<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
--------------------
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from________________ to _________________
Commission file number 000-26175
-------------------------------
DISCOVERY INVESTMENTS, INC.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 88-049151
--------------------------------- -----------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
23805 Stuart Ranch Road, Suite 220, Malibu, California 90265
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(310) 456-8494
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Check whether the Issuer (1) filed all reports to be filed by Section 13 or
15(d) 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 at least the past 90 days.
Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at May 15, 2000
----- ---------------------------
Common Stock, par 14,000,000 shares
value $.001 per share
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
DISCOVERY INVESTMENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------- -------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Accounts receivable $ 801 $ 1,137
Related party receivable 366,427 332,938
Inventories 491,862 455,476
Prepaid expenses and other 23,146 57,569
Due from officer 99,532 63,000
------------- -------------
TOTAL CURRENT ASSETS 981,768 910,120
------------- -------------
PROPERTY AND EQUIPMENT - net 9,322,707 8,562,085
------------- -------------
OTHER ASSETS
Restricted cash 112,500 112,500
Financing fees 378,090 413,629
Franchise fees - net 419,036 443,409
Other Assets 240,090 156,845
------------- -------------
TOTAL OTHER ASSETS 1,149,716 1,126,383
------------- -------------
$ 11,454,191 $ 10,598,588
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft $ 143,737 $ 19,559
Accounts payable 877,978 733,320
Interest payable - CSFC 138,957 --
Notes payable - current portion
Time Out 770,000 --
ARCO 118,587 --
Cameron Farrer 195,000 250,000
Interlochen Enterprises 250,000 150,000
M. Mehdi Mostaedi 150,000 150,000
CSFC - current portion 265,356 223,486
------------- -------------
Total notes payable - current portion 1,748,943 773,486
------------- -------------
TOTAL CURRENT LIABILITIES 2,909,615 1,526,365
------------- -------------
LONG-TERM LIABILITIES
Notes payable - net of current portion
ARCO 279,723 --
Interlochen Enterprises 250,000 250,000
Meridian Enterprises 250,000 250,000
CRS Corporation 1,000,000 1,000,000
CSFC - net of current portion 7,499,466 7,559,052
------------- -------------
TOTAL LONG-TERM LIABILITIES 9,279,189 9,059,052
------------- -------------
TOTAL LIABILITIES 12,188,804 10,585,417
------------- -------------
MINORITY INTEREST 34,467 44,230
STOCKHOLDERS' DEFICIENCY
Common Stock, $.001 par value; authorized 25,000,000 shares;
issued and outstanding - 14,000,000 shares 14,000 14,000
Additional paid-in capital 438,100 438,100
Accumulated Deficit (1,221,180) (483,159)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIENCY (769,080) (31,059)
------------- -------------
$ 11,454,191 $ 10,598,588
============= =============
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
2
<PAGE>
DISCOVERY INVESTMENTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31, 2000 (unaudited)
SALES $ 4,883,403
COST OF SALES 4,242,691
-------------
GROSS PROFIT 640,712
-------------
OPERATING EXPENSES
Direct operating expense 532,249
Royalties 56,837
Marketing 5,024
General and administrative 434,496
Depreciation and amortization 71,334
-------------
TOTAL OPERATING EXPENSES 1,099,940
-------------
LOSS BEFORE OTHER EXPENSES (459,228)
-------------
OTHER EXPENSES
Miscellaneous expense (7,681)
Interest expense (271,112)
-------------
TOTAL OTHER EXPENSES (278,793)
-------------
NET LOSS $ (738,021)
=============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 14,000,000
=============
$ (0.05)
=============
See accompanying Notes to Consolidated Condensed Financial Statements
3
<PAGE>
DISCOVERY INVESTMENTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31, 2000 (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(738,021)
Adjusments to reconcile net income to
net cash provided by operating activities:
Depreciation 46,961
Amortization 59,912
Minority interest (9,763)
Interest on notes 180,827
Changes in operating assets and liabilities:
Receivables 336
Inventories (36,386)
Prepaid expenses 34,423
Other assets (83,245)
Accounts payable and accrued expense 144,658
-----------
NET CASH USED IN OPERATING ACTIVITIES (400,298)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to officer (36,532)
Advances to affiliate (33,489)
Acquisition of LLO-Gas, Inc.
Acquisition of property and equipment (807,583)
-----------
NET CASH USED IN INVESTING ACTIVITIES (77,604)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) notes payable 1,153,724
Net increase in cash overdraft 124,178
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,277,902
-----------
INCREASE (DECREASE) IN CASH -
CASH AND CASH EQUIVALENTS
Beginning of year -
-----------
End of year $ -
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 69,717
===========
See accompanying Notes to Consolidated Condensed Financial Statements
4
<PAGE>
DISCOVERY INVESTMENTS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim consolidated financial statements presented have been prepared
by Discovery Investments, Inc. (the "Company") without audit and, in the
opinion of the management, reflect all adjustments of a normal recurring
nature necessary for a fair statement of (a) the consolidated results of
operations for the three months ended March 31, 2000, (b) the consolidated
financial position at March 31, 2000 and (c) the consolidated cash flow for
the three months ended March 31, 2000. Interim results are not necessarily
indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 1999 has been
derived from the consolidated financial statements that have been audited
by the Company's independent auditors. The consolidated financial
statements and notes are condensed as permitted by Form 10-QSB and do not
contain certain information included in the annual financial statements and
notes of the Company. The consolidated financial statements and notes
included herein should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-KSB.
2. LIQUIDITY
The Company experienced significant difficulties in operations during the
first quarter of 2000. As a result, the Company's financial condition is
imperiled, and its liquidity and capital resources have been largely
exhausted. This is primarily the result of the dramatic increase in the
wholesale price for the petroleum during the first quarter, which created
liquidity problems for the Company as its line of credit and working
capital were exhausted. As a result of its inability to obtain petroleum
product, the Company pumped significantly less gas at its facilities during
March than during January and February, a decline which accelerated during
the second quarter. Since May 1, 2000, the Company has not been pumping gas
at any of its facilities. As a result of the liquidity problem, inventory
at the Company's am/pm mini markets also declined, resulting in decreased
sales at the mini markets during the same period.
After the end of the first quarter, the Company received a Notice of
Termination of am/pm Mini Market Agreement and Contract Dealer Gasoline
Agreement dated May 22, 2000 (the "ARCO Notice") from Atlantic Richfield
Company ("ARCO"), advising the Company that ARCO intends to terminate the
Contract Dealer Agreement dated October 26, 1999, and the am/pm Mini Market
Agreement dated October 26, 1999 (collectively, the "ARCO Agreements") and
the franchise relationship between the Company and ARCO, effective at 10:00
a.m. on June 7, 2000. ARCO claims that the basis for the terminations are
the Company's failure to sell adequate or any amounts gas at the Company's
facilities during certain dates in March, April and May; failure to have
sufficient retail products available for sale to the public at the
Company's am/pm mini markets on certain dates in March, April and May;
failure to pay ARCO in a timely manner amounts due to ARCO under the
existing line of credit and term loan with ARCO, in the aggregate amount of
$658,520.86, plus late charges; and failure to pay royalties to ARCO with
respect to the franchised am/pm mini markets. The ARCO Notice also refers
to certain non-financial breeches of the ARCO Agreements.
The Company is holding discussions with ARCO regarding these matters, but
it is not possible to predict the outcome of those discussions.
After the end of the first quarter, the Company also received a notice of
default dated May 25, 2000 (the "Credit Suisse Notice"), from counsel to
Credit Suisse First Boston Specialty Finance LLC, formerly known as
Convenience Store Finance Company, LLC ("Credit Suisse"), stating that the
Company is in default under the Loan and Security Agreement dated October
26, 1999 (the "Credit Suisse Loan Agreement"), pursuant to which Credit
Suisse loaned the Company $7,800,000 (the "Loan"). Credit Suisse claims
that the basis for the default is the Company's failure to make monthly
payments of principal and interest in March, April and May; and certain
non-financial breeches of the Credit Suisse Loan Agreement, and the related
promissory notes evidencing the Loan and Deeds of Trust securing the Loan
(the "Deeds of Trust"), including breeches of various representations and
warranties contained in the Credit Suisse Loan Agreement. The Credit Suisse
Notice demands payment of delinquent principal, interest, default interest,
late charges and servicing fees of $326,128.75, as of May 22, 2000, with
additional default interest at a rate of $1,076.28 per diem from May 23,
2000, and attorneys' fees, no later than the end of business on May 31,
2000. Should the Company fail to make such payments by such time, it is
Credit Suisse's position that (i) all indebtedness secured by the Deeds of
Trust may be accelerated and
5
<PAGE>
DISCOVERY INVESTMENTS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
become due and payable in full without any further notice to the Company
and (ii) Credit Suisse may exercise any and all remedies available under
the Loan, including but not limited to, foreclosing on the Deeds of Trust
and having a receiver appointed. Additionally, it is Credit Suisse's
position that the Company's license to collect and retain the rents,
issues, deposits and profits of the Company's properties encumbered by the
Deeds of Trust is revoked pursuant to the terms of the Deeds of Trust.
The Company is holding discussions with Credit Suisse regarding these
matters, but it is not possible to predict the outcome of these
discussions.
The Company is actively pursuing discussions with a third party pursuant to
which the Company would receive bridge financing to satisfy the obligations
owing to ARCO and Credit Suisse, pending permanent financing. However,
there are no definitive agreements in place at this time with any financing
sources and there can be no assurance that any such agreements will be
entered into, entered into on terms that are favorable to the Company, or
consummated in sufficient time to forestall further action by ARCO and
Credit Suisse. Unless the Company is able to secure bridge financing very
soon, and satisfy both ARCO and Credit Suisse with respect to their various
financial and non-financial concerns, the Company may not be able to
continue operations.
3. LEGAL PROCEEDINGS
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. ("LLO-Gas"), in the Superior Court of the State of California,
County of Los Angeles (Case No. BC 225568). Mr. Castellucci is 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 Mr.
Castellucci), alleges that Mr. 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 Mr. Castellucci made
certain fraudulent statements to the West Star Board of Directors, which
induced 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. West Star seeks general and special damages of
at least $3.5 million against Mr. 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 Mr. 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. The Company has not yet filed
an answer to the complaint. The Company believes that it has meritorious
defenses and affirmative defenses to the lawsuit. The parties engaged in
meaningful settlement negotiations and entered into a non-binding Letter of
Intent on April 14, 2000. Pursuant to the Letter of Intent and in order to
facilitate the negotiation of a definitive settlement agreement, the
plaintiffs dismissed the lawsuit without prejudice. The terms of the
settlement agreement are presently being negotiated. In view of the
inherent uncertainties of litigation, the outcome of the settlement
negotiations, or the litigation itself, cannot be predicted.
In December 1999, M. Mehdi Mostaedi loaned the Company $150,000. The
Company and John Castellucci, President, Chief Financial Officer,
Secretary, Director and the principal shareholder of the Company, 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 Mr. Castellucci
pursuant to a Pledge Agreement dated December 16, 1999 between Messrs.
Castellucci and Mostaedi. On April 11, 2000, Mr. Mostaedi filed a lawsuit
against the Company and Mr. Castellucci in the Superior Court of the State
of California, West District, Santa Monica, California, alleging breach of
contract and default under the Mostaedi Note. Mr. 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 yet filed an answer to the complaint. The Company
is seeking to commence settlement discussions with the plaintiff regarding
the lawsuit.
6
<PAGE>
DISCOVERY INVESTMENTS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
4. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
on the weighted average method. Inventories consist of the following:
March 31, 2000 December 31, 1999
------------------ --------------------
Gasoline $ 16,714 $101,544
Beer 61,936 36,695
Tobacco 92,964 82,881
Food and beverage 200,273 202,010
Non food products 102,375 32,346
------------------ --------------------
$474,262 $455,476
================== ====================
7
<PAGE>
Item 2. Management's Discussion and Analysis or Plan 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
position, possible financing activities, and expectations about future
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 Act of
1934, as amended, and involve risks and uncertainties. Although the Company
believes that the assumptions on which these forward-looking statements are
based are reasonable, there can be no assurance that such assumptions will prove
to be accurate and 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, regulatory policies,
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.
Until October 26, 1999, Discovery Investments, Inc. (the "Company") was a
"shell" company with no operations, assets or financial resources. During the
period from inception (September 10, 1996) until October 26, 1999, the Company
sustained operating expenses without corresponding revenues. This resulted in
the Company's incurring a net operating loss, which loss will increase until the
Company can begin operating its new business profitability.
The Company's business operations commenced on October 26, 1999. Because
the Company's business activities are not diversified, the Company may be
subject to economic fluctuations within its business or industry and therefore
increase the risks associated with the Company's operations.
For the three months ended March 31, 2000, the Company had total revenue of
$4,883,403, cost of sales of $4,242,691 and total operating expenses of
$1,099,940, resulting in net loss before other expense of $(459,228). In
addition, the Company had total other expense, consisting primarily of interest
expense, in the amount of $(278,793). As a result, the Company had a net loss of
$(738,021), or $(.05) per share, for the three months ended March 31, 2000.
Since the Company's operations commenced on October 26, 1999, a discussion
of comparative results of operations for the three-month period ended March 31,
1999, is not possible.
The Company experienced significant difficulties in operations during the
first quarter of 2000. As a result, the Company's financial condition is
imperiled, and its liquidity and capital resources have been largely exhausted.
This is primarily the result of the dramatic increase in
8
<PAGE>
the wholesale price for the petroleum during the first quarter, which created
liquidity problems for the Company as its line of credit and working capital
were exhausted. As a result of its inability to obtain petroleum product, the
Company pumped significantly less gas at its facilities during March than during
January and February, a decline which accelerated during the second quarter.
Since May 1, 2000, the Company has not been pumping gas at any of its
facilities. As a result of the liquidity problem, inventory at the Company's
am/pm mini markets also declined, resulting in decreased sales at the mini
markets during the same period.
After the end of the first quarter, the Company received a Notice of
Termination of am/pm Mini Market Agreement and Contract Dealer Gasoline
Agreement dated May 22, 2000 (the "ARCO Notice") from Atlantic Richfield Company
("ARCO"), advising the Company that ARCO intends to terminate the Contract
Dealer Agreement dated October 26, 1999, and the am/pm Mini Market Agreement
dated October 26, 1999 (collectively, the "ARCO Agreements") and the franchise
relationship between the Company and ARCO, effective at 10:00 a.m. on June 7,
2000. ARCO claims that the basis for the terminations are the Company's failure
to sell adequate or any amounts gas at the Company's facilities during certain
dates in March, April and May; failure to have sufficient retail products
available for sale to the public at the Company's am/pm mini markets on certain
dates in March, April and May; failure to pay ARCO in a timely manner amounts
due to ARCO under the existing line of credit and term loan with ARCO, in the
aggregate amount of $658,520.86 as of May 22, 2000, plus late charges; and
failure to pay royalties to ARCO with respect to the franchised am/pm mini
markets. The ARCO Notice also refers to certain non-financial breeches of the
ARCO Agreements.
The Company is holding discussions with ARCO regarding these matters, but
it is not possible to predict the outcome of these discussions.
After the end of the first quarter, the Company also received a notice of
default dated May 25, 2000 (the "Credit Suisse Notice"), from counsel to Credit
Suisse First Boston Specialty Finance LLC, formerly known as Convenience Store
Finance Company, LLC ("Credit Suisse"), stating that the Company is in default
under the Loan and Security Agreement dated October 26, 1999 (the "Credit Suisse
Loan Agreement"), pursuant to which Credit Suisse loaned the Company $7,800,000
(the "Loan"). Credit Suisse claims that the basis for the default is the
Company's failure to make monthly payments of principal and interest in March,
April and May; and certain non-financial breeches of the Credit Suisse Loan
Agreement, and the related promissory notes evidencing the Loan and Deeds of
Trust securing the Loan (the "Deeds of Trust"), including breeches of various
representations and warranties contained in the Credit Suisse Loan Agreement.
The Credit Suisse Notice demands payment of delinquent principal, interest,
default interest, late charges and servicing fees of $326,128.75, as of May 22,
2000, with additional default interest at a rate of $1,076.28 per diem from May
23, 2000, and attorneys' fees, no later than the end of business on May 31,
2000.
Should the Company fail to make such payments by such time, it is Credit
Suisse's position that (i) all indebtedness secured by the Deeds of Trust may be
accelerated and become due and payable in full without any further notice to the
Company and (ii) Credit Suisse may exercise any and all remedies available under
the Loan, including but not limited to, foreclosing on the Deeds of Trust and
having a receiver appointed. Additionally, it is Credit Suisse's position that
the Company's license to collect and retain the rents, issues, deposits and
profits of the Company's properties encumbered by the Deeds of Trust is revoked
pursuant to the terms of the Deeds of Trust.
The Company is holding discussions with Credit Suisse regarding these
matters, but it is not possible to predict the outcome of these discussions.
9
<PAGE>
The Company is actively pursuing discussions with a third party pursuant to
which the Company would receive bridge financing to satisfy the obligations
owing to ARCO and Credit Suisse, pending permanent financing. However, there are
no definitive agreements in place at this time with any financing sources
and there can be no assurance that any such agreements will be entered into,
entered into on terms that are favorable to the Company, or consummated in
sufficient time to forestall further action by ARCO and Credit Suisse. Unless
the Company is able to secure bridge financing very soon, and satisfy both ARCO
and Credit Suisse with respect to their various financial and non-financial
concerns, the Company may not be able to continue operations.
Assuming the foregoing matters can be resolved to the satisfaction of ARCO
and Credit Suisse, until additional financing is obtained and the Company's
financial situation is stabilized, the Company will not be in a position to
pursue any aspect of its plan of operations for the fiscal year ending December
31, 2000.
Because the Company's working capital has been exhausted, the Company will
not be able to meet its needs to fund existing operations at its facilities,
assuming the Company is able to recommence full operations. The Company will
have to raise additional capital, either as equity or debt, or a combination of
both, to fund such operations, at least initially. At present, there are no
arrangements or agreements for any such financing. There can be no assurance
that any such financing will be available or, if financing is available, if
it will be on terms that are favorable to the Company.
Item 3. Defaults Upon Senior Securities
For a discussion of the Company's default under the Credit Suisse Loan
Agreement, see Part I, Item 1, "Management's Discussion and Analysis or Plan of
Operation" above.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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. ("LLO-Gas"), in the Superior Court of the State of California,
County of Los Angeles (Case No. BC 225568). Mr. Castellucci is 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 Mr. Castellucci), alleges
that Mr. 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 Mr. Castellucci made certain fraudulent statements to the West Star
Board of Directors, which induced 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.
West Star seeks general and special damages of at least $3.5 million
against Mr. 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
Mr. 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.
10
<PAGE>
The Company has not yet filed an answer to the complaint. The Company
believes that it has meritorious defenses and affirmative defenses to the
lawsuit.
The parties engaged in meaningful settlement negotiations and entered into
a non-binding Letter of Intent on April 14, 2000. Pursuant to the Letter of
Intent and in order to facilitate the negotiation of a definitive settlement
agreement, the plaintiffs dismissed the lawsuit without prejudice. The terms of
the settlement agreement are presently being negotiated. In view of the inherent
uncertainties of litigation, the outcome of the settlement negotiations, or the
litigation itself, cannot be predicted.
In December 1999, M. Mehdi Mostaedi loaned the Company $150,000. The
Company and John Castellucci, President, Chief Financial Officer, Secretary,
Director and the principal shareholder of the Company, 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 Mr. Castellucci pursuant to a Pledge Agreement dated
December 16, 1999 between Messrs. Castellucci and Mostaedi. On April 11, 2000,
Mr. Mostaedi filed a lawsuit against the Company and Mr. Castellucci in the
Superior Court of the State of California, West District, Santa Monica,
California, alleging breach of contract and default under the Mostaedi Note. Mr.
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 yet filed an answer to the complaint. The
Company is seeking to commence settlement discussions with the plaintiff
regarding the lawsuit.
Item 4. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
On April 11, 2000, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission, with respect to the retention of new
independent auditors.
On April 18, 2000, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission, with respect to litigation commenced against
the Company and John D. Castellucci for breach of contract and default under a
promissory note.
On May 23, 2000, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission, with respect to the Company's first quarter
results and operating condition.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DISCOVERY INVESTMENTS, INC.
Date: June 1, 2000 By: /s/ John D. Castellucci
---------------------------------------------
President (Principal Executive Officer)
and Chief Financial Officer
12
