-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RKdKK14C3H0iBmHdzytFb6aPXbDoZZzi6OcX5oTaIJ/S1s9MaCssDBJ/sks6Nml6 GLEC5lzwEwvcZehac1Tvag== /in/edgar/work/20000601/0000944209-00-000978/0000944209-00-000978.txt : 20000919 0000944209-00-000978.hdr.sgml : 20000919 ACCESSION NUMBER: 0000944209-00-000978 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000601 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DISCOVERY INVESTMENTS INC CENTRAL INDEX KEY: 0001083459 STANDARD INDUSTRIAL CLASSIFICATION: [6770 ] IRS NUMBER: 880409151 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-26175 FILM NUMBER: 647794 BUSINESS ADDRESS: STREET 1: 23805 STEWART RANCH ROAD STREET 2: SUITE 265 CITY: MALIBU STATE: CA ZIP: 90265 BUSINESS PHONE: 3104568494 MAIL ADDRESS: STREET 1: 23805 STEWART RANCH ROAD STREET 2: SUITE 265 CITY: MALIBU STATE: CA ZIP: 90265 10QSB 1 0001.txt FORM 10-QSB (PERIOD ENDED 3/31/00) 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] PART I FINANCIAL INFORMATION Item 1. Financial Statements DISCOVERY INVESTMENTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2000 1999 -------------- ------------- (unaudited) ASSETS 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 ============= =============
See accompanying Notes to Consolidated Condensed Financial Statements 2 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 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 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 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 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 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 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 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 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 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 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 0 0 801 0 491,862 981,768 9,322,707 0 11,454,191 2,909,615 0 0 0 14,000 (783,080) 11,454,191 4,883,403 4,883,403 4,242,691 1,099,940 278,793 0 0 (738,021) 0 (738,021) 0 0 0 (738,021) (0.05) (0.05)
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