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. Among the risks and uncertainties are: the uncertainty of securing additional loans from management or others; the uncertainty of securing additional financing through the sale of shares of Coastal Petroleum and/or Coastal Caribbean; the uncertainty of any decision favorable to Coastal Petroleum in its litigation against the State of Florida; and the substantial cost of continuing the litigation.
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.
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 and all costs to date have been expensed for impairment.
COASTAL CARIBBEAN OILS & MINERALS, LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 2 Management's Discussion and Analysis of Financial Condition andResults of Operations (Cont’d)
Liquidity and Capital Resources
Liquidity
The Company has a working capital deficiency, has a limited amount of cash, has incurred recurring losses and has 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. The cost of that litigation has been substantial, which requires the Company to continually obtain additional capital.
At June 30, 2004, Coastal Caribbean had approximately $250 of cash and cash equivalents available. In addition, the Company has received a commitment from some of its Officers to loan the Company funds during 2004 which management believes should be sufficient to fund the Company’s operations through September 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. These loans totaled approximately $53,500 through August 5, 2004. There can be no assurances that management will continue to make loans to the Company or that these loans will allow the Company to continue operations for any significant length of time.
Certain directors, officers, legal counsel and administrative consultants have agreed to defer the payment of their salaries and fees. At June 30, 2004, the amount of salaries and fees being deferred totaled approximately $1,330,000. The Company’s annual rental payments on its Florida leases of approximately $59,000 are due beginning August 31, 2004. The Company may have to suspend or cease operations and may have to wind up the company or be forced into insolvent liquidation under the laws of Bermuda unless and until the Company can secure additional funds for operations.
Coastal Caribbean and Coastal Petroleum have attempted to raise funds from the other shareholders of Coastal Petroleum and from others. Since March 2003, 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, which may result from the outcome of this uncertainty.
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COASTAL CARIBBEAN OILS & MINERALS, LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 2 Management's Discussion and Analysis of Financial Condition andResults of Operations (Cont’d)
Results of Operations
Three months ended June 30, 2004 vs. June 30, 2003
The Company incurred a loss of $171,000 for the 2004 quarter, compared to a loss of $217,000 for the comparable 2003 quarter.
Interest income and other income decreased 100% from $84 in the 2003 quarter to $-0- in the 2004 quarter because of the decrease in the amount of funds available to invest.
Legal fees and costs increased 28% to $78,000 for the 2004 quarter, compared to $61,000 in the prior period. Legal fees and costs increased in 2004 compared with 2003 due to the filing of Petition for Writ of Certiorari with the United States Supreme Court related to Coastal Petroleum Company’s lawsuit 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.
Administrative expenses decreased 49%during the 2004 period to $62,000 compared to $122,000 in the 2003 period. Accounting and administrative expenses decreased from $16,000 in the 2003 period to $5,000 in the 2004 period. In addition, Directors’ and Officers’ liability insurance decreased from $84,000 in 2003 to $26,000 in the 2004 quarter.
Salaries decreased 12%in the 2004 quarter to $25,000 compared to $28,000 in the 2003.
Shareholder communications remained constantat $6,000 during the 2004 period compared to the 2003 period.
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COASTAL CARIBBEAN OILS & MINERALS, LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION
Six months ended June 30, 2004 vs. June 30, 2003
The Company incurred a loss of $362,000 for the six months ended June 30, 2004, compared to a loss of $546,000 for the comparable 2003 period.
Interest income and other income decreased 100% from $537 in the 2003 period to $-0- in the 2004 period because of the decrease in the amount of funds available to invest.
Legal fees and costs decreased 10% to $162,000 for the 2004 period, compared to $181,000 in the 2003 period. Legal fees and costs decreased in 2004 compared with 2003 due to the minimal activity during the first quarter of 2004 related to Coastal Petroleum Company’s lawsuit 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. This was partially offset by an increase in activity during the second quarter of 2004 related to the filing of Petition for Writ of Certiorari with the United States Supreme Court for this case.
Administrative expenses decreased 53%during the 2004 period to $138,000 compared to $292,000 in the 2003 period. Accounting and administrative expenses decreased from $41,000 in the 2003 period to $26,000 in the 2004 period. In addition, Directors’ and Officers’ liability insurance decreased from $168,000 in 2003 to $53,000 in the 2004 period.
Salaries decreased 19%in the 2004 period to $50,000 compared to $62,000 in the 2003 period.
Shareholder communications remained constantat $12,000 during the 2004 period compared to the 2003 period.
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COASTAL CARIBBEAN OILS & MINERALS, LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk
The Company does not have any significant exposure to market risk as there were no investments in marketable securities at June 30, 2004.
ITEM 4 Controls and Procedures
We, 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 quarterly report is being prepared; and |
| | |
| | 2. That there were no significant changes in the Company’s internal controls or in other factors that could materially affect or are reasonably likely to materially affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
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COASTAL CARIBBEAN OILS & MINERALS, LTD.
FORM 10-Q
PART II - OTHER INFORMATION
June 30, 2004
ITEM 5-Other Information
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 final judgment of the trial court as affirmed by the appellate court, finding no taking of Coastal’s property. On June 15, 2004, Coastal issued a press release announcing the United States Supreme Court denied the Company’s Petition for Writ of Certiorari. The Company continues to evaluate its options.
Director Graham B. Collis and Director John D. Monroe resigned effective July 28, 2004. Neither director resigned because of a disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Former Director Graham B. Collis has agreed to serve as the resident representative of the Company in Bermuda in order to meet the requirements of registration under Bermuda law.
Coastal Caribbean is currently a passive foreign investment company, or PFIC, for United States federal income tax purposes, which could result in negative tax consequences to a shareholder. If, for any taxable year, the Company’s passive income or assets that produce passive income exceed levels provided by U.S. law, the Company would be a "passive foreign investment company," or PFIC, for U.S. federal income tax purposes. For the years 1987 through 2001, Coastal Caribbean's passive income and assets that produce passive income exceeded those levels and for those years Coastal Caribbean constituted a PFIC. If Coastal Caribbean is a PFIC for any taxable year, then the Company’s 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 the Company’s common stock, would cause a U.S. holder to become liable for U.S. federal income tax under section 1291 of the Internal Revenue Code (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.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
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COASTAL CARIBBEAN OILS & MINERALS, LTD.
FORM 10-Q
PART II - OTHER INFORMATION
June 30, 2004
ITEM 6-Exhibits and Reports on Form 8-K
| | (a) | Exhibits |
| | | |
| | 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 |
| | | |
| | (b) | Reports on Form 8-K |
| | | |
| | | On June 15, 2004, the Company filed a Current Report on Form 8-K to report that: |
| | | The United States Supreme Court denied the Company’s Petition for Writ of Certiorari. The Company continues to evaluate its options. |
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COASTAL CARIBBEAN OILS & MINERALS, LTD.
FORM 10-Q
June 30, 2004
SIGNATURES
Pursuant to the requirements 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 |
| |
| |
| |
| Date:August 13, 2004 | By/s/ Phillip W. Ware |
| Phillip W. Ware |
| Chief Executive Officer, |
| President and Treasurer |
| |
| |
| |
| By/s/ Kenneth M. Cornell |
| Kenneth M. Cornell |
| Chief Financial Officer |
| and Principal Financial Officer |
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