<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2000.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION FROM _______ TO ________.
COMMISSION FILE NUMBER 000-26175
DISCOVERY INVESTMENTS, INC.
----------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Nevada 88-0409151
----------------------- --------------
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2980 S. Rainbow Boulevard, Suite 108
Las Vegas, Nevada 89146
-------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
N/A
----------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
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 [ ]
<PAGE> 2
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at September 30, 2000(1)
----- ------------------------------------
<S> <C>
Common Stock, par value 2,100,000
$.001 per share
</TABLE>
----------
(1) See Part II, Item 5 as to additional 2,000,000 shares. Upon full
performance by John Castellucci and LLO-Gas, Inc., or either, said shares
of common stock will be retired and restored to the status of authorized
and unissued shares. The pledge holder under the collateral pledge
agreement may hold as additional collateral certain shares of LLO-Gas,
Inc. as additional collateral, under the collateral pledge agreement.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 3
PART I
FINANCIAL INFORMATION
Item I. Financial Statements
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
9 Mos Ending Year Ended
September 30, 2000 December 31, 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS $ 0 $ 0
TOTAL CURRENT ASSETS $ 0 $ 0
OTHER ASSETS $ 0 $ 0
TOTAL OTHER ASSETS $ 0 $ 0
TOTAL ASSETS $ 0 $ 0
</TABLE>
See accompanying notes to financial statements
-1-
<PAGE> 4
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
9 Months Ending Year Ended
September 30, 2000 December 31, 1999
(Unaudited) (Unaudited)
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Officers Advances (Note 6) $ 16,501 $ 15,654
Interlochen Enterprises 100,000 0
Alschuler Grossman Stein 84,989 0
& Kahan LLP
Interest Payable -- Notes 157,050 25,000
----------- -----------
TOTAL CURRENT LIABILITIES $ 358,540 $ 40,654
----------- -----------
LONG TERM LIABILITIES
Interlochen Enterprises 250,000 250,000
Meridian Enterprises 250,000 250,000
CRS Financial Corp., Ltd. 1,000,000 1,000,000
----------- -----------
TOTAL LONG TERM LIABILITIES $ 1,500,000 $ 1,500,000
----------- -----------
TOTAL LIABILITIES $ 1,858,540 $ 1,540,654
=========== ===========
STOCKHOLDERS EQUITY (Note 4)
Common stock, $.001 par value
authorized 25,000,000 shares issued
and outstanding at December 31,
1999 -- 2,100,000 shares June 30,
2000 -- 2,100,000 shares $ 2,100 $ 2,100
Additional paid in Capital 0 0
Accumulated loss $(1,860,640) $(1,542,754)
---------- ----------
TOTAL STOCKHOLDERS EQUITY $(1,858,540) $(1,540,654)
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 0 0
</TABLE>
See accompanying notes to financial statements
-2-
<PAGE> 5
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
9 Mos. Ended Year Ended
September 30, 2000 December 31, 1999
(Unaudited)
<S> <C> <C>
INCOME:
Revenue $ 0 $ 0
---------- -----------
EXPENSES:
General, Selling and
Administrative $ 317,886 $ 1,540,654
---------- -----------
TOTAL EXPENSE $ 317,886 $ 1,540,654
---------- -----------
NET PROFIT/LOSS (-) $(1,540,654)
-----------
Net Profit/Loss (-)
Per weighted share $ (0.1514) $ ($0.7336)
========== ===========
Weighted average
Number of common
shares outstanding 2,100,000 2,100,000
========== ===========
</TABLE>
See accompanying notes to financial statements
-3-
<PAGE> 6
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock paid-in Accumulated
Shares Amount Capital Deficit
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Balance,
March 31, 1997 21,000 $ 2,100 $ 0 $ (2,100)
Net loss year ended
December 31, 1997 0
--------- -------- ------ -----------
Balance,
December 31, 1997 21,000 $ 2,100 $ 0 $ (2,100)
Net loss year ended
December 31, 1998 0
--------- -------- ------ -----------
Balance,
December 31, 1998 21,000 $ 2,100 $ 0 $ (2,100)
March 15, 1999
Changed from no par
value to $.001 (2,079) 2,079
March 15, 1999
Forward Stock Split
100:1 2,079,000 2,079 (2,079)
Net loss year ended
December 31, 1999 (1,540,654)
--------- -------- ------ -----------
Balance,
December 31, 1999 2,100,000 $ 2,100 $ 0 $(1,542,754)
Net Loss,
December 31, 1999, to
September 30, 2000 (317,886)
--------- -------- ------ -----------
Balance,
September 30, 2000 2,100,000 $ 2,100 0 $1,860,640
--------- -------- ------ -----------
</TABLE>
See accompanying notes to financial statements
-4-
<PAGE> 7
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
-----------------------
(UNAUDITED)
<TABLE>
<CAPTION>
9 Mos. Ended Year Ended
September 30, 2000 December 31, 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash Flows from
Operating
Activities:
Net Loss (317,886) (1,540,654)
Adjustment to
reconcile net
loss to net
cash provided
by operating
activities
Chances in Assets
and Liabilities 317,039 1,525,000
Officer's Advances 847 15,654
----------
Net cash used in
Operating
Activities: 0 0
Cash Flows from
Investing
Activities: 0 0
Cash Flows from
Financing
Activities:
Issuance of
Common Stock 0 0
-------- ----------
Net Increase
(decrease) in cash 0 0
Cash,
beginning of period 0 0
-------- ----------
Cash,
end of period 0 0
======== ==========
</TABLE>
See accompanying notes to financial statements
-5-
<PAGE> 8
Discovery Investments, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000, and December 31, 1999
NOTE 1 -- HISTORY AND ORGANIZATION OF THE COMPANY
The Company was organized September 10, 1996, under the laws of the State
of Nevada as Discovery Investments, Inc., Inc. The Company currently has
no operations and in accordance with SFAS #7, is now considered a
development company.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method
The Company records income and expenses on the accrual method.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and equivalents
The Company maintains a cash balance in a non-interest-bearing bank
that currently does not exceed federally insured limits. For the
purpose of the statements of cash flows, all highly liquid
investments with the maturity of three months or less are considered
to be cash equivalents. There are no cash equivalents as of
September 30, 2000.
-6-
<PAGE> 9
Discovery Investments, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, and December 31, 1999
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Income taxes are provided for using the liability method of accounting in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS
#109) "Accounting for Income Taxes". A deferred tax asset or liability is
recorded for all temporary difference between financial and tax reporting.
Deferred tax expense (benefit) results from the net change during the year
of deferred tax assets and liabilities.
Loss Per Share
Net loss per share is provided in accordance with Statement of Financial
Accounting Standards No. 128 (SFAS #128) "Earnings Per Share". Basic loss
per share is computed by dividing losses available to common stockholders
by the weighted average number of common shares outstanding during the
period. Diluted loss per share reflects per share amounts that would have
resulted if dilative common stock equivalents had been converted to common
stock. As of September 30, 1999, the Company had no dilative common stock
equivalents such as stock options.
Year End
The Company had selected March 31st as its year-end. Prior to the
rescission (see Note 9), the year end was changed to December 31st.
-7-
<PAGE> 10
Discovery Investments, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, and December 31, 1999
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Year 2000 Disclosure
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year.
Computer programs that have time sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing
disruption of normal business activities. Since the Company
currently has no operating business and does not use any computers,
and since it has no customers, suppliers or other constituents,
there are no material Year 2000 concerns.
NOTE 3 -- INCOME TAXES
There is no provision for income taxes for the period ended September 30,
2000, due to the net loss and no state income tax in Nevada, the state of
the Company's domicile and operations. The Company's total deferred tax
asset as of September 30, 2000, is as follows:
<TABLE>
<S> <C>
Net operation loss carry forward $ 2,100
Valuation allowance $ 2,100
Net deferred tax asset $ 0
</TABLE>
The federal net operating loss carry forward will expire in 2017.
This carry forward may be limited upon the consummation of a business
combination under IRC Section 381.
-8-
<PAGE> 11
Discovery Investments, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, and December 31, 1999
NOTE 4 -- STOCKHOLDERS' EQUITY
Common Stock
The authorized common stock of Discovery Investments, Inc. consists of
25,000,000 shares with a par value of $0.001 per share.
Preferred Stock
Discovery Investments, Inc. has no preferred stock.
On September 15, 1996, the Company issued 21,000 shares of its no par
value common stock in consideration of $2,100 in cash.
On March 15, 1999, the Company amended its Articles of Incorporation,
which increased its capitalization from 25,000 common shares to 25,000,000
common shares. The no par value was changed to $0.001 and the Company
forward split its common stock 100:1, thus increasing the number of
outstanding common stock shares from 21,000 shares to 2,100,000.
Pledge
John Castellucci entered into a Pledge Agreement with M. Mehdi Mostaedi on
or about December 16, 1999, subject to the closing of the Plan and
Agreement of Reorganization on December 20, 1999, wherein John Castellucci
collaterally pledged 2,000,000 shares of his common stock of the Company
to M. Mehdi Mostaedi. A mutual rescission occurred (see Note 9) and said
rescission is subject to the rights, if any, that M. Mehdi Mostaedi may
have under said collateral pledge agreement. Upon full performance by John
Castellucci and LLO-Gas, Inc., or either, said shares of common stock will
be retired and restored to the status of authorized and unissued shares.
The pledge holder under the collateral pledge agreement holds as
additional collateral certain shares of LLO-Gas, Inc. as additional
collateral, under the collateral pledge agreement.
To the extent that any shares of stock issued to John Castellucci have not
been restored to the Company as part of the mutual rescission, the Company
deems said shares to be treasury shares. Treasury shares do not carry
voting rights or participate in distribution, may not be counted as
outstanding shares for any purpose and may not be counted as assets of the
Company for purposes of computing amounts available for distributions.
Upon physical delivery of said certificates to Pacific Stock Transfer
Company, the Company's transfer agent, said shares will be canceled,
retired and restored to the status of authorized and unissued shares in
accordance with law.
-9-
<PAGE> 12
Discovery Investments, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, and December 31, 1999
NOTE 5 -- GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course
of business. However, the Company does not have significant cash or other
material assets, nor does it have an established source of revenues
sufficient to cover its operating costs and to allow it to continue as a
going concern. It is the intent of the Company to seek a business
combination with an existing, operating company. Until that time, the
stockholders/officers and or directors have committed to advancing the
operating costs of the Company interest free.
NOTE 6 -- RELATED PARTY TRANSACTIONS
The Company neither owns nor leases any real or personal property. An
officer of the corporation provides office services without charge. Such
costs are immaterial to the financial statements and accordingly, have not
been reflected therein. The officers and directors of the Company are
involved in other business activities and may, in the future, become
involved in other business opportunities. If a specific business
opportunity becomes available, such persons may face a conflict in
selecting between the Company and their other business interests. The
Company has not formulated a policy for the resolution of such conflicts.
NOTE 7 -- WARRANTS AND OPTIONS
There are no warrants or options outstanding to acquire any additional
shares of common stock.
NOTE 8 -- LITIGATION
(a) On February 29, 2000, West Star Energy Group, Inc. ("West Star") sued
John Castellucci, the Company and its wholly-owned operating subsidiary,
LLO-Gas, Inc., in the Superior Court of the State of California, County of
Los Angeles (Case Number BC 225568). Until August 10, 2000, John
Castellucci was President, Chief Financial Officer, Secretary, director
and the principal shareholder of the Company, and President, a director
and the principal shareholder of West Star. West Star, through its Board
of Directors (other than John Castellucci), alleges that John Castellucci
breached his fiduciary duty to West Star and engaged in a series of
unauthorized transactions for his personal benefit. The plaintiff also
alleges that John Castellucci made certain fraudulent statements to the
West Star Board of Directors, which inducted them not to exercise a West
Star business opportunity to acquire the ARCO Facilities for itself and to
consent to the acquisition of the ARCO Facilities by LLO-Gas, Inc.
-10-
<PAGE> 13
Discovery Investments, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, and December 31, 1999
West Star seeks general and special damages of at least $3.5 million
against John Castellucci. West Star seeks the imposition of a constructive
trust on the Company's facilities which were purchased from ARCO (the
"ARCO Facilities") and an order compelling the Company to return the ARCO
Facilities, and all proceeds therefrom, to West Star. West Star also seeks
damages against John Castellucci and the Company of at least $3.5 million
for unfair competition. In addition, West Star seeks an accounting from
the defendants. West Star also seeks to recover the costs of the suit,
prejudgment interest, attorneys' fees and such other relief as the court
may deem just and proper.
John Castellucci and the Company have filed an answer to the complaint.
The Company believes that it has meritorious defenses and affirmative
defenses to the lawsuit.
(b) In December 1999, M. Mehdi Mostaedi loaned LLO-Gas, Inc. $150,000.
LLO-Gas, Inc. and John Castellucci jointly executed a promissory note
dated December 16, 1999 (the "Mostaedi Note") in the principal amount of
$150,000. The Mostaedi Note bears interest at the rate of 9% per annum and
was due and payable as to principal and interest on February 16, 2000. The
Mostaedi Note is secured with a pledge of 2,000,000 shares of the
Company's common stock owned by John Castellucci pursuant to a Pledge
Agreement dated December 20, 1999 between John Castellucci and M. Mehdi
Mostaedi.
On April 11, 2000, M. Mehdi Mostaedi filed a lawsuit against the Company
and John Castellucci in the Superior Court of the State of California,
West District, Santa Monica, California (Case Number SC 016250), alleging
breach of contract and default under the Mostaedi Note. M. Mehdi Mostaedi
seeks damages in the amount of $150,000, interest on that amount at the
rate of 9% from December 16, 1999, and costs of the suit. The Company has
been served with the complaint but has not filed an answer to the
complaint. On or about August 17, 2000, M. Mehdi Mostaedi filed a request
to enter the default against the Company (and John Castellucci). The
Company believes that said filing of the request to enter the default may
constitute a violation of the automatic stay provisions under the
Bankruptcy Act since the complaint alleges that the Company is the
successor to LLO-Gas, Inc. The Company believes that it may have
meritorious defenses and affirmative defenses to the lawsuit in that it
was not a party to the Mostaedi Note.
-11-
<PAGE> 14
Discovery Investments, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, and December 31, 1999
(c) On October 17, 2000, Yuri Zaloznyy ("Zaloznyy") sued John Castellucci,
the Company, LLO-Gas, Inc., and others, in an adversary proceeding in the
United States Bankruptcy Court, Central District of California, San
Fernando Valley Division.
Zaloznyy seeks general and special damages from all defendants for breach
of contract, fraud, breach of fiduciary duty, conversion, constructive
trust, fraudulent or void conveyance, specific performance, dissolution of
certain of the defendants, and damages. The Company has filed an answer to
the complaint, severing itself from all other defendants to include John
Castellucci and LLO-Gas, Inc. The Company believes that it has meritorious
defenses and affirmative defenses to the lawsuit.
(d) On September 1, 2000, the Company filed a lawsuit against John
Castellucci and Does 1 through 5, inclusive, in the Superior Court of the
State of California, West District, Santa Monica, California (Case Number
SC062993). The complaint was for cancellation of shares and of any share
certificates issued to John Castellucci. On August 10, 2000, the Company
and John Castellucci had entered into a Mutual Rescission Agreement and
Mutual Release. Pursuant to said Mutual Rescission Agreement and Mutual
Release, John Castellucci, the record holder of 9,900,000 shares of stock
of the Company, evidenced by certificate number 160, was to surrender for
cancellation said shares. See Item 5 of the Form 10-QSB filed with the
Securities and Exchange Commission on August 21, 2000 (incorporated herein
by reference).
At all times relevant, there have been no reports by any officer or
director of the Company or any person who directly or indirectly is the
beneficial owner of more than 10% of any class of equity securities of the
Company registered under the Securities Act of 1934, as amended, filed
with the Securities and Exchange Commission. Further, since the reporting
provisions of 16(a) of the Securities Exchange Act of 1934, as amended,
are designed to ensure the prompt disclosure of holdings, there are no
provisions allowing the late filing of an ownership report and there is no
extension of time for the filing of an ownership report. The California
Superior Court was informed that there have been no reports filed with the
Securities and Exchange Commission as it relates to certificate number
160.
The California Superior Court, on October 25, 2000, ordered that John
Castellucci shall surrender for cancellation certificate number 160 to the
Company or to the Company's transfer agent for cancellation and that said
shares are to be restored to authorized but unissued status. It was
further ordered that if Castellucci did not surrender for cancellation
said certificate number 160 or cause said certificate to be surrendered,
the Company may forthwith issue instructions to its transfer agent that
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<PAGE> 15
Discovery Investments, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, and December 31, 1999
said shares of stock are no longer to been deemed issued and outstanding,
that said shares are to be restored to authorized but unissued status, and
that the number of issued and outstanding shares of stock of the Company
appearing on the Company's stockholder records are to be reduced by said
9,900,000 shares. Further, the California Superior Court determined that
John Castellucci be deemed to not to have any right, title and interest in
the 9,900,000 shares evidenced by certificate number 160. A copy of the
order of the California Superior Court was delivered to the Company's
transfer agent and said shares have been cancelled. (See Note 4 above.)
NOTE 9 -- MUTUAL RESCISSION AGREEMENT AND MUTUAL RELEASE
On December 10, 1999, the Company entered into a Plan and Agreement of
Reorganization with LLO-Gas, Inc. and John Castellucci. On December 20,
1999, there was a closing under the Plan and Agreement of Reorganization
and LLO-Gas, Inc. became a wholly owned subsidiary of the Company and
there was a change of control of the Company. Between December 20, 1999
and August 11, 2000, differences of opinion as to matters of fact and as
to matters of law have arisen by and between certain of the shareholders
of the Company, who were shareholders prior to the closing, and between
the Company, John Castellucci and LLO-Gas, Inc. In addition, on June 7,
2000, LLO-Gas, Inc. filed a Voluntary Petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court, Central District of
California, San Fernando Valley Division, case number SV 00-15398-AG. Said
Chapter 11 Bankruptcy is currently pending and effects LLO-Gas, Inc.
Predicated upon the differences of matters of fact and matter of law, the
parties entered into a Mutual Rescission Agreement and Mutual Release.
The Mutual Rescission Agreement and Mutual Release provides, inter alia,
that the Company consents and agrees to rescind that certain Plan and
Agreement of Reorganization with John Castellucci consenting and agreeing
to the rescission. The parties mutually agreed, pursuant to said Mutual
Rescission Agreement and Mutual Release to forgo all rights and benefits
provided to each other under the Plan and Agreement of Reorganization, as
consideration for the rescission, ab initio, of the closing described
therein.
-13-
<PAGE> 16
Item II. Management's Discussion and Analysis or Plan of Operation
Results of Operation.
Certain statements contained in this Quarterly Report on Form 10-QSB that
are not related to historical results, including, without limitation, statements
regarding the Company's business strategy and objectives, future financial
operations, are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and involve risks and uncertainties. Although
the Company believes that the assumptions will prove to be accurate, actual
results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, competition from other similar businesses, and market
and general economic factors. All forward-looking statements contained in this
Quarterly Report on Form 10-QSB are qualified in their entirety by this
statement.
-14-
<PAGE> 17
Until October 26, 1999, Discovery Investments, Inc. (the "Company") had no
operations, assets or financial resources. During the period from inception
(September 10, 1996) until October 26, 1999, the Company sustained operation
expenses without corresponding revenues. This resulted in the Company's
incurring a net operating loss.
On December 10, 1999, the Company entered into a Plan and Agreement of
Reorganization with LLO-Gas, Inc. and John Castellucci. On December 20, 1999,
there was a closing under the Plan and Agreement of Reorganization and LLO-Gas,
Inc. became a wholly owned subsidiary of the Company and there was a change of
control of the Company. Between December 20, 1999 and August 11, 2000,
differences of opinion as to matters of fact and as to matters of law had arisen
by and between certain of the shareholders of the Company, who were shareholders
prior to the closing, and between the Company, John Castellucci and LLO-Gas,
Inc.
On June 7, 2000, LLO-Gas, Inc. filed a Voluntary Petition under Chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court, Central District
of California, San Fernando Valley Division, case number SV 00-15398-AG. Said
Chapter 11 Bankruptcy is currently pending and effects LLO-Gas, Inc. and not the
Company. Predicated upon the differences of matters of fact and matters of law,
the parties entered into a Mutual Rescission Agreement and Mutual Release (See
Form 10-QSB filed with the Securities and Exchange Commission on August 21, 2000
(incorporated herein by reference)).
The Mutual Rescission Agreement and Mutual Release provided, inter alia,
that the Company consents and agrees to rescind that certain Plan and Agreement
of Reorganization with John Castellucci consenting and agreeing to the
rescission. The parties mutually agreed, pursuant to said Mutual Rescission
Agreement and Mutual Release to forgo all rights and benefits provided to each
other under the Plan and Agreement of Reorganization, as consideration for the
rescission, ab initio, of the closing described therein.
Giving effect to the recission of the Plan and Agreement of
Reorganization, the Company has no revenues or earnings from operations, with no
significant assets or financial resources. Accordingly, the Company will in all
likelihood sustain operating expenses without corresponding revenues, at least
until the consummation of a new business combination. This resulted in the
Company incurring a net operating loss which will increase continuously until
the Company can consummate a business combination with a profitable business
opportunity and consummate such a business combination.
The Company is now dependent upon its officers to meet any de minimis
costs which may occur. Kimberly Lynn Jack, an officer and director of the
Company, has agreed to provide the
-15-
<PAGE> 18
necessary funds, without interest, for the Company to comply with the Securities
Exchange Act of 1934, as amended, provided that she is an officer and director
of the Company when the obligation is incurred. All advances are interest-free.
PART II
OTHER INFORMATION
Item 1 -- Legal Proceedings
(a) On February 29, 2000, West Star Energy Group, Inc. ("West Star") sued
John Castellucci, the Company and its wholly-owned operating subsidiary,
LLO-Gas, Inc., in the Superior Court of the State of California, County of Los
Angeles (Case Number BC 225568). Until August 10, 2000, John Castellucci was
President, Chief Financial Officer, Secretary, director and the principal
shareholder of the Company, and President, a director and the principal
shareholder of West Star. West Star, through its Board of Directors (other than
John Castellucci), alleges that John Castellucci breached his fiduciary duty to
West Star and engaged in a series of unauthorized transactions for his personal
benefit. The plaintiff also alleges that John Castellucci made certain
fraudulent statements to the West Star Board of Directors, which inducted them
not to exercise a West Star business opportunity to acquire the ARCO Facilities
for itself and to consent to the acquisition of the ARCO Facilities by LLO-Gas,
Inc.
West Star seeks general and special damages of at least $3.5 million
against John Castellucci. West Star seeks the imposition of a constructive trust
on the Company's facilities which were purchased from ARCO (the "ARCO
Facilities") and an order compelling the Company to return the ARCO Facilities,
and all proceeds therefrom, to West Star. West Star also seeks damages against
John Castellucci and the Company of at least $3.5 million for unfair
competition. In addition, West Star seeks an accounting from the defendants.
West Star also seeks to recover the costs of the suit, prejudgment interest,
attorneys' fees and such other relief as the court may deem just and proper.
John Castellucci and the Company have filed an answer to the complaint.
The Company believes that it has meritorious defenses and affirmative defenses
to the lawsuit.
In view of the inherent uncertainties of litigation, the outcome of the
litigation itself, cannot be predicted.
(b) In December 1999, M. Mehdi Mostaedi loaned LLO-Gas, Inc. $150,000.
LLO-Gas, Inc. and John Castellucci jointly executed a promissory note dated
December 16, 1999 (the "Mostaedi Note") in the principal amount of $150,000. The
Mostaedi Note bears interest at the rate of 9% per annum and was due and
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<PAGE> 19
payable as to principal and interest on February 16, 2000. The Mostaedi Note is
secured with a pledge of 2,000,000 shares of the Company's common stock owned by
John Castellucci pursuant to a Pledge Agreement dated December 20, 1999 between
John Castellucci and M. Mehdi Mostaedi.
On April 11, 2000, M. Mehdi Mostaedi filed a lawsuit against the Company
and John Castellucci in the Superior Court of the State of California, West
District, Santa Monica, California (Case Number SC 016250), alleging breach of
contract and default under the Mostaedi Note. M. Mehdi Mostaedi seeks damages in
the amount of $150,000, interest on that amount at the rate of 9% from December
16, 1999, and costs of the suit. The Company has been served with the complaint
but has not filed an answer to the complaint. On or about August 17, 2000, M.
Mehdi Mostaedi filed a request to enter the default against the Company (and
John Castellucci). The Company believes that said filing of the request to enter
the default may constitute a violation of the automatic stay provisions under
the Bankruptcy Act since the complaint alleges that the Company is the successor
to LLO-Gas, Inc. The Company believes that it may have meritorious defenses and
affirmative defenses to the lawsuit in that it was not a party to the Mostaedi
Note.
(c) On October 17, 2000, Yuri Zaloznyy ("Zaloznyy") sued John Castellucci,
the Company, LLO-Gas, Inc., and others, in an adversary proceeding in the United
States Bankruptcy Court, Central District of California, San Fernando Valley
Division.
Zaloznyy seeks general and special damages from all defendants for breach
of contract, fraud, breach of fiduciary duty, conversion, constructive trust,
fraudulent or void conveyance, specific performance, dissolution of certain of
the defendants, and damages. The Company has filed an answer to the complaint,
severing itself from all other defendants to include John Castellucci and
LLO-Gas, Inc. The Company believes that it has meritorious defenses and
affirmative defenses to the lawsuit.
In view of the inherent uncertainties of litigation, the outcome of the
litigation itself, cannot be predicted.
(d) On September 1, 2000, the Company filed a lawsuit against John
Castellucci and Does 1 through 5, inclusive, in the Superior Court of the State
of California, West District, Santa Monica, California (Case Number SC062993).
The complaint was for cancellation of shares and of any share certificates
issued to John Castellucci. On August 10, 2000, the Company and John Castellucci
had entered into a Mutual Rescission Agreement and Mutual Release. Pursuant to
said Mutual Rescission Agreement and Mutual Release, John Castellucci, the
record holder of 9,900,000 shares of stock of the Company, evidenced by
certificate number 160, was to surrender for cancellation said shares. See Item
5 of the Form 10-QSB filed with the Securities and Exchange Commission on August
21, 2000 (incorporated herein by reference).
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<PAGE> 20
At all times relevant, there have been no reports by any officer or
director of the Company or any person who directly or indirectly is the
beneficial owner of more than 10% of any class of equity securities of the
Company registered under the Securities Act of 1934, as amended, filed with the
Securities and Exchange Commission. Further, since the reporting provisions of
16(a) of the Securities Exchange Act of 1934, as amended, are designed to ensure
the prompt disclosure of holdings, there are no provisions allowing the late
filing of an ownership report and there is no extension of time for the filing
of an ownership report. The California Superior Court was informed that there
have been no reports filed with the Securities and Exchange Commission as it
relates to certificate number 160.
The California Superior Court, on October 25, 2000, ordered that John
Castellucci shall surrender for cancellation certificate number 160 to the
Company or to the Company's transfer agent for cancellation and that said shares
are to be restored to authorized but unissued status. It was further ordered
that if Castellucci did not surrender for cancellation said certificate number
160 or cause said certificate to be surrendered, the Company may forthwith issue
instructions to its transfer agent that said shares of stock are no longer to
been deemed issued and outstanding, that said shares are to be restored to
authorized but unissued status, and that the number of issued and outstanding
shares of stock of the Company appearing on the Company's stockholder records
are to be reduced by said 9,900,000 shares. Further, the California Superior
Court determined that John Castellucci be deemed to not to have any right, title
and interest in the 9,900,000 shares evidenced by certificate number 160. A copy
of the order of the California Superior Court was delivered to the Company's
transfer agent and said shares have been cancelled.
Item 2 -- Changes in the Rights of the Company's Security Holders ..........None
Item 3 -- Defaults by the Company on its Senior Securities .................None
Item 4 -- Submission of Matter to Vote of Security Holders .................None
Item 5 -- Other Information
(a) The following table lists, as of September 30, 2000 and giving effect
to the Mutual Rescission Agreement and Mutual Release and court order of October
25, 2000, the security ownership of (i) all persons known by the Company to own
beneficially 5% or more of Common Stock; (ii) all executive officers; and (iii)
each director of the Company.
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<PAGE> 21
<TABLE>
<CAPTION>
Name and Amount and
Address of Nature of
Title of Class Beneficial Beneficial Percent
Owner Owner of Class
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Kimberly Lynn Jack 550,000 26.2%
1916 East 50th Street
Wichita, Kansas 67216
Common Scott A. Jack 550,000 26.2%
1916 East 50th South
Wichita, Kansas 67216
Common Debra S. Hackney 340,000 16.2%
5262 S. Madison
Wichita, Kansas 67216
Common John Castellucci (1) --
23805 Stewart Ranch Road
Suite 265
Malibu, California 90265
Common All Officers and 1,440,000 68.6%
Directors as a Group
(three [3] individuals)
</TABLE>
----------
(1) John Castellucci entered into a Pledge Agreement with M. Mehdi Mostaedi on
or about December 16, 1999, subject to the closing of the Plan and
Agreement of Reorganization on December 20, 1999, wherein John Castellucci
collaterally pledged 2,000,000 shares of his common stock of the Company
to M. Mehdi Mostaedi. The Mutual Rescission Agreement and Release
Agreement is subject to the rights, if any, that M. Mehdi Mostaedi may
have under said collateral pledge agreement. Upon full performance by John
Castellucci and LLO-Gas, Inc., or either, said shares of common stock will
be retired and restored to the status of authorized and unissued shares.
The pledge holder under the collateral pledge agreement holds as
additional collateral certain shares of LLO-Gas, Inc. as additional
collateral, under the collateral pledge agreement.
(b) Although no receiver, fiscal agent or other officer has been appointed
for the Company in a proceeding under the Bankruptcy Act or in any other
proceeding under state or federal law in which a court or governmental entity
has assumed jurisdiction over substantially all of the assets or business of the
Company and no jurisdiction has been assumed by leaving the existing directors
and officers in possession but subject to the supervision and orders of a court
or governmental body, the
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<PAGE> 22
Company presently is considering filing a proceeding under Chapter 7 of the
Bankruptcy Code in the United States Bankruptcy Court. Said bankruptcy
proceeding may be required predicated upon the Company's present lack of
operations, assets or financial resources to defend against those creditors
claiming potential obligations or contingent obligations from the Company, in
connection with the period of time that LLO-Gas, Inc. was a wholly-owned
operating subsidiary of the Company and, further, to obtain a judicial
determination of the rights and obligations of M. Mehdi Mostaedi as it relates
to the Mostaedi Note which is secured by a pledge of 2,000,000 shares of the
Company's common stock and, further, the determination as to whether the pledge
holder holds under the collateral pledge agreement as additional collateral
certain shares of LLO-Gas, Inc. If available, the Company may file an adversary
proceeding against M. Mehdi Mostaedi as it relates to the December 1999 lawsuit
described in Part III, Item I(b) above, in that the Company was not a party to
the Mostaedi Note and did not guarantee the Note and was not a successor in
interest to LLO-Gas, Inc. At all times relevant, LLO-Gas, Inc. was an
independent wholly-owned operating subsidiary of the Company from December 20,
1999 through August 11, 2000.
Item 6 -- Exhibits and Reports on Form 8-K
(a) Form 10-QSB filed with the Securities and Exchange Commission
on August 21, 2000. (Incorporated herein by reference.)
SIGNATURE
Pursuant to the requirements 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.
Dated: November 9, 2000 DISCOVERY INVESTMENTS, INC.
(Company)
By: /s/ Kimberly Lynn Jack
------------------------------------
Kimberly Lynn Jack
President
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