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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number 001-04668
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COASTAL CARIBBEAN OILS & MINERALS, LTD.
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(Exact name of registrant as specified in its charter)
BERMUDA NONE
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Clarendon House
Church Street
Hamilton, Bermuda HM 11
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (850) 653-9165
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.12 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). |_| Yes |X| No
The aggregate market value of the common stock held by non-affiliates of
the registrant was approximately $3,074,073 (U.S.) at April 1, 2004.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common stock, par value $.12 per share, 46,211,604 shares outstanding as of
March 18, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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Page
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PART I
Risk Factors 4
Item 1. Business 10
Item 2. Properties 15
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters 25
Item 6. Selected Consolidated Financial Information 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 58
Item 9A. Controls and Procedures 58
PART III
Item 10. Directors and Executive Officers of the Company 59
Item 11. Executive Compensation 61
Item 12. Security Ownership of Certain Beneficial Owners and Management 63
Item 13. Certain Relationships and Related Transactions 65
Item 14. Principal Accounting Fees and Service 66
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 67
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All monetary figures set forth are expressed in United States currency.
3
PART I
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RISK FACTORS
An investment in the Company's common stock involves a high degree of risk.
You should carefully consider the following risk factors and other information
in this Form 10-K and the documents incorporated by reference in evaluating the
Company. If any of the following risks actually occur, the Company's business,
financial condition or results of operations could be materially adversely
affected.
RISKS RELATED TO OUR BUSINESS AND THE LITIGATION
We may be forced to wind up the Company or forced into insolvent
liquidation.
The Company's current liabilities exceed its current assets. Certain
creditors of the Company have deferred payment of amounts owed to them. There is
no assurance that those creditors will continue to permit the Company to defer
payments of amounts owed.
The Company has limited funds to continue its operations. Unless the
Company is able to raise adequate additional funds to continue its business, the
Company may be forced to wind up the Company or forced into insolvent
liquidation under the laws of Bermuda within the next several months.
We have a history of losses and anticipate further losses, which could
cause us to discontinue our business.
Our business has never had substantial revenues and has operated at a loss
in each year since our inception in 1953. We recorded a loss of $1,008,000 for
the year ended December 31, 2003, a loss of $2,448,000 for the year 2002 and a
loss of $6,585,000 for the year 2001. If we continue to sustain losses and are
unable to achieve profitability, we may not be able to continue our business and
may have to curtail, suspend or cease operations.
During the three years ended December 31, 2003, we spent approximately
$3,562,000 on legal expenses primarily for the lawsuits against the State of
Florida relating to drilling permits and royalty interests. If we continue to
incur significant expenses and are unable to raise additional funds to meet
these expenses, we may have to cease or suspend our lawsuits and/or cease
operations entirely.
In the unlikely event that we were to receive drilling permits related to
the St. George Island prospect or other exploratory wells, we would be required
to incur a significant amount of operating expenditures to commence drilling
operations and would need to generate significant revenues to achieve
profitability. We may not be able to achieve or sustain revenues, profitability
4
or positive cash flow and cannot assure that profitability, if achieved, will be
sustained.
Our auditors have expressed the view that our negative working capital,
stockholders' deficit and capital deficiencies raise substantial doubt
about our ability to continue as a going concern.
Our auditors have included an explanatory paragraph in their report for the
year ended December 31, 2003, indicating there is substantial doubt regarding
our ability to continue as a going concern. The financial statements included
elsewhere in this annual report do not include any adjustments to asset values
or recorded liability amounts that might be required in the event we are unable
to continue as a going concern. You should also see Note 1 to our financial
statements regarding the uncertainty as to our ability to continue as a going
concern.
Without additional financing, we only have enough liquid assets on hand to
continue to operate the Company for part of the year 2004.
We believe that our funds on hand and certain loan commitments from our
directors will be sufficient to permit us to continue to operate through June of
2004. After that time, we may have to suspend or cease operations unless and
until we can secure additional financing. In 2003 certain of our directors,
officers, legal counsel and administrative consultants agreed to continue
deferring the payment of their salaries and fees. At December 31, 2003, the
amount of salaries and fees deferred totaled approximately $1,054,000. We
currently do not have any commitments for additional financing. We may be unable
to obtain additional financing in the future on acceptable terms or at all.
If the courts ultimately rule that the State of Florida may deny us a
permit and not compensate us for the taking of our property, we may be
unable to continue our business.
In the event that the courts determine that the State of Florida is
entitled to deny Coastal Petroleum a permit without compensation, it is likely
that we would be unable to continue our business.
We may be unable to secure the additional funds needed to cover the
substantial litigation costs of proving our properties have been taken and
their value.
Coastal Petroleum filed a claim with the Florida Circuit Court for the
Second Judicial Circuit, that its property has been taken by the State of
Florida, and that Coastal Petroleum is owed compensation by the State of
Florida. That Court ruled that there was no taking and that no compensation was
owed and the Trial Court's decision was affirmed on Appeal to the First District
Court of Appeal. On April 7, 2004, the Company filed a Petition for Writ
Certiorari with the United States Supreme Court. We will need to secure
5
additional funds to cover the costs of any further litigation, which we estimate
will be substantial. If we are unable to secure the additional funds or raise
funds through the private sale of additional common stock needed to cover the
costs of such litigation, we might not be able to conclude the litigation and
might have to cease the lawsuits against the State of Florida without any
meaningful recovery.
The State of Florida has far greater resources than we do to prosecute the
litigation.
The State of Florida utilizes lawyers from the Florida Attorney General's
Office, the Department of Environmental Protection and at least two private law
firms to represent its interests in the litigation. In the event that our funds
are exhausted before the conclusion of the litigation, we may be unable to
conclude the litigation and might be required to cease business.
If the amount of money we recover from the State of Florida is inadequate
to cover our costs, we may be forced to cease operations.
Any recovery that Coastal Petroleum may receive as a result of a judgment
against the State of Florida may be insufficient to cover the costs of
prosecuting the claims at trial. If this occurs, we may be forced to cease
operations.
Coastal Caribbean is currently a passive foreign investment company, or
PFIC, for U. S. federal income tax purposes, which could result in negative
tax consequences to you.
If, for any taxable year, our passive income or our assets that produce
passive income exceed levels provided by U.S. law, we would be a "passive
foreign investment company," or PFIC, for U.S. federal income tax purposes. For
the years 1987 through 2003, Coastal Caribbean's passive income and assets that
produce passive income exceeded those levels and for those years Coastal
Caribbean constituted a PFIC. Based upon Coastal Caribbean's current passive
income, it is likely that Coastal Caribbean will be classified as a PFIC in
2004. If Coastal Caribbean is a PFIC for any taxable year, then our U.S.
shareholders potentially would be subject to adverse U.S. tax consequences of
holding and disposing of shares of our common stock for that year and for future
tax years. Any gain from the sale of, and certain distributions with respect to,
shares of our common stock, would cause a U.S. holder to become liable for U.S.
federal income tax under Code section 1291 (the interest charge regime). The tax
is computed by allocating the amount of the gain on the sale or the amount of
the distribution, as the case may be, to each day in the U.S. shareholder's
holding period. To the extent that the amount is allocated to a year, other than
the year of the disposition or distribution, in which the corporation was
treated as a PFIC with respect to the U.S. holder, the income will be taxed as
ordinary income at the highest rate in effect for that year, plus an interest
charge.
6
Please see a discussion of these consequences below in Item 5. Market for
the Company's Common Stock and Related Stockholder Matters. We encourage you to
consult with a personal tax advisor for advice relating to the potential adverse
tax consequences related to an investment in our common shares.
Our Bye-Laws contain provisions which may limit a shareholder's efforts to
influence our policies and prevent or delay a change in control of our
Company.
Bye-Law 1 provides that any matter to be voted on at any meeting of
shareholders must be approved not only by a simple majority of the shares voted
at such meeting, but also by a majority of the shareholders present in person or
by proxy and entitled to vote at the meeting. This provision may have the effect
of making it more difficult to take corporate action than customary "one share
one vote" provisions, because it may not be possible to obtain the necessary
majority of both votes. As a consequence, Bye-Law 1 may make it more difficult
that a takeover of the company will be consummated, which could prevent the
company's shareholders from receiving a premium for their shares. In addition,
an owner of a substantial number of shares of our common stock may be unable to
influence our policies and operations through the shareholder voting process
(e.g., to elect directors).
Our Bye-Laws also require the approval of 75% of the voting shareholders
and of the voting shares for the consummation of any business combination (such
as a merger, amalgamation or acquisition proposal) involving our company. This
higher vote requirement may deter business combination proposals which
shareholders may consider favorable.
You may face obstacles to bringing suit in Bermuda against our officers and
directors.
We are a Bermuda company and certain of our directors and officers are
residents of Bermuda and are not citizens of the United States. As a result, it
may be difficult for investors to effect service of process on us or on these
directors and officers within the United States or to enforce against these
directors and officers judgments of U.S. courts predicated on the civil
liabilities under the federal securities laws. If investors are unable to bring
such suits, they may be unable to recover a loss on their investment resulting
from any violations of the federal securities laws.
There is no precedent for, and therefore no assurance that, the courts in
Bermuda would enforce civil liabilities, whether in original actions in Bermuda
or in the form of final judgments of U.S. courts, arising under the federal
securities laws against us or the persons signing this report on Form 10-K. In
addition, there is no treaty in effect between the U.S. and Bermuda providing
for the enforcement of civil liabilities and there are grounds upon which
Bermuda Courts may not enforce judgments of U.S. courts. In addition, some
remedies available under the laws of U.S. jurisdictions, including some remedies
7
available under the U. S. federal securities laws, may not be allowed in Bermuda
courts as contrary to that nation's public policy.
We are unable to pay dividends.
We have never declared or paid dividends on our common stock and do not
anticipate declaring or paying any dividends in the foreseeable future. We plan
to retain any future earnings to reduce our deficit accumulated during the
development stage of $39,451,000 at December 31, 2003 and to finance our
operations.
Any dividends would be subject to a 30% withholding tax.
We are a Bermuda corporation. Bermuda currently imposes no taxes on
corporate income or capital gains realized outside of Bermuda. However, any
dividends we receive from Coastal Petroleum are subject to a 30% United States
withholding tax.
RISKS RELATED TO OUR INDUSTRY
The State of Florida has stated that its policy is not to permit oil and
gas drilling offshore Florida and the State has denied Coastal Petroleum a
permit with respect to its St. George's Island prospect. Consequently, we
do not believe that the State of Florida will grant drilling permits to
Coastal Petroleum with respect to its leases. In the unlikely event that
the State ever does grant Coastal Petroleum a drilling permit, Coastal
Petroleum would have to contend with other risks.
After obtaining a state drilling permit, Coastal Petroleum would have to do
the following:
o obtain a federal permit;
o finance drilling of the well (including the cost of the recommended
surety), which is currently estimated to cost approximately $5.5 million;
and
o begin drilling the well within one year of the date the state permit is
issued.
We may be unable to obtain the necessary federal permits or we may be
unable to finance and commence drilling operations in a timely manner.
If we fail to discover and develop sufficient oil and gas reserves, we
would be unable to generate sufficient revenues to cover our costs and might
have to curtail, suspend or cease our business operations.
8
Drilling activities involve numerous risks, including the risk that no
commercially productive natural gas or oil reservoirs will be discovered. The
cost of drilling, completing and operating wells is often uncertain, and
drilling operations may be curtailed, delayed or canceled as a result of adverse
conditions beyond our control. Poor results from our exploration and drilling
activities could prevent us from developing sufficient oil and gas reserves at a
commercially acceptable cost.
Compliance with environmental and other governmental regulations could be
costly.
Our operations and right to obtain interests in and hold properties or to
conduct our business might be affected to an unpredictable extent by limitations
imposed by the laws and regulations which are now in effect or which might be
adopted by the jurisdictions in which we carry on our business.
Further measures that have been or might be imposed include increased bond
requirements, conservation, proration, curtailment, cessation or other forms of
limiting or controlling production of hydrocarbons or minerals, as well as price
controls or rationing or other similar restrictions. In particular,
environmental control and energy conservation laws and regulations adopted by
federal, state and local authorities may have to be complied with by
leaseholders such as Coastal Petroleum.
We face strong competition from larger oil and gas companies that may
impair our ability to carry on operations.
If we receive the necessary state and federal permits to conduct
operations, we will operate in the highly competitive areas of oil and gas
exploration, development and production. We might not be able to compete with,
or enter into cooperative relationships with, our potential competitors, which
include major integrated oil companies, substantial independent energy
companies, affiliates of major interstate and intrastate pipelines and national
and local gas gatherers. If we were unable to establish and maintain
competitiveness, our business would be threatened.
Many of our competitors possess greater financial, technical and other
resources than we do. Factors which affect our ability to successfully compete
in the marketplace include:
o the financial resources of our competitors;
o the availability of alternate fuel sources; and
o the costs related to the extraction and transportation of oil and gas.
9
Cautionary Statement About Forward-Looking Statements
In this Form 10-K and the documents that we incorporate by reference, we
make statements that relate to our future plans, objectives, expectations and
intentions that involve risks and uncertainties. We have based these statements
on our current expectations and projections about future events. These
statements may be identified by the use of words such as "expect," "anticipate,"
"intend," "plan," "believe" and "estimate" and similar expressions. Any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements.
Forward-looking statements necessarily involve risks and uncertainties. Our
actual results could differ materially from those discussed in, or implied by,
these forward-looking statements. Factors that could contribute to such
differences include, but are not limited to, those discussed in the "Risk
Factors" section above and elsewhere in this Form 10-K. The factors set forth in
the Risk Factors section and other cautionary statements made in this Form 10-K
should be read and understood as being applicable to all related forward-looking
statements wherever they appear in this Form 10-K.
All subsequent written and oral forward-looking statements attributable to
us are expressly qualified in their entirety by the cautionary statements. You
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Item 1. Business
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(a) General Development of Business.
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Coastal Caribbean Oils & Minerals, Ltd. (Company or Coastal Caribbean), a
Bermuda corporation, has been engaged, through its majority owned subsidiary,
Coastal Petroleum Company (Coastal Petroleum), in the exploration for oil and
gas reserves. At December 31, 2003, Coastal Caribbean's principal asset was its
58.84% interest in its subsidiary Coastal Petroleum. Coastal Petroleum's
principal assets are its nonproducing oil, gas and mineral leases and royalty
interests in the State of Florida. Coastal Petroleum has made no commercial
discoveries on the lands covered by these leases. Between March 1992 and June
2000, Coastal Petroleum attempted to obtain a permit from the State of Florida
to drill an exploration well on its Lease 224-A, offshore Florida. Since January
2001, Coastal Petroleum has been involved in litigation to obtain compensation
from the State of Florida for the alleged taking by the State of Coastal
Petroleum's Lease 224-A by the denial of a permit to drill on the lease. On
November 15, 2002, after a two week trial, the trial court issued its Final
Judgment that the State's denial of a permit to drill on Coastal Petroleum's
Lease 224-A did not constitute an unlawful taking of Coastal Petroleum's
property. Coastal Petroleum Company filed a notice of appeal of the Final
Judgment to the Florida First District Court of Appeal on November 18, 2002. On
10
December 3, 2003, the appellate court issued a unanimous decision, without a
written opinion, affirming the trial court's decision. The Court further denied
Coastal's Petition for Clarification, Rehearing, Certification and Request for
written opinion and the decision became final on January 9, 2004. On April 7,
2004, Coastal filed a Petition for Writ of Certiorari with the United States
Supreme Court asking the Court to accept jurisdiction to consider the action
taken by the trial court as affirmed by the appellate court. See Item 3. "Legal
Proceedings".
Coastal Petroleum is the lessee under State of Florida leases relating to
the exploration for and production of oil, gas and minerals on approximately
3,700,000 acres of submerged lands along the Gulf Coast and under certain inland
lakes and rivers. The leases provide for a working interest in approximately
1,250,000 acres and a royalty interest in approximately 2,450,000 acres covered
by the leases. Coastal Petroleum has made no commercial discoveries on its
leaseholds.
In 1990, the State of Florida enacted legislation that prohibits drilling
or exploration for oil or gas on Florida's offshore acreage. Although the law
does not apply to areas where Coastal Petroleum is entitled to conduct
exploration, the State of Florida has effectively prevented any exploratory
drilling by denying the Company's applications for drilling permits. In
addition, in those areas where Coastal Petroleum has only a royalty interest,
the law also effectively prohibits production of oil and gas, rendering it
impossible for Coastal Petroleum to collect royalties from those areas. During
1998, Coastal Petroleum exhausted its legal remedies in its efforts to obtain
compensation for the drilling prohibition on its royalty interest acreage.
Coastal Petroleum has been involved in various lawsuits for many years.
Coastal Petroleum's current litigation (Florida Litigation) now involves one
basic claim: whether the State's denial of a permit constitutes a taking of its
property. In addition, Coastal Caribbean is a party to one additional action in
which Coastal Caribbean claims that certain of its royalty interests have been
confiscated by the State. During 2003, the Company actively pursued the Florida
Litigation.
On October 6, 1999, the Florida First District Court of Appeal ruled that
the Florida Department of Environmental Protection (DEP) has the authority to
deny Coastal Petroleum's drilling permit for its St. George Island prospect,
provided that Coastal Petroleum receives just compensation for what has been
taken. The State of Florida and certain Florida environmental groups filed on
November 1, 1999 a joint motion for clarification, rehearing, or certification
with respect to that decision, asking the Court of Appeal, among other things,
to clarify that the question of whether there has been a taking of Coastal
Petroleum's leases should be determined in the Circuit Court. On June 26, 2000,
the Court of Appeal denied all of the State's motions and stated that the issue
of whether the denial of a permit constituted a taking was not before the Court.
The Court declined to rule on the merits of the taking issue and stated that the
issue was a matter for the Circuit Court. On January 16, 2001, Coastal Petroleum
filed an inverse condemnation action in the Circuit Court to be compensated for
the value of its properties. The cost of the litigation has been substantial and
11
the cost is expected to be substantial in the future.
See Item 3. "Legal Proceedings" for a more complete discussion of the
litigation.
(b) Financial Information About Industry Segments.
---------------------------------------------
Because the Company has been engaged in only one industry, namely,
oil, gas and mineral exploration and development, this item is not applicable to
the Company. See Item 8 for general financial information concerning the
Company.
(c) Narrative Description of the Business.
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Coastal Caribbean was organized in Bermuda on February 14, 1962. The
Company is the successor to Coastal Caribbean Oils, Inc., a Panamanian
corporation organized on January 31, 1953 to be the holding company for Coastal
Petroleum Company.
Coastal Petroleum caused oil and gas exploration to take place on its
leases prior to the beginning of litigation in 1968 but has conducted more
limited exploration since that time. Coastal Petroleum believes all drilling and
exploration obligations imposed by its leases have been satisfied to date. No
commercial oil or gas discoveries have been made on these properties; therefore,
the Company has no proved reserves of oil and gas and has had no production. See
Item 2. "Properties."
(i) Principal Products.
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Not applicable.
(ii) Status of Product or Segment.
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Not applicable.
(iii) Raw Materials.
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Not applicable.
(iv) Patents, Licenses, Franchises and Concessions Held.
--------------------------------------------------
See Item 2. "Properties."
The acreage covered by Coastal Petroleum's leases is located for
the most part along offshore areas on the Gulf Coast of Florida and in submerged
and unsubmerged lands under certain bays, inlets, riverbeds and lakes, of which
Lake Okeechobee is the largest. Coastal Petroleum currently makes an annual
lease payment of $59,247 to the State of Florida.
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(v) Seasonality of Business.
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The Company's business is not seasonal.
(vi) Working Capital Items.
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The majority of the Company's current assets are in the form of
cash and cash equivalents. See Item 8. "Financial Statements and Supplementary
Data."
(vii) Customers.
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Not applicable.
(viii) Backlog.
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Not applicable.
(ix) Renegotiation of Profits or Termination of Contracts or
Subcontracts at the Election of the Government.
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Not applicable.
(x) Competitive Conditions in the Business.
--------------------------------------
Competition in the oil and gas industry is intense. The Company
must compete with companies which have substantially greater resources available
to them. In addition, the industry as a whole must compete with other industries
in supplying the energy needs of commerce and the general public. Furthermore,
competitive conditions may be substantially affected by energy legislation which
may be adopted in the future.
(xi) Research and Development.
------------------------
Not applicable.
(xii) Environmental Regulation.
------------------------
The operations of Coastal Caribbean and its right to obtain
interests in and hold properties or to do business may be affected to an
unpredictable extent by limitations imposed by the laws and regulations which
are now in effect or which may be adopted by the jurisdictions in which the
Company carries on its business. Further measures that have been or might be
imposed include increased bond requirements, conservation, proration,
curtailment, cessation or other forms of limiting or controlling production of
hydrocarbons or minerals, as well as price controls or rationing or other
similar restrictions. In particular, environmental control and energy
conservation laws and regulations adopted by federal, state and local
13
authorities may have to be complied with by leaseholders such as Coastal
Petroleum.
(xiii) Number of Persons Employed by Registrant.
----------------------------------------
The Company currently has one employee. The Company
relies heavily on consultants for legal, accounting,
geological and administrative services. The Company uses consultants because it
believes it is more cost effective than employing a larger full time staff.
(d) Financial Information About Foreign and Domestic Operations
and Export Sales.
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(1) Identifiable Assets.
-------------------
All of the Company's assets are located in the United States.
See Item 1(a) "General Development of Business."
Since the Company is a development stage company, the balance
of the information required under this paragraph is not applicable to the
Company. See Item 8. "Financial Statements and Supplementary Data."
(2) Risks Attendant to Foreign Operations.
-------------------------------------
Not applicable.
(3) Data which are not Indicative of Current or Future Operations.
-------------------------------------------------------------
Not applicable.
14
Item 2. Properties
Properties
The discussion herein relating to the Company's properties is qualified in
its entirety by the discussion in Item. 3 "Legal Proceedings" relating to the
Florida Litigation.
Coastal Petroleum, a Florida corporation, holds certain working interests
in nonproducing oil, gas and mineral leases covering approximately 1,250,000
acres, and a royalty interest in approximately 2,450,000 acres, in and offshore
the State of Florida. No commercial oil or gas discoveries have been made on the
properties covered by these leases and Coastal Petroleum has no proved reserves
of oil or gas and has had no significant production.
In 1941, Arnold Oil Explorations, Inc., renamed Coastal Petroleum Company
in 1947, entered into a contract with the Trustees of the Internal Improvement
Trust Fund of the State of Florida (Trustees), in whom title to publicly owned
lands in the State of Florida, including bottoms of salt and fresh waters, is
irrevocably vested, for the exploration of oil, gas and minerals on such lands.
Pursuant to an option to lease in this contract, the Trustees and Coastal
Petroleum entered into three leases between 1944 and 1946. The acreage covered
by these leases is located for the most part along offshore areas on the Gulf
Coast of Florida and in submerged lands under certain bays, inlets, riverbeds
and lakes, of which Lake Okeechobee is the largest.
In 1968, Coastal Petroleum sued the Secretary of the Army of the United
States in a dispute regarding certain mineral rights. In 1969, as part of that
litigation, the Trustees claimed that the leases were invalid and had been
forfeited. Coastal Petroleum and the Trustees settled their disagreement in
1976.
Under the terms of the 1976 settlement agreement, the two leases (224-A and
224-B) bordering the Gulf Coast were divided into three areas, each running the
entire length of the coastline from Apalachicola Bay to the Naples area: (1) The
inner area, including rivers, bays, and harbors, extends seaward from the
Florida shoreline a distance of 4.36 statute miles (5,280 feet per statute mile)
into the Gulf, covers approximately 2.25 million acres, and is subject to a
royalty interest payable to Coastal Petroleum. This interest is a 6 1/4% royalty
on the wellhead value of all oil and gas, 25 cents per long ton on sulfur,
receivable in cash or in kind at Coastal Petroleum's option, and a 5% royalty on
production or the market value of other minerals. (2) The middle area, three
statute miles wide and covering more than 800,000 acres, was released by Coastal
Petroleum to the Trustees, and Coastal Petroleum has no further interest in the
area. (3) Coastal Petroleum presently owns a 100% working interest in the
outside area, which extends seaward an additional three statute miles and
borders federal offshore acreage. This area, exceeding 800,000 acres, remains
subject to royalties payable to the State of Florida of 12 1/2% on oil and gas,
$.50 per long ton of sulfur and 10% on other minerals. The Florida legislature
has enacted statutes designed to protect the Big Bend Seagrass Aquatic Preserve,
an area covering approximately one quarter of Coastal Petroleum's working
interest area. However, the legislation and legislative history recognize and
15
preserve Coastal Petroleum's prior rights as granted by the leases.
Coastal Petroleum retains a 100% working interest in 450,000-acre Lake
Okeechobee which is a part of Lease 248 and which is also subject to royalties
payable to the State of Florida of 12 1/2% on oil and gas, $.50 per long ton of
sulfur and 10% on other minerals. Pursuant to its settlement with the State of
Florida in 1976, Coastal Petroleum agreed not to conduct exploration, drilling
or mining operations on Lake Okeechobee without the prior approval of the State.
As to the balance of this lease, covering approximately 200,000 acres, Coastal
Petroleum retains royalty interests of 6 1/4% on oil, gas and sulfur and 5% on
other minerals.
Under the 1976 settlement agreement with the Trustees, the three leases
have a term of 40 years beginning from January 6, 1976 and require the payment
of an annual rental of $59,247, if oil, gas or minerals are being produced in
economically sustainable quantities at January 6, 2016, these operations will be
allowed to continue until they become uneconomic. Further, the settlement
agreement provides that the drilling requirements shall be governed by Chapter
20680, Laws of Florida, Acts of 1941, and that all other drilling requirements
are waived. Under the 1941 Act, a lessee is required to drill at least one test
well on lands leased in each five-year period under the term of the lease.
Coastal Petroleum believes it is current in fulfilling its drilling
requirements. Drilling requirements of Lease 224-A have been satisfied through
the five year obligation period ended August 2, 2004. The State of Florida has
refused Coastal Petroleum the right to drill on Lease 248 since August 10, 1986.
The following charts reflect the acreage and annual rental obligations
resulting from the 1976 settlement agreement with the Trustees and the
approximate acreage under lease at December 31, 2003:
Current Current Current
Working Royalty Annual
Lease Interest Interest Rental
- ----- -------- --------- ----------
224-A and 224-B 800,000 2,250,000 $ 39,261
248 450,000 200,000 19,986
--------- --------- ----------
1,250,000 2,450,000 $ 59,247
========= ========= ==========
Acreage under lease at December 31, 2003
----------------------------------------
Gross Acres (*) Net Acres (**)
--------------- --------------
Undeveloped Developed Undeveloped Developed
----------- --------- ----------- ---------
Working interest 1,250,000 -0- 1,250,000 -0-
Royalty interest 2,450,000 -0- 153,125 -0-
--------- --------- -------- ---------
Total 3,700,000 -0- 1,403,125 -0-
========= ========= ========= =========
* A gross acre is an acre in which a working interest is owned.
** A net acre is deemed to exist when the sum of fractional ownership working
interests in gross acres equals one. The number of net acres is the sum of
the fractional working interests owned in gross acres expressed as whole
numbers and fractions thereof.
16
Disclosure Concerning Oil and Gas Operations.
Since the properties in which the Company has interests are undeveloped and
nonproducing, items 2 through 4 of Securities Exchange Act Industry Guide 2 are
not applicable.
(5) Undeveloped Acreage.
--------------------
The Company's undeveloped acreage as of December 31, 2003 was as follows:
Gross Acres Net Acres
----------- ---------
Working Interest 1,250,000 1,250,000
Royalty Interest 2,450,000 153,125
--------- --------
Total 3,700,000 1,403,125
========= =========
(6) Drilling Activity.
-----------------
None
(7) Present Activities.
------------------
None
(8) Delivery Commitments.
--------------------
None
Royalties and Other Interests
- -----------------------------
In addition to royalties payable to the State of Florida as set forth
above, Coastal Petroleum's leases are subject to several royalties and other
interests. The leases are presently subject to overriding royalties aggregating
1/16 as to oil, gas and sulphur and 13/600ths as to minerals other than oil, gas
and sulphur.
We also have granted to certain officers, directors, counsel and
consultants of Coastal Petroleum and Coastal Caribbean the right to receive a
percentage of the net recoveries from the Florida Litigation. See Item 3. "Legal
Proceedings" and Item 13. "Certain Relationships and Related Transactions."
Mineral Rights
- --------------
Coastal Petroleum's Leases 224-A, 224-B and 248 were determined by a
Florida State court in 1960 to cover not only oil, gas and sulphur, but also all
other minerals. Subsequent litigation has held that these other minerals do not
embrace certain deposits of shell accumulated on water bottoms which had not yet
become mineral, and that Lake Hancock is not within the area covered by Lease
224-B. Under the 1976 settlement agreement with the State of Florida, Coastal
Petroleum retains a 5% royalty with respect to mineral production. However, it
17
cannot conduct mining operations in 450,000-acre Lake Okeechobee without the
prior approval of the State of Florida. Although Coastal Petroleum had conducted
limited mineral exploration activities on its leases, the courts during the
1980's limited its rights to mine minerals. Coastal Petroleum has no independent
knowledge of commercial deposits on its leases. Furthermore, Coastal Petroleum
does not anticipate that the State would allow the open pit mining and heavy
industrial activity that would be necessary to remove any minerals if they were
to be present, given the State's objection to a single bore hole for an
exploratory oil and gas well.
Item 3. Legal Proceedings
- ------- -----------------
Florida Litigation
Coastal Petroleum has been involved in various lawsuits for many years.
Coastal Petroleum's current litigation now involves one basic claim: whether the
State's offshore drilling policy and its denial of a permit constitute a taking
of Coastal Petroleum's property. In addition, Coastal Caribbean is a party to
another action in which Coastal Caribbean claims that certain of its royalty
interests have been confiscated by the State.
Drilling Permit Litigation
In 1992, Coastal Petroleum applied to the Florida Department of
Environmental Protection (the "DEP") for a permit to drill an exploratory oil
and gas well off Apalachicola, Florida. The proposed well would be located in an
area included within Lease 224-A. The DEP subsequently denied the application
for issuance of a drilling permit for various reasons and imposed a $1.9 billion
bond. Coastal Petroleum appealed the actions of the DEP to the Florida First
District Court of Appeal ("Court of Appeal"). After two decisions by the Court
of Appeal in favor of Coastal Petroleum, the Florida Supreme Court in July 1996
denied the DEP's petition to review an April 1996 Court of Appeal decision. The
Florida Supreme Court had also refused to review an earlier Court of Appeal
decision.
On August 16, 1996, the DEP notified Coastal Petroleum that it was prepared
to issue the drilling permit subject to Coastal Petroleum publishing a Notice of
Intent to Issue ("Notice") the permit. The Notice allowed interested parties to
request administrative hearings on the permit.
On May 28, 1997, the Oil and Gas Drilling Bill (SB550) was enacted in
Florida. The legislation requires that a surety be based on the projected
cleanup costs and possible natural resource damage associated with offshore
drilling as estimated by the DEP and as established by the Administration
Commission (the "Commission") which is comprised of the Governor of Florida and
the Cabinet. Previously, the required surety was satisfied by a payment of
$4,000 to the Mineral Trust Fund in the first year, with a maximum $30,000 per
year and a payment of $1,500 per well for each subsequent year. On September 9,
1997, the State of Florida set a new surety amount of $4.25 billion as a
precondition for the issuance of the drilling permit.
18
On October 20, 1997, a public hearing on the permit application convened
and concluded on November 6, 1997. The hearing included the Company's appeal of
the $4.25 billion surety requirement. On April 8, 1998, a Florida Administrative
Law Judge recommended that Coastal Petroleum was entitled to a drilling permit
with the requirement of a $225 million surety. On May 13, 1998, the Commission
rejected the $225 million surety and remanded the proceedings to the
Administrative Law Judge with instructions to recalculate the surety amount.
On May 22, 1998, the DEP denied the permit to Coastal Petroleum to drill an
offshore exploration well near St. George's Island. Coastal Petroleum appealed
both the denial of the permit by the DEP and the imposition of the surety to the
Court of Appeal.
On October 6, 1999, the Court of Appeal ruled that the DEP has the
authority to deny Coastal Petroleum's drilling permit for its St. George Island
prospect, provided that Coastal Petroleum receives just compensation for what
has been taken. The State of Florida and certain Florida environmental groups
filed on November 1, 1999 a joint motion for clarification, rehearing, or
certification with respect to that decision, asking the Court of Appeal, among
other things, to clarify that the question of whether there has been a taking of
Coastal Petroleum's leases should be determined in the Circuit Court. On June
26, 2000, the Court of Appeal denied all of the State's motions and stated that
the issue of whether the denial of a permit constituted a "taking" was not
before the Court. The Court declined to rule on the merits of the taking issue
and stated that the issue was a matter for the Circuit Court.
Lease Taking Case (Lease 224-A)
On January 16, 2001, Coastal Petroleum filed a complaint in the Leon County
Circuit Court, Florida against the State of Florida seeking compensation for the
State's taking of its property rights to explore for oil and gas within its
state Lease 224-A. The lease encompasses more than 400,000 acres off the West
coast of Florida in the Gulf of Mexico. In its complaint, Coastal reserved the
right to raise any federal claims that it had a right to bring based upon the
State's actions, so that such claims could be brought in federal court if
necessary.
In that case, Coastal Petroleum claimed that the State of Florida has taken
Lease 224-A by denying Coastal Petroleum a permit to drill an offshore
exploration well near St. George Island in the Gulf of Mexico. The history of
the litigation between Coastal Petroleum and the State of Florida relating to
the denial of the drilling permit is set forth under the caption "Drilling
Permit Litigation." Coastal Petroleum maintains that the State has effectively
taken Coastal Petroleum's lease by depriving Coastal Petroleum of all or
substantially all of the economically viable use of its constitutionally
protected property.
On October 8, 2002, after a two week trial the trial court in the taking
litigation orally ruled from the bench that the State's denial of a permit to
drill on Coastal Petroleum's Lease 224-A did not constitute an unlawful taking
of Coastal Petroleum's property. On November 15, 2002, the trial court issued
its Final Judgment that the State's denial of a permit to drill on Coastal
19
Petroleum's Lease 224-A did not constitute an unlawful taking of Coastal
Petroleum's property.
Coastal Petroleum Company filed a notice of appeal of the Final Judgment to
the Florida First District Court of Appeal on November 18, 2002 and filed its
initial appeal brief on January 27, 2003. The intervenors (as described below)
joined the appeal of the Final Judgment and appealed the ruling on their motion
to intervene. After all briefs were submitted, oral arguments were heard on
November 19, 2003. On December 3, 2003 the Florida First District Court of
Appeals' affirmed the trial court's Judgment. In December, 2003 the Company
filed a Motion for Clarification, Rehearing, Certification and Request for a
Written Opinion as to the Court's per curiam decision issued on December 3,
2003. In January, 2004, the Court denied this Motion, the Court's decision
affirming the trial court's final judgment finding no taking of Coastal's State
Drilling Lease 224-A, became final.
On April 7, 2004, Coastal filed a Petition for Writ of Certiorari with the
United States Supreme Court asking the Court to accept jurisdiction to consider
the action taken by the trail court as affirmed by the appellate court. After
jurisdictional briefs are submitted the Court will decide whether to exercise
its jurisdiction and if so briefs on the merits will be required.
On December 13, 2002, the State filed a motion for an order by the trial
court by which the State seeks to recover $178,315 from Coastal Petroleum,
including expert witness fees, deposition costs and copying costs. On December
20, 2002, Coastal Petroleum filed objections and responses to the State's
motion, objecting to the costs and requesting an evidentiary hearing. In the
opinion of Company's litigation counsel, the State's motion for fees and costs
is without merit. On April 9, 2003, the State agreed not to pursue its motion
until after conclusion of the appeal in this case. An award of costs by the
trial court against Coastal Petroleum could be appealed by either party. Coastal
Petroleum also would have the right to seek an automatic stay of any cost award
rendered against it pending appeal of the award, by the posting of a bond deemed
sufficient by the trial court.
Ancillary Matters to Lease Taking Case
On February 13, 2001, certain holders of royalties pertaining to Lease
224-A filed a Motion to Intervene as Additional Plaintiffs. On April 24, 2001,
the Leon County Circuit trial judge granted certain royalty holders with
overriding royalties, which aggregate approximately 4% on State Lease 224-A, the
right to intervene on a limited basis in the takings lawsuit.
Counsel for the appealing royalty holders has advised Coastal Petroleum
that the royalty holders' position is that their interest is worth substantially
more than 4% of whatever judgment may be awarded to Coastal Petroleum in the
litigation and that they intend to make a claim against any recovery Coastal
Petroleum may obtain in the litigation. Coastal Petroleum informed the Circuit
Court and counsel for the royalty holders that Coastal Petroleum is not making
any claim in the litigation on behalf of any interest the royalty holders may
have.
20
No Assurances
There is no assurance that Coastal Petroleum will be successful on the
merits of its claims, which the State of Florida is vigorously defending. There
is also no assurance that Coastal Petroleum will receive a ruling that its Lease
224-A has been taken or that if compensation is awarded it will be awarded in
the amount sought by Coastal Petroleum.
Other Permit Applications
On February 25, 1997 Coastal Petroleum filed 12 additional applications for
drilling permits. Coastal Petroleum objected to certain requests for additional
data by the Florida DEP and the permits were denied. On March 26, 1999, an
administrative law judge upheld the DEP's requirements and denial of the
permits. The First District Court of Appeal affirmed the decision of the
administrative law judge on February 29, 2000.
In order to more fully permit the Apalachicola Reef Play, which includes
the St. George Island prospect, on October 29, 1998, Coastal Petroleum filed
four additional permit applications (1310-1313). The DEP also requested
additional data for these applications. As of March 18, 2004, Coastal Petroleum
had not yet submitted the requested data. Although these applications are still
pending, Coastal Petroleum does not believe the DEP will ever grant these
permits.
Coastal Caribbean Royalty Litigation
The offshore areas covered by Coastal Petroleum's original leases (prior to
the 1976 Settlement Agreement) are subject to certain other royalty interests
held by third parties, including Coastal Caribbean. On April 20, 1994, several
of those third parties, including Coastal Caribbean, which has approximately a
12% interest in any recovery, have instituted a separate lawsuit against the
State of Florida in the 5th Judicial Circuit in Hernando County. That lawsuit
claims that the royalty holders' interests have been confiscated as a result of
the State's actions discussed above and that they are entitled to compensation
for that taking. The royalty holders were not parties to the 1976 Settlement
Agreement, and the royalty holders contend that the terms of the Settlement
Agreement do not protect the State from taking claims by those royalty holders.
The case was subsequently transferred to the 2nd Judicial Circuit in Leon County
and it is still pending before the Circuit Court in Tallahassee. The State has
filed a motion for summary judgment but no hearing date has been set for the
motion. Discovery is proceeding. Any recovery made in the royalty holders'
lawsuit would be shared among the various plaintiffs in that lawsuit, including
Coastal Caribbean, but not Coastal Petroleum.
Lease Taking Case (Lease 224-B)
- -------------------------------
On May 21, 2002, Coastal Petroleum filed a complaint in the Leon County
Circuit Court, Florida against the State of Florida seeking compensation for the
State's alleged taking of its property rights to explore for oil and gas within
its State Lease 224-B. The lease encompasses more than 400,000 acres off the
West Coast of Florida in the Gulf of Mexico. On July 22, 2002, a motion by the
State of Florida to dismiss the case was heard. The court denied the State's
21
motion to dismiss the case and the case is currently pending and is still in the
discovery stage.
On March 28, 2003, the State filed a motion to stay the proceeding until
the appeal of Lease 224-A is completed. A hearing before the trial judge was
held on May 1, 2003, at which Coastal objected to the stay unless the stay was
conditioned upon the suspension of Coastal's lease obligation. The judge denied
the motion to stay and discovery is still proceeding.
Counsel
The Tampa, Florida law firm of Gaylord Merlin Ludovici Diaz & Bain was
Coastal Petroleum's principal trial counsel in Coastal Petroleum's inverse
condemnation claim against the State of Florida in Florida Circuit Court. Mr.
Cary Gaylord was the lead attorney for Gaylord Merlin. Mr. Gaylord, age 56, has
extensive experience in eminent domain and property rights matters. He is a 1969
graduate of the United States Military Academy and a 1974 graduate of the
University of Florida Law School.
In addition, Mr. Robert J. Angerer of the law firm of Angerer & Angerer of
Tallahassee, Florida assisted Gaylord Merlin in the litigation. Mr. Angerer, age
56, is a 1969 graduate of the University of Michigan and received his law degree
with high honors from Florida State University in 1974. Mr. Angerer was elected
a member of the Board of Directors of Coastal Caribbean and of Coastal Petroleum
on January 30, 2003 and a Vice President of Coastal Caribbean and Coastal
Petroleum on February 28, 2003. Angerer & Angerer is the principal counsel in
the appeal of the Taking Case (Lease 224-A) and the principal trial counsel in
Coastal Petroleum's inverse condemnation claim regarding Lease 224-B.
Statutory Attorneys' Fees
Chapter 73 of Florida law provides in eminent domain proceedings (which
would include Coastal Petroleum's taking claim) that, in addition to the award
made to the property owner, the court shall award attorneys' fees based on the
difference between the final judgment or settlement and the first written offer
made to the property owner by the State in accordance with the following
schedule:
1. Thirty-three percent of any difference up to $250,000; plus
2. Twenty-five percent of any portion of the difference between
$250,000 and $1 million; plus
3. Twenty percent of any portion of the difference exceeding $1
million.
As of December 31, 2003, no such written offer has been made.
Contingency Fees
In 1990, Coastal Petroleum considered that the following firms or
individuals were important to the success of the litigation against the State of
Florida and agreed to pay them an aggregate of 8.65% in contingent fees based on
22
any net recovery from execution on or satisfaction of judgment or from
settlement of the Florida litigation:
Relationship to Net
Coastal Petroleum Recovery
Holder at Date of Grant Percentage
--------------------------- ------------------------ ----------
Reasoner, Davis & Fox Special Counsel 2.00
Robert J. Angerer Litigation Counsel 1.50
Benjamin W. Heath Chairman of the Board 1.25
Phillip W. Ware President 1.25
Murtha Cullina LLP Securities Counsel to 1.00
Coastal Caribbean
Ausley & McMullen, P.A. (*) Special Counsel .75
James R. Joyce Assistant Treasurer .30
Arthur B. O'Donnell Vice President/Treasurer .30
James J. Gaughran Secretary .30
----
Total 8.65
====
(*) Interest was granted in 1996.
In addition, Coastal Petroleum has agreed to pay Gaylord Merlin a
contingent fee in connection with compensation awarded to Coastal Petroleum for
the taking of Lease 224-A, Lease 224-B and Lease 248 equal to the greater of:
(a) approximately 90% of the statutory award of attorneys' fees (discussed
above), less the hourly fees paid to Gaylord Merlin, or
(b) ten percent of the first $100 million or portion thereof of the
compensation received by Coastal Petroleum from the State as compensation for
the taking of its property, plus five percent of such compensation in excess of
$100 million, less
(i) the hourly fees paid to Gaylord Merlin and
(ii) other costs of the litigation as follows:
(a) if compensation to Coastal Petroleum is less than $55
million, there shall be no deduction of other costs;
(b) if compensation to Coastal Petroleum is equal to or greater
than $55 million, then for each $5 million increase there
shall be a deduction of $200,000 of other costs up to $100
million;
(c) for each $5 million increase in compensation to Coastal
Petroleum over $100 million up to total compensation of $160
million, there shall be a deduction of $100,000 of other
costs; and
23
(d) for compensation to Coastal Petroleum over $160 million,
there shall be a deduction of all costs of the litigation
which are not recovered from the State (which shall not
include any fees of Mr. Angerer or Mr. Aurell).
Uncertainty
Coastal Petroleum and/or Coastal Caribbean may not prevail on any of the
issues set forth above and may not recover compensation for any of their claims.
In addition, even if Coastal Petroleum were to prevail on any or all of the
issues to be decided, Coastal Caribbean or Coastal Petroleum may not have
sufficient financial resources to survive until such decisions become final. In
the unlikely event that the State of Florida were to grant a permit to drill any
wells for which applications have been filed, the wells drilled may not be
successful and may not lead to production of any oil or gas in commercial
quantities.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
None.
24
PART II
Item 5. Market for the Company's Common Stock and Related
- ------ -------------------------------------------------
Stockholder Matters
-------------------
(a) Market Information.
The principal market for the Company's common stock is in the
over-the-counter market on the "Electronic Bulletin Board" of the National
Association of Securities Dealers, Inc. under the symbol COCBF.OB. The quarterly
high and low closing prices on the Electronic Bulletin Board during the last two
years were as follows:
On February 13, 2003, Coastal Caribbean' shares of common stock were
delisted from trading on the Boston Stock Exchange because the Company's
shareholders' equity was less than the $1,000,000 minimum amount required by the
Exchange.
- --------------------------------------------------------------------------------
2002 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High $ 1.02 .91 .96 .70
Low $ .76 .57 .42 .16
- --------------------------------------------------------------------------------
2003 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High $ .25 .16 .51 .45
Low $ .10 .09 .16 .05
- --------------------------------------------------------------------------------
(b) Holders.
-------
The approximate number of record holders of the Company's common stock at
March 18, 2004 was 8,200.
(c) Dividends.
---------
The Company has never declared or paid dividends on its common stock and it
does not anticipate declaring or paying any dividends in the foreseeable future.
The Company plans to retain any future earnings to reduce the deficit
accumulated during the development stage of $39,451,292 at December 31, 2003 and
to finance its operations.
The Company's Memorandum of Association and Bye-laws do not permit the
Company to repurchase or redeem shares of its common stock.
25
Foreign Exchange Control Regulations
------------------------------------
The Company is subject to the applicable laws of The Islands of Bermuda
relating to exchange control, but has the permission of the Foreign Exchange
Control of Bermuda to carry on business in, to receive, disburse and hold United
States dollars and dollar securities under its designation as an External
Account Company. The Company has been advised that, although as a matter of law
it is possible for such designation to be revoked, there is little precedent for
revocation under Bermuda law.
Income and Withholding Taxes
----------------------------
Coastal Caribbean is a Bermuda corporation. Bermuda currently imposes no
taxes on corporate income or capital gains realized outside of Bermuda. Any
amounts received by Coastal Caribbean from United States sources as dividends,
interest, or other fixed or determinable annual or periodic gains, profits and
income, will be subject to a 30% United States withholding tax. In addition, any
dividends from its domestic subsidiary, Coastal Petroleum, will not be eligible
for the 100% dividends received deduction, which is allowable in the case of a
United States parent corporation. Shares of the Company held by persons who are
citizens or residents of the United States are subject to federal estate and
gift and local inheritance taxation. Any dividends received by such persons will
also be subject to federal, State and local income taxation. The foregoing rules
are of general application only, and reflect law in force as of the date of this
report.
A convention between Bermuda and the United States relating to mutual
assistance on tax matters became operative in 1988.
Passive Foreign Investment Company Rules
----------------------------------------
The Internal Revenue Code of 1986, as amended, provides special rules for
distributions received by U.S. holders on stock of a passive foreign investment
company (PFIC), as well as amounts received from the sale or other disposition
of PFIC stock.
Under the PFIC rules, a non-U.S. corporation will be classified as a PFIC
for U.S. federal income tax purposes in any taxable year in which, after
applying certain look-through rules, either (1) at least 75 percent of its gross
income is passive income or (2) at least 50 percent of the gross value of its
assets is attributable to assets that produce passive income or are held for the
production of passive income.
Passive income for this purpose generally includes dividends, interest,
royalties, rents, and gains from commodities and securities transactions.
Special rules apply in cases where a foreign corporation owns directly or
indirectly at least a 25 percent interest in a subsidiary, measured by value. In
this case, the foreign corporation is treated as holding its proportionate share
of the assets of the subsidiary and receiving directly its proportionate share
of the income of the subsidiary when determining whether it is a PFIC. Thus,
Coastal Caribbean would be deemed to receive its pro rata share of the income
and to hold its pro rata share of the assets, of Coastal Petroleum.
26
Based on certain estimates of its gross income and gross assets and the
nature of its business, Coastal Caribbean would be classified as a PFIC for the
years 1987 through 2002. Once an entity is considered a PFIC for a taxable year,
it will be treated as such for all subsequent years with respect to owners
holding the stock in a year that it was classified as a PFIC under the income or
asset test described above. Whether the Company will be a PFIC under either of
these tests in future years will be difficult to determine because the tests are
applied annually. Based upon Coastal Caribbean's current passive income, it is
likely that Coastal Caribbean will be classified as a PFIC in 2004.
If Coastal Caribbean is classified as a PFIC with respect to a U.S. holder
any gain from the sale of, and certain distributions with respect to, shares of
our common stock, would cause a U.S. holder to become liable for U.S. federal
income tax under Code section 1291 (the interest charge regime). The tax is
computed by allocating the amount of the gain on the sale or the amount of the
distribution, as the case may be, to each day in the U.S. shareholder's holding
period. To the extent that the amount is allocated to a year, other than the
year of the disposition or distribution, in which the corporation was treated as
a PFIC with respect to the U.S. holder, the income will be taxed as ordinary
income at the highest rate in effect for that year, plus an interest charge. The
interest charge would generally be calculated as if the distribution or gain had
been recognized ratably over the U.S. holder's holding period (for PFIC
purposes) for the shares. To the extent an amount is allocated to the year of
the disposition or distribution, or to a year before the first year in which the
corporation qualified as a PFIC, the amount so allocated is included as
additional gross income for the year of the disposition or distribution. A U.S.
holder also would be required to make an annual return on IRS Form 8621 that
describes any distributions received with respect to our shares and any gain
realized on the sale or other disposition of our shares.
As an alternative to taxation under the interest charge regime, a U.S.
holder generally can elect, subject to certain limitations, to annually take
into gross income the appreciation or depreciation in our common shares' value
during the tax year (mark-to-market election). If a U.S. holder makes the
mark-to-market election, the U.S. holder will not be subject to the
above-described rule. Instead, if a U.S. holder makes the mark-to-market
election, the U.S. holder recognizes each year an amount equal to the difference
as of the close of the taxable year between the U.S. holder's fair market value
of the common shares and the adjusted basis in the common shares. Losses would
be allowed only to the extent of net gain previously included by the U.S. holder
under the mark-to-market election for prior taxable years. Amounts included in
or deducted from income under the mark-to-market election and actual gains and
losses realized upon the sale or disposition of the common shares, subject to
certain limitations, will be treated as ordinary gains or losses. If the
mark-to-market election is made for a year other than the first year in the U.S.
holder's holding period in which the corporation was a PFIC, the first year's
mark-to-market inclusion, if any, is taxed as if it were a distribution subject
to the interest charge regime discussed above.
Another alternative election which would allow a U.S. holder to elect to
take its pro rata share of Coastal Caribbean's undistributed income into gross
income as it is earned by Coastal Caribbean (QEF election) would only be
available to a U.S. holder if Coastal Caribbean provided certain information to
27
the shareholders of Coastal Caribbean. Coastal Caribbean has had no
undistributed income for the years 1987 through 2002. If the QEF election is
made in a year other than the first year of the U.S. holder's holding period in
which the foreign corporation is a PFIC, both the QEF regime and interest charge
regime can apply, unless a special election is made. Under this special
election, the taxpayer is treated as if it disposed of its PFIC stock in a
transaction subject to the interest charge rules to the extent gain is deemed to
be recognized. Once this election is made, the holder will be subject only to
the QEF regime.
Recent Sales of Unregistered Securities
---------------------------------------
None
Item 6. Selected Consolidated Financial Information
- ------ -------------------------------------------
The following selected consolidated financial information (in thousands
except for per share amounts) for the Company insofar as it relates to each of
the five years in the period ended December 31, 2003 has been extracted from the
Company's consolidated financial statements.
Years ended December 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Net loss $ (1,008) $ (2,448) $ (6,585) $ (1,386) $ (1,105)
========= ========= ========= ========= =========
Net loss per share (basic and diluted) (.02) (.05) (.15) (.03) (.03)
========= ========= ========= ========= =========
Cash and cash equivalents and
marketable securities 3 292 609 2,959 1,042
========= ========= ========= ========= =========
Unproved oil, gas and, mineral
properties (full cost method) - - - 4,145 4,097
========= ========= ========= ========= =========
Total assets 91 707 1,077 7,497 5,544
========= ========= ========= ========= =========
Shareholders' equity:
Common stock 5,545 5,545 5,216 5,216 4,807
Capital in excess of par value 32,138 32,068 31,498 31,498 28,693
Deficit accumulated during the
development stage (39,451) (38,443) (35,996) (29,410) (28,025)
--------- --------- --------- --------- ---------
Total shareholders' (deficit) equity $ (1,768) $ (830) $ 718 $ 7,304 $ 5,475
========= ========= ========= ========= =========
Common stock shares outstanding
(weighted average) 44,734 44,734 43,468 40,844 40,056
========= ========= ========= ========= =========
28
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
intended to be forward looking statements. The Company cautions readers that
forward looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward looking statements. For a discussion of certain risk factors affecting
the Company, please see "Risk Factors" above.
Critical Accounting Policies
- ----------------------------
The Company follows the full cost method of accounting for its oil and gas
properties. All costs associated with property acquisition, exploration and
development activities whether successful or unsuccessful are capitalized. Since
the Company's properties were undeveloped and nonproducing and the subject of
litigation, capitalized costs were not being amortized, however, as more fully
described in Note 3, these costs were written off in 2001.
The capitalized costs are subject to a ceiling test which basically limits
such costs to the aggregate of the estimated present value discounted at a 10%
rate of future net revenues from proved reserves, based on current economic and
operating conditions, plus the lower of cost or fair market value of unproved
properties. The Company assesses whether its unproved properties are impaired on
a periodic basis. This assessment is based upon work completed on the properties
to date, the expiration date of its leases and technical data from the
properties and adjacent areas. These properties are subject to extensive
litigation with the State of Florida.
During the year 2001, the Company concluded that its leases had been taken
and its property interests were impaired by the actions taken by the State of
Florida and therefore, had recorded an impairment charge to reflect the write
off of the costs of unproved oil, gas and minerals properties. See Note 4.
Litigation. All costs incurred in 2002 and 2003 in connection with the Company's
Florida leases have been expensed as incurred (as will be all future costs).
(1) Liquidity and Capital Resources
-------------------------------
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
forward looking statements. The Company cautions readers that forward looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward looking
statements. Among the risks and uncertainties are:
1. the uncertainty of any decision favorable to Coastal Petroleum in its
litigation against the State of Florida;
29
2. the substantial cost of continuing the litigation;
As more fully described in Notes 1 and 4 to the consolidated financial
statements, we have a working capital deficiency, have incurred recurring losses
and have a deficit accumulated during the development stage. We have been and
continue to be involved in several legal proceedings against the State of
Florida which has limited our ability to commence development activities on our
unproven oil and gas properties or obtain compensation for certain property
rights we believe have been taken. These situations raise substantial doubt
about our ability to continue as a going concern. Our consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or amounts and classification
of liabilities which may result from the outcome of this uncertainty.
Liquidity
In July 2002 Coastal Caribbean concluded a rights offering and sold
2,743,275 shares of common stock for $.50 per share and received net proceeds of
approximately $900,000.
At December 31, 2003, Coastal Caribbean had approximately $3,000 of cash
and cash equivalents available. In addition, the Company has received a
commitment from some of its Directors to loan the Company funds which management
believes should be sufficient to fund the Company's operations through June
2004, provided that payments to the Company's litigation counsel and to the
Company's salaried employee are deferred and provided further that payments to
other Company counsel are also deferred.
Coastal Caribbean has a working capital deficiency, has a limited amount of
cash and cash equivalents, has incurred recurring losses and has a deficit
accumulated during the development stage. Certain directors, officers, legal
counsel and administrative consultants have agreed to defer the payment of their
salaries and fees. At December 31, 2003, the amount of salaries and fees being
deferred totaled approximately $1,054,000. After the filing of the 10-K, the
Company may have to suspend or cease operations and may have to file for
bankruptcy under the laws of Bermuda unless and until the Company can secure
additional funds for operations.
Since October 2002, Coastal Caribbean and Coastal Petroleum have attempted
to raise funds from the other shareholders of Coastal Petroleum and from others.
In March 2003 Coastal Petroleum sold two shares of its common stock for $25,000
per share to a non-shareholder of Coastal Petroleum and in October Coastal
Petroleum sold two shares of its common stock for $10,000 per share to an
existing shareholder of Coastal Petroleum. Other than these sales, Management
has been unsuccessful at raising additional funds.
(2) Results of Operations
---------------------
The Company, a development stage enterprise, has never had substantial
revenues and has operated at a loss each year since its inception in 1953.
During the three years ended December 31, 2003, the Company spent approximately
$3,562,000 on legal expenses primarily for the lawsuits against the State of
30
Florida relating to drilling permits and royalty interests.
2003 vs. 2002
- -------------
The Company incurred a loss of $1,008,000 for the year 2003, compared to a
loss of $2,488,000 for the year 2002.
Interest income and other income decreased 91% in 2003 to $1,000 from
$7,000 in 2002 because less funds were available for investment and due in part
to lower interest rates.
Legal fees and costs decreased 78% in 2003 to $342,000 from $1,549,000 in
2002. Legal fees and costs decreased in 2003 as compared with 2002 due to a
reduction in expenditures for legal fees and geological experts related to
Company's lawsuit against the State of Florida seeking compensation for the
State's alleged taking of its property rights to explore for oil and gas within
its state Lease 224-A.
Administrative expenses decreased 29% in 2003 to $458,000 from $662,000 in
2002 primarily because of a reduction in Accounting and administrative expenses
and other corporate expenses associated with the closing of the New Jersey
offices.
Salaries expense decreased 32% in 2003 to $119,000 from $152,000 in 2002
due to the reduction in personnel from two individuals to one.
Shareholder communications decreased 5% in 2003 from $31,000 compared to
$32,000 in 2002. These costs remain low because there was no annual meeting of
shareholders held in 2003 or 2002.
Write off of unproved properties totaled $59,000 in 2003 and 2002 as the
Company has concluded that the value of its leases had been taken and its
property interests had been impaired by actions taken by the State of Florida.
All costs incurred in 2003 in connection with the Company's Florida leases have
been and all future costs will be expensed as incurred.
2002 vs. 2001
- -------------
The Company incurred a loss of $2,488,000 for the year 2002, compared to a
loss of $6,585,000 for the year 2001.
Interest income and other income decreased 91% from $78,000 in 2001 to
$7,000 in 2002 because less funds were available for investment and in part due
to lower interest rates.
Legal fees and costs decreased 7% to $1,549,000 for 2002 from $1,670,000 in
2001. Legal fees and costs decreased in 2002 as compared with 2001 due to a
reduction in expenditures for legal fees and fees paid to geological experts
consulted in preparation for the trial of the Company's lawsuit against the
State of Florida seeking compensation for the State's alleged taking of its
31
property rights to explore for oil and gas within its state Lease 224-A. This
reduction was partially offset by an increase in costs incurred for legal
services directly connected with the trial which took place in September 2002.
Administrative expenses increased 24% in 2002 to $662,000 from $534,000 in
2001 primarily because of a $72,000 increase in the cost of liability insurance.
Also, Accounting and Administrative costs increased because of additional
services required in connection with the Florida Litigation.
Salaries did not change during the periods and remained at $152,000 in
2002.
Shareholder communications costs decreased to $32,000 in 2002 compared to
$106,000 in 2001 because there was no annual meeting of shareholders held in
2002.
Write off of unproved properties totaled $59,000 in 2002 compared to
$4,202,000 in 2001. During the year 2001, the Company concluded that the value
of its leases had been taken and its property interests had been impaired by
actions taken by the State of Florida and therefore, had recorded an impairment
charge to reflect the write off of these costs. All costs incurred in 2002 in
connection with the Company's Florida leases have been and all future costs will
be expensed as incurred.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- ------- ---------------------------------------------------------
The Company does not have any significant exposure to market risk as the
only market risk sensitive instruments are its investments in marketable
securities. At December 31, 2003, the carrying value of such investments
(including those classified as cash and cash equivalents) was approximately
$3,000, the fair value was $3,000 and the face value was $3,000. Since the
Company expects to hold the investments to maturity, the maturity value should
be realized.
32
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Coastal Caribbean Oils & Minerals, Ltd.
We have audited the accompanying consolidated balance sheet of Coastal Caribbean
Oils & Minerals, Ltd. (a development stage company) as of December 31, 2002, and
the related consolidated statements of operations, cash flows, and common stock
and capital in excess of par value for each of the two years in the period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Coastal
Caribbean Oils & Minerals, Ltd. at December 31, 2002, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Notes 1 and 4 to the consolidated financial statements, the Company has a
working capital deficiency, has incurred recurring losses and has a deficit
accumulated during the development stage. In addition, the Company has been and
continues to be involved in several legal proceedings against the State of
Florida which have limited the Company's ability to commence development
activities on its unproved oil or gas properties or obtain compensation for
certain property rights it believes have been confiscated. These situations
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or amounts and classification of liabilities that may result from the
outcome of these uncertainties.
/s/ Ernst & Young LLP
Stamford, Connecticut
February 12, 2003
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Coastal Caribbean Oils & Minerals, Ltd.:
We have audited the accompanying consolidated balance sheet of Coastal Caribbean
Oils & Minerals, Ltd. (a development stage company) as of December 31, 2003, and
the related consolidated statements of operations, cash flows and common stock
and capital in excess of par value for the year ended December 31, 2003 and for
the period from January 31, 1953 (inception) to December 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Coastal Caribbean
Oils & Minerals, Ltd. as of December 31, 2003, and the results of its operations
and its cash flows for the year ended December 31, 2003 and for the period from
January 31, 1953 (inception) to December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Notes 1 and 4 to the consolidated financial statements, the Company had a
working capital deficiency, has incurred recurring losses and has a deficit
accumulated during the development stage. In addition, the Company has been and
continues to be involved in several legal proceedings against the State of
Florida which have limited the Company's ability to commence development
activities on its unproved oil or gas properties or obtain compensation for
certain property rights it believes have been confiscated. These situations
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or amounts and classifications or liabilities that may result from the
outcome of these uncertainties.
/s/ James Moore & Co., P.L.
March 23, 2004
Gainesville, Florida
34
COASTAL CARIBBEAN OILS & MINERALS, LTD.
(A Bermuda Corporation)
A Development Stage Company
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
December 31,
----------------------------------
2003 2002
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,875 $ 292,095
Prepaid expenses and other 87,947 414,700
------------ ------------
Total current assets 90,822 706,795
Contingent litigation claim (Note 4) - -
------------ ------------
Total assets $ 90,822 $ 706,795
============ ============
Liabilities and Shareholders'
(Deficit) Equity Current liabilities:
Accounts payable and accrued liabilities 805,110 915,085
Amounts due to related parties 1,053,800 621,618
------------ ------------
Total current liabilities 1,858,910 1,536,703
------------ ------------
Minority interests - -
Shareholders' (deficit) equity: Common stock, par value $.12 per share:
Authorized - 250,000,000 shares
Outstanding - 46,211,604
shares, respectively 5,545,392 5,545,392
Capital in excess of par value 32,137,811 32,067,811
------------ ------------
37,683,203 37,613,203
Deficit accumulated during the development stage (39,451,291) (38,443,111)
------------ ------------
Total shareholders' (deficit) equity (1,768,088) (829,908)
------------ ------------
Total liabilities and shareholders' (deficit) equity $ 90,822 $ 706,795
============ ============
See accompanying notes.
35
COASTAL CARIBBEAN OILS & MINERALS, LTD.
(A Bermuda Corporation)
A Development Stage Company
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
For the
period from
Jan. 31, 1953
Years ended December 31, (inception)
---------------------------------------------------- to
2003 2002 2001 Dec. 31, 2003
------------ ------------ ------------ ------------
Interest and other income $ 658 $ 7,357 $ 78,432 $ 3,877,570
------------ ------------ ------------ ------------
Expenses:
Legal fees and costs 342,451 1,549,178 1,670,446 16,572,588
Administrative expenses 457,649 662,390 533,579 9,527,279
Salaries 118,745 151,800 151,800 3,642,973
Shareholder communications 30,746 32,286 105,863 3,948,527
Write off of unproved properties 59,247 59,247 4,201,733 5,560,494
Exploration costs - - 480 247,465
Lawsuit judgments - - - 1,941,916
Minority interests - - - (632,974)
Other - - - 364,865
Contractual services - - - 2,155,728
------------ ------------ ------------ ------------
1,008,838 2,454,901 6,663,901 43,328,861
------------ ------------ ------------ ------------
Net loss $ (1,008,180) $ (2,447,544) $ (6,585,469)
============ ============
Deficit accumulated during the
development stage $(39,451,292)
============
Net loss per share based on weighted
average number of shares outstanding
during the period:
Basic and diluted EPS $(.02) $(.05) $(.15)
====== ===== =====
Weighted average number of shares outstanding
(basic and diluted)
44,734,456 44,734,456 43,468,329
========== ========== ==========
See accompanying notes.
36
COASTAL CARIBBEAN OILS & MINERALS, LTD.
(A Bermuda Corporation)
A Development Stage Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
For the period from
Jan. 31, 1953
Years ended December 31, (inception)
------------------------------------------------ To
2003 2002 2001 Dec. 31, 2003
------------ ------------ ------------ -------------------
Operating activities:
Net loss $ (1,008,180) $ (2,447,544) $ (6,585,469) $(39,451,292)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest - - - (632,974)
Write off of unproved properties 59,247 59,247 4,201,733 5,619,741
Common stock issued for services - - - 119,500
Compensation recognized for stock option grant - - - 75,000
Net change in:
Prepaid expenses and other 326,752 (52,500) 3,217 (87,948)
Accrued liabilities 322,208 1,178,082 165,445 1,858,912
Other assets - 90,391 (62,525) -
------------ ------------ ------------ ------------
Net cash used in operating activities (299,973) (1,172,324) (2,277,599) (32,246,888)
------------ ------------ ------------ ------------
Investing activities:
Additions to oil, gas, and mineral properties
net of assets acquired for common stock and
reimbursements (59,247) (59,247) (57,051) (3,740,182)
Proceeds from relinquishment of surface rights - - - 246,733
Marketable securities (net) - - - -
Notes receivable - 15,000 (15,000) -
Purchase of fixed assets - - - (61,649)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (59,247) (44,247) (72,051) (3,555,098)
------------ ------------ ------------ ------------
Financing activities:
Sale of common stock, net of expenses - 899,642 - 30,380,612
Shares issued upon exercise of options - - - 884,249
Sale of shares by subsidiary 70,000 - - 820,000
Sale of subsidiary shares - - - 3,720,000
------------ ------------ ------------ ------------
Net cash provided by financing activities 70,000 899,642 - 35,804,861
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (289,220) (316,929) (2,349,650) 2,875
Cash and cash equivalents at beginning of period 292,095 609,024 2,958,674 -
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,875 $ 292,095 $ 609,024 $ 2,875
============ ============ ============ ============
See accompanying notes.
37
COASTAL CARIBBEAN OILS & MINERALS, LTD.
(A Bermuda Corporation)
A Development Stage Company
CONSOLIDATED STATEMENT OF COMMON STOCK
AND CAPITAL IN EXCESS OF PAR VALUE
(Expressed in U.S. dollars)
For the period from January 31, 1953 (inception) to December 31, 2003
Capital in
Number of Common Excess
Shares Stock of Par Value
---------- ----------- ------------
Shares issued for net assets and unrecovered costs
at inception 5,790,210 $ 579,021 $ 1,542,868
Sales of common stock 26,829,486 3,224,014 16,818,844
Shares issued upon exercise of stock options 510,000 59,739 799,760
Market value ($2.375 per share) of shares issued in
1953 to acquire an investment 54,538 5,454 124,074
Shares issued in 1953 in exchange for 1/3rd of a 1/60th
overriding royalty (sold in prior year) in nonproducing
leases of Coastal Petroleum 84,210 8,421 -
Market value of shares issued for services rendered
during the period 1954-1966 95,188 9,673 109,827
Net transfers to restate the par value of common stock
outstanding in 1962 and 1970 to $0.12 per share - 117,314 (117,314)
Increase in Company's investment (equity) due to
capital transactions of Coastal Petroleum in 1976 - - 117,025
---------- ----------- ------------
Balance at December 31, 1990 33,363,632 4,003,636 19,395,084
Sale of subsidiary shares - - 300,000
---------- ----------- ------------
Balance at December 31, 1991 33,363,632 4,003,636 19,695,084
Sale of subsidiary shares - - 390,000
---------- ----------- ------------
Balance at December 31, 1992 33,363,632 4,003,636 20,085,084
Sale of subsidiary shares - - 1,080,000
---------- ----------- -----------
Balance at December 31, 1993 33,363,632 4,003,636 21,165,084
Sale of subsidiary shares - - 630,000
---------- ----------- ------------
Balance at December 31, 1994 33,363,632 4,003,636 21,795,084
Sale of subsidiary shares - - 600,000
---------- ----------- ------------
Balance at December 31, 1995 33,363,632 4,003,636 22,395,084
Sale of common stock 6,672,726 800,727 5,555,599
Sale of subsidiary shares - - 480,000
Exercise of stock options 10,000 1,200 12,300
---------- ----------- ------------
Balance at December 31, 1996 40,046,358 4,805,563 28,442,983
Sale of subsidiary shares - - 240,000
Exercise of stock options 10,000 1,200 10,050
---------- ---------- ------------
Balance at December 31, 1997,1998 and 1999 40,056,358 4,806,763 28,693,033
Sale of common stock 3,411,971 409,436 2,729,329
Compensation recognized for stock option grant - - 75,000
---------- ----------- -----------
Balance at December 31, 2000 and 2001 43,468,329 5,216,199 31,497,362
Sale of common stock 2,743,275 329,193 570,449
---------- ----------- ------------
Balance as of December 31, 2002 46,211,604 5,545,392 32,067,811
---------- ----------- ------------
Sale of subsidiary shares - - 70,000
Balance as of December 31, 2003 46,211,604 $ 5,545,392 $ 32,137,811
========== =========== ============
See accompanying notes.
38
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
1. Summary of significant accounting policies
------------------------------------------
Consolidation
The accompanying consolidated financial statements include the accounts of
Coastal Caribbean Oils & Minerals, Ltd., a Bermuda corporation (Coastal
Caribbean) and its majority owned subsidiary, Coastal Petroleum Company (Coastal
Petroleum), referred to collectively as the Company. The Company, which has been
engaged in a single industry and segment, is considered to be a development
stage company since its exploration for oil, gas and minerals has not yielded
any significant revenue or reserves. All intercompany transactions have been
eliminated.
Reclassifications
- -----------------
Certain amounts in the 2002 and 2001 financial statements have been
reclassified for comparative purposes to conform to the 2003 presentation.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid short-term investments with
maturities of three months or less at the date of acquisition to be cash
equivalents. Cash and cash equivalents are carried at cost which approximates
market value. The components of cash and cash equivalents are as follows:
December 31,
---------------------------
2003 2002
-------- --------
Cash $ 2,875 $ 92,777
Marketable securities - 199,318
-------- --------
$ 2,875 $292,095
======== ========
Use of Estimates
- ----------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. The outcome of the litigation
and the ability to develop the Company's oil and gas properties will have a
significant effect on the Company's financial position and results of
operations. Actual results could differ from those estimates.
Unproved Oil, Gas and Mineral Properties
- ----------------------------------------
The Company follows the full cost method of accounting for its oil and gas
properties. All costs associated with property acquisition, exploration and
development activities whether successful or unsuccessful are capitalized.
39
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
1. Summary of significant accounting policies (Cont'd)
---------------------------------------------------
Since the Company's properties were undeveloped and nonproducing and the
subject of litigation, capitalized costs were not being amortized, however, as
more fully described in Note 3, these costs were written off in 2001.
The capitalized costs are subject to a ceiling test which basically limits
such costs to the aggregate of the estimated present value discounted at a 10%
rate of future net revenues from proved reserves, based on current economic and
operating conditions, plus the lower of cost or fair market value of unproved
properties.
The Company assesses whether its unproved properties are impaired on a
periodic basis. This assessment is based upon work completed on the properties
to date, the expiration date of its leases and technical data from the
properties and adjacent areas. These properties are subject to extensive
litigation with the State of Florida.
During the year 2001, the Company concluded that its leases had been taken
and its property interests were impaired by the actions taken by the State of
Florida and therefore, had recorded an impairment charge to reflect the write
off of the costs of unproved oil, gas and minerals properties. See Note 4.
Litigation. All costs incurred in 2002 and 2003 in connection with the Company's
Florida leases have been capitalized and immediately expensed as an impairment
charge.
Sale of Subsidiary Shares
- -------------------------
All amounts realized from the sale of Coastal Petroleum shares have been
credited to capital in excess of par value.
Loss Per Share
- --------------
Loss per common share is based upon the weighted average number of common
and common equivalent shares outstanding during the period. The Company's basic
and diluted calculations of EPS are the same because the exercise of options is
not assumed in calculating diluted EPS, as the result would be anti-dilutive
(the Company has continuing losses).
Financial instruments
- ---------------------
The carrying value for cash and cash equivalents, and accounts payable
approximates fair value based on anticipated cash flows and current market
conditions.
40
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
1. Summary of significant accounting policies (Cont'd)
---------------------------------------------------
Stock Options
- -------------
The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards (SFAS or Statement) No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation", in 2002. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation, which was originally
provided under SFAS No. 123. The Statement also improves the timeliness of
disclosures by requiring the information to be included in interim as well as
annual financial statements. The adoption of these disclosure provisions had no
impact on the Company's 2002 consolidated results of operations, financial
position or cash flows.
At December 31, 2003, the Company maintains one stock-based employee
compensation plan (see note 6, Stock Option Plan). The Company accounts for the
employee stock compensation plan in accordance with the intrinsic value-based
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." No stock-based employee compensation expense is
reflected in net loss as all options granted under the plans have an exercise
price equal to the fair market value of the underlying common stock on the date
of grant.
Going Concern
- -------------
The Company has a working capital deficiency, has a limited amount of cash
and cash equivalents, has incurred recurring losses and has a deficit
accumulated during the development stage. Furthermore, on January 16, 2001,
Coastal Petroleum filed a complaint in the Leon County Circuit Court in Florida
against the State of Florida seeking compensation for the State's taking of its
property rights to explore for oil and gas within its Lease 224-A. On November
15, 2002, the Trial Court issued its Final Judgment that the State's denial of a
permit to drill on Coastal Petroleum's Lease 224-A did not constitute an
unlawful taking of Coastal Petroleum's property. The cost of that litigation has
been substantial and has required the Company to obtain additional capital.
41
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
1. Summary of significant accounting policies (Cont'd)
---------------------------------------------------
Coastal Petroleum Company filed a notice of appeal of the Final Judgment to
the Florida First District Court of Appeal on November 18, 2002. On December 3,
2003, the appellate court issued a unanimous decision, without a written
opinion, affirming the trial court's decision. The Court further denied
Coastal's Petition for Clarification, Rehearing, Certification and Request for
written opinion and the decision became final on January 9, 2004. On April 7,
2004, Coastal filed a Petition for Writ of Certiorari with the United States
Supreme Court asking the Court to accept jurisdiction to consider the action
taken by the trail court as affirmed by the appellate court.
At December 31, 2003, Coastal Caribbean had approximately $3,000 of cash
and cash equivalents available. In addition, the Company has received a
commitment from some of its Directors to loan the Company funds which management
believes should be sufficient to fund the Company's operations through June
2004, provided that payments to the Company's litigation counsel and to the
Company's salaried employee are deferred and provided further that payments to
other Company counsel are also deferred.
Since October 2002, Coastal Caribbean and Coastal Petroleum have attempted
to raise funds from the other shareholders of Coastal Petroleum and from others.
In March 2003 Coastal Petroleum sold two shares of its common stock for $25,000
per share to a non-shareholder of Coastal Petroleum and in October 2003 Coastal
Petroleum sold two shares of its common stock for $10,000 per share to an
existing shareholder of Coastal Petroleum. Other than these sales, Management
has been unsuccessful at raising additional funds. These situations raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or amounts and classification of liabilities that may result from the outcome of
these uncertainties.
2. Coastal Petroleum Company - Minority Interests
----------------------------------------------
In 1992, Coastal Caribbean granted Lykes Minerals Corp. (Lykes), a wholly
owned subsidiary of Lykes Bros. Inc., an option to acquire 78 shares of Coastal
Petroleum at $40,000 per share. Lykes exercised all of its options to purchase
Coastal Petroleum shares at a total cost of $3,120,000 and as of December 31,
2003 and 2002, held 26.35% and 26.7% of Coastal Petroleum, respectively.
The Lykes agreement provides that Lykes is entitled to exchange each
Coastal Petroleum share for 100,000 Coastal Caribbean shares, subject to
adjustment for dilution and other factors. If fully exercised, that entitlement
would leave Lykes with about 15% of Coastal Caribbean's outstanding shares.
Lykes also has the right to exchange Coastal Petroleum shares for overriding
42
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
2. Coastal Petroleum Company - Minority Interests (Cont.)
------------------------------------------------------
royalty interests in Coastal Petroleum's properties. If Lykes were to exchange
its 26.35% interest in Coastal Petroleum for a royalty interest, its overriding
royalty interest in Coastal Petroleum's working-interest acreage would be 3.3%.
Coastal Petroleum shares were owned as follows:
December 31, December 31,
2003 2002
---- ----
Shares % Shares %
------ ----- ------ -----
Coastal Caribbean 173 58.45 173 59.30
Lykes 78 26.35 78 26.70
Others 45 15.20 41 14.00
--- ------ --- -----
296 100.0 292 100.0
=== ====== === =====
Coastal Caribbean has been making loans to Coastal Petroleum, its majority
owned subsidiary, in order for Coastal Petroleum to continue the Florida
Litigation and pay its operating expenses. At December 31, 2003, the amount of
these loans totaled $21,912,915 and the accumulated interest at 6.0% on the
loans totaled $9,232,026 for a total indebtedness of $31,144,941. All such loans
and interest have been eliminated in consolidation, as Coastal Caribbean is
required to record 100% of the losses of Coastal Petroleum because the minority
interests have been fully liquidated and have no further obligation to fund
Coastal Petroleum.
3. Unproved Oil, Gas and Mineral Properties
----------------------------------------
Coastal Petroleum holds three unproved and nonproducing oil, gas and
mineral leases granted by the Trustees of the Internal Improvement Fund of the
State of Florida (Trustees). These leases cover submerged and unsubmerged lands,
principally along the Florida Gulf Coast, and certain inland lakes and rivers
throughout the State.
The two leases bordering the Gulf Coast have been divided into three areas,
each running the entire length of the coastline from Apalachicola Bay to the
Naples area. Coastal Petroleum has certain royalty interests in the inner area,
no interest in the middle area and a 100% working interest in the outside area.
Coastal Petroleum also has a 100% working interest in Lake Okeechobee, and
a royalty interest in other areas. Coastal Petroleum has agreed not to conduct
exploration, drilling, or mining operations on said lake, except with prior
approval of the Trustees.
43
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
3. Unproved Oil, Gas and Mineral Properties (Cont.)
------------------------------------------------
The three leases have a term of 40 years from January 6, 1976 and require
the payment of annual lease rentals of totaling $59,247; if oil, gas or minerals
are being produced in economically sustainable quantities at January 6, 2016,
these operations will be allowed to continue until they become uneconomic. The
drilling requirements are governed by Chapter 20680, Laws of Florida, Acts of
1941. Under the 1941 Act, a lessee is required to drill at least one test well
on lands leased in each five year period under the term of the lease. The
Company believes that it is current in fulfilling its drilling requirements.
The working interest areas of the three leases are subject to royalties
payable to the Trustees of 12 1/2% on oil and gas, $.50 per long ton of sulfur
and 10% on other minerals. The leases are subject to additional overriding
royalties which aggregate 1/16th as to oil, gas and sulfur and 13/600ths as to
other minerals.
During the year 2001, the Company concluded that its property interests
were impaired by the actions taken by the State of Florida and therefore
recorded an impairment charge in the amount of $4,201,733 to reflect the write
off of these costs. See Note 4. Litigation. Although these costs have been
written off, the Company still has legal title to the leases and intends to
continue to pay annual lease rentals on the leases.
4. Litigation
----------
Florida Litigation
- ------------------
Coastal Petroleum has been involved in various lawsuits for many years.
Coastal Petroleum's current litigation now involves one basic claim: whether the
State's offshore drilling policy and its denial of a permit constitute a taking
of Coastal Petroleum's property. In addition, Coastal Caribbean is a party to
another action in which Coastal Caribbean claims that certain of its royalty
interests have been confiscated by the State.
Drilling Permit Litigation
- --------------------------
In 1992, Coastal Petroleum applied to the Florida Department of
Environmental Protection (the "DEP") for a permit to drill an exploratory oil
and gas well off Apalachicola, Florida. The proposed well would be located in an
area included within Lease 224-A. The DEP subsequently denied the application
for issuance of a drilling permit for various reasons and imposed a $1.9 billion
bond. Coastal Petroleum appealed the actions of the DEP to the Florida First
District Court of Appeal ("Court of Appeal"). After two decisions by the Court
of Appeal in favor of Coastal Petroleum, the Florida Supreme Court in July 1996
denied the DEP's petition to review an April 1996 Court of Appeal decision. The
44
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
4. Litigation (Cont.)
------------------
Florida Supreme Court had also refused to review an earlier Court of Appeal
decision.
On August 16, 1996, the DEP notified Coastal Petroleum that it was prepared
to issue the drilling permit subject to Coastal Petroleum publishing a Notice of
Intent to Issue ("Notice") the permit. The Notice allowed interested parties to
request administrative hearings on the permit.
On May 28, 1997, the Oil and Gas Drilling Bill (SB550) was enacted in
Florida. The legislation requires that a surety be based on the projected
cleanup costs and possible natural resource damage associated with offshore
drilling as estimated by the DEP and as established by the Administration
Commission (the "Commission") which is comprised of the Governor of Florida and
the Cabinet. Previously, the required surety was satisfied by a payment of
$4,000 to the Mineral Trust Fund in the first year, with a maximum $30,000 per
year and a payment of $1,500 per well for each subsequent year. On September 9,
1997, the State of Florida set a new surety amount of $4.25 billion as a
precondition for the issuance of the drilling permit.
On October 20, 1997, a public hearing on the permit application convened
and concluded on November 6, 1997. The hearing included the Company's appeal of
the $4.25 billion surety requirement. On April 8, 1998, a Florida Administrative
Law Judge recommended that Coastal Petroleum was entitled to a drilling permit
with the requirement of a $225 million surety. On May 13, 1998, the Commission
rejected the $225 million surety and remanded the proceedings to the
Administrative Law Judge with instructions to recalculate the surety amount.
On May 22, 1998, the DEP denied the permit to Coastal Petroleum to drill an
offshore exploration well near St. George's Island. Coastal Petroleum appealed
both the denial of the permit by the DEP and the imposition of the surety to the
Court of Appeal.
On October 6, 1999, the Court of Appeal ruled that the DEP has the
authority to deny Coastal Petroleum's drilling permit for its St. George Island
prospect, provided that Coastal Petroleum receives just compensation for what
has been taken. The State of Florida and certain Florida environmental groups
filed on November 1, 1999 a joint motion for clarification, rehearing, or
certification with respect to that decision, asking the Court of Appeal, among
other things, to clarify that the question of whether there has been a taking of
Coastal Petroleum's leases should be determined in the Circuit Court. On June
26, 2000, the Court of Appeal denied all of the State's motions and stated that
the issue of whether the denial of a permit constituted a "taking" was not
before the Court. The Court declined to rule on the merits of the taking issue
and stated that the issue was a matter for the Circuit Court.
45
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
4. Litigation (Cont.)
------------------
Lease Taking Case (Lease 224-A)
- -------------------------------
On January 16, 2001, Coastal Petroleum filed a complaint in the Leon County
Circuit Court, Florida against the State of Florida seeking compensation for the
State's taking of its property rights to explore for oil and gas within its
state Lease 224-A. The lease encompasses more than 400,000 acres off the West
coast of Florida in the Gulf of Mexico. In its complaint, Coastal reserved the
right to raise any federal claims that it had a right to bring based upon the
State's actions, so that such claims could be brought in federal court, if
necessary.
In that case, Coastal Petroleum claimed that the State of Florida has taken
Lease 224-A by denying Coastal Petroleum a permit to drill an offshore
exploration well near St. George Island in the Gulf of Mexico. The history of
the litigation between Coastal Petroleum and the State of Florida relating to
the denial of the drilling permit is set forth under the caption "Drilling
Permit Litigation." Coastal Petroleum maintains that the State has effectively
taken Coastal Petroleum's lease by depriving Coastal Petroleum of all or
substantially all of the economically viable use of its constitutionally
protected property.
On October 8, 2002, after a two week trial the trial court in the taking
litigation orally ruled from the bench that the State's denial of a permit to
drill on Coastal Petroleum's Lease 224-A did not constitute an unlawful taking
of Coastal Petroleum's property. On November 15, 2002, the trial court issued
its Final Judgment that the State's denial of a permit to drill on Coastal
Petroleum's Lease 224-A did not constitute an unlawful taking of Coastal
Petroleum's property.
Coastal Petroleum Company filed a notice of appeal of the Final Judgment to
the Florida First District Court of Appeal on November 18, 2002 and filed its
initial appeal brief on January 27, 2003. The intervenors (as described below)
joined the appeal of the Final Judgment and appealed the ruling on their motion
to intervene. After all briefs were submitted, oral arguments were heard on
November 19, 2003. On December 3, 2003 the Florida First District Court of
Appeals' affirmed the trial court's Judgment. In December, 2003 the Company
filed a Motion for Clarification, Rehearing, Certification and Request for a
Written Opinion as to the Court's per curiam decision issued on December 3,
2003. In January, 2004, the Court denied this Motion, the Court's decision
affirming the trial court's final judgment finding no taking of Coastal's State
Drilling Lease 224-A, became final.
46
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
4. Litigation (Cont.)
------------------
On April 7, 2004, Coastal filed a Petition for Writ of Certiorari with the
United States Supreme Court asking the Court to accept jurisdiction to consider
the action taken by the trail court as affirmed by the appellate court. After
jurisdictional briefs are submitted the Court will decide whether to exercise
its jurisdiction and if so briefs on the merits will be required.
On December 13, 2002, the State filed a motion for an order by the trial
court by which the State seeks to recover $178,315 from Coastal Petroleum,
including expert witness fees, deposition costs and copying costs. On December
20, 2002, Coastal Petroleum filed objections and responses to the State's
motion, objecting to the costs and requesting an evidentiary hearing. In the
opinion of Company's litigation counsel, the State's motion for fees and costs
is without merit. On April 9, 2003, the State agreed not to pursue its motion
until after conclusion of the appeal in this case. An award of costs by the
trial court against Coastal Petroleum could be appealed by either party. Coastal
Petroleum also would have the right to seek an automatic stay of any cost award
rendered against it pending appeal of the award, by the posting of a bond deemed
sufficient by the trial court.
Ancillary Matters to Lease Taking Case
- --------------------------------------
On February 13, 2001, certain holders of royalties pertaining to Lease
224-A filed a Motion to Intervene as Additional Plaintiffs. On April 24, 2001,
the Leon County Circuit trial judge granted certain royalty holders with
overriding royalties, which aggregate approximately 4% on State Lease 224-A, the
right to intervene on a limited basis in the takings lawsuit.
Counsel for the appealing royalty holders has advised Coastal Petroleum
that the royalty holders' position is that their interest is worth substantially
more than 4% of whatever judgment may be awarded to Coastal Petroleum in the
litigation and that they intend to make a claim against any recovery Coastal
Petroleum may obtain in the litigation. Coastal Petroleum informed the Circuit
Court and counsel for the royalty holders that Coastal Petroleum is not making
any claim in the litigation on behalf of any interest the royalty holders may
have.
No Assurances
- -------------
There is no assurance that Coastal Petroleum will be successful on the
merits of its claims, which the State of Florida is vigorously defending. There
is also no assurance that Coastal Petroleum will receive a ruling that its Lease
224-A has been taken or that if compensation is awarded it will be awarded in
the amount sought by Coastal Petroleum.
47
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
4. Litigation (Cont.)
------------------
Other Permit Applications
- -------------------------
On February 25, 1997 Coastal Petroleum filed 12 additional applications for
drilling permits. Coastal Petroleum objected to certain requests for additional
data by the Florida DEP and the permits were denied. On March 26, 1999, an
administrative law judge upheld the DEP's requirements and denial of the
permits. The First District Court of Appeal affirmed the decision of the
administrative law judge on February 29, 2000.
In order to more fully permit the Apalachicola Reef Play, which includes
the St. George Island prospect, on October 29, 1998, Coastal Petroleum filed
four additional permit applications (1310-1313). The DEP also requested
additional data for these applications. As of March 18, 2004, Coastal Petroleum
had not yet submitted the requested data. Although these applications are still
pending, Coastal Petroleum does not believe the DEP will ever grant these
permits.
Coastal Caribbean Royalty Litigation
- ------------------------------------
The offshore areas covered by Coastal Petroleum's original leases (prior to
the 1976 Settlement Agreement) are subject to certain other royalty interests
held by third parties, including Coastal Caribbean. On April 20, 1994, several
of those third parties, including Coastal Caribbean, which has approximately a
12% interest in any recovery, have instituted a separate lawsuit against the
State of Florida in the 5th Judicial Circuit in Hernando County. That lawsuit
claims that the royalty holders' interests have been confiscated as a result of
the State's actions discussed above and that they are entitled to compensation
for that taking. The royalty holders were not parties to the 1976 Settlement
Agreement, and the royalty holders contend that the terms of the Settlement
Agreement do not protect the State from taking claims by those royalty holders.
The case was subsequently transferred to the 2nd Judicial Circuit in Leon County
and it is still pending before the Circuit Court in Tallahassee. The State has
filed a motion for summary judgment but no hearing date has been set for the
motion. Discovery is proceeding. Any recovery made in the royalty holders'
lawsuit would be shared among the various plaintiffs in that lawsuit, including
Coastal Caribbean, but not Coastal Petroleum.
48
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
4. Litigation (Cont.)
------------------
Lease Taking Case (Lease 224-B)
- -------------------------------
On May 21, 2002, Coastal Petroleum filed a complaint in the Leon County
Circuit Court, Florida against the State of Florida seeking compensation for the
State's alleged taking of its property rights to explore for oil and gas within
its State Lease 224-B. The lease encompasses more than 400,000 acres off the
West Coast of Florida in the Gulf of Mexico. On July 22, 2002, a motion by the
State of Florida to dismiss the case was heard. The court denied the State's
motion to dismiss the case and the case is currently pending and is still in the
discovery stage.
On March 28, 2003, the State filed a motion to stay the proceeding until
the appeal of Lease 224-A is completed. A hearing before the trial judge was
held on May 1, 2003, at which Coastal objected to the stay unless the stay was
conditioned upon the suspension of Coastal's lease obligation. The judge denied
the motion to stay and discovery is still proceeding.
Counsel
- -------
The Tampa, Florida law firm of Gaylord Merlin Ludovici Diaz & Bain (Gaylord
Merlin) was Coastal Petroleum's principal trial counsel in Coastal Petroleum's
inverse condemnation claim against the State of Florida in Florida Circuit
Court. Mr. Cary Gaylord is the lead attorney for Gaylord Merlin. In addition,
the law firm of Angerer & Angerer of Tallahassee, Florida assisted Gaylord
Merlin in the litigation. Robert Angerer, Sr., a member of the firm, was elected
director of Coastal Caribbean and Costal Petroleum on January 30, 2003 and a
Vice President of Coastal Caribbean and Coastal Petroleum on February 28, 2003.
Angerer & Angerer is the principal counsel in the appeal of the Taking Case
(Lease 224-A) and the principal trial counsel in Coastal Petroleum's inverse
condemnation claim regarding Lease 224-B.
Statutory Attorneys' Fees
- -------------------------
Chapter 73 of Florida law provides in eminent domain proceedings (which
would include Coastal Petroleum's taking claim) that, in addition to the award
made to the property owner, the court shall award attorneys' fees based on the
difference between the final judgment or settlement and the first written offer
made to the property owner by the State in accordance with the following
schedule:
49
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
4. Litigation (Cont.)
------------------
1. Thirty-three percent of any difference up to $250,000; plus
2. Twenty-five percent of any portion of the difference between $250,000
and $1 million; plus
3. Twenty percent of any portion of the difference exceeding $1 million.
As of December 31, 2003, no such written offer has been made.
Contingency Fees
- ----------------
Coastal Petroleum has agreed to pay an aggregate of 8.65% in contingent
fees based on any net recovery from execution on or satisfaction of judgment or
from settlement of the Florida litigation to various law firms and current or
former officers of the Company.
The following contingencies have been granted to related parties:
Relationship to Coastal Net Recovery
Holder Petroleum at Date of Grant Percentage
------------------ ----------------------------- ------------
Benjamin W. Heath Chairman of the Board 1.25
Phillip W. Ware President 1.25
Robert J. Angerer Litigation Counsel 1.50
Murtha Cullina LLP Securities Counsel to Coastal
Caribbean 1.00
James R. Joyce Assistant Treasurer .30
----
Total 5.30
====
In addition, Coastal Petroleum has agreed to pay Gaylord Merlin a
contingent fee in connection with compensation awarded to Coastal Petroleum for
the taking of Lease 224-A, Lease 224-B and Lease 248 equal to the greater of:
(a) approximately 90% of the statutory award of attorneys' fees (discussed
above), less the hourly fees paid to Gaylord Merlin, or
(b) ten percent of the first $100 million or portion thereof of the
compensation received by Coastal Petroleum from the State as compensation for
the taking of its property, plus five percent of such compensation in excess of
$100 million, less
(i) the hourly fees paid to Gaylord Merlin and
(ii) other costs of the litigation as follows:
50
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
4. Litigation (Cont.)
------------------
(a) if compensation to Coastal Petroleum is less than $55
million, there shall be no deduction of other costs;
(b) if compensation to Coastal Petroleum is equal to or greater
than $55 million, then for each $5 million increase there
shall be a deduction of $200,000 of other costs up to $100
million;
(c) for each $5 million increase in compensation to Coastal
Petroleum over $100 million up to total compensation of $160
million, there shall be a deduction of $100,000 of other
costs; and
(d) for compensation to Coastal Petroleum over $160 million,
there shall be a deduction of all costs of the litigation
which are not recovered from the State (which shall not
include any fees of Mr. Angerer or Mr. Aurell).
Uncertainty
Coastal Petroleum and/or Coastal Caribbean may not prevail on any of the
issues set forth above and may not recover compensation for any of their claims.
In addition, even if Coastal Petroleum were to prevail on any or all of the
issues to be decided, Coastal Caribbean or Coastal Petroleum may not have
sufficient financial resources to survive until such decisions become final. In
the event that the State of Florida were to grant a permit to drill any wells
for which applications have been filed, the wells drilled may not be successful
and lead to production of any oil or gas in commercial quantities.
51
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
5. Common Stock
------------
The Company's Bye-Law No. 21 provides that any matter to be voted upon must
be approved not only by a majority of the shares voted at such meeting, but also
by a majority in number of the shareholders present in person or by proxy and
entitled to vote thereon.
The Company has been financing its operations primarily from sales of
common stock and sales of shares of Coastal Petroleum (See Note 2).
On July 31, 2002, the Company concluded the sale of 2,743,000 shares at
$.50 per share and realized gross proceeds of approximately $1,372,000 ($900,000
after expenses of the offering of $90,391 incurred during 2001 and $381,600
during 2002 for an aggregate of approximately $472,000).
On March 10, 2003, the Company concluded the sale of two shares of Coastal
Petroleum at a price of $25,000 per share. On October 7 and 28, 2003, the
Company concluded the sale of two shares of Coastal Petroleum at a price of
$10,000 per share. The Company realized net proceeds of $70,000 in 2003 for
these sales.
52
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
5. Common Stock (Cont.)
--------------------
The following represents shares issued upon sales of common stock:
Number Common Capital in Excess
Year of Shares Stock of Par Value
---- --------- ----- ------------
1953 300,000 $ 30,000 $ 654,000
1954 53,000 5,300 114,265
1955 67,000 6,700 137,937
1956 77,100 7,710 139,548
1957 95,400 9,540 152,492
1958 180,884 18,088 207,135
1959 123,011 12,301 160,751
1960 134,300 13,430 131,431
1961 127,500 12,750 94,077
1962 9,900 990 8,036
1963 168,200 23,548 12,041
1964 331,800 46,452 45,044
1965 435,200 60,928 442,391
1966 187,000 26,180 194,187
1967 193,954 27,153 249,608
1968 67,500 9,450 127,468
1969 8,200 1,148 13,532
1970 274,600 32,952 117,154
1971 299,000 35,880 99,202
1972 462,600 55,512 126,185
1973 619,800 74,376 251,202
1974 398,300 47,796 60,007
1975 - - (52,618)
1976 - - (8,200)
1977 850,000 102,000 1,682,706
1978 90,797 10,896 158,343
1979 1,065,943 127,914 4,124,063
1980 179,831 21,580 826,763
1981 30,600 3,672 159,360
1983 5,318,862 638,263 1,814,642
1985 - - (36,220)
1986 6,228,143 747,378 2,178,471
1987 4,152,095 498,251 2,407,522
1990 4,298,966 515,876 26,319
1996 6,672,726 800,727 5,555,599
2000 3,411,971 409,436 2,729,329
2002 2,743,275 329,193 570,449
--------- ------- -------
39,657,458 $4,763,370 $25,674,221
========== ========== ===========
The following represents shares issued upon exercise of stock options:
Number Common Capital in Excess
Year of Shares Stock of Par Value
---- ---------- ----- ------------
1955 73,000 $ 7,300 $175,200
1978 7,000 840 6,160
1979 213,570 25,628 265,619
1980 76,830 9,219 125,233
1981 139,600 16,752 227,548
1996 10,000 1,200 12,300
1997 10,000 1,200 10,050
------- ------- --------
530,000 $62,139 $822,110
======= ======= ========
Coastal Caribbean has reserved 7,800,000 shares which may be issued in
exchange for Coastal Petroleum shares, as described in Note 2.
53
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
6. Stock Option Plan
-----------------
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
Interpretations in accounting for its stock options because the alternative fair
value accounting provided under FASB Statement No. 123, "Accounting for Stock
Based Compensation," requires use of option valuation models that were not
developed for use in valuing stock options. Under APB No. 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
During 1995, the Company adopted a Stock Option Plan covering 1,000,000
shares of the Company's common stock. On March 24, 2000, ten year options to
purchase 700,000 shares of the Company's common stock were granted. A charge to
legal expense in the amount of $75,000 for the issuance of 100,000 options to
legal counsel was recorded. The charge was calculated using a Black-Scholes
option-pricing model with the same assumptions as discussed below. Options are
normally immediately vested and exercisable. The following table summarizes
stock option activity:
Options outstanding Number of Shares Exercise Price ($)
- ------------------- ---------------- ------------------
Outstanding and exercisable at December 31, 1999 527,000 1.13-2.625
Expired (302,000) 1.13
Granted 700,000 .91
-------
Outstanding and exercisable at December 31, 2000,
2001, and 2002 925,000 .91 -2.625
Expired (225,000) 1.13-2.625
---------
Outstanding and exercisable at December 31, 2003 700,000 .91
=======
Available for grant at December 31, 2003 75,000
- ---------------------------------------- ======
Summary of Options Outstanding at December 31, 2003
- ---------------------------------------------------
Year Granted Number of Shares Expiration Date Exercise Prices ($)
- ------------ ---------------- --------------- -------------------
Granted 2000 700,000 Mar. 22, 2010 .91
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, and has been determined as if the Company
had accounted for its stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option-pricing model.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. The assumptions used in the
valuation model for 2000 were: risk free interest rate - 6.66%, expected life -
10 years, expected volatility - .741 and expected dividend - 0.
54
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
6. Stock Option Plan (Cont.)
-------------------------
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
7. Income taxes
------------
Bermuda currently imposes no taxes on corporate income or capital gains
outside of Bermuda. The Company's subsidiary, Coastal Petroleum, has U.S. net
operating loss carry forwards for federal and state income tax purposes, which
may be used to reduce its taxable income, if any, during future years which
aggregated approximately $11,400,000 at December 31, 2003 ($12,106,000 at
December 31, 2002) and expire in varying amounts from 2004 through 2023 as
follows: $647,000 in 2004, $550,000 in 2005, $418,000 in 2006, $549,000 in 2007,
$480,000 in 2009, $571,000 in 2010, $955,000 in 2011, $1,281,000 in 2012,
$757,000 in 2018, $622,000 in 2019, $749,000 in 2020, $1,884,000 in 2021,
$1,693,000 in 2022, and $229,000 in 2023. For financial reporting purposes, a
valuation allowance has been recognized to offset the deferred tax assets
relating to those carry forwards. Significant components of the Company's
deferred tax assets were as follows:
2003 2002
----------- -----------
Net operating losses $ 4,284,000 $ 4,557,000
Deferred intercompany interest deduction 3,474,000 2,794,000
Accruals to related parties 123,000 0
Write off of unproved properties 1,831,000 1,831,000
----------- -----------
Total deferred tax assets 9,712,000 9,182,000
Valuation allowance (9,712,000) (9,182,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
8. Related parties
---------------
Legal Services
The Company was billed $288,000, in fees by Angerer & Angerer during 2003,
2002, and 2001. Robert Angerer, Sr. was elected a director of Coastal Caribbean
and of Coastal Petroleum on January 30, 2003 and a Vice President of Coastal
Caribbean and Coastal Petroleum on February 28, 2003. At December 31, 2003, fees
of $126,000, $268,000 and $315,000 remain unpaid to G&OD, Murtha Cullina LLP and
Angerer & Angerer, respectively.
55
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
8. Related parties (Cont.)
-----------------------
The Company was billed approximately $43,500, $232,000, and $105,000 in
fees by the law firm of Murtha Cullina LLP during 2003, 2002, and 2001,
respectively. Mr. Timothy L. Largay, a partner of the firm of Murtha Cullina
LLP, was a director and Vice President of the Company from January 15, 2001
until his resignation on October 7, 2002.
Accounting & Administrative Services
G&O'D INC provided accounting and administrative services, office
facilities and support staff to the Company until December 2002. G&O'D INC is
owned by Mr. James R. Joyce, who was the Treasurer and Assistant Secretary,
until his retirement in December 2002. During 2002 and 2001, G&O'D billed fees
of $178,000 and $136,000, respectively. Subsequent to this time, Mr. Daniel
Sharp provided accounting and administrative services to the Company until June
24, 2003. Effective June 24, 2003, Mr. Daniel W. Sharp resigned as Treasurer,
Chief Financial Officer, Chief Accounting Officer and Assistant Secretary of the
Company. Kenneth Michael Cornell of Cornell & Associates, Inc. has become the
Acting Chief Financial Officer of the Company, effective June 24, 2003 until
present. During 2003 Mr. Sharp and Mr. Cornell billed fees of $34,000 and
$16,000, respectively.
The Company had the following balances due at December 31:
2003 2002
--------- -------
G&O'D $ 129,240 $ 127,077
Murtha Cullina 268,244 220,337
Angerer & Angerer 315,029 112,839
Other 341,287 161,365
----------- ---------
Due to Related Parties $ 1,053,800 $ 621,618
=========== =========
56
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2003
9. Selected quarterly financial data (unaudited)
---------------------------------------------
The following is a summary (in thousands, except for per share amounts) of
the quarterly results of operations for the years ended December 31, 2003 and
2002:
2003 QTR 1 QTR 2 QTR 3 QTR 4
- ---- ----- ----- ----- -----
($) ($) ($) ($)
Total revenues - - - -
Expenses (329) (217) (265) (197)
------ ------ ------ ------
Net loss (329) (217) (265) (197)
====== ====== ====== ======
Per share (basic & diluted) (.005) (.005) (.005) (.005)
====== ====== ====== ======
Weighted average number of shares
outstanding 46,212 46,212 46,212 46,212
====== ====== ====== ======
2002 QTR 1 QTR 2 QTR 3 QTR 4
- ---- ----- ----- ----- -----
($) ($) ($) ($)
Total revenues 4 1 2 1
Expenses (557) (607) (860) (430)
------ ------ ------ ------
Net loss (553) (606) (858) (429)
====== ====== ====== ======
Per share (basic & diluted) (.01) (.01) (.02) (.01)
====== ====== ====== ======
Weighted average number of shares
outstanding 43,468 43,468 45,525 46,212
====== ====== ====== ======
57
Item 9. Changes in and Disagreements with Accountants on
- ------- ------------------------------------------------
Accounting and Financial Disclosure
-----------------------------------
Previous Independent Accountants
On May 28, 2003, Ernst & Young LLP ("Ernst & Young") resigned as Coastal
Caribbean Oils & Minerals, Ltd.'s (the "Company") independent public
accountants. Ernst & Young's decision to resign was not recommended or approved
by the Company's Board of Directors or any committee thereof.
Ernst & Young's reports on the Company's consolidated financial statements
for each of the Company's fiscal years ended December 31, 2002 and December 31,
2001 did not contain an adverse opinion or disclaimer of opinion, and were not
qualified or modified as to audit scope or accounting principles, but did
contain an explanatory paragraph for an uncertainty regarding the Company's
ability to continue as a going concern.
During the fiscal years ended December 31, 2002 and December 31, 2001 and
through May 28, 2003, there were no disagreements with Ernst & Young on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to Ernst & Young's
satisfaction, would have caused Ernst & Young to make reference to the subject
matter in connection with their report on the Company's consolidated financial
statements for such years; and there were no reportable events as defined in
Item 304(a)(1)(v) of the Regulation S-K.
The Company provided Ernst & Young with a copy of the foregoing
disclosures.
New Independent Accountants
In June, 2003 the Company retained James Moore & Company as its independent
public accountants.
Item 9A. Controls and Procedures
- -------- -----------------------
Phillip W. Ware, the principal executive officer, and Kenneth M. Cornell,
the principal financial officer, have evaluated the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) adopted
under the Securities Act of 1934) within the ninety (90) day period prior to the
date of this report and have concluded:
1. That the Company's disclosure controls and procedures are adequately
designed to ensure that material information relating to the Company,
including its consolidated subsidiary, is timely made known to such
officers by others within the Company and its subsidiary, particularly
during the period in which this annual report is being prepared; and
2 That there were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of our evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
58
PART III
--------
Item 10. Directors and Executive Officers of the Company
- -------- -----------------------------------------------
Directors
---------
As of December 31, 2003, the board of directors included five members, two
of whom, Messrs. Heath and Ware, also serve as executive officers. The
board is divided into two classes, with each class serving a term of office
of three years or until such time as their successors are elected,
qualified, and assume office. In as much as no annual meeting of the
shareholders has been held since 2001, no directors have been elected since
that time.
Name Position Biographical Information
---- -------- ------------------------
Class 2002
Robert J. Angerer Director Mr. Robert J. Angerer, Sr. was appointed as a director of
Vice President Coastal Caribbean and Coastal Petroleum on January 30, 2003
to fill a vacancy left by the retirement of Benjamin
Heath. He is a principal in the law firm of Angerer &
Angerer, Tallahassee, Florida. He has been litigation
counsel to Coastal Petroleum for more than twenty-five
years. Age fifty-seven
Phillip W. Ware Director Mr. Ware, a geologist, has been President and a director of
President Coastal Petroleum since 1985. Mr. Ware has also been a
Treasurer director of Coastal Caribbean since 1985. Age fifty-one.
Class 2003
Graham B. Collis Director Mr. Collis, a director since 1998, has been a member of the
Secretary law firm of Conyers Dill & Pearman, Hamilton, Bermuda, our
Audit Committee Bermuda counsel since 1995. Age forty-two.
John D. Monroe Director Mr. Monroe is a real estate broker and was formerly
Audit Committee President of a real estate brokerage and development firm
in Naples, Florida. Mr. Monroe, a director since 1981, is
also a director of our subsidiary, Coastal Petroleum.
Age seventy-six.
59
Executive Officers
------------------
Philip W. Ware has been President of Coastal Petroleum and Vice President
of Coastal Caribbean for many years and became President of Coastal Caribbean
effective March 1, 2003, and Robert J. Angerer, became a director of Coastal
Caribbean on January 30, 2003 and Vice President of Coastal Caribbean on
February 27, 2003. Effective June 24, 2003, Daniel W. Sharp resigned as
Treasurer, Chief Financial Officer, Chief Accounting Officer and Assistant
Secretary of the Company. Kenneth Michael Cornell of Cornell & Associates, Inc.
has become the Chief Financial Officer and Principal Accounting Officer of the
Company, effective June 24, 2003. Mr. Cornell, age 35, is a Certified Public
Accountant who has served businesses in various financial and accounting
capacities during the past seven years.
All of the officers of Coastal Caribbean are elected annually by the board
and report directly to it.
Only Mr. Ware received direct compensation for his services as an officer
of Coastal Caribbean or Coastal Petroleum. $69,000 of Mr. Ware's compensation
for his services has been deferred during 2003. Mr. Ware devotes 100% of his
professional time to the business and affairs of Coastal Caribbean and Coastal
Petroleum. The other executive officers devote a small percentage of their
professional time as officers on behalf of the companies.
The business experience described for each director or executive officer
above covers the past five years.
We are not aware of any arrangements or understandings between any of the
individuals named above and any other person by which any of the individuals
named above was selected as a director and/or executive officer. We are not
aware of any family relationship among the officers and directors of Coastal
Caribbean or its subsidiary.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
- --------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of beneficial ownership and
reports of changes in beneficial ownership with the Securities and Exchange
Commission (the "SEC"). Such persons are required by the SEC regulations to
furnish the Company with copies of all Section 16(a) forms filed by such
persons. Based solely on its copies of forms received by it, or written
representations from certain reporting persons that no Form 5's were required
for those persons, the Company believes that during the just completed fiscal
year, its executive officers, directors, and greater than 10% beneficial owners
compiled with all applicable filing requirements.
60
Item 11. Executive Compensation
- -------- ----------------------
The following table sets forth certain summary information concerning
the compensation of the Company's two most highly-paid executive officers (the
"Named Executive Officers"). No other executive officer earned compensation in
excess of $100,000 during the year 2003.
- --------------------------------------------------------------------------------------------------------------------------
Summary Compensation Table
- --------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term
------------------- Compensation
Award All Other
Name and Securities Underlying Compensation ($)
Principal Position Year Salary(1) ($) Options/SARs (#)
- --------------------------------------------------------------------------------------------------------------------------
Benjamin W. Heath, President 2003 6,666 - -
and Chief Executive Officer 2002 40,000 - 18,075 (2)
2001 40,000 100,000 15,600 (2)
- --------------------------------------------------------------------------------------------------------------------------
Phillip W. Ware, Vice 2003 92,000 - -
President 2002 92,000 100,000 13,800 (3)
2001 92,000 13,800 (3)
- --------------------------------------------------------------------------------------------------------------------------
(1) Mr. Heath was only paid $3,333 of his salary during 2002, and none in 2003.
Mr. Ware was only paid $23,000 of his salary during 2003.
(2) Reimbursement for office expenses $12,075 (of which $10,025 has been
deferred), $12,075 in 2001 and $9,600 in 2000, and payments to a SEP-IRA
pension plan $6,000 in 2002 (all of which has been deferred), $6,000 in
2001 and 2000.
(3) Payment to SEP-IRA pension plan (all of which has been deferred in 2002).
Mr. Sharp was paid an hourly fee for his services to the Company and was
paid $34,000 in fees during 2003.
Mr. Cornell is paid an hourly fee for his services to the Company and was
paid $16,000 in fees during 2003.
Compensation of Directors
All of our directors except for directors who are also executive officers
are entitled to receive annual directors' fees in the amount of $22,500. For the
year 2003, all director fees have been deferred.
61
Stock Options
No Stock Options were granted during the year ended December 31, 2003. The
following table provides information about unexercised stock options held by the
Named Executive Officers at December 31, 2002:
- -----------------------------------------------------------------------------------------------------------------------
Aggregated Option/SAR Exercises in 2003 and December 31, 2003
Option/SAR Values
- -----------------------------------------------------------------------------------------------------------------------
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-The-Money
On Exercise Realized ($) Options/SARs (#) Options/SARs
(#) at December 31, 2003 at December 31, 2003
- -----------------------------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
Benjamin W. Heath -0- -0- 100,000 - -0- -
Benjamin W. Heath -0- -0- 45,000 - -0- -
- -----------------------------------------------------------------------------------------------------------------------
Phillip W. Ware -0- -0- 100,000 - -0- -
Phillip W. Ware -0- -0- 72,000 - -0- -
- -----------------------------------------------------------------------------------------------------------------------
The Company has not adjusted or amended the exercise price of any stock options
during the year end December 31, 2003.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The entire board of directors constitutes the compensation committee.
Phillip W. Ware is a director and President of Coastal Caribbean and Coastal
Petroleum.
62
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Security Ownership of Certain Beneficial Owners
The following table provides information as to the number of shares of our
stock owned beneficially at December 31, 2003 by each person who is known to be
the beneficial owner of more than 5% of the outstanding shares of our common
stock.
Amount and Nature of
Beneficial Ownership
------------------------------------
Name and Address of Shares Held Shares Subject
Beneficial Owner Directly to Option Percent of Class
---------------- -------- --------- ----------------
Lykes Minerals Corp. - 7,800,000* 14.4**
111 East Madison Street
P.O. Box 1690 Tampa, FL 33601
- ----------
* Lykes Minerals Corp. has purchased a total of 78 shares of Coastal
Petroleum which are convertible into 7,800,000 of our shares.
** Assumes all outstanding options held by Lykes Mineral Corp are exercised to
acquire our shares.
As of February 1, 2003, Mr. Robert J. Angerer, Sr. owned 2,207,487 shares , or
4.77%, of our common stock and his son, Mr. Robert J. Angerer, Jr., owned
2,206,914 shares, or 4.76%, of our common stock. Mr. Angerer, Sr. disclaims
beneficial ownership of any shares owned by his son.
Security Ownership of Management
The following table sets forth information as to the number of shares of the
Company's common stock owned beneficially at March 18, 2004 by each
director of the Company and by all directors and executive officers as a
group:
Amount and Nature of Beneficial
-------------------------------
Ownership
----------------------------------------------------
Shares Held Directly
or Percent of
Name of Individual or Group Indirectly Options Class
- --------------------------- ---------- ------- -----
Graham B. Collis 85,000 (1) 112,000 *
John D. Monroe 0 136,000 *
Phillip W. Ware 3,791 172,000 *
Kenneth M. Cornell 0 0 *
Robert J. Angerer, Sr. 2,207,487 0 4.77
--------- -------
Directors and executive officers
as a group (a total of 5 persons) 2,296,278 689,000 4.97%
--------- -------
- ----------------------
* Less than 1%.
(1) Director of Lane Enterprises (Bermuda) Limited, a Bermuda company, which
also owns 27,758 shares.
63
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about the Company's common stock
that may be issued upon the exercise of options and rights under the Company's
1995 Stock Option Plan as of December 31, 2003.
- --------------------------------------------------------------------------------------------------------------------
Number of Securities to Weighted average Number of securities remaining
be issued upon exercise exercise price of available for issuance under
of outstanding options, outstanding options, equity compensation plans
warrants and rights warrants and rights (excluding securities reflected
(a) (#) (b) ($) in column (a))
(c) (#)
Plan Category
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders (1) 700,000 $1.33 75,000
- --------------------------------------------------------------------------------------------------------------------
Total: 700,000 $1.33 75,000
- --------------------------------------------------------------------------------------------------------------------
(1) 1995 Stock Option Plan.
The Company's 1995 Stock Option Plan was adopted by the Board of Directors
of the Company in March 1995. 1,000,000 shares of the Company's common stock
were authorized for issuance under the terms of the plan. Options under the plan
may be granted only to directors, officers, key employees of, and consultants
and consulting firms to, (i) the Company, (ii) subsidiary corporations of the
Company from time to time and any business entity in which the Company from time
to time has a substantial interest, who, in the sole opinion of the Committee of
the Board administering the Plan, are responsible for the management and/or
growth of all or part of the business of the Company. The exercise price of each
option to be granted under the plan shall not be less than the fair market value
of the stock subject to the option on the date of grant of the option.
64
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Angerer & Angerer
-----------------
The law firm of Angerer & Angerer, Tallahassee, Florida, has been
litigation counsel to Coastal Petroleum for more than twenty-five years. Mr.
Robert J. Angerer, Sr., a member of the firm, was elected a director of Coastal
Caribbean and of Coastal Petroleum on January 30, 2003, and a Vice President of
Coastal Caribbean and Coastal Petroleum on February 28, 2003. During 2003,
Angerer & Angerer billed Coastal Petroleum $288,000 for legal fees. At December
31, 2003, fees owed by Coastal Petroleum to Angerer & Angerer of $306,000 remain
unpaid.
Royalty Interests
The State of Florida oil, gas and mineral leases held by Coastal Petroleum
on approximately 3,700,000 acres of submerged lands along the Gulf Coast and
certain inland lakes and rivers are subject to certain overriding royalties
aggregating 1/16th as to oil, gas and sulphur, and 13/600ths as to minerals
other than oil, gas and sulphur. Of the overriding royalties as to oil, gas and
sulphur, a 1/90th overriding royalty, and of the overriding royalties on
minerals other than oil, gas and sulphur, a 1/60th overriding royalty, is held
by Johnson & Company, a Connecticut partnership which is used as a nominee by
the members of the family of the late William F. Buckley. A trust, in which Mr.
Heath has a 54.4% beneficial interest, has a beneficial interest in such royalty
interest held by Johnson & Company. No payments have been made to Johnson &
Company (or to the beneficial owners of such royalty interests) in more than
forty years.
In 1990, Coastal Petroleum granted to the following persons the following
percentages of any net recovery from execution on or satisfaction of judgment or
from settlement of the lawsuit against the State of Florida as follows:
Percent
of net Coastal Petroleum
Name recovery Position
------------------ -------- -----------------
Benjamin W. Heath 1.25 Chairman of Board*
Phillip W. Ware 1.25 President
James R. Joyce 0.30 Treasurer**
(*) Mr. Heath retired on February 28, 2003.
(**) Mr. Joyce retired in December 2002.
65
Item 14. Principal Accounting Fees and Service
- -------- -------------------------------------
James Moore & Co., P.L. audited the Company's financial statements for
2003. Ernst & Young LLP audited the Company's financial statements for 2002.
Fees related to services performed by James Moore & Co., P.L. and Ernst & Young
LLP in 2003 and 2002 were as follows:
2003 2002
---- ----
Audit Fees (1) $ 17,500 $ 142,250
Audit-Related Fees -0- -0-
Tax Fees (2) 750 -0-
All Other Fees -0- -0-
-------- ---------
Total $ 18,250 $ 142,250
======== =========
(1) Audit fees represent fees for professional services provided in connection
with the audit of our financial statements, review of our quarterly
financial statements, and for professional services provided in connection
with the filing of the Company's S-1. The Audit Committee must preapprove
audit related and non-audit services not prohibited by law to be performed
by the Company's independent auditors. The Audit Committee for the Company
is made up of John D. Monroe and Graham B. Collis. The Audit Committee
preapproved all audit related and non-audit services in 2003 and 2002.
(2) Tax fees principally included tax advice, tax planning and tax return
preparation.
66
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a) (1) Financial Statements.
--------------------
The financial statements listed below and included under Item 8
above are filed as part of this report.
Page
----
Reports of Independent Auditors 33
Consolidated balance sheets at December 31, 2003 and 2002 35
Consolidated statements of operations for each of the three years in the
period ended December 31, 2003 and for the period from January 31, 1953
(inception) to December 31, 2003. 36
Consolidated statements of cash flows for each of the three years in the
period ended December 31, 2003 and for the period from January 31, 1953
(inception) to December 31, 2003. 37
Consolidated statement of common stock and capital in excess of par value
for the period from January 31, 1953 (inception) to December 31, 2003. 38
Notes to consolidated financial statements. 39-57
(2) Financial Statement Schedules.
------------------------------
All schedules have been omitted since the required information
is not present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and the notes thereto.
(b) Reports on Form 8-K.
-------------------
(1) On January 13, 2004 , the Company filed a Current Report on
Form 8-K to report that:
On December 3, 2003, Coastal Caribbean Oils & Minerals,
Ltd. ("Company") issued a press release announcing the Florida
First District Court of Appeals' decision relating to the
Company's Motion for Clarification, Rehearing, Certification
and Request for a Written Opinion as to the Court's per curiam
decision issued on December 3, 2003. As a result of the denial
of the Motion, the Court's decision affirming the trial
court's final judgment finding no taking of Coastals State
67
Drilling Lease 224-A, has become final. The Company continues
to evaluate its options.
(c) Exhibits.
The following exhibits are filed as part of this report:
Item Number
- -----------
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession Not applicable.
3. Articles of incorporation and By-Laws.
(a) Memorandum of Association as amended on June 30, 1982, May 14,
1985 and April 7, 1988 filed as Exhibit 3. (a) to Report on Form
10-K for the year ended December 31, 1998 (File Number 001-04668)
is incorporated herein by reference.
(b) Bye-laws are incorporated by reference to Schedule 14(a) Proxy
Statement filed on May 13, 1997 (File Number 001-04668).
4. Instruments defining the rights of security holders, including
indentures.
Not applicable.
9. Voting trust agreement.
Not applicable.
10. Material contracts.
(a) Drilling Lease No. 224-A, as modified, between the Trustees of
the Internal Improvement Fund of the State of Florida and Coastal
Petroleum Company dated February 27, 1947 filed as Exhibit 10(a)
to Report on Form 10-K for the year ended December 31, 1998 (File
Number 001-04668) is incorporated herein by reference.
(b) Drilling Lease No. 224-B, as modified, between the Trustees of
the Internal Improvement Fund of the State of Florida and Coastal
Petroleum Company dated February 27, 1947 filed as Exhibit 10(b)
to Report on Form 10-K for the year ended December 31, 1998 (File
Number 001-04668) is incorporated herein be reference.
(c) Drilling Lease No. 248, as modified, between the Trustees of the
Internal Improvement Fund of the State of Florida and Coastal
Petroleum Company dated February 27, 1947 filed as Exhibit 10(c)
to Report on Form 10-K for the year ended December 31, 1998 (File
Number 001-04668) is incorporated herein by reference.
68
(d) Memorandum of Settlement dated January 6, 1976 between Coastal
Petroleum Company and the State of Florida filed as Exhibit 10(d)
to Report on Form 10-K for the year ended December 31, 1998 (File
Number 001-04668) is incorporated herein by reference.
(e) Agreement between the Company and Coastal Petroleum dated
December 3, 1991 filed as Exhibit 10(e) to Report on Form 10-K
for the year ended December 31, 1998 (File Number 001-04668) is
incorporated herein by reference
(f) Agreement between Lykes Minerals Corp. and Coastal Caribbean and
Coastal Petroleum dated October 16, 1992 filed as Exhibit 10(f)
to Report on Form 10-K for the year ended December 31, 1998 (File
Number 001-04668) is incorporated herein by reference.
(g) Stock Option Plan adopted March 7, 1995 filed as Exhibit 4A to
form S-8 dated July 28, 1995 (File Number 001-04668) is
incorporated herein by reference.
11. Statement re: computation of per share earnings.
------------------------------------------------
None.
12. Statement re: computation of ratios.
-----------------------------------
Not applicable.
13. Annual report to security holders, Form 10-Q or quarterly report to
---------------------------------------------------------------------
security holders.
-----------------
Not applicable.
16. Letter re: change in certifying accountant.
------------------------------------------
Not applicable.
18. Letter re: change in accounting principles.
-------------------------------------------
Not applicable.
21. Subsidiaries of the registrant.
-------------------------------
The Company has one subsidiary, Coastal Petroleum Company, a Florida
corporation which is 58.45 % owned.
22. Published report regarding matters submitted to vote of security
---------------------------------------------------------------------
holders.
-------
Not applicable.
23. Consent of experts and counsel.
--------------------------------
69
23.1 Consent of Ernst & Young LLP.
23.2 Consent of James, Moore & Co., P.L.
24. Power of attorney.
------------------
Not applicable.
31.1 Certification of Chief Executive Officer Required by Rule
13a-14(a)-15d-14(a) under the Exchange Act
31.2 Certification of Chief Accounting and Financial Officer Required by
Rule 13a-14(a)-15d-14(a) under the Exchange Act
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 executed by Phillip
W. Ware
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 executed by Kenneth
M. Cornell
99. Additional exhibits.
-------------------
99.1 The decision Coastal Petroleum Company v. Florida Wildlife
Federation et. al. of the First District Court of Appeal dated
October 6, 1999 (St. George Island permit application case), is
incorporated by reference to Exhibit 99(a) to the Company's
Current Report on Form 8-K filed on October 7, 1999 (File
Number 001-04668).
99.2 Complaint, filed January 16, 2001 in the Leon County Circuit
Court, Coastal Petroleum Company, Plaintiff vs. State of
Florida, Department of Environmental Protection, and Board of
Trustees of the Internal Improvement Fund, Defendants, is
incorporated by reference to Exhibit 99(a) to the Company's
Current Report on Form 8-K filed on January 18, 2001 (File
Number 001-04668).
99.3 The final judgment in the Leon County Circuit Court, Coastal
Petroleum Company, Plaintiff vs. State of Florida, Department
of Environmental Protection, and Board of Trustees of the
Internal Improvement Fund, Defendants, dated November 15, 2002
is incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed on November 18, 2002 (File
Number 001-04668).
99.4 The Appellant Decision of the First District Court of Appeal,
Coastal Petroleum Company, Appellant vs. State of Florida,
Department of Environmental Protection, and Board of Trustees
of the Internal Improvement Fund, Appellees, dated December 3,
2003.
99.5 Financial Statement Schedules.
-----------------------------
None.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COASTAL CARIBBEAN OILS & MINERALS, LTD.
(Registrant)
By /s/ Phillip W. Ware
-------------------
Phillip W. Ware, President and
Chief Executive Officer
Dated: April 08, 2004
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
By /s/ Phillip W. Ware By /s/ Kenneth M. Cornell
------------------------------------- ------------------------------
Phillip W. Ware Kenneth M. Cornell
President, Treasurer, Director and Chief Financial Officer and
Chief Executive Officer Chief Accounting Officer
Dated: April 08, 2004 Dated: April 08, 2004
--------------------------------- ------------------------------
By /s/ Graham B. Collis
-------------------------------------
Graham B. Collis
Director
Dated: April 08, 2004
---------------------------------
By /s/ John D. Monroe
-------------------------------------
John D. Monroe
Director
Dated: April 08, 2004
---------------------------------
By /s/ Robert J. Angerer
-------------------------------------
Robert J. Angerer
Director
Dated: April 08, 2004
---------------------------------
71
INDEX TO EXHIBITS
-----------------
Exhibit No.
- -----------
23.1 Consent of Ernst & Young LLP
23.2 Consent of James Moore & Co., P.L.
31.1 Certification pursuant to Rule 13a-14 by Phillip W. Ware
31.2 Certification pursuant to Rule 13a-14 by Kenneth M. Cornell
32.1 Certification pursuant to Section 906 by Phillip W. Ware
32.2 Certification pursuant to Section 906 by Kenneth M. Cornell
99.4 Opinion of the District Court of Appeal, First District, State of
Florida, dated December 3, 2003.