UNITED STATES
SECURITY AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period _______to_______
Commission File Number: 0-6541
DISCOVERY OIL, LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 83-0207909
(State of Incorporation or Organization) (IRS Employer ID Number)
6127 RAMIREZ CANYON ROAD, MALIBU, CA 90265
(Address of Principal Executive Offices)
(310) 457-1967
(Registrant's Telephone Number)
Securities Registered Under Section 12 (b) of the Act:
NONE
(Title of Class)
Securities Registered Under Section 12 (g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(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 in response to
Item 405 of Regulation S-K 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 or any amendment to this Form
10-KSB. [X]
As of April 5, 2002, the Registrant had 20,039,971 shares of common stock
outstanding with a par value of $0.001. The aggregate market value of the
Registrant's common stock held by non-affiliates as of April 5, 2002 was
$1,680,493. The Registrant's revenues for the most recent fiscal year were
$37,442.
The Company qualifies under Regulation SB as a "small business issuer",
(i.e. less than $25,000,000 in revenues; a U.S. company other than an investment
company) and has met the small business issuer requirements at the end of the
past two consecutive fiscal years. The Company is entering the Regulation SB
disclosure system by filing its annual report with the Commission on this Form
10-KSB.
<page>
TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business 1
Item 2. Description of Properties 2
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 7. Financial Statements 9
Item 8. Changes in and Disagreements with Accountants 22
PART III
Item 9. Directors and Executive Officers of the Registrant 22
Item 10. Executive Compensation 22
Item 11. Security Ownership of Certain Beneficial Owners and Management 22
Item 12. Certain Relationships and Related Transactions 23
Item 13. Exhibits and Reports on Form 8-K 23
Signatures 24
<page>
PART I
EXPLANATORY NOTE: As used in this report; the terms "we", "us", and "our" are
sometimes used to refer to Discovery Oil, Ltd. and, as the context requires, its
management.
ITEM 1. DESCRIPTION OF BUSINESS
SAFE HARBOR STATEMENT
This Form 10-KSB contains forward-looking statements. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events, or performances and underlying assumptions that are not statements of
historical facts. This document and any other written or oral statements
made by us or on our behalf may include forward-looking statements, which
reflect our current views with respect to future events and financial
performance. The words "believe", "expect", "anticipate", "intends",
"estimates", "forecast", "project", and similar expressions identify
forward-looking statements.
The forward-looking statements in this document are based upon various
assumptions; many of which are based on management's discussion and analysis or
plan of operations and elsewhere in this report. Although we believe that these
assumptions were reasonable when made, other statements are not guarantees of
future performance and are subject to certain risks and uncertainties, some of
which are beyond our control and are difficult to predict. Actual results could
differ materially from those expressed in forward-looking statements. Readers
are cautioned not to place undue reliance on any forward-looking statements,
which reflect management's view only as of the date of this report.
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 a
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.
EMPLOYEES
The Company has no paid employees. Neither of the Company's executive officers
are employed by the Company. Management services are provided on an "as needed"
basis without compensation. The Company has no oral or written contracts for
services with any member of management.
<page>
RISK FACTORS
The Company's business is subject to numerous risk factors, including the
following:
Independent Certified Public Accountants' Opinion - 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 inception that raise substantial
doubt about its ability to continue as a going concern.
The Company must expand its operations
- -------------------------------------------
The Company's long-term success is ultimately dependent on its ability to expand
its revenue base through the acquisition of producing properties or negotiating
a business combination with a profitable business entity. There is no assurance
that the Company will be successful in its plans to expand its operations.
Limited financial resources
- -----------------------------
The Company has limited financial resources and, if the business is not
profitable, may not be able to raise sufficient funds to sustain, continue or
expand its business. The Company currently has limited revenues and relies
principally on the issuance of common stock to raise funds to finance the
business of the Company. There is no assurance that market conditions will
continue to permit the Company to raise funds if required.
Prices of oil and natural gas fluctuate widely based on market conditions
- --------------------------------------------------------------------------------
The Company's revenues, operating results, cash flow and future rate of growth
are very dependent upon prevailing prices for oil and gas. Historically, oil
and gas prices and markets have been volatile and not predictable, and they are
likely to continue to be volatile in the future. Prices for oil and gas are
subject to wide fluctuations in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of
additional factors that are beyond our control, including:
- - political conditions in oil producing and exporting countries;
- - the supply and price of foreign oil and gas;
- - the level of consumer product demand;
- - the price and availability of alternative fuels; and
- - the effect of federal and state regulation on production and
transportation
The Company must replace the reserves it produces
- --------------------------------------------------------
A substantial portion of the Company's oil and gas properties contain proved
developed reserves. Successful development and production of those reserves
cannot be assured. There is no assurance that the Company's present oil and gas
wells will continue to produce at current or anticipated rates of production,
that development drilling will be successful, that production of oil and gas
will commence when expected, that there will be favorable markets for oil and
gas which may be produced in the future or that production rates achieved in
early periods can be maintained.
<page>
The Company faces intense competition
- -----------------------------------------
The oil and natural gas industry is highly competitive. The Company competes
with others for property acquisitions and for opportunities to explore or to
develop and produce oil and natural gas. The Company faces strong competition
from many companies and individuals with greater capital, financial resources
and larger technical staffs.
Company reserves are uncertain
- ---------------------------------
Estimating Company proved reserves involves many uncertainties, including
factors beyond the Company's control. There are uncertainties inherent in
estimating quantities of proved oil and natural gas reserves since petroleum
engineering is not an exact science. Estimates of commercially recoverable oil
and gas reserves and of the future net cash flows from them are based upon a
number of variable factors and assumptions including:
- - historical production from the properties compared with production
from other producing properties;
- - the effects of regulation by governmental agencies;
- - future oil and gas prices; and
- - future operating costs, severance and excise taxes, abandonment costs,
development costs and workover and remedial costs.
Governmental regulation, environmental risks and taxes could adversely affect
- --------------------------------------------------------------------------------
the Company's operations
- --------------------------
The Company's oil and natural gas operations are subject to regulation by
federal and state governments, including environmental laws. To date, the
Company has not had to expend significant resources in order to satisfy
environmental laws and regulations presently in effect. However, compliance
costs under any new laws and regulations that might be enacted could adversely
affect the Company's business and increase the costs of planning, designing,
drilling, installing, operating and abandoning the Company's oil and gas wells.
Additional matters that are, or have been from time to time, subject to
governmental regulation include land tenure, royalties, production rates,
spacing, completion procedures, water injections, utilization, the maximum price
at which products could be sold, energy taxes and the discharge of materials
into the environment.
Environmental risks
- --------------------
The Company is subject to laws and regulations that control the discharge of
materials into the environment, require removal and cleanup in certain
circumstances, require the proper handling and disposal of waste materials or
otherwise relate to the protection of the environment. In operating and owning
petroleum interests, the Company may be liable for damages and the costs of
removing hydrocarbon spills for which it is held responsible. Laws relating to
the protection of the environment have in many jurisdictions become more
stringent in recent years and may, in certain circumstances, impose strict
liability, rendering the Company liable for environmental damage without regard
to negligence or fault on the part of the Company. Such laws and regulations may
expose the Company to liability for the conduct of, or conditions caused by,
others or for acts of the Company that were in compliance with all applicable
laws at the time such acts were performed. The application of these requirements
<page>
or the adoption of new requirements could have a material adverse effect on the
business of the Company. The Company believes that it has conducted its business
in substantial compliance with all applicable environmental laws and
regulations.
ITEM 2. DESCRIPTION OF PROPERTIES
Oil and gas interests
- ------------------------
In April of 1984, the Company purchased a non-operating working interest in six
producing oil wells near the city of Signal Hill, California. 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 and gas produced and sold
from each well.
Geologic definition or description of properties
- -----------------------------------------------------
The Company's working interest is in six producing oil wells having proved
reserves contained on approximately 21 acres located in the Long Beach Oil Field
near the city of Signal Hill, California. The wells are "stripper wells"
(producing less than 15 barrels per day), and derive their production from
Pliocene and Miocene sands.
Drilling activities
- --------------------
The Company does not participate in any drilling activities or farmout
agreements. Under a farmout agreement, outside parties undertake exploration
activities using prospects owned by the Company. This would enable the Company
to participate in exploration prospects without incurring additional capital
costs, although with a substantially reduced ownership interest in each
prospect. During the year ended December 31, 2001, no wells were drilled under
farmout agreements.
Oil and gas production, prices and costs
- ----------------------------------------------
As of December 31, 2001, the Company had a 12.5% non-operating working interest
in six wells that produce oil, only.
For information concerning the Company's oil and gas production, estimated oil
and gas reserves, and estimated future cash inflows relating to proved oil and
gas reserves, see Notes 2 and 9 to the financial statements included in Item 7
of this report. The reserve estimates for the reporting year were prepared by an
Independent Exploration Company, the operator of the wells and the majority
owner of the wells. Estimates, provided by Independent Exploration Company, are
based on historic production data and the analyses of their technical staff.
The Company did not file any oil and gas reserve estimates with any federal
authority or agency during its fiscal year ended December 31, 2001.
Customers
- ---------
During fiscal year 2001, the Company had one major customer. The Company does
not believe that it is dependent on a single customer. The Company has the
option to change customers if conditions so warrant.
<page>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special shareholders' meeting was held on August 10, 2001. At the meeting a
majority of the common shares (11,877,625 out of the total issued and
outstanding of 19,312,702) were present to vote at the meeting and unanimously
passed three proposals:
- - Proposal 1: To increase the total authorized common stock from
twenty-five million shares to two hundred million shares, and to decrease the
par value of the common stock from $0.01 to $0.001 per share by an amendment to
the Articles of Incorporation.
- - Proposal 2. To further amend the Articles of Incorporation to eliminate
the provision authorizing preferred shares.
- - Proposal 3: To authorize the Board of Directors to insure additional
shares of common stock pursuant to Rule 506 and Section 4(2) to accredited
investors to raise funds in the amount of $100,000 as needed.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of high and low bid prices as reported
by the Over-the-Counter Bulletin Board (OTCBB) for the periods indicated. The
quotations reflect inter-dealer prices without retail mark-up, markdown, or
commission, and may not necessarily represent actual transactions. Currently
the stock is traded on the OTCBB under the symbol "DSCY".
YEAR ENDED DECEMBER 31, 2000
- --------------------------------
HIGH LOW
---------- ----------
Quarter ended 3-31-00 No trades No trades
Quarter ended 6-30-00 No trades No trades
Quarter ended 9-30-00 No trades No trades
Quarter ended 12-31-00 No trades No trades
YEAR ENDED DECEMBER 31, 2001
- --------------------------------
HIGH LOW
---------- ----------
Quarter ended 3-31-01 No trades No trades
Quarter ended 6-30-01 No trades No trades
Quarter ended 9-30-01 $ 0.42 $ 0.01
Quarter ended 12-31-01 $ 0.35 $ 0.11
Holders. The number of stockholders of record on April 5, 2002 was 5,860.
Dividends. No dividends have been paid or declared during the last five years;
and the registrant does not anticipate paying dividends on its common stock in
the foreseeable future.
<page>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis is intended to be read in conjunction with
the Company's audited financial statements and notes thereto. The following
statements may be forward-looking in nature and actual results may differ
materially.
RESULTS OF OPERATIONS
For the year ended December 31, 2001, compared to the year ended December 31,
2000
The Company reported a net loss of $60,762 for the year ended December 31, 2001,
compared to a net loss of $15,496 reported for the year ended December 31, 2000.
The increase in the net loss during 2001 was primarily due to increased general
and administrative expenses and lower prices received from oil sales.
Oil sales for the year ended December 31, 2001, were $37,442, and were generated
from sales of 1,907 barrels of oil at an average sales price of $19.63 per
barrel. During 2000, the Company had sales of $42,427 generated from sales of
1,714 barrels of oil at an average sale price of $24.75 per barrel.
Direct oil production expenses during the year ended December 31, 2001, were
$14,883, compared to $18,717 for the year ended December 31, 2000.
General and administrative expenses of $69,000 were incurred during 2001,
compared to $19,709 during the year ended December 31, 2000. The increase in
general and administrative expenses during 2001 related primarily to costs
incurred in connection with the Company's audit of its financial statements,
filings with the Securities and Exchange Commission, and listing its common
stock on the Over-the-Counter Bulletin Board.
Interest expense decreased from $19,497 during the year ended December 31, 2000
to $14,321 for the year ended December 31, 2001. The decrease was due to a
corresponding decrease in a related party payable during 2001.
FINANCIAL CONDITION AND LIQUIDITY
Total assets at December 31, 2001, were $4,332, stockholders' deficit was $6,621
and the accumulated deficit was $590,623. Net cash used by operations was
$58,949 during the year ended December 31, 2001, and $77,000 of cash was
provided by convertible promissory notes sold during 2001.
The Company's liabilities decreased substantially from $441,361 as of December
31, 2000, to $10,953 as of December 31, 2001, due to the conversions of a
related party payable, convertible promissory notes and accrued interest to
common stock. As of December 31, 2001 the company had a negative working
capital of $6,621. The Company's working interest in its oil properties has
been depleted to zero.
The Company plans to fund its operations during fiscal year 2002, through
advances from related parties and net revenues from oil sales. Management
believes that additional funding may also be available through sales of the
Company's common stock, although there can be no assurance the Company will be
successful in selling its common stock.
<page>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Discovery Oil, LTD.
We have audited the accompanying balance sheet of Discovery Oil, LTD. ("the
Company") as of December 31, 2001, and the related statements of operations,
stockholders' deficit, and cash flows for the year then ended. 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 audit. The financial statements of Discovery Oil, LTD. as of December 31,
2000, were audited by other auditors whose report dated March 5, 2001, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Discovery Oil, LTD. as of
December 31, 2001, and the results of its operations and its cash flows for the
year then ended, in conformity with auditing standards generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's operating losses raise substantial doubt
about its ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
DeCoria, Maichel & Teague P.S.
/s/ DeCoria, Maichel & Teague P.S.
Spokane, Washington
March 22, 2002
<page>
DISCOVERY OIL, LTD.
TABLE OF CONTENTS
Page
Balance Sheets, December 31, 2001 and 2000 F-3
Statements of Operations for the years ended December 31, 2001 and 2000 F-4
Statements of Changes in Stockholders' Deficit
for the years ended December 31, 2001 and 2000 F-5
Statements of Cash Flows for the years ended December 31, 2001 and 2000 F-6
Notes to Financial Statements F-7-F-16
DISCOVERY OIL, LTD.
BALANCE SHEETS
December 31, 2001 and 2000
2001 2000
-------------- --------------
ASSETS
Current assets:
Cash $ 3,058 $ 0
Accounts receivable 1,274
-------------- --------------
Total assets $ 4,332 $ 0
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 10,819
Related party payable 134 $ 172,457
Interest payable to related party 268,904
-------------- --------------
Total liabilities 10,953 441,361
-------------- --------------
Commitments and Contingencies
Stockholders' deficit:
Common stock, $0.001 and $0.01 par value;
200,000,000 and 25,000,000 shares
authorized; 20,039,971 and 9,313,352
shares issued and outstanding 20,041 93,134
Common stock discount (4,634)
Additional paid-in capital 563,961
Accumulated deficit (590,623) (529,861)
-------------- --------------
Total stockholders' deficit (6,621) (441,361)
-------------- --------------
Total liabilities and stockholders' deficit $ 4,332 $ 0
============== ==============
The accompanying notes are an integral part of the financial statements.
<page>
DISCOVERY OIL, LTD.
STATEMENTS OF OPERATIONS
For the years ended December 31, 2001 and 2000
2001 2000
-------------- --------------
Revenues:
Sales of oil 37,442 42,427
-------------- --------------
Operating expenses:
Direct costs of production 14,883 18,717
General and administrative expenses 69,000 19,709
-------------- --------------
83,883 38,426
-------------- --------------
Other expenses:
Interest expense 14,321 19,497
-------------- --------------
14,321 19,497
-------------- --------------
Net loss $ (60,762) $ (15,496)
============== ==============
Net loss per share-basic $ Nil $ Nil
============== ==============
Weighted-average shares outstanding-basic 13,525,298 9,313,352
============== ==============
The accompanying notes are an integral part of the financial statements.
<page>
DISCOVERY OIL, LTD.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the years ended December 31, 2001 and 2000
<table>
COMMON STOCK ADDITIONAL DISCOUNT ON
---------------------- PAID-IN COMMON ACCUMULATED
SHARES AMOUNT CAPITAL STOCK DEFICIT TOTALS
---------- ---------- ---------- ---------- ---------- ----------
<s> <c> <c> <c> <c> <c> <c>
Balance,
Dec. 31, 1999 9,313,352 $ 93,134 $ - $ (4,634) $ (514,365) $ (425,865)
Net loss (15,496) (15,496)
---------- ---------- ---------- ---------- ---------- ----------
Balance,
Dec. 31, 2000 9,313,352 93,134 - (4,634) (529,861) (441,361)
Issuance of
common stock for
related party
payable and
accrued interest 8,979,350 89,793 305,310 395,103
Issuance of
common stock
for consulting
services 1,020,000 10,200 10,200 20,400
Issuance of
common stock
for convertible
promissory notes
and accrued
interest 727,269 7,273 72,726 79,999
Adjustment to
common stock
par value (180,359) 175,725 4,634 -
Net loss (60,762) (60,762)
---------- ---------- ---------- ---------- ---------- ----------
Balance,
Dec. 31, 2001 20,039,971 $ 20,041 $ 563,961 $ - $ (590,623) $ (6,621)
========== ========== ========== ========== ========== ==========
</table>
The accompanying notes are an integral part of the financial statements.
<page>
DISCOVERY OIL, LTD.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001 and 2000
2001 2000
-------------- --------------
Cash flows from operating activities:
Net loss $ (60,762) $ (15,496)
Adjustments to reconcile net loss to
net cash used by operating activities:
Common stock issued for consulting
services 20,400
Change in:
Accounts receivable (1,274)
Accounts payable 10,819
Interest payable to related party (28,266) 19,497
Related party payable 134
-------------- --------------
Net cash provided (used) by operating
activities (58,949) 4,001
-------------- --------------
Cash flows from financing activities:
Proceeds from related party payable 2,007
Proceeds from convertible promissory notes 77,000
Payments on related party payable (17,000) (4,898)
-------------- --------------
Net cash provided (used) by financing
activities 62,007 (4,898)
-------------- --------------
Net change in cash 3,058 (897)
Cash, beginning of year 0 897
-------------- --------------
Cash, end of year $ 3,058 $ 0
============== ==============
Supplemental cash flows disclosure:
Cash paid for related party interest $ 42,588
=============
Non-cash financing activities:
Conversion of related party payable,
convertible promissory notes and
accrued interest into common stock $ 475,102
=============
The accompanying notes are an integral part of the financial statements.
<page>
DISCOVERY OIL, LTD.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. DESCRIPTION OF BUSINESS
Discovery Oil, Ltd. ("the Company"), originally organized under the laws of the
State of Wyoming in 1964, 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 a 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. Currently, the Company has a 12.5% non-operating working interest
in six small oil wells near the city of Signal Hill, California, and 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.
Management's plans for the continuation of the Company as a going concern
include financing the Company's operations through related party advances and
locating an entity that wishes to engage in a business combination with the
Company. There are no assurances, however, with respect to the future success
of these plans. The financial statements do not contain any adjustments, which
might be necessary, if the Company is unable to continue as a going concern.
Unless otherwise indicated, amounts provided in these notes to the financial
statements pertain to continuing operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
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.
Cash and cash equivalents
For the purpose of the balance sheet and the statement of cash flows, the
Company considers all highly liquid investments purchased, with an original
maturity of three months or less, to be cash equivalents.
Use of estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
<page>
DISCOVERY OIL, LTD.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Income taxes
Income taxes are recognized in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," whereby deferred income tax
liabilities or assets at the end of each period are determined using the tax
rate expected to be in effect when the taxes are actually paid or recovered. A
valuation allowance is recognized on deferred tax assets when it is more likely
than not that some or all of these deferred tax assets will not be realized.
Net loss per share
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
requires dual presentation of basic earnings per share ("EPS") and diluted EPS
on the face of all income statements, for all entities with complex capital
structures. Basic EPS is computed as net loss divided by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur from common shares issuable through stock
options, warrants, and other convertible securities. At December 31, 2001 and
2000, the Company had no outstanding stock options, warrants, or other
convertible securities, accordingly, only basic EPS is presented.
Fair values of financial instruments
The carrying amounts of financial instruments including cash, accounts
receivable, and accounts payable, approximated their fair values as of December
31, 2001 and 2000. The carrying values of related party payable and accrued
interest payable approximated their fair values based upon management's
assessment of the fair values of comparable instruments as of December 31, 2001
and 2000.
Segment information
During the years ended December 31, 2001 and 2000, all of the Company's revenues
came from sales of oil to a single customer.
Reclassifications
Certain reclassifications of prior year balances have been made to conform to
the current year presentation. These reclassifications have no affect on total
assets or stockholders' deficit as reported.
Oil properties
The Company's oil properties consist of 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.
Unless otherwise indicated, quantitative information contained herein regarding
the Company's oil properties and the production therefrom relates to the working
interest. All of the Company's oil properties are in the United States.
<page>
DISCOVERY OIL, LTD.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Oil properties, Continued
The Company follows the successful efforts method of accounting for its oil and
gas operations. Under this method of accounting, all property acquisition costs
and costs of exploratory and development wells are capitalized when incurred,
pending determination of whether an individual well has found proved reserves.
If it is determined that an exploratory well has not found proved reserves, the
costs of drilling the well are expensed. The costs of development wells are
capitalized whether productive or nonproductive. The Company amortizes
capitalized costs on the units-of-production method based on production and
total estimated proved reserves.
New accounting pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," collectively, the Statements. These
Statements drastically change the accounting for business combinations, goodwill
and intangible assets. Companies are required to adopt Statement 142 in their
fiscal year beginning after December 15, 2001. The Company anticipates that the
adoption of these Statements will not have a material affect on its financial
statements.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations," which provides accounting requirements for retirement
obligations associated with tangible long-lived assets. The Company anticipates
that the adoption of this statement will not have a material affect on its
financial statements.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which will be effective for
financial statements issued for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years. SFAS No. 144 requires that
long-lived assets to be disposed of by sale be measured at the lower of the
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. The Company anticipates that the
adoption of this statement will not have a material affect on its financial
statements.
3. INCOME TAXES
The Company recorded no income tax provision for the years ended December 31,
2001 and 2000, as during those years net losses were incurred. During 2001, the
Company's prior years' tax-basis net operating losses substantially expired
pursuant to the provisions of Internal Revenue Code Section 382, and upon the
Company's issuance of additional shares of its common stock (See Note 7).
Accordingly, any deferred tax asset associated with prior years' net operating
losses is not recognized in the Company's financial statements.
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DISCOVERY OIL, LTD.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. CONVERTIBLE PROMISSORY NOTES
During 2001, the Company sold $77,000 of its convertible promissory notes to
certain accredited individual investors. The principal balances of the notes
were due one year from the date of issue and included accrued interest at 9% per
annum. The holders of the notes had rights to convert the notes into
unregistered shares of the Company's common stock at a rate of $0.11 per share.
In August of 2001, all of the note holders exercised their conversion rights and
converted $79,999 of convertible promissory note principal and accrued interest
into 727,269 shares of the Company's unregistered common stock.
5. RELATED PARTY PAYABLE
In August of 1987, the Company's board of directors entered into an agreement
with Andrew V. Ippolito, president and a director, whereby Mr. Ippolito's
advances, accommodations and expenses paid on the Company's behalf would accrue
interest equal to the prime rate plus two percent in effect at the time of the
advances. At December 31, 2000, the related party payable was composed as
follows:
YEAR RATE AMOUNT
---- ------- ---------
1987 10.21% $ 16,224
1988 11.32% 146,233
1989 12.87% 10,000
---------
$ 172,457
=========
Accrued interest on Mr. Ippolito's payable was $268,904, at December 31, 2000.
In July of 2001, Mr. Ippolito agreed to convert the principal balance of the
payable due him along with a portion of the accrued interest, into unregistered
shares of the Company's common stock at a rate of $0.02 per share. Accordingly,
the Company issued 8,979,350 shares of its unregistered common stock to Mr.
Ippolito in exchange for the extinguishment of the account payable and accrued
interest due him. In connection with the transaction, Mr. Ippolito also agreed
to forgive the remaining balance of unconverted accrued interest. The Company
recorded the conversion and the forgiveness of unconverted interest in its
common stock and paid-in capital accounts according to the provisions of
Accounting Principles Board No. 26 and its guidance on extinguishment
transactions between related parties.
The schedule below summarizes the activity in the related party payable and
accrued interest accounts during 2001:
RELATED PARTY
PAYABLE ACCRUED INTEREST TOTAL
------------- ---------------- ------------
Balance, December 31, 2000 $ 172,457 $ 268,904 $ 441,361
------------- ---------------- ------------
Advances and accruals 2,141 11,323 13,464
Payments (17,000) (42,588) (59,588)
Conversion to common stock (157,464) (22,123) (179,581)
Forgiveness of accrued interest - (215,516) (215,516)
------------- ---------------- ------------
Total (172,323) (268,904) 441,221
------------- ---------------- ------------
Balance, December 31, 2001 $ 134 $ 0 $ 134
============= ================ ============
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DISCOVERY OIL, LTD.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. COMMITMENTS AND CONTINGENCIES
In connection with the purchase of the 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.
7. STOCKHOLDERS' DEFICIT
Common stock
The Company has one class of issued and outstanding common stock. Prior to 2001,
the par value of the common stock was $0.01, and 25 million shares were
authorized for issue. Pursuant to a majority shareholder action at a special
meeting of shareholders held in August of 2001, the Company's Certificate of
Incorporation was amended to increase the number of shares of common stock
authorized for issue to 200 million shares, to decrease the par value of the
Company's common stock to $0.001 per share, and to eliminate the provision
authorizing preferred stock of the Company.
Preferred stock
At December 31, 2000, the Company was authorized to issue 5,000,000 shares of
preferred stock with a par value of $1.00 per share, none of which had been
issued. The provision authorizing preferred stock was eliminated through an
amendment to the Company's Certificate of Incorporation during 2001 (see "Common
Stock").
Common stock discount
In prior years, the Company issued common stock at per-share amounts less than
the common stock's par value. As a result, at December 31, 2000, a common stock
discount of $4,643 was recorded in the Company's stockholders' deficit accounts.
The common stock discount was extinguished during 2001 when the Company reduced
the par value of its common stock and converted certain debts into common stock
equity.
Common stock issued for consulting services
During 2001, the Company issued an aggregate of 1,020,000 shares to three
consultants that had provided accounting and financial services to the Company.
In connection with the issuance, the Company recorded an expense of $20,400,
approximating the value of the services rendered.
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DISCOVERY OIL, LTD.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. STOCKHOLDERS' DEFICIT, CONTINUED:
Common stock issued for related party payable
In July of 2001, Andrew V. Ippolito, the Company's president and a director,
converted $157,464 due him together with accrued interest totaling $22,123, into
8,979,350 shares of the Company's unregistered common stock. The related party
payable and accrued interest were converted at $0.02 per share (See Note 5).
Convertible promissory notes converted to common stock
In August of 2001, the holders of outstanding convertible promissory notes
converted principal and accrued interest of $79,999 into 727,269 shares of the
Company's unregistered common stock at $0.11 per share (See Note 4).
8. RELATED PARTY TRANSACTIONS
The Company occupies office space provided by Andrew V. Ippolito, the Company's
president and a director. The Company pays no rent for the space it occupies
and the value of the space is not considered material for financial reporting
purposes. The Company reimburses Mr. Ippolito for various out-of-pocket and
general and administrative expenses inccured by him on the Company's behalf.
During 2001, the Company's reimbursements to Mr. Ippolito totaled approximately
$11,000.
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DISCOVERY OIL, LTD.
SUPPLEMENTAL INFORMATION
For the years ended December 31, 2001 and 2000 (Unaudited)
The following notes include unaudited supplemental financial information as
currently required by the Securities and Exchange Commission ("SEC") and the
Financial Accounting Standards Board.
9. ESTIMATED QUANTITIES OF OIL AND GAS RESERVES (UNAUDITED)
Proved reserves are the estimated quantities of crude oil, which upon analysis
of geological and engineering data appear with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves which can be
expected to be recovered through existing wells with existing equipment and
under existing operating conditions.
The estimation of reserves requires substantial judgment on the part of
petroleum engineers and may result in imprecise determinations, particularly
with respect to new discoveries. Accordingly, it is expected that the estimates
of reserves will change as future production and development information becomes
available and that revisions in these estimates could be significant.
The Company's proved reserves are contained on approximately 21 acres located in
the Long Beach Oil Fields near the city of Signal Hill, California.
Following is a reconciliation of the Company's estimated net quantities of
proved oil reserves, based upon net oil production after royalties to be
generated from the Company's working interest and as estimated by petroleum
consultants.
Barrels of Oil
----------------
Proved reserves, December 31, 1999 33,052
Oil production for the period ended December 31, 2000 (1,714)
---------
Proved reserves, December 31, 2000 31,338
---------
Oil production for the year ended December 31, 2001 (1,907)
---------
Proved reserves, December 31, 2001 29,431
=========
The Company's current properties have no remaining natural gas reserves.
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DISCOVERY OIL, LTD.
SUPPLEMENTAL INFORMATION, CONTINUED:
For the years ended December 31, 2001 and 2000 (Unaudited)
10. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and
Gas Producing Activities," prescribes guidelines for computing a standardized
measure of future net cash flow and changes therein relating to estimated proved
reserves. The Company has followed these guidelines, which are briefly discussed
in the following paragraphs.
Future cash inflows and future production and development costs are determined
by applying year-end oil prices and costs to the estimated quantities of oil to
be produced. Estimated future income taxes are computed using current statutory
income tax rates including consideration for estimated future depletion. The
resulting future net cash flows are reduced to present value amounts by applying
a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such, do not necessarily
reflect the Company's expectations of actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process, as discussed previously, are equally applicable to
the standardized measure computations since these estimates are the basis for
the valuation process.
The following summary sets forth the Company's future net cash flows relating to
proved oil and gas reserves based on the standardized measure prescribed in
Statement of Financial Accounting Standards No. 69:
2001 2000
-------------- ---------------
Future cash inflows $ 389,822 $ 470,072
Future production costs (374,919) (393,070)
Future income tax provision (5,067) (26,185)
-------------- ---------------
Future net cash flows 9,836 50,817
Effect of 10% discount factor (927) (21,456)
-------------- ---------------
Standardized measure of discounted
future net cash flows $ 8,909 $ 29,361
============== ===============
Oil prices used in calculating the standardized measure of discounted future net
cash flows were $13.25 per barrel and $15.00 per barrel, for December 31, 2001
and 2000, respectively.
The principal sources of changes in the standardized measure of discounted
future net cash flows are as follows for the year ended December 31, 2001:
2001
Standardized measure, beginning of year $ 29,361
Sales of oil produced, net of production costs (3,876)
Change in prices (17,061)
Accretion of discount and other 485
-------------
Standardized measure, end of year $ 8,909
=============
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective January 3, 2002, DeCoria, Maichel & Teague P.S. replaced Williams &
Webster, P.S. as the Company's independent public accountants. During the years
ended December 31, 2000 and 2001, Williams & Webster P.S. report on the
financial statements of the Company contained no adverse opinion or disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope,
or accounting principles, except for a paragraph wherein Williams & Webster P.S.
expressed substantial doubt about the Company's ability to continue as a going
concern. During such periods there were no disagreements with Williams &
Webster P.S. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope, or procedure, which, if not resolved to
the satisfaction of such firm, would have caused them to make reference to the
subject matter of such disagreement in their report on such financial
statements.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name of Executive Officers and Principal Occupation, Five-Year
Directors and Positions Held Age Business History and Directorships
- ------------------------------- ----- --------------------------------------
Andrew V. Ippolito, Currently and for the past 25 years,
President 68 Mr. Ippolito functioned as a business
and Chairman of the Board of executive, diplomat, Honorary Consul
Directors General of Liberia and General Secretary
of the Los Angeles Consular Corps,
representing more than 86 countries and
providing access to international
finance and trade markets. Current
President and Chairman of the Board of
Discovery Oil, LTD and co-founder of
Sunshine Management International,
serving as management and financial
consultant to several foreign nations
and corporations.
M. Jeanett Ippolito, Secretary
and a Director 58 Mrs. Ippolito has been a real estate
broker for over 20 years.
The bylaws of the Company provided that the Directors serve until the next
annual meeting of shareholders or until their respective successors have been
duly elected and qualified. The bylaws also provide that the officers serve at
the discretion of the Board of Directors
ITEM 10. EXECUTIVE COMPENSATION
No officer receives any compensation for services rendered to the Company.
Directors receive no annual compensation nor attendance fees for servicing in
such capacity.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Andrew V. Ippolito, president and a director and his wife M. Jeanett, secretary
and a director, collectively owned 2,037,625 shares of the Registrant's common
stock representing 60% of the total outstanding shares as of April 5, 2002.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See notes 5, 7, and 8 to the financial statements for the years ended December
31, 2001 and 2000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS OF FORM 8-K
During the fourth quarter of 2001, no reports were filed on form 8-K.
EXHIBITS
NO. DESCRIPTION DATE
99.1* Notice of Order Confirming Plan and
Discharge May 13, 1988
99.2* Order of Final Decree (Bankruptcy) July 15, 1996
99.3* Declaration of Andrew V. Ippolito June 26, 1996
3(i)** Certificate of Second Amendment of
Certificate of Incorporation September 7, 2001
* As previously filed with the Registrant's annual report on Form 10-K for the
year ended December 31, 2000.
**As filed herewith.
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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.
DISCOVERY OIL, LTD
By: /s/ Andrew V. Ippolito
-------------------------
Andrew V. Ippolito
President
Date: April 12, 2002
By: /s/ M. Jeanett Ippolito
--------------------------
M. Jeanett Ippolito
Secretary
Date: April 12, 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 dates indicated.
By:/s/ Andrew V. Ippolito
-------------------------
Andrew V. Ippolito
President and Director
Date: April 12, 2002
By:/s/ M. Jeanett Ippolito
--------------------------
M. Jeanett Ippolito
Secretary and Director
Date: April 12, 2002
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