that time that the debt would not be fully
paid until mid-year 2007.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, the Company had a working capital deficit of $2.7 million.
This negative working capital is due, in large part, to costs incurred with the
drilling of the OCS GA 297 exploratory well. Subsequent to March 31, 2005, the
Company engaged in several transactions that directly affected this deficit
On March 15, 2005, the Company had entered into an agreement for the acquisition
of producing properties located in St. Bernard Parish, Louisiana, and Chandeleur
Area, OCS Blocks 27, 29 and 30, and funded a $1.0 million cash deposit with the
seller of the properties. Closing for the acquisition took place on May 4, 2005.
The closing cost of $12.1 million, which reflected adjustment for net revenue
credits from the effective date to the closing date and a credit for a $1.0
million cash deposit paid by Capco, was funded by selling the acquired property
interests to a joint venture partner, while retaining an interest in the
properties after the joint venture partner receives payout on its investment
amount as discussed below.
On May 4, 2005, the Company closed on a joint venture arrangement with Hoactzin
Partners, L.P., ("Hoactzin") an oil and gas investment affiliate of New York
based investment firm Dolphin Asset Management Corp. The Company contributed to
the joint venture the properties acquired in Louisiana that same date, its
interests in High Island Block 196 which were acquired in February 2005, a
portion of its interests in producing wells in the Brazos Field in Texas state
waters, and a portion of its interest in the OCS Galveston Block 297 well on
which drilling operations were in progress at that date.
Hoactzin had previously provided funding in the amount of $4.9 million for the
acquisition of the High Island Block 196 property and had also advanced $1.5
million for the pending acquisition of other property interests from the
Company. The total indebtedness of $6.4 million owed by the Company to Hoactzin
as of March 31, 2005, was eliminated by the Company's contribution of the
underlying property interests to the joint venture.
16
The joint venture arrangement is governed under the terms of a Management
Agreement between the parties. Hoactzin will own and retain all cash flow from
the properties until their investment is repaid ("Repayment Date"), at which
time the Company will receive a management fee equal to 66.7% of the net cash
flow from the properties. The Company has the option to purchase the property
interests from Hoactzin at any time after the one-year anniversary of the
Repayment Date, and Hoactzin has the option to sell its property interests to
the Company at any time after the two-year anniversary of the Repayment Date.
The option prices are based on formulas specified in the Management Agreement.
As of May 4, 2005, Hoactzin had invested a total of $18.4 million under this
arrangement.
On May 10, 2005, the Company entered into a Securities Purchase Agreement with
certain accredited investors with respect to a private placement under
Regulation D of 4.0 million shares of Common Stock and purchase warrants for 2.0
million shares of Common Stock for a total purchase price of $1.2 million. The
warrants are exercisable for a period of five years from date of issue at a
price of $0.45 per share of Common Stock. No underwriter discounts or
commissions were paid in connection with the transaction. Capco intends to use
the proceeds of the offering for working capital.
On February 3, 2005, drilling operations had commenced on an exploratory well at
Outer Continental Shelf ("OCS") Galveston Block 297. Capco is the operator of
the well which was targeted for a total drilled depth of not more than 13,500
feet. On April 12, 2005, the Company announced that due to encountering
excessive gas pressures at a depth of approximately 13,350 feet, the decision
was made to sidetrack from the existing well bore and re-drill the well from a
depth of approximately 8,500 feet to the target depth. On May 16, 2005, the
Company announced that it had recommended to its joint interest partners that
the well be plugged and abandoned. The well had been drilled to its target depth
and tested for the presence of hydrocarbons, but in the opinion of management,
the test results did not warrant a completion attempt. The total cost of the
well at that time approximated $8.9 million, an increase of $3.7 million from
the cost incurred as of March 31, 2005. In accordance with the terms of the
joint interest participation agreement, Capco received, in May, cash payments in
the amount of $1.2 million from certain joint interest partners as reimbursement
for a portion of the drilling costs incurred by the Company. Advance payments
from other joint interest partners in the amount of $1.5 million that were
reported as current liabilities at March 31, 2005, will be reclassified as a
reduction against the initial drilling costs incurred by the Company. As a
result, the well cost attributable to the Company's ownership interest has
increased approximately $0.7 million since March 31, 2005. Capco has also
notified its insurance carrier that it intends to file a claim in the amount of
approximately $5.0 million for recovery of certain costs incurred as a result of
the events that caused the well to be sidetracked and re-drilled. Any insurance
proceeds received by Capco will reduce the Company's net cost of the well and
will be used for working capital, although it is not known at this time if the
claim will be sustained, or in what amount.
Net cash provided by operating activities totaled $1.6 million for the three
months ended March 31, 2005, compared to cash provided by operating activities
of $0.5 million for the three months ended March 31, 2004. In 2005, net loss,
adjusted for reconciling items, resulted in a cash outflow of $13,000. Changes
in assets and liabilities in 2005 resulted in a cash source of $1.6 million. In
2004, net income, adjusted for reconciling items, resulted in a cash source of
$0.3 million. Changes in assets and liabilities resulted in a cash source of
$0.2 million.
Net cash used in investing activities totaled $10.9 million for the three months
ended March 31, 2005, compared to cash used in investing activities of $0.2
million for the three months ended March 31, 2004. Proceeds from the collection
of notes receivable in the amount of $1.0 million was the source of cash inflow
in 2005. Expenditures for oil and gas property, including $5.1 million on the
drilling of the OCS Galveston Block 297 well, amounted to $5.6 million. An
additional $5.5 million was expended as deposits for oil and gas property
acquisitions, including $4.5 million for the OCS High Island 196 property and
$1.0 million for a pending acquisition in offshore Louisiana. Excess cash
deposits in the amount of $0.4 million were invested in marketable securities
and $0.3 million was deposited as cash collateral with the Company's surety
company in connection with the issuance of bonds for the OCS Galveston Block 297
well. Proceeds from the sale of marketable securities in the amount of $0.1
million were the principal cash source in 2004. Expenditures for oil and gas
property and other assets totaled $0.2 million, and payments to reduce amounts
owed to related parties totaled $0.1 million in 2004.
17
Net cash provided by financing activities totaled $9.0 million for the three
months ended March 31, 2005, and net cash used in financing activities totaled
$0.3 million for the three months ended March 31, 2004. Proceeds in the amount
of $6.0 million were received from the placement of notes payable and private
placements of the Company's Common Stock provided a cash source of $3.2 million
in 2005. Payments on notes payable and long-term debt resulted in a cash outflow
of $0.2 million in 2005. Proceeds from the issuance of convertible promissory
notes provided a cash source in the amount of $0.1 million in 2004. Payments on
long-term debt resulted in a cash outflow of $0.4 million in 2004.
The Company has various loans which require principal payments of $7.4 million
during the twelve month period ending March 31, 2006. Of this amount,
approximately $6.4 million was eliminated during the second calendar quarter of
year 2005 upon the closing of a sale of various oil and gas property interests
to the lender. The remainder of the payments are anticipated to be made from
cash flow available from the operations of other producing property, and from
proceeds from the sale of assets and equity and/or debt fundings.
To the extent such cash flow is insufficient to make the debt payments and
provide adequate working capital for the business of the Company, the Company
may be required to reduce or curtail certain operations or seek other sources of
capital. Capco has historically secured financing for its acquisition and
development activities on a project-financing basis. Such financing has included
the sale of portions of target acquisitions or drilling ventures to third
parties, participation with co-venturers on financing arranged by the other
party, private borrowings from individuals and private placements of the
Company's Common Stock. Other than financing arrangements already consummated in
the second calendar quarter of year 2005, the Company does not have any
agreements or arrangements providing for such financing and it may not be
available on terms acceptable to the Company.
In addition to debt service requirements, Capco has several other obligations
that affect the Company's available cash flow. The Company is obligated to pay
operating lease costs of approximately $0.1 million in 2005 for land and
facilities and has an obligation to a surety company to make monthly cash
collateral deposits of $12,000 over a period of twenty-four months, beginning
February 2005. Acquisitions of producing oil and gas properties that closed
during the year ended December 31, 2004, include obligations to make development
expenditures of $0.6 million during the year 2005 to earn the entire working
interests stipulated in the purchase agreements. Various purchase agreements
require that funding obligations of $1.1 million and $0.3 million be paid from
the net profits, if any, derived from the respective operations of the
properties. Utilization of available cash flow to fund these requirements may
affect Capco's ability to adequately fund other planned activities.
The Company disposed of its equity ownership in Enterprise and subsidiaries
during the year 2003, but remained as guarantor of certain indebtedness incurred
by those business interests prior to the date of sale by Capco. As of March 31,
2005, Capco was the guarantor of approximately $1.1 million of obligations for
trade accounts, real estate and equipment purchases and leases owed by
Enterprise. The obligations are being serviced by Enterprise, and Capco believes
that there is sufficient underlying collateral value in the related assets to
significantly reduce the exposure of loss to the Company. Capco is also the
guarantor of indebtedness issued to one lender by Graves, a former subsidiary of
Enterprise, in the original amount of $3.9 million. Graves is owned by Capco's
Chief Executive Officer. In December 2004, a Pay-Off Agreement ("Agreement") was
negotiated with the lender, which provided for the following: the outstanding
amount of debt owed was reduced from $3.9 million to $2.7 million by application
of proceeds from properties sold and a discount given by the lender, scheduled
monthly payments were to be made for the period February 15, 2005, to June 15,
2005, with the balance owing at June 30, 2005, $2.6 million, to be paid at that
date ("Date of Closing"). Alternatively, by making a payment of $1.0 million on
or before May 31, 2005, the Date of Closing would be extended for a period of
ninety (90) days. The $1.0 million payment was not made on or before May 31,
2005, and accordingly, the Date of Closing was not extended. As a further
condition of the Agreement, Graves deposited into an escrow account ten million
shares of the Company's Common Stock. In the event that debt payments are not
made in accordance with the terms of the Agreement, the lender has the right to
proceed to collect the unpaid indebtedness based on the original amount owed and
has the right to liquidate the Common Stock in escrow in addition to seeking
other remedies available to it to collect the outstanding balance. In March
2005, proceeds in the amount of $95,000 from the sale of a property were
utilized as an additional principal payment to the lender. At this time Capco
believes that the indebtedness will be satisfied in accordance with the terms of
the Agreement and that the Company will not incur any loss attributable to the
guarantee.
18
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.
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 as well as government intervention. The volatility and uncertainty in
oil and gas prices have made it more difficult for a company like Capco to
increase its oil and gas asset base and become a significant participant in the
oil and gas industry. Most of Capco's oil and gas production is sold to certain
major oil companies and gas transmission companies. However, in the event these
purchasers discontinued oil and gas purchases, Capco has made contact with other
purchasers who would purchase the oil and gas at terms standard in the industry.
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, the proceeds to be
realized from the sale of real property, 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, 2004.
19
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 March 31, 2005, 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 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.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
The Registrant does not have procedures in place by which security holders
may recommend nominees to the Registrant's Board of Directors.
Item 6. Exhibits.
(a) The following exhibits are filed as part of this report:
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Accounting Officer
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
section 1350
32.2 Certification of Chief Accounting Officer pursuant to 18 U.S.C.
section 1350
21
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: June 13, 2005 By: /s/ Ilyas Chaudhary
------------------------------------
Ilyas Chaudhary, Chief Executive Officer