COASTAL CARIBBEAN OILS & MINERALS LTD - 10-K Annual Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(Mark One)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-04668

COASTAL CARIBBEAN OILS & MINERALS, LTD.

(Exact name of registrant as specified in its charter)

BERMUDA

NONE

State or other jurisdiction of
incorporation or organization

(I.R.S. Employer
Identification No.)

Clarendon House

Church Street

Hamilton, Bermuda

HM 11

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code

(850) 421-2024

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on
which registered

NONE

Securities registered pursuant to Section 12(g) of the Act:


	Common stock, par value $.12 per share

	(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 o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K §229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

o Yes x No

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $3,074,073 (U.S.) at April 1, 2005.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Common stock, par value $.12 per share, 46,211,604 shares outstanding as of May 31, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

None

TABLE OF CONTENTS


		Page

PART I

	Risk Factors	4

Item 1.	Business	10

Item 2.	Properties	14

Item 3.	Legal Proceedings	18

Item 4.	Submission of Matters to a Vote of Security Holders	22

PART II

Item 5.	Market for the Company’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities	23

Item 6.	Selected Consolidated Financial Information	26

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 8.	Financial Statements and Supplementary Data	32

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	54

Item 9A.	Controls and Procedures	54

PART III

Item 10.	Directors and Executive Officers of the Company	55

Item 11.	Executive Compensation	57

Item 12.	Security Ownership of Certain Beneficial Owners and Management	59

Item 13.	Certain Relationships and Related Transactions	61

Item 14.	Principal Accountant Fees and Services	63

PART IV

Item 15.	Exhibits and Financial Statement Schedules	64

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.

After years of litigation against the State of Florida (the “State”) in an effort to secure drilling permits to use its Leases or to secure compensation for the taking of those Leases, the Company, along with its majority owned subsidiary Coastal Petroleum Company and royalty holders, has entered into an agreement (the Agreement) with the State through which the Company will surrender the Leases and the Company will receive compensation from the State. Recent court decisions against the Company and its subsidiary and the State’s continuing anti-drilling policies have made it clear that Coastal Petroleum will not be allowed to drill on its Leases and, despite that fact, the courts have not found that the Leases were taken and have not awarded the Company compensation. The Company has also been unable to raise additional funds to continue operations and has only survived this last year on loans from officers of the Company. Under the Agreement with the State, the Company will receive and distribute the following:


Agreement with the State	$	12,500,000

To Lykes Mineral Corporation		1,390,000
To Outside Royalty Holders		2,225,000


To the Company and its Subsidiary		8,885,000

To Settlement Consultant		465,000
To Company Creditors (as of April 30, 2005)
CCO		230,000
CPC		2,265,000


Amount to Company and Subsidiary After payment to Creditors	$	5,925,000

The other shareholders of Coastal Petroleum have agreed to sell their shares back to Coastal Petroleum for a total of $801,923.03 out of the remaining funds in the subsidiary. Coastal will then own 100% of the subsidiary.

RISKS RELATED TO OUR BUSINESS AND THE LITIGATION

We may be forced to wind up the Company or forced into insolvent liquidation.

The Company’s current liabilities exceed its current assets. Certain creditors of the Company have deferred payment of amounts owed to them. There is no assurance that those creditors will continue to permit the Company to defer payments of amounts owed.

The Company has limited funds to continue its operations. In the event the Agreement is not finally consummated and unless the Company is able to raise adequate additional funds to continue its business, the Company may be required to wind up the Company or forced into insolvent liquidation under the laws of Bermuda within the next several months.

We have a history of losses and anticipate further losses, which could cause us to discontinue our business.

Our business has never had substantial revenues and has operated at a loss in each year since our inception in 1953. We recorded a loss of $673,000 for the year ended December 31, 2004, a loss of $1,008,000 for the year 2003 and a loss of $2,448,000 for the year 2002. In the event the Agreement is not finally consummated and 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.

Our auditors have expressed the view that our negative working capital, stockholders’ deficit and capital deficiencies raise substantial doubt about our ability to continue as a going concern.

Our auditors have included an explanatory paragraph in their report for the year ended December 31, 2004, 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. You should also see Note 1 to our financial statements regarding the uncertainty as to our ability to continue as a going concern.

Without additional financing, we only have enough liquid assets on hand to continue to operate the Company for part of the year 2005.

If the Agreement is consummated, we believe that funds on hand will be sufficient to permit us to continue to operate through 2005. However, in the event the Agreement is not finally consummated, we may have to suspend or cease operations unless and until we can secure additional financing or privately sell additional shares of our stock. 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.

We believe that our funds on hand and certain loan committements from our directors will be sufficient to permit us to continue to operate through June of 2005. After that time, we may have to suspend or cease operations unless and until we can secure additional financing. In 2004 certain of our directors, officers, legal counsel and administrative consultants agreed to continue deferring the payment of their salaries and fees. At December 31, 2004, the amount of salaries and fees deferred totaled approximately $1,594,000. We currently do not have any commitments for additional financing. We may be unable to obtain additional financing in the future on acceptable terms or at all.

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 still pending. In the event that the Agreement is not finally consummated and our funds exhausted before the conclusion of the litigation, we may be unable to conclude the litigation and might be required to cease business.

If the amount of money we recover from the State of Florida is inadequate to cover our costs, we may be forced to cease operations.

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 still pending. In the event that the agreement is not finally consummated and 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.

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 2004, 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 2005. 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. 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.

We are unable to pay dividends.

We have never declared or paid dividends on our common stock and do not anticipate declaring or paying any dividends in the foreseeable future. We plan to retain any future earnings to reduce our deficit accumulated during the development stage of $40,124,000 at December 31, 2004 and to finance our operations.

Any dividends would be subject to a 30% withholding tax.

We are a Bermuda corporation. Bermuda currently imposes no taxes on corporate income or capital gains realized outside of Bermuda. However, any dividends we receive from Coastal Petroleum are subject to a 30% United States withholding tax.

RISKS RELATED TO OUR INDUSTRY

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.

We face strong competition from larger oil and gas companies that may impair our ability to carry on operations.

We plan to 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:


•	the financial resources of our competitors;

•	the availability of alternate fuel sources; and

•	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.

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, Coastal Petroleum Company (Coastal Petroleum), in the exploration for oil and gas reserves. At December 31, 2004, Coastal Caribbean’s principal asset was its 58.84% interest in its subsidiary Coastal Petroleum. Coastal Petroleum’s principal assets are its nonproducing oil, gas and mineral leases and royalty interests in the State of Florida. Coastal Petroleum 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 and for more than 15 years, the State has prevented Coastal from using its leases. Since the late 1980’s the State has used laws, policies and permit denials to prevent and prohibit drilling and production of oil and gas offshore Florida and to deny Coastal the use of its leases. The Company has vigorously litigated to be able to use its leases or to be compensated for the State’s taking of them. During 2004, the Company continued its legal battle by asking the United States Supreme Court to hear its case. However, on June 14, 2004, the United States Supreme Court denied the Writ of Certiorari and no further appeal of that claim can be taken. See Item 3. “Legal Proceedings”.

After the United States Supreme Court refused to hear the case and the Company’s legal options were limited, the State of Florida contacted the Company regarding a possible buyback of the Company’s leases. With limited financial resources to continue the legal fight, which was constrained by the recent court decisions, the Company continued discussions with the State and ultimately, on June 1, 2005 entered an agreement to surrender the leases back to the State of Florida in exchange for compensation as set out below. The Agreement will allow the Company to end all of its current litigation and will provide it the capital to move forward with drilling opportunities in other locations. The Agreement is contingent upon approval of funding by the State, and the Company and other parties to the Agreement providing releases and certain other documents to the State.

A condition of the Agreement is that Coastal Petroleum and the royalty holders be joined in one agreement. Under the Agreement, the State will repurchase Coastal Petroleum’s Leases and the royalties held by various individuals and Coastal Caribbean, for a total of $12.5 million. The parties will also sign mutual releases and will dismiss pending actions against each other. The money received from the State will be divided between the parties in interest. Under the Agreement with the State, the Company will receive and distribute the following:


Agreement with the State	$	12,500,000

To Lykes Mineral Corporation		1,390,000
To Outside Royalty Holders		2,225,000


To the Company and its Subsidiary		8,885,000

To Settlement Consultant		465,000
To Company Creditors (as of April 30, 2005)
CCO		230,000
CPC		2,265,000


Amount to Company and Subsidiary After payment to Creditors	$	5,925,000

The other shareholders of Coastal Petroleum have agreed to sell their shares back to Coastal Petroleum for a total of $801,923.03 out of the remaining funds in the subsidiary. This would leave Coastal Caribbean, which has 46,211,604 shares outstanding, owning 100% of Coastal Petroleum Company. A copy of the Agreement is attached hereto as Exhibit 10.(h).

The Florida Legislature addressed the funding of this Agreement by the State in the recent legislative session which began in March of this year. The Governor and Cabinet, sitting as the Board of Trustees of the Internal Improvement Trust Fund, approved the Agreement on June 1, 2005. Upon approval of the Legislative Budget Commission, the Company expects to receive the funds after July 1 of this year. The date of closing will also be determined by the time it takes for the parties to collect and exchange with the State the releases and other documents set out in the Agreement. The Company will continue to develop plans for its continued operations.

In recent years the Company has described the valuable prospects that, based upon expert advice, management believes lie offshore Florida on the Company’s leases. However, without a permit to drill those prospects, their value can never be realized. For years the Company litigated against the State of Florida and provided it with every piece of information it requested, in an effort to obtain a permit to drill. That process for a single location took years and cost the Company more than $1 million. The end result was that the State denied the permit based upon a balancing process that gave greater weight to its anti-offshore drilling policy and the environment than to rights of the Company. That process and decision was affirmed on appeal, but the court decision left open the possibility that the State would have to pay compensation for its denial of the use of the leases. The Company filed a claim for compensation for the denial of the use of its lease, but the trial court found that the State did not have to pay compensation, based, in part, upon the nature of the Company’s lease interest. The State has filed motions seeking to extend the Court’s reasoning to the entirety of Coastal’s leases.

In light of the recent decisions, the high cost and futility of pursuing another permit and the Company’s financial condition, management believes that every stone has been turned in efforts to drill on its leases and that the Agreement is in the best interest of the Company and its shareholders. Recent efforts to raise funds have not been successful. The Company has been sustained on loans from officers and grace from some of its creditors. The position of the State of Florida regarding offshore drilling and the enormous cost and toll of litigation required to overcome that position to be able to drill on the leases has discouraged interest in the leases by other operating oil and gas companies. In the past, major oil companies have encountered similar problems and have been unable to explore or develop their leases offshore Florida. As described in this document, a potential option for the Company is dissolution which would take place under Bermuda laws. Based upon advice regarding Bermuda insolvency law, such an insolvency process would have a less favorable result for the Company and shareholders than would the Agreement.

(b) Financial Information About Industry Segments.

Because the Company has been engaged in only one industry, namely, oil, gas and mineral exploration and development, this item is not applicable to the Company. See Item 8 for general financial information concerning the Company.

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.

		Not applicable.

	(ii)	Status of Product or Segment.

		Not applicable.

	(iii)	Raw Materials.

		Not applicable.

	(iv)	Patents, Licenses, Franchises and Concessions Held.
		See Item 2. “Properties.”

The acreage covered by Coastal Petroleum’s leases is located for the most part along offshore areas on the Gulf Coast of Florida and in submerged and unsubmerged lands under certain bays, inlets, riverbeds and lakes, of which Lake Okeechobee is the largest. Coastal Petroleum historically made an annual lease payment of $59,247 to the State of Florida. These lease payments were not made during 2004, pending the outcome of the Agreement with the State of Florida.

See Item 1(a) General Development of Business above for a more complete discussion of the Agreement with the State.


	(v)	Seasonality of Business.

		The Company’s business is not seasonal.

	(vi)	Working Capital Items.

The Company has substantially no current assets and a working capital deficit of approximately $2.4 million at December 31, 2004. See Item 8. “Financial Statements and Supplementary Data.”


	(vii)	Customers.

		Not applicable.

	(viii)	Backlog.

		Not applicable.

	(ix)	Renegotiation of Profits or Termination of Contracts or Subcontracts at the Election of the Government.

		Not applicable.

	(x)	Competitive Conditions in the Business.

Competition in the oil and gas industry is intense. The Company must compete with companies which have substantially greater resources available to them. In addition, the industry as a whole must compete with other industries in supplying the energy needs of commerce and the general public. Furthermore, competitive conditions may be substantially affected by energy legislation which may be adopted in the future.


	(xi)	Research and Development.

		Not applicable.

	(xii)	Environmental Regulation.

The operations of Coastal Caribbean and its right to obtain interests in and hold properties or to do business may be affected to an unpredictable extent by limitations imposed by the laws and regulations which are now in effect or which may be adopted by the jurisdictions in which the Company carries on its business. Further measures that

have been or might be imposed include increased bond requirements, conservation, proration, curtailment, cessation or other forms of limiting or controlling production of hydrocarbons or minerals, as well as price controls or rationing or other similar restrictions. In particular, environmental control and energy conservation laws and regulations adopted by federal, state and local authorities may have to be complied with.


	(xiii)	Number of Persons Employed by Registrant.

The Company currently has one employee. The Company relies heavily on consultants for legal, accounting, geological and administrative services. The Company uses consultants because it believes it is more cost effective than employing a larger full time staff.


(d)	Financial Information About Foreign and Domestic Operations and Export Sales.

	(1)	Identifiable Assets.

All of the Company’s assets are located in the United States. See Item 1(a) “General Development of Business.”

Since the Company is a development stage company, the balance of the information required under this paragraph is not applicable to the Company. See Item 8. “Financial Statements and Supplementary Data.”

	(2)	Risks Attendant to Foreign Operations.

		Not applicable.

	(3)	Data which are not Indicative of Current or Future Operations.

		Not applicable.

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 especially in repect to the Agreement with the State which, if it is finally completed, will result in the Leases discussed below being surrendered to the State of Florida in return for funds that will be used to carry on operations elsewhere. We have not paid the 2004 annual lease payments, pending the final outcome of the Agreement with the State of Florida.

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 6¼% 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 12½% 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 12½% 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 6¼% 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. 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, 2004:

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, 2004


	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, 2004 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. The costs and fees for the years involved in the Florida litigation exceed the amount of the funds Coastal Petroleum will receive under the Agreement with the State. Therefore, if the Agreement is finally consummated, there is no net recovery and no contingency fees due under the contingent interests granted to officers, directors and counsel. 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. If the Agreement with the State becomes final, as described in Item 1(a) General Development of Business above, these rights will be surrendered to the State of Florida in exchange for compensation.

Item 3. Legal Proceedings

Agreement with the State of Florida

For years Coastal Petroleum has litigated against the State in an effort to secure drilling permits and drill for oil off the coast of Florida. The State has denied Coastal Petroleum permission to drill on its Leases, a decision that has been upheld by a Florida court. Florida courts have also denied Coastal Petroleum compensation for a taking of the Leases. Since that time, efforts to secure funding to continue operations have not been successful. Furthermore, the longstanding State policy against any drilling for oil or gas offshore of Florida remains in place with no indication that it will change. In fact, the policy reflects the Florida Statutes which ban drilling for oil and gas in Florida state waters. Given the policy and court decisions, any additional attempt by Coastal Petroleum to secure a permit to drill its Leases is seen by Management as futile.

After the United States Supreme Court refused to hear Coastal Petroleum’s taking case in 2004 and the Company’s legal options were limited, the State of Florida contacted Coastal Petroleum regarding a possible buyback of its leases. With limited financial resources to continue a legal fight which was further frustrated with recent court decisions, Coastal Petroleum continued discussions with the State and ultimately, on June 1, 2005 was joined by Coastal Caribbean in accepting an offer by the State of Florida to repurchase Coastal Petroleum’s Florida Leases. The Company will receive $5.9 million after payment to all creditors. The Agreement will allow the Company to end all of its litigation, including the State’s action for costs against the Company arising from the inverse condemnation trial on Lease 224-A, and will provide it the capital to move forward with drilling opportunities in other locations. The Agreement is conditioned upon approval of funding by the State, and the Company and other parties to the Agreement providing certain documents to the State as outlined above in Item 1(a) General Development of Business. Since the finalization of the Agreement has not yet occurred and is contingent, the following descriptions remain applicable until such finalization does occur.

Florida Litigation

Coastal Petroleum has been involved in various lawsuits for many years. Coastal Petroleum’s recent litigation has involved one basic claim: whether the State’s offshore drilling policy and its denial of a permit constitute a taking of Coastal Petroleum’s property. In addition, Coastal Caribbean is a party to another action in which Coastal Caribbean claims that certain of its royalty interests have been confiscated by the State.

Drilling Permit Litigation - Lease Taking Case (Lease 224-A)

Since 1992, Coastal Petroleum has sought a permit from the Florida Department of Environmental Protection (the “DEP”) to drill an exploratory oil and gas well off Apalachicola, Florida. The permit has been repeatedly denied leaving Coastal without a permit and the alternative of seeking compensation for the taking of its lease.

During the past year, Coastal Petroleum continued its legal battle in an attempt to obtain compensation for the taking of its lease. Previously, the trial court ruled that the State’s denial of a permit to drill on Lease 224-A did not constitute an unlawful taking of Coastal Petroleum’s property and that decision was affirmed by the Florida First District Court of Appeal. On April 8, 2004, Coastal Petroleum filed a Petition for Writ of Certiorari with the United States Supreme Court asking the Court to accept jurisdiction to consider the action taken by the trial court as affirmed by the appellate court. The State’s Answer Brief and Coastal’s subsequent Reply Brief were filed by May 21, 2004. On June 14, 2004, the United States Supreme Court denied the Writ of Certiorari, leaving no further avenue of appeal for this claim.

Meanwhile, after the trial in 2002, the State filed a motion for an order by the trial court by which the State seeks to recover $178,315 from Coastal Petroleum, including expert witness fees, deposition costs and copying costs. Coastal Petroleum has filed objections and responses to the State’s motion, objecting to the costs and requesting an evidentiary hearing. On April 9, 2003, the State agreed not to pursue its motion until after conclusion of the appeal in this case and the motion has not been set for hearing. Under the Agreement with the State, this claim would be dismissed.

Ancillary Matters to Lease Taking Case (Lease 224-A)

In 2001, certain holders of royalties, which aggregate approximately 4%, were allowed to intervene on a limi


(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, 2004

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to


BERMUDA		NONE

State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)



	Clarendon House
	Church Street
	Hamilton, Bermuda	HM 11

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code		(850) 421-2024


Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered

NONE


	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

*	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.


	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