UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
Commission file number 0-6541
DISCOVERY OIL, LTD.
(Exact name of registrant as specified in its charter)
DELAWARE
83-0207909
(State or other jurisdiction of
(IRS Employer Identification Number)
incorporation or organization)
6127 Ramirez Canyon Road
Malibu, CA
(Address of principal executive offices)
90265
(Zip Code)
(310) 457-1967
(Registrant’s Telephone Number, Including Area Code)
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.
Yes
X
No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 11, 2002:
20,245,923
TABLE OF CONTENTS
PART I
PAGE
ITEM 1.
Statements of Financial Position as of September 30, 2002
and December 31, 2001
3
Statements of Operations For the Three and Nine Month
Periods Ended September 30, 2002 and 2001
4
Statements of Cash Flows For the Nine Month Periods
Ended September 30, 2002 and 2001
5
Notes to Financial Statements
6
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
7
ITEM 3.
Controls and Procedures
9
PART II
ITEM 1.
Legal Proceedings
10
ITEM 2.
Changes in Securities
10
ITEM 3.
Defaults Upon Senior Securities
10
ITEM 4.
Submission of Matters to a Vote of Security Holders
10
ITEM 5.
Other Information
10
ITEM 6.
Exhibits and Reports on Form 8-K
10
Signatures
11
Certifications
attached
Statements of Financial Position as of
Discovery Oil, LTD. September 30, 2002 and December 31, 2001
PART I.
ITEM 1.
FINANCIAL STATEMENTS
ASSETS
(Unaudited)
September 30,
December 31,
2002
2001
CURRENT ASSETS:
Cash
$
1,931
$
3,058
Accounts receivable
16,700
1,274
Total assets
$
18,631
$
4,332
LIABILITES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable
$
16,231
$
10,819
Related party payable
134
Total current liabilities
16,231
10,953
STOCKHOLDERS’ EQUITY (DEFICIT):
Preferred stock; $1.00 par value; 5,000,000 shares
authorized; none issued and outstanding
Common stock; $0.001 par value; 200,000,000
shares authorized; 20,039,971 shares issued
and outstanding as of December 31, 2001
and 20,245,923 shares issued and outstanding
as of September 30, 2002
20,247
20,041
Additional paid-in capital
607,575
563,961
Accumulated equity (deficit)
(625,422)
(590,623)
Total stockholders’ equity (deficit)
2,400
(6,621)
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT)
$
18,631
$
4,332
The accompanying notes are an integral part of these financial statements.
Discovery Oil, LTD. Statements of Operations for the Three and Nine
(Unaudited) Month Periods Ended September 30, 2002 and 2001
September 30, 2002
September 30, 2001
Three
Nine
Three
Nine
Months
Months
Months
Months
REVENUES:
Sales of oil
$
12,719
$
24,208
$
10,611
$
29,348
OPERATING EXPENSES:
Direct costs of production
11,589
17,679
3,817
10,643
General and administrative expenses
7,951
42,199
37,439
56,772
Total operating expenses
19,540
59,878
41,256
67,415
OTHER EXPENSES:
Interest expense
3,687
14,322
Total other expenses
3,687
14,322
NET LOSS
$
6,821
$
35,670
$
34,332
$
52,389
NET LOSS PER SHARE-BASIC
$
Nil
$
Nil
$
Nil
$
Nil
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING–BASIC
20,245,923
20,138,370
15,297,173
11,329,878
The accompanying notes are an integral part of these financial statements.
Discovery Oil, LTD. Statements of Cash Flows for the Nine Month
(Unaudited)
Periods Ended September 30, 2002 and 2001
Nine Months Ended
September 30,
2002
2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(34,799)
$
(52,389)
Adjustments to reconcile net loss to net cash
used by operating activities:
Issuance of common stock for services
20,400
Change in:
Accounts payable
5,412
4,631
Account receivable
(15,426)
(2,984)
Interest payable
(28,266)
Net cash flows used in operating activities
(44,813)
(58,608)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on related party payable
(134)
(14,992)
Proceeds from convertible notes payable
77,000
Proceeds from issuance of common stock
43,820
Net cash flows provided by financing activities
43,686
62,008
NET INCREASE (DECREASE) IN CASH
(1,127)
3,400
CASH AT BEGINNING OF PERIOD
3,058
0
CASH AT END OF PERIOD
$
1,931
$
3,400
SUPPLEMENTAL DISCLOSURE OF
CASH FLOWS INFORMATION:
Cash paid during the year for interest
$
42,588
NON-CASH INVESTING AND FINANCING
TRANSACTIONS:
Conversion of shareholder debt to additional
paid-in capital
$
215,516
Conversion of shareholder debt to common stock
279,986
$
495,502
The accompanying notes are an integral part of these financial statements.
DISCOVERY OIL, LTD.
Notes to Financial Statements
(Unaudited)
1.
Basis of Presentation:
The financial statements of Discovery Oil, LTD. included herein, have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Although certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America has been condensed or omitted, Discovery Oil, LTD. believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended December 31, 2001 included in Discovery Oils, LTD.’s annual report on Form 10-KSB.
The financial statements included herein reflect all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation. The results for interim periods are not necessarily indicative of trends or of results to be expected for the full year ending December 31, 2002.
Included in the Company’s production expenses as presented are all direct expenses of oil production, including severance taxes and royalties, not included in production expenses are depreciation, depletion, and amortization (“DD&A”) expenses and corporate administration expenses. All information is presented on the accrual basis of accounting.
2.
Commitments and Contingencies:
In connection with its 12.5% non-operating working interest in six oil wells, the Company entered into an operating agreement with the majority owner and operator of the wells. The agreement, modeled after agreements standard and customary to the oil industry, commits the Company to pay its share of joint interest operating costs incurred in the operation, maintenance, and potential future development of the wells. Oil prices are extremely volatile and instances may occur where the Company’s revenues from oil sales are less than its corresponding production expenses. In addition, oil well repair and maintenance activities may interrupt oil sale revenue and add to overall operation costs.
Domestic oil operations are also subject to extensive federal regulation and potential interruption or termination by governmental authorities on account of environmental and other regulatory considerations. The recent trend towards stricter standards in environmental legislation and regulation may continue, and this could increase the overall costs to the Company.
3.
Related Party Transactions
During the first nine months of 2002, the Company paid or accrued $40,014 to Andrew V. Ippolito, the Company’s president, a director and major shareholder, for management services provided by him and to reimburse him for travel and other expenses incurred on the Company’s behalf.
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
General
Discovery Oil, Ltd. (the “Company”, “Registrant”, or “Discovery Oil”), was originally organized under the laws of the State of Wyoming in 1964. The Company became a Delaware corporation through a merger with a wholly owned subsidiary in 1981. Prior to 1992, the Company was involved as a general partner in several limited partnerships for the purpose of drilling oil and gas wells in Ohio, Wyoming, Colorado, Kansas, and Texas. In 1988 the Company filed a petition in Bankruptcy pursuant to Chapter 11 of the Bankruptcy code in the United States Bankruptcy Court. On July 10, 1996, the Court entered its order and Final Decree, confirming the execution of the Company’s reorganization plan and concluding all proceedings and jurisdiction of the bankruptcy.
The Company has a non-operating working interest in six producing oil wells having proved reserves. The working interest grants the Company a 12.5% working interest, or a 9.32% net revenue interest after underlying royalty payments, in the oil produced and marketed from each well. The oil wells are near the city of Signal Hill, California; the Company maintains an office in Malibu, California.
The financial statements are presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. The Company has incurred operating losses for several years and has a stockholders’ deficit. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s financial statements for the year ended December 31, 2001, were audited by the Company’s independent certified public accountants, whose report includes an explanatory paragraph stating that the financial statements have been prepared assuming the Company will continue as a going concern and that the Company has incurred operating losses since its in ception that raise substantial doubt about its ability to continue as a going concern.
This report contains both historical and prospective statements concerning the Company and its operations. Prospective statements (known as "forward-looking statements") may or may not prove true with the passage of time because of future risks and uncertainties. The Company cannot predict what factors might cause actual results to differ materially from those indicated by prospective statements.
Results of Operations
For the three month period ended September 30, 2002 compared to the three month period ended September 30, 2001.
During the three month period ended September 30, 2002, the Company had a net loss of $6,821 compared to a net loss of $34,332 during the compatible period in the previous year. The decrease in the net loss from 2001 to 2002 was primarily due to decreases in general and administrative expenses and interest expense.
Results of Operations (continued)
During the three month period ended September 30, 2002, the company generated $12,719 from the sale of 514 barrels (the Company’s net revenue interest share) of oil at an average sales price of approximately $25 per barrel. During the three month period ended September 30, 2001, the Company generated $10,611 from the sale of 495 barrels of oil at an average sales price of approximately $22 per barrel. Direct oil production costs were $11,589 during the third quarter of 2002, or approximately $24 per barrel sold, compared to $3,817 or approximately $8 per barrel sold during the third quarter of 2001. The increase in production expense from 2001 to 2002 is primarily due to an update of oil production equipment incurred in 2002 that was not incurred in 2001.
General and administrative expenses decreased from $37,439 in the third quarter of 2001 to $7,951 in the third quarter of 2002. The decrease was primarily due to a reduction in accounting and auditing fees and interest expense during the third quarter of 2002. There was no interest expense for the third quarter of 2002 because all interest bearing related party advances and convertible promissory notes had been converted to common stock during the second and third quarters of 2001.
For the nine month period ended September 30, 2002 compared to the nine month period ended September 30, 2001
For the nine months ended September 30, 2002, the Company had a net loss of $35,670 compared to a net loss of $52,389 during the comparable period in the previous year. The decrease in net loss from 2001 to 2002 was primarily due to decreased general and administrative and interest expense.
During the nine month period ended September 30, 2002, the Company generated $24,208 from the sale of 1,502 barrels (the Company's net revenue interest share) of oil at an average sales price of approximately $22 per barrel. During the nine month period ended September 30, 2001, the Company generated $29,348 from the sale of 1,338 barrels of oil at an average sales price of approximately $22 per barrel. Oil production expenses were $17,679 during the first nine months of 2002, or approximately $12 per barrel sold, compared to $10,643 or approximately $8 per barrel sold during the first nine months of 2001.
General and administrative expenses decreased from $56,772 in the first nine months of 2001 to $42,199 in the first nine months of 2002. The decrease was due to decreased accounting and administrative expense and no interest expense in 2002.
[The balance of this page intentionally left blank]
Financial Condition and Liquidity
During the nine month period ended September 30, 2002, the Company used $44,813 of cash in its operating activities. During the second quarter of 2002, the Company sold 205,952 shares of its restricted common stock to various foreign purchasers for $48,969 The sale was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 as amended. In connection with the sale, the Company incurred costs of $5,149 payable to an Australian consulting firm. Management plans to fund future short-term operating needs through profits from its oil producing properties, advances from related party shareholders and additional restricted common stock sales, although there can be no assurances that these resources will be sufficient to fund the Company’s operations.
The Company’s management hopes to negotiate a business combination with an entity in the oil or oil related industries which desires the perceived advantages of an Exchange Act registered corporation. While management intends to diligently pursue this strategy, there are no assurances, however, that they will be successful in their plans.
ITEM 3.
CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed within 90 days of the filing of this Form 10-QSB, the Company's president believes the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes in the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses.
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PART II.
ITEM 1.
LEGAL PROCEEDINGS
NONE
ITEM 2.
CHANGES IN SECURITIES
NONE
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5.
OTHER INFORMATION
NONE
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
NONE
SIGNATURES
&nb sp;
Pursuant to the requirements of Section 13 or 15(b) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Discovery Oil, LTD
(Registrant)
By: /s/ Andrew V. Ippolito_____________
November 13, 2002
Andrew V. Ippolito
Date
President and Director
