<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 June 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)
Nevada 88-0409151
----------------------- --------------------
(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)
23805 Stewart Ranch Road, Suite 265
Malibu, California 90265
-------------------------------------------------
(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:
Class Outstanding at June 30, 2000(1)
----- ----------------------------
Common Stock, par value 2,100,000
$.001 per share
----------------
(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 holds 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]
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BALANCE SHEET - ASSETS 4
BALANCE SHEET - LIABILITIES AND STOCKHOLDERS' EQUITY 5
STATEMENT OF OPERATIONS 6
STATEMENT OF STOCKHOLDERS' EQUITY 7
STATEMENT OF CASH FLOWS 8
NOTES TO FINANCIAL STATEMENTS 9
</TABLE>
3
<PAGE> 4
PART I
FINANCIAL INFORMATION
Item I. Financial Statements
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
RESTATED
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
6 Mos Ending Year Ended
June 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
4
<PAGE> 5
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
RESTATED
BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
6 Mos Ending Year Ended
June 30, 2000 December 31, 1999
(Unaudited) (Unaudited)
----------- ----------------
<S> <C> <C>
CURRENT LIABILITIES
Officers Advances (Note 6) $ 13,225 $ 0
Interlochen Enterprises 100,000 0
Alschuler Grossman Stein & Kahan LLP 84,989 0
Interest Payable - Notes 102,198 25,000
----------- -----------
TOTAL CURRENT LIABILITIES $ 300,412 $ 25,000
----------- -----------
LONG TERM LIABILITIES
Interlochen Enterprises 250,000 250,000
Meridian Enterprises 250,000 250,000
CRS Financiers 1,000,000 1,000,000
----------- -----------
TOTAL LONG TERM LIABILITIES $ 1,500,000 $ 1,500,000
----------- -----------
TOTAL LIABILITIES $ 1,800,412 $ 1,525,000
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 ($1,798,312) ($1,522,900)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIENCY $ 1,800,412 $ 1,525,000
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY ($1,798,312) ($1,522,900)
----------- -----------
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
RESTATED
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Sep.10, 1996
6 Mos Ended Year Ended Year Ended (Inception)
June 30, Dec. 31, Dec. 31, to June 30,
2000 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE: $ 0 $ 0 $ 0 $ 0
EXPENSES:
General, Selling and
Administrative $ 187,187 $ 13,225 $ 0 $ 15,325
---------- ---------- ---------- ----------
Total Expenses $ 187,187 $ 13,225 $ 0 $ 15,325
---------- ---------- ---------- ----------
Net Profit/
Loss (-) $ 187,187 $ -13,225 $ 0 $ -15,325
---------- ---------- ---------- ----------
Net Profit/Loss(-)
per weighted
share (Note 2) $ -.002 $ -.0063 $ NIL $ -.0073
---------- ---------- ---------- ----------
Weighted average
number of common
shares outstanding 2,100,000 2,100,000 2,100,000 2,100,000
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
RESTATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Accumu-
Common Stock paid-in lated
Shares Amount Capital Deficit
------ ------ ------- -------
<S> <C> <C> <C> <C>
Balance,
March 31, 1997 21,000 $ 2,100 $ 0 $ -2,100
Net loss year ended
March 31, 1998 0
---------
Balance,
December 31, 1997 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 0
---------
Balance,
December 31, 1999 2,100,000 $ 2,100 $ 0 $ -2,100
Net Loss,
December 31, 1999, to
June 30, 2000 1,804,512
---------
Balance,
June 30, 2000 2,100,000 $ 2,100 $1,804,512
--------- ------- ----------
</TABLE>
See accompanying notes to financial statements
7
<PAGE> 8
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
RESTATED
STATEMENT OF CASH FLOWS
-----------------------
(UNAUDITED)
<TABLE>
<CAPTION>
Sep. 10, 1996
6 Mos Ended Year Ended Year Ended (Inception)
June 30, Dec. 31, Dec. 31, to June 30,
2000 1998 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash Flow from
Operating Activities
Net Loss $ 0 $ 0 $ 0 $ -15,325
Adjustment to reconcile
net loss to net cash
provided by operating
activities 0 0 0 0
Changes in Assets
and Liabilities
Increase in current
Liabilities
Officers Advances 1,800,412 0 0 $ +13,225
---------- -------- ---------- ----------
Net cash used in
operating Activities $ 0 $ 0 $ 0 $ -2,100
Cash Flows from
Investing Activities 0 0 0 0
Cash Flows from
Financing Activities
Issuance of Common
Stock 0 0 0 +2,100
---------- -------- ---------- ----------
Net increase
(decrease)
in cash $ 0 $ 0 $ 0 $ 0
Cash, beginning
of period 0 0 0 0
---------- -------- ---------- ----------
Cash, end of period $ 0 $ 0 $ 0 $ 0
---------- -------- ---------- ----------
</TABLE>
See accompanying notes to financial statements
8
<PAGE> 9
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
June 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 June 30, 2000.
9
<PAGE> 10
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 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 June 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.
10
<PAGE> 11
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 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 June 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 June 30, 2000, is as follows:
Net operation loss carry forward $ 2,100
Valuation allowance $ 2,100
Net deferred tax asset $ 0
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.
11
<PAGE> 12
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 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 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
Mehdi Mostaedi. A mutual rescission occurred (see Note 9) and said
rescission is subject to the rights, if any, that 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.
12
<PAGE> 13
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 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/off- icers 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 then 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). Until August 10,
2000, Mr. 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 Mr. Castellucci), alleges that Mr.
Castellucci breached
13
<PAGE> 14
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, and December 31, 1999
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 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.
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.
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 $150,000. LLO- Gas
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 Mr. 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, 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. The Company believes that it has
meritorious defenses and affirmative defenses to the lawsuit in that the
Company was not a party to the Mostaedi Note.
14
<PAGE> 15
DISCOVERY INVESTMENTS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, and December 31, 1999
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.
15
<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.
16
<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, this loss will increase until the Company
acquires a profitable business.
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. 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. and not the Company. Predicated upon the differences of matters of
fact and matter of law, the parties entered into a Mutual Rescission Agreement
and Mutual Release (See Part II, Item 6).
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.
Giving effect to the recission of the Plan and Agreement of Reorganization,
the Company has no operating history nor any 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
may result 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 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
17
<PAGE> 18
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. ("LLO-GAS"), in the Superior Court of the State of California,
County of Los Angeles (Case No. BC 225568). Until August 10, 2000, Mr.
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 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
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.
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.
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 $150,000. LLO-Gas
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 Mr.
Castellucci pursuant to a Pledge Agreement dated December 20, 1999 between John
Castellucci
18
<PAGE> 19
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, 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. The Company believes that it has meritorious
defenses and affirmative defenses to the lawsuit in that it was not a party to
the Mostaedi Note.
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
Item 5 - Other Information
(a) The following table lists, as of June 30, 2000 giving effect to the
Mutual Rescission Agreement and Mutual Release, 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.
<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
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
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 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 (9,900,000) 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.
(b) Giving effect to the closing which occurred on December 20, 1999, John
Castellucci had served as the President, Chief Financial Officer, Secretary and
Director of the Company. There are no agreements or understandings for any
officer or director to serve as such or resign at the request of another person,
other than on December 20, 1999, Kimberly Lynn Jack, Scott A. Jack and Debra S.
Hackney, directors and officers resigned all positions in connection with the
Plan and Agreement of Reorganization. Other than restoring Kimberly Lynn Jack,
Scott A. Jack and Debra S. Hackney as current directors as part of the
rescission described in Part I, Item II, and hereinbelow, there has been no
other changes in control of the Company.
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None of the Company's current officers and directors receive any
compensation for their services. All compensation for services of John
Castellucci had been allocated to LLO-Gas, Inc., the former wholly owned
subsidiary of the Company. The Board of Directors has not established any
standing committees or subcommittees. In the last quarter the sole member of the
Board of Directors held three (3) meetings by written consent.
The reinstalled and new directors are as are follows:
Kimberly Lynn Jack
Scott A. Jack
Debra S. Hackney
Each of the officers and directors have entered into a lock up agreement as
of May 3, 1999 and said lock up agreements have been filed as an exhibit to
Company's General Form for Registration of Securities of Small Business Issuers
on Form 10-SB filed, with the Securities and Exchange Commission on June 24,
1999. Although said lock up agreements may have terminated in connection with
the closing of the Plan and Agreement of Reorganization, with LLO-Gas, Inc. and
John Castellucci as at December 20, 1999, with the closing under the Mutual
Rescission Agreement and Mutual Release, said lock up agreements have been
reinstated, ab initio.
The background information on each of the directors is as follows:
Kimberly Lynn Jack, age 31, has been a shareholder of the Company since
1996 and has been its President and a director of the of the Company since
1999. From 1993 to 1997. she was a student and homemaker. From 1997 to the
present, she has been a parent-involvement worker for the Wichita, Kansas
United School District at Lawrence Elementary, with responsibilities for
the identification and resolution of troubled children syndrom and provides
counseling to both the parent and child.
Scott A. Jack, age 34, has been a shareholder of the Company since 1996 and
has been Secretary/Treasurer and a director of the Company since 1999. From
1992 to 1997, he was the owner of Kansas Building Supply, a company which
designed and installed, primarily, floor covering. From 1997 to the
present, he has been employed by Star Lumber Company as a senior floor
covering specialist.
Debra S. Hackney, age 40, has been a shareholder of the Company since 1996
and has been a director of the Company since 1999. From 1989 to the
present, she has been the facility coordinator and senior construction
specialist for Pizza Hut, Inc., with responsibilities involving
construction documentation and payments for the company's expansion and
dotting program.
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(c) If required, except for the shares of stock held pursuant to the Pledge
Agreement for the benefit of M. Mehdi Mostaedi, the Company intends to file a
complaint for cancellation of any certificates evidencing shares of stock which
may be subject to the Mutual Rescission Agreement and Mutual Release and request
that said shares be deemed canceled and restored to authorized but unissued
shares of stock.
Item 6 - Exhibits and Reports on Form 8-K
(a) Mutual Rescission Agreement and Mutual Release.
(b) Form 10-SB filed with the Securities and Exchange Commission on June
24, 1999. (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: August 21, 2000 DISCOVERY INVESTMENTS, INC.
(Company)
By: /s/ Kimberly Lynn Jack
---------------------------
Kimberly Lynn Jack
President
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