-----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, J2yBIN1hwixqTHpgN9WaJpYn091RwFy2HLAurcFxdhu9p/xduU+G6snZC0py4tQQ Rz6F5te490H3L0pToHYR5Q== 0001011034-96-000105.txt : 19961101 0001011034-96-000105.hdr.sgml : 19961101 ACCESSION NUMBER: 0001011034-96-000105 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961031 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DISCOVERY TECHNOLOGIES INC /KS/ CENTRAL INDEX KEY: 0000857949 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 363526027 STATE OF INCORPORATION: KS FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18606 FILM NUMBER: 96650730 BUSINESS ADDRESS: STREET 1: 1299 FOURTH ST STREET 2: STE 400 CITY: SAN RAFAEL STATE: CA ZIP: 94901 BUSINESS PHONE: 4154573442 MAIL ADDRESS: STREET 2: 1507 PINE STREET CITY: BOULDER STATE: CO ZIP: 80302 FORMER COMPANY: FORMER CONFORMED NAME: DISCOVERY SYSTEMS INC DATE OF NAME CHANGE: 19900613 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 [ ] 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 0-18606 DISCOVERY TECHNOLOGIES, INC. ---------------------------- (Exact Name of Registrant as Specified in its Charter) Kansas 36-3526027 -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 24 Tejon Street, Colorado Springs, CO 80901 ----------------------------------------------- (Address of principal executive offices) (719) 575-0503 -------------- (Registrant's telephone number) -------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 No X --------- -------- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Check whether the Registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes No --------- -------- APPLICABLE ONLY TO CORPORATE ISSUERS: As of September 30, 1996, 3,746,196 shares of Common Stock, $1.00 par value, of the Registrant were outstanding. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of June 30, 1996 (unaudited) and December 31, 1995 Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 1996 and June 30, 1995 (unaudited) Condensed Consolidated Statement of Cash Flows for the Three Months and Six Months Ended June 30, 1996 and June 30, 1995 (unaudited) Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K PART I. FINANCIAL INFORMATION Item 1. Financial Statements The accompanying Condensed Consolidated Balance Sheets at June 30, 1996; Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 1996 and June 30, 1995; Condensed Consolidated Statement of Cash Flows for the Three Months and Six Months Ended June 30, 1996 and June 30, 1995 are unaudited but reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the financial position and results of operations for the interim period presented. These statements reflect only the performance of the Company's wholly owned subsidiaries, Rocky Mountain Taco, Inc. (RMT) and The Colorado Taco Corporation (CTC) (collectively ZuZu (registered) Colorado), and do not reflect any impact of Innovative Financial Strategies, Inc. which had no material operations during fiscal 1996, and was disposed of effective March 29, 1996. DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET UNAUDITED
JUNE 30, DEC. 31, 1996 1995 (UNAUDITED) (AUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 42,714 $ 131,279 Inventories 19,676 14,119 Prepaid expense 2,734 6,893 ----------- ----------- Total current assets 65,124 152,291 ----------- ----------- PROPERTY AND EQUIPMENT, AT COST Leasehold improvements 617,082 605,307 Furniture and fixtures 51,853 45,124 Equipment 371,705 369,215 ----------- ----------- 1,040,640 1,019,646 Less accumulated depreciation and amortization 139,833 139,108 ----------- ----------- 900,807 880,538 ----------- ----------- OTHER ASSETS Franchise fees - at cost, less accumulated amort 68,959 69,709 Development rights - at cost, less accumulated amort 239,875 239,875 Organizational costs - at cost, less accumulated amort 14,938 8,431 Loan costs - at cost, less accumulated amort 11,650 4,650 Deposits 48,867 48,867 Prepaid expenses 0 11,502 ----------- ----------- 384,289 390,034 ----------- ----------- Total assets $1,350,219 $1,422,863 =========== =========== JUNE 30, DEC. 31, 1996 1995 (UNAUDITED) (AUDITED) LIABILITIES AND STOCK HOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 83,178 66,691 Current portion of leases payable 40,100 37,015 Note payable 30,000 30,000 Accounts payable 190,536 170,871 Salaries 70,179 8,903 Development and franchise fees payable 127,500 127,500 Royalties 15,865 0 Other 0 17,381 ----------- ----------- Total current liabilities 557,358 458,361 ----------- ----------- LONG-TERM DEBT, less current maturities 427,691 469,182 ----------- ----------- LEASES PAYABLE, less current portion 131,898 159,036 ----------- ----------- COMMITMENTS AND CONTINGENCIES 0 0 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock, authorized, 1,000,000 shares of $0.01 par value issuable in series, none issued Common stock - authorized, 40,000,000 shares of $1 par value, issued, 3,527,000 3,617,000 930,000 Discount on common stock (2,608,759) 0 Accumulated deficit (774,968) (541,716) ----------- ----------- 233,273 388,284 ----------- ----------- Total liabilities and stockholders' equity $1,350,219 $1,422,863 =========== ===========
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
THREE MONTHS ENDED JUNE 30, 1996 JUNE 30, 1995 (UNAUDITED) (UNAUDITED) Net sales $ 370,340 $ 246,664 Cost of sales 318,566 178,113 ----------- ----------- Gross margin 51,775 68,551 Operating expenses - General and administrative 172,259 109,334 ----------- ----------- Profit/Loss from operations (120,484) (40,783) ----------- ----------- Other income (expenses) Interest income 638 1,860 Interest expense (19,154) (13,850) ----------- ----------- Total other expenses, net (18,516) (11,990) ----------- ----------- Net income (loss) (139,000) (52,773) =========== ===========
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 JUNE 30, 1995 (UNAUDITED) (UNAUDITED) Net sales $ 771,171 $ 487,426 Cost of sales 581,212 302,309 ----------- ----------- Gross margin 129,959 185,117 Operating expenses - General and administrative 325,950 210,560 ----------- ----------- Profit/Loss from operations (195,991) (25,443) ----------- ----------- Other income (expenses) Interest income 1,276 5,354 Interest expense (38,538) (25,289) ----------- ----------- Total other expenses, net (37,262) (19,935) ----------- ----------- Net income (loss) (233,253) (45,378) =========== ===========
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
THREE MONTHS ENDED JUNE 30, 1996 JUNE 30, 1995 (UNAUDITED) (UNAUDITED) Increase (decrease) in cash and cash equivalents Cash flows from operating activities Net loss $ (139,000) $ (52,773) Adjustments to reconcile net loss to net cash Depreciation and amortization 35,140 19,277 Change in assets and liabilities Increase in inventories (2,149) (3,457) Increase in prepaid expenses (2,734) 0 Payment of loan costs 0 0 Increase in accounts payable (13,489) 36,370 Increase in accrued & other liabilities 6,298 3,564 ----------- ----------- Net cash provided by (used in) operating activities (115,934) 2,980 ----------- ----------- Cash flows from investing activities Acquisition of property and equipment 0 (166,797) Payments of franchise fees 375 162 Payments of development rights 0 1,590 Payments of organizational costs 103 49 Increase in deposits 0 0 ----------- ----------- Net cash used in investing activities 478 (164,997) ----------- ----------- Cash flows from financing activities Proceeds on long-term debt 0 0 Principal payments on long-term debt (8,219) (4,981) Proceeds from note payable 0 0 Principal payments on capital leases (9,102) (5,306) Proceeds from issuance of common stock 39,000 0 Changes in related party payables 0 0 Changes in refunded payables 0 0 ----------- ----------- Net cash provided by financing activities 21,678 (10,286) ----------- ----------- Net increase (decrease) in cash and cash equivs. (93,777) (172,303) Cash and cash equivalents at beginning of period 86,314 425,637 ----------- ----------- Cash and cash equivalents at end of period (7,463) 253,334 ----------- ----------- Cash paid during the year for interest 19,154 13,850 ----------- -----------
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 JUNE 30, 1995 (UNAUDITED) (UNAUDITED) Increase (decrease) in cash and cash equivalents Cash flows from operating activities Net loss $ (233,253) $ (45,378) Adjustments to reconcile net loss to net cash Depreciation and amortization 70,117 30,444 Change in assets and liabilities Increase in inventories (5,557) (8,085) Increase in prepaid expenses 4,159 1,500 Payment of loan costs (10,435) (688) Increase in accounts payable (19,665) 52,328 Increase in accrued & other liabilities 26,284 10,527 ----------- ----------- Net cash provided by (used in) operating activities (168,350) 40,648 ----------- ----------- Cash flows from investing activities Acquisition of property and equipment (20,994) (291,848) Payments of franchise fees 750 (24,910) Payments of development rights 0 (109,612) Payments of organizational costs (6,507) (973) Increase in deposits 0 0 ----------- ----------- Net cash used in investing activities (26,750) (427,342) ----------- ----------- Cash flows from financing activities Proceeds on long-term debt 0 270,000 Principal payments on long-term debt (16,438) (9,962) Proceeds from note payable 0 0 Principal payments on capital leases (18,204) (10,612) Proceeds from issuance of common stock 91,000 0 Changes in related party payables 0 0 Changes in refunded payables 0 (25,000) ----------- ----------- Net cash provided by financing activities 56,357 224,427 ----------- ----------- Net increase (decrease) in cash and cash equivs. (138,743) (162,267) Cash and cash equivalents at beginning of period 131,279 448,850 ----------- ----------- Cash and cash equivalents at end of period (7,464) 286,538 ----------- ----------- Cash paid during the year for interest 38,538 25,289 ----------- -----------
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED - --------------------------------------------------------------------------- FINANCIAL STATEMENTS - -------------------- 1. Background ---------- Discovery Technologies Inc. ("Discovery" or the "Company") was incorporated in February, 1987 under the laws of the State of Kansas. Effective October 1, 1993, Discovery merged with Innovative Financial Strategies, Inc. (IFS). IFS was incorporated under the laws of the State of Delaware and was engaged in the business of providing revenue enhancement consulting services to hospitals and other health care clientele. Effective March 29, 1996 Discovery acquired one hundred percent (100%) of the issued and outstanding shares of Rocky Mountain Taco, Inc., a Colorado corporation, and one hundred percent (100%) of the issued and outstanding shares of The Colorado Taco Corporation, a Colorado Corporation (collectively called ZuZu (registered) Colorado), Colorado developers of ZuZu (registered) Handmade Mexican Food restaurants (the "Reorganization"). For accounting purposes, the transaction was accounted for as a reverse acquisition whereby Discovery was considered to have been acquired by ZuZu (registered) Colorado. As part of the Reorganization, IFS was sold to Mr. Don McCrea-Hendrick for 126,221 shares of the Company's Common Stock and forgiveness of $175,000 in past due salary along with a mutual release with the Company whereby the parties agreed to terminate all obligations under Mr. McCrea-Hendrick's employment agreement. In addition IFS and Mr. McCrea-Hendrick agreed to indemnify the Company against any and all liabilities which existed on or before December 31, 1995. Following consummation of the Reorganization, Discovery remained as the surviving entity, and as a result, the Company will retain Discovery's capital structure. 2. INTERIM FINANCIAL STATEMENTS ---------------------------- The condensed consolidated balance sheet of Discovery Technologies, Inc. and Subsidiaries as of June 30, 1996 and the condensed consolidated statements of operations and cash flows for the three months and six months ended June 30, 1996 and June 30, 1995 are unaudited, but include all adjustments (consisting of only normal recurring accruals) which the Company considers necessary for a fair presentation of its consolidated positions, results of operations and cash flows of these periods. These interim financial statements do not include all disclosures required by generally accepted accounting principles and therefore should be read in conjunction with the Company's financial statements and notes thereto included in the Company's latest annual report on Form 10-KSB. Results of operations for interim periods are not necessarily indicative of the results for a full year. 3. INCOME TAXES ------------ The Company provides for deferred income taxes under an asset and liability approach in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" which generally requires that the tax asset or liability be computed based upon the statutory income tax rates in effect when the differences in reporting income and expenses for financial and tax reporting purposes are reported on the tax return. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF DISCOVERY TECHNOLOGIES, INC. The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Effective March 29, Discovery sold IFS to Don McCrea-Hendrick and, concurrently with the sale of IFS acquired one hundred percent (100%) of the outstanding Common Stock of ZuZu (registered) Colorado. For accounting purposes, the transaction was accounted for as a reverse acquisition whereby Discovery was considered to have been acquired by ZuZu (registered) Colorado. As a result, ZuZu (registered) Colorado's operations are the only operations of the Company following the Reorganization. Therefore, portions of the following discussions compare the Company's liquidity, capital resources and results of operations to those of ZuZu (registered) Colorado for the prior year. LIQUIDITY AND CAPITAL RESOURCES - JUNE 30, 1996 COMPARED TO DECEMBER 31, 1995 Total assets decreased from $1,422,863 on December 31, 1995 to $1,350,219 on June 30, 1996, a decrease of 5.1%. The decrease is attributed to dispersion of funds to complete construction on a new location and the payment of Accounts Payable. Current assets decreased from $152,291 as of December 31, 1995 to $65,124 as of June 30, 1996 or 57.24%. The Company's cash account fell substantially from $131,279 on December 31, 1995 to $42,714 on June 30, 1996, a decrease of $88,565. Property and Equipment/Other Assets increased $14,524 or 1.1% over the amount reported on December 31, 1995. These increases reflect the continued construction of a new ZuZu (registered) Handmade Mexican Food restaurant in Colorado Springs, Colorado. The Company's current liabilities increased $98,997 or 21.6%. Long term debt decreased from $469,182 as of December 31, 1995 to $427,691 as of June 30, 1996. The Company continued to suffer a working capital deficit due to development costs and losses from operations. To this end, the Company's working capital deficit increased from $(306,070) on December 31, 1995 to ($492,234) on June 30, 1996, an increase of $186,164. The Company has continued to expand the ZuZu (registered) concept in Colorado with the addition of a fifth restaurant in Colorado Springs, Colorado. On May 29, 1996 the Company signed a letter of intent to purchase seventeen Arby's Roast Beef restaurants from Circle Restaurant Company of Denver, Colorado. The units are located in southern Colorado with the largest concentration in Colorado Springs, Colorado. Triarc Restaurant Group, parent company of Arby's Roast Beef, and ZuZu (registered), Inc., parent company of ZuZu (registered) Handmade Mexican Food, signed an agreement to co-brand ZuZu (registered) with Arby's. The agreement is in force throughout the United States with the exception of the state of Colorado. The Company intends to co- brand as many of the Arby's units in southern Colorado as is practical. The Company will need to raise at least $2,200,000 through a debt agreement or through sale of equity to complete the purchase. To date, however, the Company has not obtained any commitments for additional capital, and there can be no assurance that the Company will be able to raise the needed capital on terms favorable or acceptable to the Company. The letter of intent is non-binding and so there is no assurance that the purchase will be consummated. The Company anticipates continued improvement in liquidity through modest increases in current assets as sales and marketing efforts improve. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995 Revenues for the six months ended June 30, 1996 increased over the same period in 1995. Specifically revenues, for the six month period ended June 30, 1996 were $711,171, up from $487,426 reported June 30, 1995 or nearly 46%. Gross Margin decreased from $185,117 as of June 30, 1995 to $129,959 as of June 30, 1996 as a result of the inefficiencies experienced in startup of a new site. General and Administrative expenses increased from $210,560 as of June 30, 1995 to $325,950, an increase of nearly 55%. The increase in these expenses was due to the merger between ZuZu (registered) Colorado and the Company. Interest income decreased from $5,354 to $1,276 and Interest Expense went from $19,935 to $37,262 for the six months ended June 30, 1995 and June 30, 1996 respectively. As a result the Net Loss increased from ($45,378) to ($233,253). Likewise, the Company's net loss per share increased to ($.0645) per share. The Company intends to lower operating expenses through control of labor and food costs with the addition of a commissary to provide most of the food preparation necessary for the five operating sites. The commissary will reduce kitchen labor costs at the unit level by reducing the amount of food preparation, enhance training and product consistency, and reduce food costs by concentrating delivery of food to one site, reducing delivery costs, thus allowing ZuZu (registered) to take advantage of volume purchase discounts. In addition, the Company has negotiated an agreement with Bethesda Management to reduce the standard lease costs on the site located at 1899 S. Nevada Ave., Colorado Springs, Colorado in return for percentage rent agreements. The reduction will lower the base costs of the site during the start up of the site when revenues are expected to be lower. Management believes that the actions underway to reduce labor cost and food cost will improve the gross profit margin of the operations and that when adequate funding is available, a substantial advertising program can be initiated to improve market awareness and thus revenue and profit margin. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 Revenues for the three months ended June 30, 1996 increased over the same period in 1995. Specifically revenues, for the three month period ended June 30, 1996 were $370,340, up from $246,664 reported June 30, 1995 or 50.14%. Gross Margin decreased from $68,551 as of June 30, 1995 to $51,775 as of June 30, 1996 as a result of the inefficiencies experienced in startup of a new site. General and Administrative expenses increased from $109,334 as of June 30, 1995 to $172,259, an increase of 57.6%. The increase in these expenses was due to the merger between ZuZu (registered) Colorado and the Company. Interest income decreased from $1,860 to $638 and Interest Expense went from $13,850 to $19,154 for the three months ended June 30, 1995 and June 30, 1996 respectively. As a result the Net Loss increased from ($52,773) to ($139,000). Likewise, the Company's net loss per share increased to ($.0384) per share. Management believes that the actions underway to reduce labor cost and food cost will improve the gross profit margin of the operations and that when adequate funding is available, a substantial advertising program can be initiated to improve market awareness and thus revenue and profit margin. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On March 21, 1996 Contract Media Specialists, Inc. d.b.a. Entree-Denver initiated suit against The Colorado Taco Corporation in the County Court, El Paso County, Colorado, for non-payment of $3,000 in fees charged for placement of advertisement in Entree magazine. The Company contended that Entree was in direct violation of the contract which describes specific requirements for placement of the advertising material. On October 3, 1996 the County Court of El Paso County, State of Colorado, ruled in favor of the Company, denying Entree any collection and causing Entree to pay court costs and reasonable attorney's fees to the Company. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULT UPON SENIOR SECURITIES In December, 1995, Innovative purchased certain secured promissory notes in return for Innovative issuing its own Note in the amount of $200,000. The Note called for monthly payments of $40,000 each commencing in January, 1996. Innovative has refused to make payments on the Note claiming numerous defenses and counterclaims based upon misrepresentations in the transaction. These obligations are the sole responsibility of Innovative Financial Strategies and Don McCrea-Hendrick as part of the acquisition of the Company by ZuZu (registered) Colorado. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits - None 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 hereunto duly authorized. DISCOVERY TECHNOLOGIES, INC. Dated: October 30, 1996 By: /s/ D. William Hill ------------------------------ D. William Hill, Chief Executive Officer Dated: October 30, 1996 By: /s/ Craig T. Rogers ------------------------------ Craig T. Rogers, Chief Financial Officer and Chief Accounting Officer EX-27 2
5 6-MOS DEC-31-1995 JUN-30-1996 42,714 0 0 0 19,676 65,124 1,040,640 139,833 1,350,000 557,358 0 0 0 3,617,000 (3,383,727) 1,350,219 771,171 771,171 581,212 581,212 325,950 0 (38,538) (233,253) 0 (233,253) 0 0 0 (233,253) (.07) (.07)
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