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 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
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ITEM 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operation (Cont’d) |
Liquidity and Capital Resources
Liquidity
The Company currently 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 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. Management expects to receive the net proceeds in July 2005 and believes the proceeds to be sufficient to fund future operations of the Company.
At March 31, 2005, Coastal Caribbean had no cash available. The Company has received a commitment from some of its Officers to loan the Company funds until the settlement proceeds are received from the State, 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 $138,000 through June 30, 2005.
Certain directors, officers, legal counsel and administrative consultants have agreed to defer the payment of their salaries and fees. At March 31, 2005 the amount of salaries and fees being deferred totaled approximately $1,623,000. The payment due dates for the Company’s annual rental payments on its Florida leases of approximately $59,000 have been extended during the time the State and Coastal have been in discussions and they are currently not due. No amounts have been accrued related to these leases in the current year. Should the settlement with the State be unsuccessful, 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.
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 and Results of Operation (Cont’d) |
Results of Operations
Three months ended March 31, 2005 vs. March 31, 2004
The Company incurred a loss of $88,000 for the 2005 quarter, compared to a loss of $192,000 for the comparable 2004 quarter.
Interest income and other income remained flat from $-0- in the 2004 quarter to $-0- in the 2005 quarter because of lack of available funds to invest.
Legal fees and costs decreased 89% to $9,000 for the 2005 quarter, compared to $84,000 in the prior period. Legal fees and costs decreased in 2005 compared with 2004 due to reduction in expenditures for legal fees and experts 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 37% during the 2005 period to $48,000 compared to $76,000 in the 2004 period. This was primarily related to Directors’ and Officers’ liability insurance which decreased from $27,000 in 2004 to $-0- in the 2005 quarter.
Salaries remained flat during the 2005 quarter at $25,000.
Shareholder communications remained flat during the 2005 quarter at $6,000.
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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 March 31, 2005.
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:
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| 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 |
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| 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
March 31, 2005
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, 2004.
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COASTAL CARIBBEAN OILS & MINERALS, LTD.
FORM 10-Q
PART II - OTHER INFORMATION
March 31, 2005
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31.1 | | Certification pursuant to Rule 13a-14 by Phillip W. Ware |
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31.2 | | Certification pursuant to Rule 13a-14 by Kenneth M. Cornell |
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32.1 | | Certification pursuant to Section 906 by Phillip W. Ware |
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32.2 | | Certification pursuant to Section 906 by Kenneth M. Cornell |
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COASTAL CARIBBEAN OILS & MINERALS, LTD.
FORM 10-Q
March 31, 2005
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.
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| COASTAL CARIBBEAN OILS & MINERALS, LTD. |
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| Registrant |
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Date: July 5, 2005 | | By /s/ Phillip W. Ware |
| | | | |
| | | Phillip W. Ware | |
| | | Chief Executive Officer, | |
| | | President and Treasurer | |
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| | By /s/ Kenneth M. Cornell |
| | | | |
| | | Kenneth M. Cornell | |
| | | Chief Financial Officer
and Principal Financial Officer | |
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