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 June 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 August 15, 2002: 20,245,923
<page>
TABLE OF CONTENTS
PART I
PAGE
ITEM 1.Statements of Financial Position as of June 30, 2002
and December 31, 2001.....................................3
Statements of Operations For the Three and Six Month
Periods Ended June 30, 2002 and 2001 4
Statements of Cash Flows For the Six Month Periods
Ended June 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
PART II
ITEM 1.Legal Proceedings.........................................9
ITEM 2.Changes in Securities.....................................9
ITEM 3.Defaults Upon Senior Securities...........................9
ITEM 4.Submission of Matters to a Vote of Security Holders.......9
ITEM 5.Other Information.........................................9
ITEM 6.Exhibits and Reports on Form 8-K..........................9
Signatures...............................................10
PART I.
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL POSITION AS OF
DISCOVERY OIL, LTD. JUNE 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 23,610 $ 3,058
Accounts receivable 3,635 1,274
------------ ------------
Total assets $ 27,245 $ 4,332
============ ============
LIABILITES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 18,024 $ 10,819
Related party payable 134
------------ ------------
Total current liabilities 18,024 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 June 30, 2002 20,247 20,041
Additional paid-in capital 607,575 563,961
Accumulated equity (deficit) (618,601) (590,623)
------------ ------------
Total stockholders' equity (deficit) 9,221 (6,621)
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 27,245 $ 4,332
============ ============
The accompanying notes are an integral part of these financial statements.
DISCOVERY OIL, LTD. STATEMENTS OF OPERATIONS FOR THE THREE AND SIX
(UNAUDITED) MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
<table>
<caption>
JUNE 30, 2002 JUNE 30, 2001
-------------------------- --------------------------
THREE SIX THREE SIX
MONTHS MONTHS MONTHS MONTHS
------------ ------------ ------------ ------------
<s> <c> <c> <c> <c>
REVENUES:
Sales of oil $ 11,489 $ 19,885 $ 9,188 $ 18,737
OPERATING EXPENSES:
Direct costs of production 6,090 9,376 3,550 6,826
General and administrative
expenses 34,248 38,487 7,050 19,334
------------ ------------ ------------ ------------
Total operating expenses 40,338 47,863 10,600 26,160
OTHER EXPENSES:
Interest expense - - 5,827 10,635
------------ ------------ ------------ ------------
Total other expenses - - 5,827 10,635
NET LOSS $ 28,849 $ 27,978 $ 7,239 $ 18,058
============ ============ ============ ============
NET LOSS PER SHARE-BASIC $ Nil $ Nil $ Nil $ Nil
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING-BASIC
20,334,187 20,290,546 9,313,352 9,313,352
============ ============ ============ ============
</table>
DISCOVERY OIL, LTD. STATEMENTS OF CASH FLOWS FOR THE SIX MONTH
(UNAUDITED) PERIODS ENDED JUNE 30, 2002 AND 2001
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (27,978) $ (18,058)
Adjustments to reconcile net loss to
net cash used by operating activities:
Stock issuance costs (5,149) -
Change in:
Accounts payable 7,205 (334)
Account receivable (2,361) (1,249)
Interest payable - (31,953)
------------ ------------
Net cash flows used in operating activities (28,283) (51,594)
------------ ------------
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 48,969 -
------------ ------------
Net cash flows provided by financing activities 48,835 62,008
------------ ------------
NET INCREASE IN CASH 20,552 10,414
CASH AT BEGINNING OF PERIOD 3,058 -
------------ ------------
CASH AT END OF PERIOD $ 23,610 $ 10,414
============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOWS INFORMATION:
Cash paid during the year for interest $ 42,588
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 second quarter of 2002, the Company paid or accrued $23,500 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.
<page>
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 inception 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 June 30, 2002 compared to the three month
period ended June 30, 2001.
During the second quarter of 2002, the Company entered into discussions with
Great South Land Minerals Limited, Inc. ("GSLM"), an Australian natural
resource company, whereby GSLM would become a wholly owned subsidiary of the
Company. The proposed merger was contingent upon mutual shareholder approval,
due diligence investigations and other conditions. The merger proposal was
terminated by mutual consent of the parties on June 13, 2002, with no
expectation of renewed interest.
<page>
RESULTS OF OPERATIONS (CONTINUED)
For the three months ended June 30, 2002, the Company had a net loss of $28,849
compared to a net loss of $7,239 during the comparable period in the previous
year. The increase in net loss from 2001 to 2002 was primarily due to expenses
associated with due diligence activities related to a possible business
combination with an Australian natural resources company, that were not
incurred in 2001.
During the three month period ended June 30, 2002, the Company generated
$11,489 from the sale of 496 barrels (the Company's net revenue interest share)
of oil at an average sales price of approximately $23 per barrel. During the
three month period ended June 30, 2001, the Company generated $9,188 from the
sale of 415 barrels of oil at an average sales price of approximately $22 per
barrel. Direct oil production costs were $6,090 during the second quarter of
2002, or approximately $12 per barrel sold, compared to $3,550 or approximately
$9 per barrel sold during the second quarter of 2001.
General and administrative expenses increased from $7,050 in the second quarter
of 2001 to $34,248 in the second quarter of 2002. The increase was due to
increased travel expenses and officer compensation incurred in 2002, no similar
expenses were incurred in the comparable period of 2001.
Interest expense was $5,827 during the second quarter of 2001; there was no
interest expense for the comparable period of 2002, as 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 six month period ended June 30, 2002 compared to the six month period
ended June 30, 2001
For the six months ended June 30, 2002, the Company had a net loss of $27,978
compared to a net loss of $18,058 during the comparable period in the previous
year. The increase in net loss from 2001 to 2002 was primarily due to expenses
associated with due diligence activities related to a possible business
combination with an Australian natural resources company, that were not
incurred in 2001.
During the six month period ended June 30, 2002, the Company generated $19,885
from the sale of 988 barrels (the Company's net revenue interest share) of oil
at an average sales price of approximately $20 per barrel. During the six
month period ended June 30, 2001, the Company generated $18,737 from the sale
of 843 barrels of oil at an average sales price approximately $22 per barrel.
Oil production expenses were $9,376 during the first six months of 2002, or
approximately $9 per barrel sold, compared to $6,826 or approximately $8 per
barrel sold during the first six months of 2001.
General and administrative expenses increased from $19,334 in the first six
months of 2001 to $38,487 in the first six months of 2002. The increase was
due to increased travel expenses and officer compensation incurred during the
second quarter of 2002.
Interest expense was $10,635 during the second quarter of 2001; there was no
interest expense for the comparable period of 2002, as all interest bearing
related party advances and convertible promissory notes had been converted to
common stock during the second and third quarters of 2001.
<page>
FINANCIAL CONDITION AND LIQUIDITY
During the six month period ended June 30, 2002, the Company used $28,283 of
cash in its operating activities. During the second quarter of 2002, the
Company sold 205,950 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.
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
<page>
SIGNATURES
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 August 15, 2002
- ------------------------------- ---------------
Andrew V. Ippolito Date
President and Director