UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
(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, 2001
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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
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Commission file number 001-04668
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 (441) 295-1422
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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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Common stock, par value $.12 per share Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
(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|
The aggregate market value of the common stock held by non-affiliates
of the registrant was approximately $34,685,000 (U.S.) at March 11, 2002.
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, 43,468,329 shares outstanding
as of March 11, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
None
EXPLANATORY NOTE
This Form 10-K/A amends and restates in its entirety, and is substituted in lieu
thereof, the Form 10-K previously filed by Coastal Caribbean Oils & Minerals,
Ltd. (the "Company") on March 14, 2002 for the fiscal year ended December 31,
2001.
TABLE OF CONTENTS
Page
PART I
Risk Factors 4
Item 1. Business 10
Item 2. Properties 16
Item 3. Legal Proceedings 19
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 24
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 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 52
PART III
Item 10. Directors and Executive Officers of the Company 52
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and Management 55
Item 13. Certain Relationships and Related Transactions 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 58
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All monetary figures set forth are expressed in United States currency.
PART I
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 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 $6,585,000
for the year December 31, 2001, a loss of $1,386,000 for the year 2000 and a
loss of $1,105,000 for the year 1999. 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. You should also see Note 1 to
our financial statements regarding the uncertainty as to our ability to continue
as a going concern.
During the three years ended December 31, 2001, we spent approximately
$2.7 million 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
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,
negative stockholders' equity 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, 2001, indicating there is substantial doubt
regarding our ability to continue as a going concern. The financial statements
included elsewhere in this prospectus 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.
Without additional financing, we only have enough liquid assets on hand
to continue to operate the Company for part of the year 2002.
We believe that our funds on hand will be sufficient to permit us to
continue to operate through the second quarter of 2002 and to pay the expenses
related to this offering which are estimated to be approximately $300,000. After
that time, we may have to suspend or cease operations unless and until we can
secure additional financing. Effective February 20, 2002, our directors,
officers, legal counsel and administrative consultants have agreed to defer the
payment of all of their salaries and fees until we have working capital of at
least $1 million. 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 ultimately the courts 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 raise the additional financing needed to cover the
substantial litigation costs of proving our properties have been taken
and their value.
Coastal Petroleum has filed a claim with the Florida Circuit Court that
its property has been taken by the State of Florida, and that Coastal Petroleum
is owed compensation by the State of Florida. We will need to secure additional
financing to cover the costs of this litigation, which we estimate will be
substantial. If we are unable to secure the additional financing adequate to
fund the costs of such litigation for a lengthy period of time, 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 suffer additional losses.
Coastal Petroleum's lawsuits against the State of Florida involve
highly specialized technical engineering and legal judgments. Any recovery that
Coastal Petroleum may receive as a result of a court 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 2001, 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
2002. 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.
Please see a discussion of these consequences below in Item 5. Market
for the Company's Common Stock and Related Stockholder Matters - Passive Foreign
Investment Company Rules. 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 registration
statement. 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 available under the United States federal securities
laws, may not be allowed in Bermuda courts as contrary to that nation's public
policy.
Our dividend policy could depress our stock price.
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 $35,996,000 at December 31, 2001 and to finance our
operations.
Any dividends are 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 drilling 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.
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.
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 within the meaning
of the Private Securities Litigation Reform Act of 1995, and are subject to the
safe harbor created by that Act.
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
(a) General Development of Business.
Coastal Caribbean Oils & Minerals, Ltd. (Company or Coastal
Caribbean), a Bermuda corporation, has been engaged, through its majority owned
subsidiary, in the exploration for oil and gas reserves. At December 31, 2001,
Coastal Caribbean's principal asset was its 59 1/4 % interest in its subsidiary,
Coastal Petroleum Company (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.
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 2001, the Company actively
pursued the Florida Litigation.
On October 6, 1999, the Florida First District 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. 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 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.
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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.
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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.
(v) Seasonality of Business.
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The Company's business is not seasonal.
(vi) Working Capital Items.
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.
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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.
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Not applicable.
(xii) Environmental Regulation.
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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
authorities may have to be complied with by leaseholders such as Coastal
Petroleum.
(xiii) Number of Persons Employed by Registrant.
----------------------------------------
The Company currently has two employees. 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.
(1) Identifiable Assets.
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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.
(2) Risks Attendant to Foreign Operations.
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Not applicable.
(3) Data which are not Indicative of Current or Future
Operations.
--------------------------------------------------
Not applicable.
The following graphic presentation has been omitted, but the following is a
description of the omitted material:
Map showing Coastal Lease Areas in the State of Florida
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
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, 2001:
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, 2001
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.
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, 2001 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
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.
Lease Taking Case
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.
Coastal Petroleum claims 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.
The State claims that there has been no taking of Coastal Petroleum's
property which justifies compensation. The State asserts several affirmative
defenses, including that:
(a) Coastal Petroleum is barred from litigating issues which it
has litigated in prior cases against the State and other parties;
(b) Coastal Petroleum's leases are not constitutionally
protected property which can be the subject of an inverse condemnation claim,
relying in part on earlier litigation;
(c) Coastal Petroleum's claim that its property has been taken is not
ripe for legal consideration because Coastal Petroleum has not applied to drill
on other locations on its leaseholds;
(d) The statute of limitations bars any allegation by Coastal Petroleum
that an action taken by any state entity prior to January 16, 1997 constitutes a
taking of Coastal Petroleum's alleged property interest;
(e) Coastal Petroleum has no right to drill for oil on Lease 224-A
which can be taken because it does not have the permit which it agreed to obtain
pursuant to the 1976 Memorandum of Settlement.
On March 5, 2001, the State filed a Motion to Dismiss Coastal
Petroleum's complaint, which was denied by the Court on April 26, 2001. After
the Motion was denied, discovery, which had been suspended pending the outcome
of the Motion to Dismiss, resumed. Some depositions have now been taken,
documents have been exchanged and discovery is expected to continue until the
court mandated cutoff date of August 25, 2002.
On November 27, 2001, the Leon County Circuit Court set a trial date of
September 30, 2002. The Court has set aside two weeks for the trial on the issue
of whether the State has taken Coastal Petroleum's lease. If the Court rules in
Coastal Petroleum's favor, there will then be a second trial before a jury to
determine the amount of compensation to be awarded. Both the decision of the
Court and any decision of a jury are subject to appeals by any of the parties to
the litigation.
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. On May 22, 2001,
the royalty holders appealed the Circuit Court's order granting them limited
intervention to the First District Court of Appeal, claiming the order denied
them the right to fully participate in the case until after final judgment and
that the court erroneously found that the royalty holders lack an ownership
interest in Coastal Petroleum's lease. On June 12, 2001, the Court of Appeal
ordered the royalty holders to show cause why the appeal should not be dismissed
for lack of jurisdiction. The royalty holders filed a response to the Court of
Appeal on June 21, 2001, Coastal Petroleum filed its reply on July 2, 2001 and
the State of Florida filed its reply on July 5, 2001. The Court of Appeal is
currently considering the matter.
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 has 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.
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.
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. On January 16,
2001, Coastal Petroleum Company 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. That complaint is described above under the caption Lease Taking Case.
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. On March 26, 1999, an administrative law
judge upheld the DEP's requirements. 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 11, 2002, Coastal Petroleum
has 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 currently pending before the Circuit Court in
Tallahassee. On December 2, 1999, the Circuit Court denied the State's motion to
dismiss the plaintiffs' claim of inverse condemnation but dismissed several
other claims.
On May 10, 2000, the State 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.
Counsel
The Tampa, Florida law firm of Gaylord Merlin Ludovici Diaz & Bain is
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. Mr. Gaylord, age 55, 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 Angerer & Angerer of Tallahassee,
Florida is assisting Gaylord Merlin in the litigation. Mr. Angerer, age 55, is a
1969 graduate of the University of Michigan and received his law degree with
high honors from Florida State University in 1974.
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.
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
any net recovery from execution on or satisfaction of judgment or from
settlement of the Florida litigation:
Relationship to Net Recovery
Coastal Petroleum Percentage
Holder at Date of Grant
____________________ ___________________ ______
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 Corporate Counsel 1.00
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 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 the hourly fees paid to Gaylord Merlin and other costs of the
litigation.
Uncertainty
Coastal Petroleum 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 also no assurance that any wells drilled will be successful and lead
to production of any oil or gas in commercial quantities.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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 the Boston Stock
Exchange under the symbol CCOBF. The common stock is also traded 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 Boston Stock Exchange during the last two
years were as follows:
- ----------------------------------------------------------------------
2001 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High 1.81 1.75 1.32 1.05
Low .85 .90 .85 .80
- ----------------------------------------------------------------------
2000 1st quarter 2nd quarter 3rd quarter 4th quarter
- ---- ----------- ----------- ----------- -----------
High 1.19 1.19 2.50 1.13
Low .88 .53 1.00 .69
- ----------------------------------------------------------------------
(b) Holders.
The approximate number of record holders of the Company's common stock
at March 11, 2002 was approximately 9,000.
(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 $35,995,567 at December 31, 2001 and
to finance our operations.
The Company's Memorandum of Association and Bye-laws do not permit the
Company to repurchase or redeem shares of its common stock.
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.
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 2001. 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 2002.
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
the shareholders of Coastal Caribbean. Coastal Caribbean has had no
undistributed income for the years 1987 through 2001. 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.
(d) Recent Sales of Unregistered Securities.
None.
Item 6. Selected Consolidated Financial Information
The following selected consolidated financial information (in
thousands) for the Company insofar as it relates to each of the five years in
the period ended December 31, 2001 has been extracted from the Company's
consolidated financial statements.
Years ended December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
($) ($) ($) ($) ($)
(Restated) (Restated) (Restated) (Restated)
Net loss (6,585) (1,386) (1,105) (1,155) (1,611)
======= ======= ======= ======= =======
Net loss per share (basic and diluted) (.15) (.03) (.03) (.03) (.04)
==== ==== ==== ===== =====
Cash and cash equivalents
and marketable securities 609 2,959 1,042 2,181 3,749
=== ===== ===== ===== =====
Unproved oil, gas and,
mineral properties (full cost method) - 4,145 4,097 4,073 3,732
===== ===== ===== ===== =====
Total assets 1,077 7,497 5,544 6,648 7,799
===== ===== ===== ===== =====
Shareholders' equity:
Common stock 5,216 5,216 4,807 4,807 4,807
Capital in excess of par value 31,498 31,498 28,693 28,693 28,693
Deficit accumulated during the
development stage (35,996) (29,410) (28,025) (26,919) (25,765)
-------- -------- -------- -------- --------
Total shareholders' equity 718 7,304 5,475 6,581 7,735
======= ======== ======== ======== =======
Common stock shares outstanding (average) 43,468 40,844 40,056 40,056 40,056
====== ====== ====== ====== ======
As more fully described in Notes 1 and 4 to the consolidated financial
statements, we have a limited amount of working capital, 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 have limited our ability to commence development activities on our
unproved 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.
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
of the costs of unproved oil, gas and minerals properties. See Item 8. - Note 4.
Litigation. During 2001, the Company restated the deficit accumulated during the
development stage at December 31, 1997 to reflect a write off of certain costs
incurred prior to December 31, 1960 attributable to dry holes on abandoned
leases as follows (in thousands):
Deficit accumulated during the development stage
Balance at December 31, 1997 as previously reported $25,102
Write off of unproved properties 663
--------
Balance at December 31, 1997 as restated $25,765
=======
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(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 intended to be, and are hereby identified as, "forward looking statements"
for purposes of the "Safe Harbor Statement" under the Private Securities
Litigation Reform Act of 1995. 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;
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 limited amount of working capital, 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
unproved 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.
Short Term Liquidity
At December 31, 2001, Coastal Caribbean had approximately $609,000 of
cash and cash equivalents available and this amount should be sufficient to fund
the Company's operations through the second quarter of 2002 and to pay the
remaining expenses associated with the proposed rights offering of approximately
$260,000. After June 30, 2002, the Company may have to suspend or cease
operations unless and until the Company can secure additional financing. In
addition, an estimated minimum amount of $500,000 would be necessary to fund the
Company's operations through December 31, 2002. These funds are expected to be
used for general corporate purposes, including lease rental payments of
approximately $60,000 annually and to continue the litigation against the State
of Florida. The estimated working capital necessary to fund the Company's
operations, including the costs of the litigation and the proposed rights
offering, for 2002 is approximately $2,400,000. Effective February 20, 2002, our
directors, officers, legal counsel and administrative consultants have agreed to
defer the payment of all of their salaries and fees until the Company has
working capital of at least $1 million. The amount of this deferral, which is
included in the 2002 working capital requirements of approximately $2,400,000,
amounts to approximately $1,300,000 on an annual basis.
Coastal Caribbean has a limited amount of working capital, has incurred
recurring losses and has a deficit accumulated during the development stage. 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. The cost of that litigation has been substantial and will require
the Company to obtain additional capital. On January 10, 2002, the Company filed
a preliminary registration statement for the sale of its common stock. The terms
of the offering have not yet been determined.
Long Term Liquidity
On January 16, 2001, Coastal Petroleum Company 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 Company expects that the cost of the
litigation will be substantial.
In the event that the offering of the Company's common stock referred
to above is inadequate to fund the Company's capital needs, the Company intends
to explore other possible funding sources, particularly the other shareholders
of Coastal Petroleum.
(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, 2001, the Company spent approximately
$2.7 million on legal expenses primarily for the lawsuits against the State of
Florida relating to drilling permits and royalty interests.
2001 vs. 2000
- -------------
The Company incurred a loss of $6,585,000 for the year 2001, compared
to a loss of $1,386,000 for the year 2000.
Interest income and other income increased 24% from $63,000 in 2000 to
$78,000 in 2001 because of the funds realized and invested from the October 2000
sale of common stock to the Company's shareholders.
Legal fees and costs increased 164% to $1,670,000 for 2001 from
$634,000 in 2000. Legal fees and costs increased in 2001 in connection with
Coastal Petroleum 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. The Company expects that the cost
of the litigation will be substantial.
Administrative expenses decreased in 2001 to $534,000 from $535,000 in
2000.
Salaries did not change during the periods and remained at $152,000 in
2001.
Shareholder communications costs decreased slightly to $106,000 in 2001
compared to $108,000 in 2000.
Exploration costs decreased from $20,000 in 2000 to $500 in 2001
because of the State of Florida's denial of the Company's application for a
permit to drill on Lease 224-A. In 2000, Coastal Petroleum incurred expenses
associated with drilling permit applications in connection with shallow test
wells to comply with Coastal Petroleum's drilling obligations.
Write off of unproved properties totaled $4,202,000 in 2001. During the
year 2001, the Company concluded that the value of its leases has been taken and
its property interests were impaired by the actions taken by the State of
Florida and therefore, has recorded an impairment charge to reflect the write
off of these costs. All future costs incurred in connection with the Company's
Florida leases will be expensed as incurred.
2000 vs. 1999
- -------------
The Company recorded a loss of $1,386,000 for the year 2000, compared
to a loss of $1,105,000 in 1999.
Interest income and other income increased 13% to $63,000 in 2000 from
$55,000 in 1999 because more funds were available for investment during 2000
after the Company's sale of common stock was completed in October 2000.
Legal fees and costs increased 56% in 2000 to $634,000 compared to
$405,000 in 1999 because in 2000 the Company prepared its complaint to file in
the Florida Circuit Court to claim that the Company's Lease 224-A had been taken
by the State of Florida. The Company also recorded a noncash charge to legal
expense in the amount of $75,000 in connection with the issuance of a stock
option grant in 2000.
Administrative expenses increased 13% during 2000 to $535,000 compared
to $474,000 in 1999. During December 1999, the Company increased its Directors
and Officers liability insurance coverage from $6.2 million to $12.2 million
which increased insurance costs.
Salaries decreased 4% to $152,000 during 2000 compared to $158,000
during 1999. An employee who has not been replaced left the Company during 1999.
Shareholder communications increased 5% from $103,000 in 1999 to
$108,000 in 2000 because of the cost of various listing fees.
Exploration costs decreased 6% from $21,000 in 1999 to $20,000 in 2000.
These miscellaneous exploration expenses do not include the exploration
expenditures totaling $48,000 that were capitalized in 2000 ($24,000 in 1999).
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, 2001, the carrying value of such investments
(including those classified as cash and cash equivalents) was approximately
$497,000, the fair value was $500,000 and the face value was $500,000. Since the
Company expects to hold the investments to maturity, the maturity value should
be realized.
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 sheets of Coastal
Caribbean Oils & Minerals, Ltd. (a development stage company) as of December 31,
2001 and 2000, and the related consolidated statements of operations, cash
flows, and common stock and capital in excess of par value for each of the three
years in the period ended December 31, 2001 and for the period from January 31,
1953 (inception) to December 31, 2001. 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, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001 and for the period from January 31,
1953 (inception) to December 31, 2001 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
limited amount of working capital, 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 has 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. As more fully described in Note 1, the Company
restated certain amounts previously reported as of and for the year ended
December 31, 2000 and for the period from January 31, 1953 (inception) to
December 31, 2000.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 8, 2002
COASTAL CARIBBEAN OILS & MINERALS, LTD.
(A Bermuda Corporation)
A Development Stage Company
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
December 31,
2001 2000
ASSETS (Restated)
------ --------- ----------
Current assets:
Cash and cash equivalents $ 609,024 $ 2,958,674
Interest and accounts receivable 8,604 41,520
Notes receivable 15,000 -
Prepaid expenses 353,596 323,897
-------- ----------
Total current assets 986,224 3,324,091
------- ---------
Unproved oil, gas and mineral properties
(full cost method) - 4,144,682
Contingent litigation claim (Note 4) - -
Other assets 90,391 27,866
------------- -------------
Total assets $ 1,076,615 $ 7,496,639
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued liabilities $ 358,621 $ 193,176
--------- ----------
Minority interests - -
Shareholders' equity:
Common stock, par value $.12 per share:
Authorized - 250,000,000 shares
Outstanding - 43,468,329 shares 5,216,199 5,216,199
Capital in excess of par value 31,497,362 31,497,362
---------- ----------
36,713,561 36,713,561
Deficit accumulated during the development stage (35,995,567) (29,410,098)
------------ ------------
Total shareholders' equity 717,994 7,303,463
----------- -------------
Total liabilities and shareholders' equity $ 1,076,615 $ 7,496,639
============ ============
See accompanying notes.
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
(inception)
Years ended December 31, to
2001 2000 1999 Dec. 31, 2001
------------------ ------------------ ---------------- ------------------
(Restated)
Interest and other income $ 78,432 $ 62,544 $ 55,275 $ 3,869,555
--------- --------- --------- ------------
Expenses:
Legal fees and costs 1,670,446 633,521 405,380 14,680,959
Administrative expenses 533,579 535,325 474,027 8,407,240
Salaries 151,800 151,800 157,550 3,372,428
Shareholder communications 105,863 107,852 102,825 3,885,495
Write off of unproved properties 4,201,733 - - 5,501,247
Exploration costs 480 19,598 20,954 188,218
Lawsuit judgments - - - 1,941,916
Minority interests - - - (632,974)
Other - - - 364,865
Contractual services - - - 2,155,728
---------- ----------- ---------- ----------
6,663,901 1,448,096 1,160,736 39,865,122
--------- --------- --------- ----------
Net loss $(6,585,469) $(1,385,552) $(1,105,461)
============ ============ ============
Deficit accumulated during the
development stage $(35,995,567)
============
Net loss per share based on average number of shares outstanding during the
period:
Basic and diluted EPS $(.15) $(.03) $(.03)
====== ====== ======
Average number of shares outstanding
(basic and diluted) 43,468,329 40,843,736 40,056,358
========== ========== ==========
See accompanying notes.
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
(inception)
Years ended December 31, to
2001 2000 1999 Dec. 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
(Restated)
Operating activities:
Net loss $(6,585,469) $(1,385,552) $(1,105,461) $(35,995,567)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest - - - (632,974)
Write off of unproved properties 4,201,733 - - 5,501,247
Common stock issued for services - - - 119,500
Compensation recognized for stock option grant - 75,000 - 75,000
Recoveries from previously written off properties - - 252,173
Net change in:
Interest and accounts receivable 32,916 (15,937) 27,051 (8,604)
Prepaid expenses (29,699) 28,192 (37,809) (353,596)
Accrued liabilities 165,445 124,752 1,125 358,621
Other assets (62,525) (421) (247) (90,391)
----------- ----------- ------------ ------------
Net cash used in operating activities (2,277,599) (1,173,966) (1,115,341) (30,774,591)
----------- ----------- ----------- ------------
Investing activities:
Additions to oil, gas, and mineral properties
net of assets acquired for common stock and
reimbursements (57,051) (48,190) (23,913) (3,621,688)
Proceeds from relinquishment of surface rights - - - 246,733
Marketable securities (net) - 390,941 1,737,898 -
Notes receivable (15,000) - - (15,000)
Purchase of fixed assets - - (61,649)
--------- - ---------- ---------- ----------
-
Net cash provided by (used in) investing activities (72,051) 342,751 1,713,985 (3,451,604)
-------- ------- --------- -----------
Financing activities:
Sale of common stock net of expenses - 3,138,765 - 29,480,970
Shares issued upon exercise of options - - - 884,249
Sale of shares by subsidiary - - - 750,000
Sale of subsidiary shares 3,720,000
---------- ---------- ---------- ---------
- - -
Net cash provided by financing activities 3,138,765 34,835,219
----------- --------- ---------- ----------
- -
Net increase (decrease) in cash and cash equivalents (2,349,650) 2,307,550 598,644 609,024
Cash and cash equivalents at beginning of period 2,958,674 651,124 52,480 -
------------ -------------- ------------ -----------
Cash and cash equivalents at end of period $ 609,024 $ 2,958,674 $ 651,124 $ 609,024
============ ============ ========== ==========
See accompanying notes.
<page>
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, 2001
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
============ ============ ============
See accompanying notes.
COASTAL CARIBBEAN OILS & MINERALS, LTD.
Notes to Consolidated Financial Statements
December 31, 2001
1. Summary of significant accounting policies
Consolidation
The accompanying consolidated financial statements include the accounts
of Coastal Caribbean Oils & Minerals, Ltd. (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. During the year 2001, the Company concluded that the value of its
leases has been taken and its property interests were impaired by the actions
taken by the State of Florida and therefore, has recorded an impairment charge
to reflect the write off of the costs of unproved oil, gas and minerals
properties. See Note 4. Litigation. All intercompany transactions have been
eliminated. Certain prior year amounts have been reclassified to conform with
the current year 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,
------------------------
2001 2000
------------- -------------
Cash $ 111,682 $ 159,834
Federal Home Loan Bank discount notes 497,342 2,798,840
------------- -----------
$ 609,024 $ 2,958,674
============= ===========
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.
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.
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 the value of its
leases has been taken and its property interests were impaired by the actions
taken by the State of Florida and therefore, has recorded an impairment charge
to reflect the write off of the costs of unproved oil, gas and minerals
properties to reflect the write off of these costs. See Note 4. Litigation. All
future costs incurred in connection with the Company's Florida leases will be
expensed as incurred. During 2001, the Company restated the deficit accumulated
during the development stage to reflect a write off of certain costs incurred
prior to December 31, 1960 attributable to dry holes on abandoned leases as
follows:
Deficit accumulated during the development stage
Balance at December 31, 2000 as previously reported $28,747,058
Write off of unproved properties 663,040
-------------
Balance at December 31, 2000 as restated $29,410,098
===========
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).
1. Summary of significant accounting policies (Cont'd)
Financial instruments
The carrying value for cash and cash equivalents, accounts receivable,
marketable securities and accounts payable approximates fair value based on
anticipated cash flows and current market conditions.
Going Concern
The Company has a limited amount of working capital, has incurred
recurring losses and has a deficit accumulated during the development stage.
Furthermore, as discussed in Note 4, on January 16, 2001, Coastal Petroleum
Company 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 27, 2001,
the Leon County Circuit Court set a trial date for two weeks beginning September
30, 2002 for Coastal Petroleum's lawsuit against the State of Florida. The cost
of that litigation has been substantial and will require the Company to obtain
additional capital. On January 10, 2002, the Company filed a registration
statement for the sale of its common stock, which has not yet been declared
effective by the Securities and Exchange Commission. The terms of the offering
have not yet been determined. There can be no assurances that funds on hand or
realized or realizable on the sales of the Company's shares described in Note 5
will be sufficient to allow the Company to survive until such litigation is
concluded. The Company believes the funds on hand at December 31, 2001 are
sufficient to pay the expenses associated with the proposed rights offering and
to fund the Company's operations through the second quarter of 2002. In
addition, an estimated minimum amount of $500,000 would be necessary to fund the
Company's operations through December 31, 2002. In the event that the offering
of the Company's common stock is inadequate to fund the Company's capital needs,
the Company intends to explore other possible funding sources, particularly the
other shareholders of Coastal Petroleum. 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,
2001 and 2000, held 26.7% of Coastal Petroleum.
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
royalty interests in Coastal Petroleum's properties. If Lykes were to exchange
its 26.7% interest in Coastal Petroleum for a royalty interest, its overriding
royalty interest in Coastal Petroleum's working-interest acreage would be 3.3%.
As of December 31, 2001 and 2000, Coastal Petroleum shares were owned
as follows:
Shares %
------ ---
Coastal Caribbean 173 59.3
Lykes 78 26.7
Others 41 14.0
-- ----
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, 2001, the
amount of these loans totaled $20,826,287 and the accumulated interest on the
loans totaled $5,758,768 for a total indebtedness of $26,585,055. 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.
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 will continue
to pay annual lease rentals on the leases. The following is a summary of the
cost of unproved oil, gas and mineral properties at December 31, 2000 and 1999,
accounted for under the full cost method, all of which are located in Florida:
2000 1999
----------------- -----------
(Restated) (Restated)
Lease acquisition costs $ 877,797 $ 877,797
Lease and royalty costs (principally legal fees) 585,348 585,348
Lease rentals 2,485,138 2,425,892
Other exploratory expenses 1,228,510 1,239,566
Salaries 457,708 457,708
------------ ------------
5,634,501 5,586,311
----------- -----------
Deduct:
Reimbursement for lease rentals and other expenses 1,243,085 1,243,085
Proceeds from relinquishment of surface rights 246,733 246,733
------------ ------------
1,489,819 1,489,819
----------- -----------
Total unproved oil, gas and mineral properties $4,144,682 $4,096,492
========== ==========
4. Litigation
Florida Litigation
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
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.
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 application 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.
Lease Taking Case
On June 26, 2000, the First District Court of Appeal affirmed an
earlier ruling that the Florida Department of Environmental Protection (DEP)
could deny Coastal Petroleum a permit to drill an exploratory well about nine
miles south of St. George Island in the Florida Panhandle. While the appeals
court held that the DEP could take such action on the basis of a compelling
public purpose in not allowing offshore oil and gas drilling in Florida, the
court also found that the DEP's action would be unconstitutional "if just
compensation is not paid for what is taken." The appeals court stated that
whether the denial of the permit constituted a taking of Coastal Petroleum's
property should be determined by the Circuit Court.
On January 16, 2001, Coastal Petroleum Company 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 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. On May 22, 2001,
the royalty holders appealed the Circuit Court's order granting them limited
intervention to the First District Court of Appeal, claiming the order denied
them the right to fully participate in the case until after final judgment and
that the court erroneously found that the royalty holders lack an ownership
interest in Coastal Petroleum's lease. On June 12, 2001, the Court of Appeal
ordered the royalty holders to show cause why the appeal should not be dismissed
for lack of jurisdiction. The royalty holders filed a response to the Court of
Appeal on June 21, 2001, Coastal Petroleum filed its reply on July 2, 2001 and
the State of Florida filed its reply on July 5, 2001. The Court of Appeal is
currently considering the matter.
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 has 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.
On March 5, 2001, the State filed a Motion to Dismiss Coastal
Petroleum's complaint. After the Motion was denied, discovery, which had been
suspended pending the outcome of the Motion to Dismiss, resumed. Some
depositions have now been taken, documents have been exchanged and discovery is
expected to continue until the court ordered cutoff date of August 25, 2002.
On November 27, 2001, the Leon County Circuit Court set a trial date of
September 30, 2002. The Court has set aside two weeks for the trial on the issue
of whether the State has taken Coastal Petroleum's lease. If the Court rules in
Coastal Petroleum's favor, there will then be a second trial before a jury to
determine the amount of compensation to be awarded. Both the decision of the
Court and any decision of a jury are subject to appeals by any of the parties to
the litigation.
Royalty Taking Case
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. In 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. 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 is
currently pending before the Circuit Court in Tallahassee. On December 2, 1999,
the Circuit Court denied the State's motion to dismiss the plaintiffs' claim of
inverse condemnation but dismissed several other claims.
On May 10, 2000, the State 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.
Counsel
The Tampa, Florida law firm of Gaylord Merlin Ludovici Diaz & Bain
(Gaylord Merlin) is 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 is assisting
Gaylord Merlin in the litigation.
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.
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.
4. Litigation (Cont'd)
The following contingencies have been granted to related parties:
Relationship to Coastal Petroleum at Net Recovery
Holder Date of Grant Percentage
- ------------------- ------------- ----------
Benjamin W. Heath Chairman of the Board 1.25
Phillip W. Ware President 1.25
Murtha Cullina LLP Counsel 1.00
James R. Joyce Assistant Treasurer .30
---
Total 3.80
====
In addition, Coastal Petroleum has agreed to pay Gaylord Merlin a
contingent fee equal to the greater of:
(b) 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
the hourly fees paid to Gaylord Merlin and other costs of the
litigation.
Uncertainty
Coastal Petroleum 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.
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 October 23, 2000, the Company completed the sale of 3,411,971 shares
of its common stock to its shareholders at $1.00 per share. The net proceeds to
the Company were $3,138,765 after deducting the $273,206 cost of the offering.
On January 10, 2002, the Company filed a registration statement for the
sale of its common stock, which has not yet been declared effective by the
Securities and Exchange Commission. The terms of the offering have not yet been
determined. The proceeds of the offering, if any, will be used for general
corporate purposes, including working capital and to continue the litigation
against the State of Florida. The costs incurred in connection with the offering
totaling $90,391 at December 31, 2001 are included in other assets.
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
--------- ------- ---------
36,914,183 $4,434,177 $25,103,772
---------- ---------- -----------
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.
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, 1998 587,000 1.13-2.625
Expired (60,000) 1.13
-------
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 and 2001 925,000 .91 -2.625
=======
(1.33 weighted average)
Available for grant at December 31, 2001 55,000
- ---------------------------------------- ======
Summary of Options Outstanding at December 31, 2001
Year Granted Number of Shares Expiration Date Exercise Prices ($)
- ------------ ---------------- --------------- -------------------
Granted 1998 225,000 May 19, 2003 2.625
Granted 2000 700,000 Mar. 22, 2010 .91
-------
Total 925,000
=======
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.
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.
For the purpose of pro forma disclosures, the estimated fair value of
the stock options is expensed in the year of grant since the options are
immediately exercisable. The Company's pro forma information follows:
Amount Per Share
Net loss as reported - December 31, 2000 $ (1,385,522) $(.03)
Stock option expense (450,000) (.01)
------------ -----
Pro forma net loss - December 31, 2000 $(1,835,552) $(.04)
============ ======
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 $13,218,000 at December 31, 2001 ($12,133,000 at
December 31, 2000) and expire in varying amounts from 2002 through 2021 as
follows: $2,931,000 in 2002, $824,000 in 2003, $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 and $1,884,000 in 2021. 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:
2001 2000
--------------- ------------
(Restated)
Net operating losses $4,974,000 $4,720,000
Deferred intercompany interest deduction 2,167,000 1,453,000
Write off of unproved properties 1,831,000 250,000
--------- -------
Total deferred tax assets 8,972,000 6,423,000
Valuation allowance (8,972,000) (6,423,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
8. Related parties
G&O'D INC provides accounting and administrative services, office
facilities and support staff to the Company. G&O'D INC is owned by Mr. James R.
Joyce, Treasurer and Assistant Secretary. During 2001, 2000 and 1999, G&O'D
billed fees of $135,573, $155,440 and $144,495 respectively. The Company was
billed $105,000 in 2001, $195,000 in 2000 and $65,000 in 1999 by the law firm of
Murtha Cullina LLP. Mr. Timothy L. Largay, a partner of the firm of Murtha
Cullina LLP, is a director and Vice President of the Company. Notes receivable
at December 31, 2001, represent a six month loan to an officer of the Company,
payable on May 10, 2002 with interest at 4% per annum
9. Selected quarterly financial data (unaudited)
The following is a summary (in thousands) except for per share amounts
of the quarterly results of operations for the years ended December 31, 2001 and
2000:
2001 QTR 1 QTR 2 QTR 3 QTR 4
- ------------------------------------------------------------------------------------------------------------------
($) ($) ($) ($)
Total revenues 37 23 13 5
Expenses (729) (623) (499) (4,813) (*)
------ ------ ------ -------
Net loss (692) (600) (486) (4,808)
====== ====== ====== =======
Per share (basic & diluted) (.02) (.01) (.01) (.11)
===== ===== ===== =====
Average number of shares outstanding 43,468 43,468 43,468 43,468
====== ====== ====== ======
2000 QTR 1 QTR 2 QTR 3 QTR 4
- ------------------------------------------------------------------------------------------------------------------
($) ($) ($) ($)
Total revenues 10 10 4 39
Expenses (386) (326) (317) (420)
------ ------- ------ ------
Net loss (376) (316) (313) (381)
====== ======= ====== ======
Per share (basic & diluted) (.01) (.01) (-) (.01)
===== ===== === =====
Average number of shares outstanding 40,056 40,056 40,056 40,844
====== ====== ====== ======
(*) 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 $4,202 to
reflect the write off of these costs
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Company
The board of directors includes six members, two of whom, Messrs. Heath
and Ware, also serve as executive officers. The board is divided into three
classes, with each class serving a term of office of three years.
Name Position Biographical Information
Class of 2002
Benjamin W. Heath Director Mr. Heath has been a director since 1962. He also serves
President as Chairman and a director of Coastal Petroleum. He is
also a director of Canada Southern Petroleum Ltd. Age
eighty-six.
Phillip W. Ware Director Mr. Ware, a geologist, has been President and a director of
Vice President Coastal Petroleum since 1985. Mr. Ware has been a director
since 1985. Age fifty.
Class of 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-one.
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-five.
Class of 2004
Name Position Biographical Information
Nicholas B. Dill Director Mr. Dill has been a consultant to the law firm of Conyers
Dill & Pearman, Hamilton, Bermuda, our Bermuda counsel
since 2000. Previous, Mr. Dill had been a member of the
firm for many years. Mr. Dill, a director since 1997, is
also a director of Worldwide Securities Ltd, Bermuda
Electric Light Co. Ltd., Bermuda Waterworks Ltd. and SAL
Ltd. Age sixty-eight.
Timothy L. Largay Director Timothy L. Largay has been a partner in the law firm of
Vice President and Murtha Cullina LLP, Hartford, Connecticut since 1974. He
Assistant Secretary was elected a director and Vice President of the Company on
January 15, 2001. Mr. Largay is also a director and
Secretary of Canada Southern Petroleum Ltd. and a director
of Magellan Petroleum Corporation. Murtha Cullina has been
retained by the Company for more than five years and is
being retained during the current year. Age fifty-eight.
Our other executive officer is the Chief Financial Officer. All of the
officers of Coastal Caribbean are elected annually by the board and report
directly to it.
James R. Joyce Treasurer, Assistant Mr. Joyce has been our Treasurer, Assistant Secretary and
Secretary and Chief Chief Financial Officer since 1994. He is also President,
Financial Officer Chief Financial Officer and a director of Magellan Petroleum
Corporation. Mr. Joyce is President of G&O'D INC, a firm that
provides accounting and administrative services, office
facilities and support to Coastal Caribbean
and other clients. Age sixty-one.
Only Messrs. Heath and Ware received direct compensation for their services
as officers of Coastal Caribbean or Coastal Petroleum. Mr. Heath and Mr. Ware
devote approximately 50% and 100% respectively of their professional time to the
business and affairs of Coastal Caribbean and Coastal Petroleum. The other non
executive officers devote a small percentage of their professional time as
officers on behalf of the companies except for Mr. Joyce, who devoted
approximately 27% of his time during the year 2001.
All of the named companies are engaged in oil, gas or mineral
exploration and/or development except where noted. 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.
Item 11. Executive Compensation
The following table sets forth certain summary information concerning
the compensation of the Company's two executive officers. No other executive
officer earned compensation in excess of $100,000 during the year 2001.
- ----------------------------------------------------------------------------------------------------------------------
Summary Compensation Table
- ----------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term
Compensation
Name and Award All Other
Principal Position Year Salary ($) Options/SARs (#) Compensation ($)
- ----------------------------------------------------------------------------------------------------------------------
Benjamin W. Heath, President and 2001 40,000 - 18,075 (1)
Chief Executive Officer 2000 40,000 100,000 15,600 (1)
1999 40,000 - 15,550 (1)
- ----------------------------------------------------------------------------------------------------------------------
Phillip W. Ware, Vice President 2001 92,000 - 13,800 (2)
2000 92,000 100,000 13,800 (2)
1999 92,000 - 13,800 (2)
- ----------------------------------------------------------------------------------------------------------------------
(1) Reimbursement for office expenses $12,075 in 2001, $9,600 in 2000, and
$9,550 in 1999, and payments to a SEP-IRA pension plan $6,000 in 2001, 2000
and 1999.
(2) Payment to SEP-IRA pension plan.
Compensation of Directors
All of our directors except for directors who are also executive
officers receive annual directors' fees in the amount of $22,500. For the year
2001, Messrs. Collis, Dill, and Monroe each received directors' fees of $22,500
and Mr. Largay received $21,263 in fees. Effective February 20, 2002, Messrs.
Collis, Dill, Largay and Monroe will defer the payment of all of their
directors' fees until our working capital is at least $1 million.
Stock Options
The following table provides information about unexercised stock
options held by the Named Executive Officers at December 31, 2001:
- -----------------------------------------------------------------------------------------------------------------------
Aggregated Option/SAR Exercises in 2001 and December 31, 2001
Option/SAR Values
- -----------------------------------------------------------------------------------------------------------------------
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-The-Money
On Exercise Realized ($) Options/SARs (#) Options/SARs ($)
(#) at December 31, 2001 at December 31, 2001
- -----------------------------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
Benjamin W. Heath -0- -0- 100,000 - 9,000 -
Benjamin W. Heath -0- -0- 45,000 - -0- -
- -----------------------------------------------------------------------------------------------------------------------
Phillip W. Ware -0- -0- 100,000 - 9,000 -
Phillip W. Ware -0- -0- 72,000 - -0- -
- -----------------------------------------------------------------------------------------------------------------------
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, 2001 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
- -------------------------- --------- ----------- ----------------
Leon S. Gross 4,499,688 - 10.34
3900 Ford Road
Philadelphia, PA 19131
Lykes Minerals Corp. - 7,800,000* 15.2**
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.
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 December 31, 2001 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
Indirectly
--------------------------- Percent of
Name of Individual or Group Options Class
- --------------------------- ------- -----
Graham B. Collis 25,000 (1) 112,000 *
Nicholas B. Dill - (2) 124,000 *
Benjamin W. Heath 20,000 145,000 *
John D. Monroe 400 136,000 *
Timothy L. Largay 49,200 100,000 *
Phillip W. Ware 3,791 172,000 *
------------ -----------
Directors and executive officers
as a group (a total of 7 persons) 111,579 925,000 2.3%
- ----------------------
* Less than 1%.
(1) Director of Lane Enterprises (Bermuda) Limited, a Bermuda company, which also owns 17,758 shares.
(2) Director of Brackish Pond Company Limited, a Bermuda company, which owns 3,355 shares.
Item 13. Certain Relationships and Related Transactions
G&O'D INC
During the year 2001, G&O'D INC charged us a total of $135,573 for
accounting and administrative services, office facilities and support staff
which includes two full time and two part time persons. Mr. James R. Joyce, the
Company's Treasurer and Assistant Secretary, owns the firm of G&O'D whose fees
are based on the time spent in performing services for us.
There is no written agreement between G&O'D and the Company. The
Company believes that the arrangement with G&O'D is as favorable to the Company
as could be obtained from an unaffiliated third party.
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 our current officers 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 recovery Coastal Petroleum
Name Position
------------------------ -------------- -----------------
Benjamin W. Heath 1.25 Chairman of Board
Phillip W. Ware 1.25 President
James R. Joyce 0.30 Treasurer
PART IV
Item 14. 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
Report of Independent Auditors 33
Consolidated balance sheets at December 31, 2001 and 2000 34
Consolidated statements of operations for each of the three years in the
period ended December 31, 2001 and for the period from January 31, 1953
(inception) to December 31, 2001.
35
Consolidated statements of cash flows for each of the three years in the
period ended December 31, 2001 and for the period from January 31, 1953
(inception) to December 31, 2001.
36
Consolidated statement of common stock and capital in excess of par value
for the period from January 31, 1953 (inception) to December 31, 2001
37
Notes to consolidated financial statements. 38-51
(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.
-------------------
(i) On October 3, 2001, the Company filed a Current Report on Form 8-K
to report that on October 1, 2001, the Leon County Circuit Court in
Coastal Petroleum Company's lawsuit against the State of Florida on its
own motion issued an order scheduling a case management conference for
November 27, 2001. The order provided that counsel be prepared to
discuss a discovery schedule, the setting of a trial date, and several
other matters.
(ii) On December 10, 2001, the Company filed a Current Report on Form
8-K to report that on November 27, 2001, the Company announced that
Florida's Leon County Circuit Court set a trial date of September 30,
2002 for Coastal Petroleum's lawsuit against the State of Florida.
(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.
(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.
(h) 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).
(i) 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).
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 59 1/4 % owned.
22. Published report regarding matters submitted to vote of
security holders.
-------------------------------------------------------------
Not applicable.
23. Consent of experts and counsel.
------------------------------
Consent of Ernst & Young LLP is filed herein.
24. Power of attorney.
-----------------
Not applicable.
99. Additional exhibits.
-------------------
(a) 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).
...
(b) 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).
(d) Financial Statement Schedules.
-----------------------------
None.
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/ Benjamin W. Heath
--------------------------------------------
Benjamin W. Heath, President and
Chief Executive Officer
Dated: June 6, 2002
------------------------------------------
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/ Benjamin W. Heath By /s/ James R. Joyce
------------------------------------------------- ----------------------------------------
Benjamin W. Heath James R. Joyce
President, Director and Chief Executive Treasurer and Chief Financial and Officer
Accounting Officer
Dated: June 6, 2002 Dated: June 6, 2002
------------------------------------------------ ------------------------------------
By /s/ Graham B. Collis By /s/ Nicholas D. Dill
----------------------------------------------------- ------------------------------------------
Graham B. Collis Nicholas D. Dill
Director Director
Dated: June 6, 2002 Dated: June 6, 2002
----------------------------------------------- -------------------------------------
By /s/ Timothy L. Largay By /s/John D. Monroe
--------------------------------------------------------- ----------------------------------------
Timothy L. Largay John D. Monroe
Director Director
Dated: June 6, 2002 Dated: June 6, 2002
------------------------------------------------- -------------------------------------
By /s/ Phillip W. Ware
----------------------------------------------------
Phillip W. Ware
Director
Dated: June 6, 2002
- -----------------------------------
INDEX TO EXHIBITS
Exhibit No.
- ----------
23. Consent of Ernst & Young LLP