-----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, AerbigCEw00SJXktgla3xty0BrxKgT7iDi350DHNWrgrl4bn7cuPXrMUIfstaT1q iXBXQu9aylHSqIkU+eKSJA== 0000950148-01-500737.txt : 20010516 0000950148-01-500737.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950148-01-500737 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DISCOVERY INVESTMENTS INC CENTRAL INDEX KEY: 0001083459 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [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: 1637047 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 v72763e10qsb.txt FORM 10-QSB 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 MARCH 31, 2001. 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.) 6767 W. Tropicana Boulevard, Suite 207 Las Vegas, Nevada 89103 - -------------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) 2980 S. Rainbow Boulevard, Suite 108 Las Vegas, Nevada 89146 ------------------------------------------- (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 [ ] 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 March 31, 2001 (1) ----- --------------------------------- Common Stock, par value 2,100,000 (1) $.001 per share - ---------------- (1) See Part II, Item 5. Transitional Small Business Disclosure Format: Yes [ ] No [X] PART I FINANCIAL INFORMATION Item I. Financial Statements BALANCE SHEET ASSETS
Restated 3/31/01 Year Ended (Unaudited) 12/31/99 ----------- ---------- CURRENT ASSETS $ 0 $ 0 --------- ------- TOTAL CURRENT ASSETS $ 0 $ 0 --------- ------- OTHER ASSETS $ 0 $ 0 --------- ------- TOTAL OTHER ASSETS $ 0 $ 0 --------- ------- TOTAL ASSETS $ 0 $ 0 --------- -------
-2- 3 BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------
Year Ended Restated 3/31/01 Year Ended (Unaudited) 12/31/00 ----------- ---------- CURRENT LIABILITIES Officers Advances (Note 6) $ 17,567 $ 16,501 Interlochen Enterprises 100,000 100,000 Alschuler Grossman Stein & Kahan LLP 84,989 84,989 Ronald J. Stauber 7,500 7,500 Savoy Financial Group, Inc. 1,303 1,303 Interest Payable - Notes 157,050 157,050 ----------- ----------- TOTAL CURRENT LIABILITIES $ 368,418 $ 367,343 ----------- ----------- LONG TERM LIABILITIES Interlochen Enterprises 250,000 250,000 Meridian Enterprises 250,000 250,000 CRS Financial Corp., Ltd. 1,000,000 1,000,000 ----------- ----------- TOTAL LONG TERM LIABILITIES $ 1,500,000 $ 1,500,000 ----------- ----------- TOTAL LIABILITIES $ 1,868,418 $ 1,867,343 =========== =========== STOCKHOLDERS EQUITY (Note 4) Common stock, $.001 par value authorized 25,000,000 shares issued and outstanding at December 31, 2000 - 2,100,000 shares; December 31, 1999 - 2,100,000 shares; September 31, 2000 - 2,100,000 shares $ 2,100 $ 2,100 Additional paid in Capital 0 0 Accumulated loss (1,870,518) (1,869,443) ----------- ----------- TOTAL STOCKHOLDERS EQUITY (1,868,418) (1,867,343) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 0 $ 0 ----------- -----------
See accompanying notes to financial statements. -3- 4 STATEMENTS OF INCOME (RESTATED)
SEPT. 10, 1996 THREE MONTHS ENDED YEARS ENDED (INCEPTION) TO MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31, 2001 2000 2000 1999 2001 --------- --------- ------------ ------------ --------- REVENUES $ 0 $ 0 $ 0 $ 0 $ 0 COST OF REVENUE 0 0 0 0 0 GROSS PROFIT $ 0 $ 0 $ 0 $ 0 $ 0 GENERAL, SELLING AND ADMINISTRATIVE EXPENSES 1,075 326,689 1,075 327,764 ----------- ----------- ----------- ----------- ---------- OPERATING (LOSS) $ (1,075) $ $ (326,689) $ (1,725) $ (327,764) NONOPERATING INCOME (EXPENSE) 0 0 0 0 0 NET (LOSS) $ (1,075) $ $ (326,689) $ (1,725) $ (327,764) =========== =========== =========== =========== ========== NET (LOSS) PER SHARE, BASIC AND DILUTED (NOTE 2) $ (NIL) $ (0.01) $ (.1556) $ (0.00) $ (0.156) =========== =========== ========== =========== ========== AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 2,100,000 2,100,000 2,100,000 2,100,000 2,100,000 ========== =========== ========== =========== ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. -4- 5 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -------------------------------------------- (RESTATED)
Additional Common Stock paid-in Accumulated Shares Amount Capital Deficit ------------ ----------- ----------- ----------- Balance, March 31, 1997 21,000 $ 2,100 $ 0 $ (2,100) Net loss year ended December 31, 1997 0 ----------- ----------- ----------- ----------- Balance, December 31, 1997 21,000 $ 2,100 $ 0 $ (2,100) Net loss year ended December 31, 1998 0 ----------- ----------- ----------- ----------- Balance, December 31, 1998 21,000 $ 2,100 $ 0 $ (2,100) March 15, 1999 Changed from no par value to $.001 (2,079) 2,079 March 15, 1999 Forward Stock Split 100:1 2,079,000 2,079 (2,079) Net loss year ended December 31, 1999 (1,540,654) ----------- ----------- ----------- ----------- Balance, December 31, 1999 2,100,000 $ 2,100 $ 0 $(1,542,754) Net Loss, December 31, 2000 (326,689) ----------- ----------- ----------- ----------- Balance, December 31, 2000 2,100,000 $ 2,100 0 $ 1,869,443 ----------- ----------- ----------- ----------- Net Loss period ended March 31, 2001 0 $ (1,075) ----------- ----------- ----------- ----------- Balance, December 31, 2000 2,100,000 $ 2,100 0 $ 1,870,518 ----------- ----------- ----------- -----------
See accompanying notes to financial statements. -5- 6 STATEMENTS OF CASH FLOWS
SEPT. 10, 1996 THREE MONTHS ENDED YEARS ENDED (INCEPTION) TO MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31, 2001 2000 2000 1999 2001 --------- --------- ------------ ------------ --------- CASH FLOWS FROM OPERATING ACTIVITIES NET (LOSS) $ (1,075) $ (0) $(326,689) $ (1,725) $(326,689) ADJUSTMENTS TO RECONCILE NET (LOSS) TO CASH (USED IN) OPERATING ACTIVITIES: CHANGES IN ASSETS AND LIABILITIES INCREASE IN ACCOUNTS PAYABLE 1,075 0 0 0 1,075 INCREASE IN OFFICER ADVANCES 0 16,501 16,501 16,501 17,576 --------- --------- --------- --------- --------- NET CASH (USED IN) OPERATING ACTIVITIES $ 0 $ 0 $ 0 $ 0 $ 0 --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES $ 0 $ 0 $ 0 $ 0 $ 0 --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES ISSUANCE OF COMMON STOCK 0 0 0 0 2,100 NET CASH (USED IN) FINANCING ACTIVITIES $ 0 $ 0 $ 0 $ 0 $ 2,100 --------- --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH $ 0 $ 0 $ 0 $ 0 $ 0 CASH, BEGINNING OF PERIOD ...... 0 0 0 0 0 CASH, END OF PERIOD ............ $ 0 $ 0 $ 0 $ 0 $ 0 ========= ========= ========= ========= =========
See accompanying notes to financial statements. -6- 7 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 March 31, 2001. 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 December 31, 2000, the Company had no dilative common stock equivalents such as stock options. -7- 8 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 were no material Year 2000 concerns. NOTE 3 - INCOME TAXES There is no provision for income taxes for the period ended December 31, 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 December 31, 2000, is as follows: Net operation loss carry forward $ 327,764 Valuation allowance $ 2,100 -------- Net deferred tax asset $ 325,664 =========
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. 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. 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. Preferred Stock - --------------- Discovery Investments, Inc. has no preferred stock. -8- 9 Pledge - ------ John Castellucci entered into a Pledge Agreement with M. Mehdi Mostaedi on or about December 16, 1999, subject to the closing of the Plan and Agreement of Reorganization on December 20, 1999, wherein John Castellucci collaterally pledged 2,000,000 shares of his common stock of the Company to M. Mehdi Mostaedi. A mutual rescission occurred (see Note 9) The pledge holder under the collateral pledge agreement holds as collateral certain shares of LLO-Gas, Inc. as 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. 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. -9- 10 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 Febrary 29, 2000, West Star Energy Group, Inc. ("West Star") sued John Castellucci, the Company and its wholly- owned operating subsidiary, LLO-Gas, Inc., in the Superior Court of the State of California, County of Los Angeles (Case Number BC 225568). Until August 10, 2000, John Castellucci was President, Chief Financial Officer, Secretary, director and the principal shareholder of the Company, and President, a director and the principal shareholder of West Star. West Star, through its Board of Directors (other than John Castellucci), alleges that John Castellucci breached his fiduciary duty to West Star and engaged in a series of unauthorized transactions for his personal benefit. The plaintiff also alleges that John Castellucci made certain fraudulent statements to the West Star Board of Directors, which inducted them not to exercise a West Star business opportunity to acquire the ARCO Facilities for itself and to consent to the acquisition of the ARCO Facilities by LLO-Gas, Inc. West Star seeks general and special damages of at least $3.5 million against John Castellucci. West Star seeks the imposition of a constructive trust on the Company's facilities which were purchased from ARCO (the "ARCO Facilities") and an order compelling the Company to return the ARCO Facilities, and all proceeds therefrom, to West Star. West Star also seeks damages against John Castellucci and the Company of at least $3.5 million for unfair competition. In addition, West Star seeks an accounting from the defendants. West Star also seeks to recover the costs of the suit, prejudgment interest, attorneys' fees and such other relief as the court may deem just and proper. John Castellucci had informed the Company that it had filed an answer to the complaint. The Company believes that it has meritorious defenses and affirmative defenses to the lawsuit. (b) In December 1999, M. Mehdi Mostaedi loaned LLO-Gas, Inc. $150,000. LLO-Gas, Inc. and John Castellucci jointly executed a promissory note dated December 16, 1999 (the "Mostaedi Note") in the principal amount of $150,000. The Mostaedi Note bears interest at the rate of 9% per annum and was due and payable as to principal and interest on February 16, 2000. The Mostaedi Note was secured with a pledge of -10- 11 common stock owned by John Castellucci pursuant to a Pledge Agreement dated December 20, 1999 between John Castellucci and M. Mehdi Mostaedi. On April 11, 2000, M. Mehdi Mostaedi filed a lawsuit against the Company and John Castellucci in the Superior Court of the State of California, West District, Santa Monica, California (Case Number SC 016250), alleging breach of contract and default under the Mostaedi Note. M. Mehdi Mostaedi seeks damages in the amount of $150,000, interest on that amount at the rate of 9% from December 16, 1999, and costs of the suit. The Company has been served with the complaint but has not filed an answer to the complaint. On or about August 17, 2000, M. Mehdi Mostaedi filed a request to enter the default against the Company (and John Castellucci). The Company believes that said filing of the request to enter the default may constitute a violation of the automatic stay provisions under the Bankruptcy Act since the complaint alleges that the Company is the successor to LLO-Gas, Inc. The Company believes that it may have meritorious defenses and affirmative defenses to the lawsuit in that it was not a party to the Mostaedi Note. (c) On October 17, 2000, Yuri Zaloznyy ("Zaloznyy") sued John Castellucci, the Company, LLO-Gas, Inc., and others, in an adversary proceeding in the United States Bankruptcy Court, Central District of California, San Fernando Valley Division. Zaloznyy seeks general and special damages from all defendants for breach of contract, fraud, breach of fiduciary duty, conversion, constructive trust, fraudulent or void conveyance, specific performance, dissolution of certain of the defendants, and damages. The Company has filed an answer to the complaint, severing itself from all other defendants to include John Castellucci and LLO-Gas, Inc. The Company believes that it has meritorious defenses and affirmative defenses to the lawsuit. (d) On September 1, 2000, the Company filed a lawsuit against John Castellucci and Does 1 through 5, inclusive, in the Superior Court of the State of California, West District, Santa Monica, California (Case Number SC062993). The complaint was for cancellation of shares and of any share certificates issued to John Castellucci. On August 10, 2000, the Company and John Castellucci had entered into a Mutual Rescission Agreement and Mutual Release. Pursuant to said Mutual Rescission Agreement and Mutual Release, John Castellucci, the record holder of 9,900,000 shares of stock of the Company, evidenced by certificate number 160, was to surrender for cancellation said shares. See Item 5 of the -11- 12 Form 10-QSB filed with the Securities and Exchange Commission on August 21, 2000 (incorporated herein by reference). The California Superior Court, on October 25, 2000, ordered that John Castellucci shall surrender for cancellation certificate number 160 to the Company or to the Company's transfer agent for cancellation and that said shares are to be restored to authorized but unissued status. It was further ordered that if Castellucci did not surrender for cancellation said certificate number 160 or cause said certificate to be surrendered, the Company may forthwith issue instructions to its transfer agent that said shares of stock are no longer to been deemed issued and outstanding, that said shares are to be restored to authorized but unissued status, and that the number of issued and outstanding shares of stock of the Company appearing on the Company's stockholder records are to be reduced by said 9,900,000 shares. Further, the California Superior Court determined that John Castellucci be deemed to not to have any right, title and interest in the 9,900,000 shares evidenced by certificate number 160. A copy of the order of the California Superior Court was delivered to the Company's transfer agent and said shares have been cancelled. (See Note 4 above.) (e) At all times relevant, there have been no reports by any officer or director of the Company or any person who directly or indirectly is the beneficial owner of more than 10% of any class of equity securities of the Company registered under the Securities Act of 1934, as amended, filed with the Securities and Exchange Commission. Further, since the reporting provisions of 16(a) of the Securities Exchange Act of 1934, as amended, are designed to ensure the prompt disclosure of holdings, there are no provisions allowing the late filing of an ownership report and there is no extension of time for the filing of an ownership report. The California Superior Court was informed that there have been no reports filed with the Securities and Exchange Commission as it relates to the shares issued to John Castellucci and the shares held by a pledge holder as it relates to M. Mehdi Mostaedi or by M. Mehdi Mostaedi. 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, -12- 13 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. 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. 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. -13- 14 On December 10, 1999, the Company entered into a Plan and Agreement of Reorganization with LLO-Gas, Inc. and John Castellucci. On December 20, 1999, there was a closing under the Plan and Agreement of Reorganization and LLO-Gas, Inc. became a wholly owned subsidiary of the Company and there was a change of control of the Company. Between December 20, 1999 and August 11, 2000, differences of opinion as to matters of fact and as to matters of law had arisen by and between certain of the shareholders of the Company, who were shareholders prior to the closing, and between the Company, John Castellucci and LLO-Gas, Inc. On June 7, 2000, LLO-Gas, Inc. filed a Voluntary Petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court, Central District of California, San Fernando Valley Division, case number SV 00-15398-AG. Said Chapter 11 Bankruptcy is currently pending and effects LLO-Gas, Inc. and not the Company. Predicated upon the differences of matters of fact and matters of law, the parties entered into a Mutual Rescission Agreement and Mutual Release (See Form 10-QSB filed with the Securities and Exchange Commission on August 21, 2000 (incorporated herein by reference)). The Mutual Rescission Agreement and Mutual Release provided, inter alia, that the Company consents and agrees to rescind that certain Plan and Agreement of Reorganization with John Castellucci consenting and agreeing to the rescission. The parties mutually agreed, pursuant to said Mutual Rescission Agreement and Mutual Release to forgo all rights and benefits provided to each other under the Plan and Agreement of Reorganization, as consideration for the rescission, ab initio, of the closing described therein. Giving effect to the recission of the Plan and Agreement of Reorganization, the Company has no revenues or earnings from operations, with no significant assets or financial resources. Accordingly, the Company will in all likelihood sustain operating expenses without corresponding revenues, at least until the consummation of a new business combination. This resulted in the Company incurring a net operating loss which will increase continuously until the Company can consummate a business combination with a profitable business opportunity and consummate such a business combination. The Company is now dependent upon its officers to meet any de minimis costs which may occur. Kimberly Lynn Jack, an officer and director of the Company, has agreed to provide the necessary funds, without interest, for the Company to comply with the Securities Exchange Act of 1934, as amended, provided that she is an officer and director of the Company when the obligation is incurred. All advances are interest-free. -14- 15 PART II OTHER INFORMATION Item 1 - Legal Proceedings (a) On Febrary 29, 2000, West Star Energy Group, Inc. ("West Star") sued John Castellucci, the Company and its wholly- owned operating subsidiary, LLO-Gas, Inc., in the Superior Court of the State of California, County of Los Angeles (Case Number BC 225568). Until August 10, 2000, John Castellucci was President, Chief Financial Officer, Secretary, director and the principal shareholder of the Company, and President, a director and the principal shareholder of West Star. West Star, through its Board of Directors (other than John Castellucci), alleges that John Castellucci breached his fiduciary duty to West Star and engaged in a series of unauthorized transactions for his personal benefit. The plaintiff also alleges that John Castellucci made certain fraudulent statements to the West Star Board of Directors, which inducted them not to exercise a West Star business opportunity to acquire the ARCO Facilities for itself and to consent to the acquisition of the ARCO Facilities by LLO- Gas, Inc. West Star seeks general and special damages of at least $3.5 million against John Castellucci. West Star seeks the imposition of a constructive trust on the Company's facilities which were purchased from ARCO (the "ARCO Facilities") and an order compelling the Company to return the ARCO Facilities, and all proceeds therefrom, to West Star. West Star also seeks damages against John Castellucci and the Company of at least $3.5 million for unfair competition. In addition, West Star seeks an accounting from the defendants. West Star also seeks to recover the costs of the suit, prejudgment interest, attorneys' fees and such other relief as the court may deem just and proper. John Castellucci and the Company have filed an answer to the complaint. The Company believes that it has meritorious defenses and affirmative defenses to the lawsuit. In view of the inherent uncertainties of litigation, the outcome of the litigation itself, cannot be predicted. (b) In December 1999, M. Mehdi Mostaedi loaned LLO- Gas, Inc. $150,000. LLO-Gas, Inc. and John Castellucci jointly executed a promissory note dated December 16, 1999 (the "Mostaedi Note") in the principal amount of $150,000. The Mostaedi Note bears interest at the rate of 9% per annum and was due and payable as to principal and interest on February 16, 2000. The Mostaedi Note is secured with a pledge of 2,000,000 shares of the Company's common stock owned by John Castellucci pursuant to a -15- 16 Pledge Agreement dated December 20, 1999 between John Castellucci and M. Mehdi Mostaedi. On April 11, 2000, M. Mehdi Mostaedi filed a lawsuit against the Company and John Castellucci in the Superior Court of the State of California, West District, Santa Monica, California (Case Number SC 016250), alleging breach of contract and default under the Mostaedi Note. M. Mehdi Mostaedi seeks damages in the amount of $150,000, interest on that amount at the rate of 9% from December 16, 1999, and costs of the suit. The Company has been served with the complaint but has not filed an answer to the complaint. On or about August 17, 2000, M. Mehdi Mostaedi filed a request to enter the default against the Company (and John Castellucci). The Company believes that said filing of the request to enter the default may constitute a violation of the automatic stay provisions under the Bankruptcy Act since the complaint alleges that the Company is the successor to LLO-Gas, Inc. The Company believes that it may have meritorious defenses and affirmative defenses to the lawsuit in that it was not a party to the Mostaedi Note. (c) On October 17, 2000, Yuri Zaloznyy ("Zaloznyy") sued John Castellucci, the Company, LLO-Gas, Inc., and others, in an adversary proceeding in the United States Bankruptcy Court, Central District of California, San Fernando Valley Division. Zaloznyy seeks general and special damages from all defendants for breach of contract, fraud, breach of fiduciary duty, conversion, constructive trust, fraudulent or void conveyance, specific performance, dissolution of certain of the defendants, and damages. The Company has filed an answer to the complaint, severing itself from all other defendants to include John Castellucci and LLO-Gas, Inc. The Company believes that it has meritorious defenses and affirmative defenses to the lawsuit. In view of the inherent uncertainties of litigation, the outcome of the litigation itself, cannot be predicted. (d) On September 1, 2000, the Company filed a lawsuit against John Castellucci and Does 1 through 5, inclusive, in the Superior Court of the State of California, West District, Santa Monica, California (Case Number SC062993). The complaint was for cancellation of shares and of any share certificates issued to John Castellucci. On August 10, 2000, the Company and John Castellucci had entered into a Mutual Rescission Agreement and Mutual Release. Pursuant to said Mutual Rescission Agreement and Mutual Release, John Castellucci, the record holder of 9,900,000 shares of stock of the Company, evidenced by certificate number 160, was to surrender for cancellation said shares. See Item 5 of the Form 10-QSB filed with the Securities and Exchange Commission on August 21, 2000 (incorporated herein by reference). -16- 17 At all times relevant, there have been no reports by any officer or director of the Company or any person who directly or indirectly is the beneficial owner of more than 10% of any class of equity securities of the Company registered under the Securities Act of 1934, as amended, filed with the Securities and Exchange Commission. Further, since the reporting provisions of 16(a) of the Securities Exchange Act of 1934, as amended, are designed to ensure the prompt disclosure of holdings, there are no provisions allowing the late filing of an ownership report and there is no extension of time for the filing of an ownership report. The California Superior Court was informed that there have been no reports filed with the Securities and Exchange Commission as it relates to certificate number 160. The California Superior Court, on October 25, 2000, ordered that John Castellucci shall surrender for cancellation certificate number 160 to the Company or to the Company's transfer agent for cancellation and that said shares are to be restored to authorized but unissued status. It was further ordered that if Castellucci did not surrender for cancellation said certificate number 160 or cause said certificate to be surrendered, the Company may forthwith issue instructions to its transfer agent that said shares of stock are no longer to been deemed issued and outstanding, that said shares are to be restored to authorized but unissued status, and that the number of issued and outstanding shares of stock of the Company appearing on the Company's stockholder records are to be reduced by said 9,900,000 shares. Further, the California Superior Court determined that John Castellucci be deemed to not to have any right, title and interest in the 9,900,000 shares evidenced by certificate number 160. A copy of the order of the California Superior Court was delivered to the Company's transfer agent and said shares have been cancelled. Item 2 - Changes in the Rights of the Company's Security Holders ..........................................None Item 3 - Defaults by the Company on its Senior Securities .........................................None Item 4 - Submission of Matter to Vote of Security Holders ...................................................None Item 5 - Other Information (a) The following table lists, as of March 31, 2001 and giving effect to the Mutual Rescission Agreement and Mutual Release and court order of October 25, 2000, the security ownership of (i) all persons known by the Company to own beneficially 5% or more of Common Stock; (ii) all executive officers; and (iii) each director of the Company. -17- 18
Name and Amount and Address of Nature of Title of Class Beneficial Beneficial Percent Owner Owner of Class - ------------------------------------------------------------------------------------------------- Common Kimberly Lynn Jack 550,000 26.2% 1916 East 50th Street Wichita, Kansas 67216 Common Scott A. Jack 550,000 26.2% 1916 East 50th South Wichita, Kansas 67216 Common Debra S. Hackney 340,000 16.2% 5262 S. Madison Wichita, Kansas 67216 Common John Castellucci (1) - 23805 Stewart Ranch Rd, #265 Malibu, California 90265 Common All Officers and 1,440,000 68.6% Directors as a Group (three [3] individuals)
- ---------------- (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. The pledge holder under the collateral pledge agreement holds as collateral certain shares of LLO- Gas, Inc. as additional collateral, under the collateral pledge agreement. (b) Although no receiver, fiscal agent or other officer has been appointed for the Company in a proceeding under the Bankruptcy Act or in any other proceeding under state or federal law in which a court or governmental entity has assumed jurisdiction over substantially all of the assets or business of the Company and no jurisdiction has been assumed by leaving the existing directors and officers in possession but subject to the supervision and orders of a court or governmental body, the Company presently is considering filing a proceeding under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court. Said bankruptcy proceeding may be required predicated upon the Company's present lack of operations, assets or financial resources to defend against those creditors claiming potential obligations or contingent obligations from the Company, in connection with the period of time that LLO-Gas, Inc. was a wholly-owned operating subsidiary of the Company. -18- 19 (c) The board held three meetings during the current quarter, which were special meetings by written consent. (d) The board of directors has not established any audit committee. In addition, the Company does not have any other compensation or executive or similar committees. The Company will not, in all likelihood, establish any audit committee until such time as the Company completes a business combination, of which there can be no assurance. The Company recognizes that an audit committee, when established, will play a critical role in the financial reporting system of the Company by overseeing and monitoring management's and the independent auditors' participation in the financial reporting process. At such time as the Company establishes an audit committee, its additional disclosures with the Company's auditors and management may promote investor confidence in the integrity of the financial reporting process. Until such time as an audit committee has been established, the full board of directors will undertake those tasks normally associated with an audit committee to include, but not by way of limitation, the (i) review and discussion of the audited financial statements with management, (ii) discussions with the independent auditors the matters required to be discussed by the Statement On Auditing Standards No. 61, as may be modified or supplemented, and (iii) received from the auditors disclosures regarding the auditors' Independents Standards Board Standard No. 1, as may be modified or supplemented. Item 6 - Exhibits and Reports on Form 8-K (a) No reports on Form 8-K were filed during the quarter for which the report is filed. 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: May 14, 2001 DISCOVERY INVESTMENTS, INC. (Company) By: /s/ Kimberly Lynn Jack ---------------------------- Kimberly Lynn Jack President -19- -----END PRIVACY-ENHANCED MESSAGE-----