UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 29, 1996
DISCOVERY TECHNOLOGIES, INC.
----------------------------
(Exact name of registrant as specified in its charter)
KANSAS 0-18606 36-3526027
- -------------------- --------------------- -----------------
State or other jurisdiction Commission file number IRS Employer
of incorporation or Identification No.
organization
24 Tejon Street, Colorado Springs, CO 80901
------------------------------------------------------------
(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code: (719) 575-0503
----------------------------------------------------------------------
------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 1: CHANGE IN CONTROL OF REGISTRANT
- -----------------------------------------
(a) Pursuant to the Closing on March 29, 1996 of a Definitive
Agreement and Plan of Reorganization (the "Agreement"), a change in
control of the Registrant occurred (the "Reorganization") in connection
with the Registrant's acquisition of one hundred percent (100%) of the
issued and outstanding shares of common stock of Rocky Mountain Taco,
Inc., a Colorado corporation, and the Colorado Taco Corporation, a
Colorado corporation, (collectively referred to as "ZuZu (registered)
Colorado").
Pursuant to the terms of the Reorganization, the Company
exchanged 2,800,000 shares of its Common Stock for a combined total of
1,159,049 shares of ZuZu (registered) Colorado's issued and outstanding
common stock. Additionally, warrants exercisable to acquire up to 124,000
shares of RMT common stock at an exercise price of $2.50 per share were
exchanged for warrants exercisable to purchase 124,000 shares of the
Company's Common Stock at an exercise price of $1.04 per share, which
warrants expire December 31, 1998. For accounting purposes, the
Reorganization has been accounted for as a reverse acquisition whereby
Discovery was considered to have been acquired by ZuZu (registered)
Colorado.
As part of the Reorganization, the Company transferred 100% of
the outstanding Common Stock of the Company's wholly-owned subsidiary,
Innovative Financial Strategies, Inc. ("Innovative") to the Company's then
Chairman and principal shareholder, Don McCrea-Hendrick. In conjunction
with the foregoing transaction, the Company entered into a separation
agreement with Mr. McCrea-Hendrick effective December 31, 1995, whereby
Mr. McCrea-Hendrick resigned as President/CEO of the Company (the
"Separation Agreement"). In May, 1996 Mr. McCrea-Hendrick resigned as a
Director of the Company. Pursuant to the terms of the Separation
Agreement, the Company and Mr. McCrea-Hendrick agreed, among other things,
to release each other from all obligations under McCrea-Hendrick's
employment agreement with the Company.
As part of the Reorganization, Mr. D. William Hill was appointed
Chairman/CEO and Mr. David W. Hill was made President/COO and a Director
of the Company. Mr. Craig Rogers remained to serve as the Company's CFO.
The executive officers and members of the Board of Directors of
the Registrant following consummation of the Reorganization, and their
respective ages and terms, are as follows:
<TABLE>
<CAPTION>
Name(1) Age Position
------ --- --------
<S> <C> <C>
D. William Hill 50 Chairman, CEO, since January 1, 1996
<PAGE>
David W. Hill 30 President, COO, Treasurer, and Director
since January 1, 1996
Craig T. Rogers 34 Secretary, CFO, and Director since
July, 1993
</TABLE>
The foregoing persons will serve in their respective capacities
as officers of the Registrant until the next regular annual meeting of the
Registrant's Board of Directors, and until their successors are elected
and qualified.
Information with respect the Messrs. Hill and Rogers is set
forth below:
D. WILLIAM HILL
Mr. Hill currently serves as Chairman of the Board of Directors
and CEO of the Company. From July 1994 until December 31, 1995 Mr. Hill
was Chairman and Director of Rocky Mountain Taco, Inc. and Colorado Taco
Corporation. Prior to this, he spent 21 years in the semiconductor
industry. From October 1990 until July 1994 he served as Chief Operating
Officer and Executive Vice President of Simtek Corp., and was involved in
Simtek's initial and secondary public stock offerings. Mr. Hill was
employed by United Technologies as Wafer Fab Manager from June 1989
through October 1990. He was employed by Advanced Micro Devices from July
1987 until June 1989 as Engineering Manager and held various positions at
Texas Instruments from June 1973 until July 1987. Mr. Hill received a
Bachelor of Science Degree in Mathematics from Texas A&M, West Texas in
1973.
DAVID W. HILL
Mr. Hill currently serves as President, Treasurer, and Director
of the Company. From March 1993 until December 31, 1995, Mr. Hill was
President, Treasurer and Director of Rocky Mountain Taco, Inc. and
Colorado Taco Corporation. During this tenure, Mr. Hill built the first
ZuZu (registered) Handmade Mexican Food restaurant outside of Dallas,
Texas and secured the development rights for the state of Colorado.
Additionally, Mr. Hill orchestrated the development, construction, and
introduction of four additional ZuZu (registered) Handmade Mexican Food
restaurants in the state of Colorado. Mr. Hill has been instrumental in
the evolution of the ZuZu (registered) concept by developing a number of
unique product offerings and promotions. From August 1992 to January
1994, Mr. Hill was a partner in a financial services company offering
mortgage consulting, property assessment, investment strategies, and
mortgage financing services. From August 1989 to August 1992, Mr. Hill
served as a corporate officer of NationsBank coordinating the nationwide
consolidation of banking institutions as well as developing, tracking and
coordinating retail home mortgage lending practices. Mr. Hill received an
MBA in August 1989 from Baylor University's Hankamer School of Business
(ATTENDED ON FULL ACADEMIC SCHOLARSHIP) and a BS in Economics from Texas
Tech University in 1987. From 1982 to 1989, Mr. Hill developed a
significant background in the food services industry serving as a head-
waiter, chef, and restaurant manager. Mr. Hill will appear at the
upcoming NATION'S RESTAURANT NEWS MUFSO (Multi-Unit Food Service
Operators) convention to speak on "Managing Growth".
<PAGE>
CRAIG T. ROGERS
Mr. Rogers has been a Director and officer of the Company since
July, 1993. Mr. Rogers had been Chief Executive Officer, President and
Director of Intelligent Financial Corporation from June 30, 1991 until its
merger with Cell Robotics on February 23, 1995. Mr. Rogers was Chief
Operating Officer of Rockies Fund, Inc., a Colorado business development
company, from July, 1993, to October 1, 1996. Mr. Rogers also serves as
Chief Financial Officer, Secretary/Treasurer, and Director of Cell
Robotics International, Inc., a developer and manufacturer of scientific
and medical laser products. From April 1988 to June 1991, he served as
Chief Financial Officer for DMA Computer Solutions, a general partnership
operating four Connecting Point franchise stores. He served as President
of DMA Financial Corporation from inception until its merger into
Intelligent Financial Corp. in September, 1991. Previously, Mr. Rogers
was Assistant Vice-President of Century Bank and he was a Commercial Loan
Officer with Colorado National Bank - Exchange in Colorado Springs,
Colorado. Mr. Rogers received a Bachelor of Arts Degree in
Business/Economics from Colorado College in 1984. He was a Boettcher
Scholar, graduated summa cum laude, Phi Beta Kappa and co-valedictorian.
EMPLOYMENT CONTRACTS
A written employment agreement with Mr. Rogers provides for the
payment of a base salary of $36,000 per year as well as the payment of
incentive compensation conditioned upon the Company achieving certain
minimum thresholds of after-tax net income. The Employment Agreement also
grants to Mr. Rogers the right to receive salary continuation for a period
of three (3) years in the event the Company terminates the Agreement
without cause prior to its expiration. The agreement expires December 31,
1996.
No employment contracts exist between the Company and Messieurs
Hill.
BENEFICIAL SHAREHOLDERS
The following table sets forth, as of the date of the Report,
the stock ownership of (i) each person known by the Company to be the
beneficial owner of five (5%) percent or more of the Company's Common
Stock, (ii) all Directors individually, (iii) all Officers, individually,
and (iv) all Directors and Officers as a group. Each person has sole
voting and investment power with respect to the shares shown, except as
noted.
<TABLE>
<CAPTION>
NAME & ADDRESS SHARES BENEFICIALLY OWNED
-------------------------
OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------ ------ -------
OFFICERS, DIRECTORS AND
PRINCIPAL SHAREHOLDERS
- ----------------------
<S> <C> <C>
Don McCrea-Hendrick(2) 334,987 8.7%
75 Capilano Dr.
Novato, CA 94949
Craig T. Rogers(3) 133,131 3.5%
4465 Northpark Drive
Colorado Springs, CO 80907
<PAGE>
D. William Hill 678,849 18.1%
24 Tejon Street
Colorado Springs, CO 80901
David W. Hill 487,064 13.0%
24 Tejon Street
Colorado Springs, CO 80901
Fred M. Seed Annuity Trust(4) 646,596 16.9%
One Citizens Plaza
Providence, RI 02903
Deborah Salzman(5) 257,650 6.9%
538 Garden Of The Gods Road
Colorado Springs, CO 80907
All current Directors and
Officers as a group (3 persons) 1,291,044 33.6%
</TABLE>
- ---------------
(1) Shares not outstanding but deemed beneficially owned by virtue
of the individual's right to acquire them as of October 1, 1996, or within
60 days of such date, are treated as outstanding when determining the
percent of the class owned by such individual and when determining the
percent owned by the group.
(2) Includes Common Stock Purchase Warrants exercisable to acquire
up to 95,833 shares of Common Stock at an exercise price of $3.00 per
share.
(3) Includes 5,804 shares owned by Mr. Rogers personally; and 24,327
shares owned of record by R.O.I., Inc., a Colorado corporation of which
Mr. Rogers is an officer, director and fifty percent shareholder. Also
includes Common Stock Purchase Warrants exercisable to acquire up to
90,000 shares of Common Stock at an exercise price of $1.00 per share, and
Common Stock Purchase Warrants exercisable to acquire up to 5,000
additional shares of Common Stock at an exercise price of $3.00 per share.
Includes Common Stock Purchase Warrants exercisable to acquire up to 8,000
shares of Common Stock at an exercise price of $1.04 per share owned of
record by R.O.I., Inc. Mr. Rogers disclaims beneficial ownership of fifty
percent (50%) of the shares and warrants owned by R.O.I., Inc. for
purposes of Section 16 of the Securities Exchange Act of 1934, as amended.
(4) Includes Common Stock Purchase Warrants exercisable to acquire
up to 80,000 shares of Common Stock at an exercise price of $1.04 per
share.
(5) Includes 48,316 shares jointly owned with her husband, Harry
Salzman.
ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS
- -----------------------------------------------
(a) Acquisition
-----------
As more fully set forth in Item 1 above, on March 29, 1996 the
Registrant consummated the reverse acquisition of Rocky Mountain Taco,
Inc., a Colorado corporation, and the Colorado Taco Corporation, a
Colorado corporation.
<PAGE>
The acquisition was structured in a manner calculated to qualify
as a tax-free reorganization under Section 368 (a)(1)(B) of the Internal
Revenue Code of 1986, as amended. Pursuant to the terms of the
Reorganization, the Company exchanged 2,800,000 shares of its Common Stock
for a combined total of 1,159,049 shares of ZuZu (registered) Colorado's
issued and outstanding shares of Common Stock, which shares constituted
one hundred percent (100%) of the issued and outstanding shares of RMT and
CTC on the effective date of the Reorganization. Additionally, warrants
exercisable to acquire up to 124,000 shares of RMT common stock at an
exercise price of $2.50 per share were exchanged for warrants exercisable
to purchase 124,000 shares of the Company's Common Stock at an exercise
price of $1.04 per share, which warrants expire December 31, 1998. For
accounting purposes, the Reorganization has been accounted for as a
reverse acquisition whereby Discovery was considered to have been acquired
by ZuZu (registered) Colorado.
ZuZu (registered) Colorado maintains its principal offices in
Colorado Springs, Colorado. The Company is the exclusive developer and
operator of ZuZu (registered) Handmade Mexican Food in the state of
Colorado. ZuZu (registered), Inc. is a Dallas, Texas based franchisor of
ZuZu (registered) Handmade Mexican Food restaurants. RMT and CTC
collectively hold the exclusive traditional and non-traditional
development rights to ZuZu (registered) Handmade Mexican Food restaurants
for the state of Colorado and are today, collectively, the largest ZuZu
(registered) franchisee. As of the date of this report, RMT and CTC
collectively operate five ZuZu (registered) restaurants.
(b) Disposition
-----------
As more fully set forth in Item 1 above, and as part of the
Reorganization, the Company transferred 100% of the outstanding Common
Stock of the Company's wholly-owned subsidiary, Innovative Financial
Strategies, Inc. ("Innovation") to Don McCrea-Hendrick.
As consideration for the transfer, Mr. McCrea-Hendrick returned
to the Company 126,221 shares of the Company's Common Stock. In addition,
Mr. McCrea-Hendrick forgave $175,000 in past due salary obligations.
Innovative and Mr. McCrea-Hendrick also assumed and agreed to pay all of
the outstanding liabilities and obligations of the Company which were
incurred and/or accrued prior to January 1, 1996, save and except for
$52,000 of liabilities which were retained by the Company. As further
consideration, the Company granted Mr. McCrea-Hendrick options exercisable
to acquire up to 85,833 shares of the Company's common stock at an
exercise price of $3.00 per share.
ITEM 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
- -------------------------------------------------------------------
EXHIBITS
--------
(a) Financial Statements
--------------------
(i) Filed herewith are the Report of Independent Certified
Public Accountants; the audited Balance Sheets as of December 31, 1993,
1994 and 1995; the audited Statements of Operations for the period
November 3, 1993 (inception) through December 31, 1993 and for the years
ended December 31, 1994 and 1995; the audited Statements of Stockholder's
Equity for the period November 3, 1993 (inception) through December 31,
1993 and for the years ended December 31, 1994 and 1995; and the audited
Statements of Cash Flows for the period November 3, 1993 (inception)
through December 31, 1993 and for the years ended December 31, 1994 and
1995, of Rocky Mountain Taco, Inc., together with the notes thereto.
<PAGE>
(ii) Filed herewith are the Report of Independent Certified
Public Accountants; the audited Balance Sheets as of December 31, 1994 and
1995; the audited Statements of Operations for the period November 23,
1994 (inception) through December 31, 1994 and for the year ended December
31, 1995; the audited Statements of Stockholder's Equity for the period
November 23, 1994 (inception) through December 31, 1994 and for the year
ended December 31, 1995; and the audited Statements of Cash Flows for the
period November 23, 1994 (inception) through December 31, 1994 and for the
year ended December 31, 1995, of The Colorado Taco Corporation, together
with the notes thereto.
(b) ProForma Combined, Condensed Financial Information
--------------------------------------------------
Filed herewith are the unaudited ProForma Combined
Condensed Financial Information of Discovery Technologies, Inc. ("DTI"),
Rocky Mountain Taco, Inc. ("RMT") and The Colorado Taco Corporation
("CTC"), (RMT and CTC shall collectively be referred to as "ZuZu
(registered) Colorado"), consisting of the unaudited proforma combined,
condensed Balance Sheet for DTI and ZuZu (registered) Colorado as of
December 31, 1995; unaudited proforma combined, condensed Statements of
Operations for DTI and ZuZu (registered) Colorado for the year ended
December 31, 1995; unaudited proforma combined, condensed Statements of
Cash Flows for DTI and ZuZu (registered) Colorado as of December 31, 1995,
with adjustments.
<PAGE>
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
ROCKY MOUNTAIN TACO, INC.
DECEMBER 31, 1993, 1994 and 1995
<PAGE>
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
BALANCE SHEETS 4
STATEMENTS OF OPERATIONS 6
STATEMENTS OF STOCKHOLDER'S EQUITY 7
STATEMENTS OF CASH FLOWS 8
NOTES TO FINANCIAL STATEMENTS 11
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Rocky Mountain Taco, Inc.
We have audited the accompanying balance sheets of Rocky Mountain Taco,
Inc. as of December 31, 1993, 1994 and 1995, and the related statements of
operations, stockholder's equity, and cash flows for the period November
3, 1993 (inception) through December 31, 1993 and the years ended December
31, 1994 and 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rocky Mountain Taco,
Inc. as of December 31, 1993, 1994 and 1995, and the results of its
operations and its cash flows for the period November 3, 1993 (inception)
through December 31, 1993 and the years ended December 31, 1994 and 1995,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $1,878, $96,598 and
$285,128 for the period November 3, 1993 (inception) through December 31,
1993 and for the years ended December 31, 1994 and 1995, respectively, and
has significant debt service requirements and restaurant development
obligations as of December 31, 1995. The Company's ability to generate
sufficient cash flows to meet these obligations, as discussed in Note B,
cannot be determined at this time. These uncertainties raise substantial
doubt about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of these uncertainties.
Colorado Springs, Colorado
April 23, 1996, except notes
J and L which are April 30, 1996
<PAGE>
<TABLE>
Rocky Mountain Taco, Inc.
BALANCE SHEETS
December 31,
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents
(inclusive of certificates
of deposits) (note A3) $202,827 $ 47,760 $ 41,577
Receivable -
related party (note I) - 6,453 -
Inventories (notes A4 and C) - 5,004 10,355
Prepaid expenses - 1,500 2,278
----------- ----------- -----------
Total current assets 202,827 60,717 54,210
----------- ----------- -----------
PROPERTY AND EQUIPMENT, AT COST
(notes A5, D and E)
Leasehold improvements 3,391 166,879 362,011
Furniture and fixtures - 31,062 38,445
Equipment 6,495 219,363 305,172
----------- ----------- -----------
9,886 417,304 705,628
Less accumulated depreciation
and amortization 90 23,876 113,244
----------- ----------- -----------
9,796 393,428 592,384
----------- ----------- -----------
OTHER ASSETS
Franchise fees - at cost, less
accumulated amortization of
$0 in 1993, $1,333 in 1994 and
$2,833 in 1995 (note A6) 15,000 21,167 34,667
Development rights - at cost,
less accumulated amortization
of $0 in 1993, $5,000 in 1994
and $10,000 in 1995 (note A6) 75,000 70,000 65,000
Organizational costs - at cost,
less accumulated amortization
of $40 in 1993, $1,006 in 1994
and $2,210 in 1995 (note A6) 3,045 5,007 5,795
Deposits 3,052 13,853 42,746
Prepaid expenses - 7,266 11,502
-------- -------- --------
96,097 117,293 159,710
-------- -------- --------
Total assets $308,720 $571,438 $806,304
======== ======== ========
The accompanying notes are an integral part of these statements.
<PAGE>
Rocky Mountain Taco, Inc.
BALANCE SHEETS
December 31,
(Continued)
1993 1994 1995
-------- -------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of
long-term debt (note E) $ - $ 30,505 $ 32,359
Current portion of leases
payable (note F) - 21,052 37,015
Note payable (note D) - - 30,000
Accounts payable 598 87,660 86,505
Salaries - 8,970 8,903
Franchise fees - - 15,000
Royalties - 2,805 -
Related party payable
(note I) - - 225
Other - 3,399 6,765
-------- -------- --------
Total current liabilities 598 154,391 216,772
-------- -------- --------
LONG-TERM DEBT, less current
maturities (note E) - 2,879 259,100
-------- -------- --------
LEASES PAYABLE, less current
portion (note F) - 112,644 159,036
-------- -------- --------
COMMITMENTS (notes F and K) - - -
-------- -------- --------
STOCKHOLDER'S EQUITY (note J)
Common stock - authorized,
1,000,000 shares of no par
value; issued, 481,429 shares
in 1993, 571,429 shares in
1994 and 695,429 shares
in 1995 310,000 400,000 555,000
Accumulated deficit (1,878) (98,476) (383,604)
-------- -------- --------
308,122 301,524 171,396
-------- -------- --------
Total liabilities and
stockholder's equity $308,720 $571,438 $ 806,304
======== =========
==========
</TABLE>
<PAGE>
<TABLE>
Rocky Mountain Taco, Inc.
STATEMENTS OF OPERATIONS
<CAPTION>
Period
November 3, 1993
(inception) through Year ended December 31,
------------------------
December 31, 1993 1994 1995
------------------- -------- --------
<S> <C> <C> <C>
Net sales $ - $383,658 $ 951,487
Cost of sales - 295,596 771,658
-------- -------- --------
Gross margin - 88,062 179,829
Operating expenses
General and administrative 1,878 177,611 415,047
-------- -------- --------
Loss from operations (1,878) (89,549) (235,218)
-------- -------- --------
Other income (expenses)
Interest income - - 269
Interest expense - (7,049) (50,179)
-------- -------- --------
Total other expenses, net - (7,049) (49,910)
-------- -------- --------
Net loss $ (1,878) $(96,598) $(285,128)
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
Rocky Mountain Taco, Inc.
STATEMENTS OF STOCKHOLDER'S EQUITY
For the period November 3, 1993 (inception)
through December 31, 1993 and the years ended
December 31, 1994 and 1995
<CAPTION>
Common Stock Accumulated
------------------
Shares Amount Deficit Total
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Balance November 3, 1993 - $ - $ - $ -
Sale of common stock 481,429 310,000 - 310,000
Net loss for the period
November 3, 1993
(inception) through
December 31, 1993 - - (1,878) (1,878)
--------- --------- --------- ---------
Balance December 31, 1993 481,429 310,000 (1,878) 308,122
Sale of common stock 90,000 90,000 - 90,000
Net loss for the year
ended December 31, 1994 - - (96,598) (96,598)
--------- --------- --------- ---------
Balance December 31, 1994 571,429 400,000 (98,476) 301,524
Sale of common stock 124,000 155,000 - 155,000
Net loss for the year
ended December 31, 1995 - - (285,128) (285,128)
--------- --------- --------- ---------
Balance December 31, 1995 695,429 $555,000 $(383,604) $ 171,396
========= ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
Rocky Mountain Taco, Inc.
STATEMENTS OF CASH FLOWS
<CAPTION>
Period
Nov. 3, 1993
(inception) Year ended
----------
through Dec. 31,
----------
Dec. 31, 1993 1994 1995
--------------- -------- --------
<S> <C> <C> <C>
Increase (decrease) in cash
and cash equivalents
Cash flows from operating activities
Net loss $ (1,878) $ (96,598) $(285,128)
Adjustments to reconcile
net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 130 31,085 97,072
Change in assets and liabilities
Increase in inventories - (5,004) (5,351)
Increase in prepaid expenses - (8,766) (5,014)
Increase (decrease) in accounts
payable - 87,062 (1,155)
Increase in accrued and other
liabilities - 15,174 494
---------- ---------- ----------
Net cash provided by (used in)
operating activities (1,748) 22,953 (199,082)
---------- ---------- ----------
Cash flows from investing activities
Acquisition of property
and equipment (9,886) (266,968) (207,538)
Payments of franchise fees (15,000) (7,500) -
Payments of development rights (75,000) - -
Payments of organizational costs (2,487) (2,928) (1,767)
Increase in deposits (3,052) (10,801) (28,893)
(Increase) decrease in related
party receivable - (6,453) 6,453
---------- ---------- ----------
Net cash used in investing
activities (105,425) (294,650) (231,745)
---------- ---------- ----------
Cash flows from financing activities
Proceeds on long-term debt - 33,851 277,754
Principal payments on long-term
debt - (467) (19,679)
Proceeds from note payable - - 30,000
Principal payments on capital leases - (6,754) (18,431)
Proceeds from issuance of
common stock 310,000 90,000 155,000
---------- ---------- ----------
Net cash provided by
financing activities 310,000 116,630 424,644
---------- ---------- ----------
<PAGE>
Rocky Mountain Taco, Inc.
STATEMENTS OF CASH FLOWS
(Continued)
Period
Nov. 3, 1993
(inception) Year ended
----------
through Dec. 31,
----------
Dec. 31, 1993 1994 1995
--------------- -------- --------
Net increase (decrease)
in cash and cash
equivalents 202,827 (155,067) (6,183)
Cash and cash equivalents at
beginning of period - 202,827 47,760
---------- ---------- ----------
Cash and cash equivalents at
end of period $ 202,827 $ 47,760 $ 41,577
========== ========== ==========
Cash paid during the year
for interest: $ - $ 7,050 $ 48,375
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Rocky Mountain Taco, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Noncash investing and financing activities:
As of December 31, 1993, organizational costs of $598 have been accrued
and are included in accounts payable in the balance sheet.
During 1994, the Company acquired $140,450 of equipment through capital
leases.
As of December 31, 1995, franchise fees of $15,000 have been accrued and
are included in franchise fees payable in the balance sheet.
Additionally, $225 of organizational costs was paid by a related party
(note I) and the related payable is included in related party payables as
of December 31, 1995. Also during 1995, the Company acquired $80,786 of
equipment through capital leases.
<PAGE>
Rocky Mountain Taco, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
1. NATURE OF OPERATIONS
The Company, a Colorado corporation, is the franchisee of three ZuZu
Handmade Mexican Food restaurants, two of which are in Colorado Springs,
Colorado and the third is located in Boulder, Colorado. In January 1996,
a fourth restaurant was opened which is located in Colorado Springs.
Under the terms of a 1993 development agreement with the franchiser, the
Company has the right and obligation to develop a total of ten restaurants
within the Colorado counties of El Paso, Boulder and Larimer.
Revenues of the Company are derived principally from the sale of freshly-
prepared, authentic, handmade Mexican food and other products in quick-
service restaurants under the mark ZuZu Mexican Food.
Effective December 31, 1995, under the terms of an agreement and plan of
reorganization, 100% of the Company's outstanding common stock was
acquired by Discovery Technologies, Inc. in exchange for 1,680,000 shares
of common stock of Discovery Technologies, Inc., a public company (note
J).
2. USE OF 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
4. INVENTORIES
Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method.
<PAGE>
Rocky Mountain Taco, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
5. PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives, either five or seven years, using the straight-line method.
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
6. DEVELOPMENT RIGHTS, FRANCHISE FEES, AND ORGANIZATIONAL COSTS
Development rights and franchise fees paid to the franchisor (ZuZu
Franchising Corporation) are stated at cost less amortization computed on
the straight-line method principally over fifteen years. Organizational
costs are stated at cost less amortization computed on the straight-line
method principally over five years.
The franchise agreements have an initial term of ten years with an option
by the franchisee to renew the franchise for an additional ten years
subject to compliance with the franchise agreement's terms. Upon
termination of the franchise agreement, all rights granted under the
agreement shall terminate.
7. Income taxes
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires a company to recognize deferred tax liabilities and assets for
the expected future tax consequences of events that have been recognized
in a company's financial statements or tax returns. Taxes are provided on
all revenue and expense items included in the statement of operations,
regardless of the period in which such items are recognized for income tax
purposes, except for items representing a permanent difference between
pretax accounting income and taxable income.
NOTE B - GOING CONCERN
The Company's continued existence as a going concern is ultimately
dependent upon its ability to generate sufficient cash flows to meet
operating requirements, debt service requirements and restaurant
development obligations (notes A1, K and L). Management believes that its
marketing plan will produce increased revenues in fiscal 1996 which will
improve cash flow from operations. Additionally, the Company's parent,
Discovery Technologies, Inc. (note J) plans to raise additional capital
<PAGE>
Rocky Mountain Taco, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE B - GOING CONCERN - Continued
through a contemplated public offering of common stock in 1996 and interim
financing through short-term financing prior to the public offering which
will be used in part to support the operations and meet the commitments of
the Company.
NOTE C - INVENTORIES
Inventories consist of the following as of December 31,
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Food items $ - $ 2,502 $ 4,703
Beverages - 431 1,539
Finished products - 448 1,044
Other - 1,623 3,069
-------- -------- --------
$ - $ 5,004 $ 10,355
======== ======== ========
</TABLE>
NOTE D - NOTE PAYABLE
The Company entered into a $30,000 revolving line of credit with a bank in
1995 which was originally due March 30, 1996. Subsequent to December 31,
1995 the line of credit was extended until September 30, 1996. Interest
is payable monthly beginning October 30, 1995 at 2.25% over the bank's
current index rate. The line of credit is collateralized by equipment,
general intangibles and fixtures and is guaranteed by certain stockholders
of the Company. As of December 31, 1995, $30,000 was outstanding on the
line of credit and the interest rate was 10.75%.
<PAGE>
Rocky Mountain Taco, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following as of December 31,:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Note payable to a bank, guaranteed by
the U.S. Small Business Administration,
principal and interest of $4,981
payable monthly, interest (11.00%
as of December 31, 1995) at 2.25%
above lowest New York prime, due
February 2002,collateralized by
leasehold improvements, equipment,
machinery and inventory, guaranteed
by certain stockholders $ - $ - $281,377
Note payable to a bank,interest only
monthly payments beginning October
1994, principal payable monthly at
$2,500 per month beginning December
1994, interest at 3.00% over prime,
collateralized by equipment,
machinery and inventory, guaranteed
by certain stockholders - 30,000 -
Notes payable to a financing corporation,
principal and interest payable monthly
at $81 per month as of December 31,
1994 and at $246 per month as of
December 31, 1995, interest rates from
9.50% - 10.20%, due through July 2000,
collateralized by equipment - 3,384 10,082
---------- ---------- ----------
- 33,384 291,459
Less current maturities - (30,505) (32,359)
---------- ---------- ----------
$ - $ 2,879 $259,100
========== ========== ==========
</TABLE>
<PAGE>
Rocky Mountain Taco, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE E - LONG-TERM DEBT - Continued
Aggregate maturities of long-term debt are as follows as of December 31,
1995:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1996 $ 32,359
1997 36,081
1998 40,230
1999 44,617
2000 47,774
Thereafter 90,398
--------
Total $291,459
========
</TABLE>
NOTE F - LEASES
The Company conducts its operations in leased facilities under
noncancelable operating leases expiring at various dates through January
2016. At the end of the lease terms, most of the leases are renewable for
additional periods of up to ten years. The rental payments for several of
the leases are based on a minimum annual rental plus a percentage of sales
in excess of specified amounts. Additionally, certain signage and other
equipment is leased under noncancelable operating leases expiring at
various dates through December 2000. Most of such leases have provisions
which allow for the continuation of such leases at the option of the
Company.
<PAGE>
Rocky Mountain Taco, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE F - LEASES - Continued
The minimum rental commitments under operating leases are as follows as of
December 31, 1995:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1996 $ 188,618
1997 190,448
1998 192,407
1999 185,944
2000 106,196
Thereafter 1,495,545
----------
$2,359,158
==========
</TABLE>
Rental expense for all operating leases for the period from November 3,
1993 (inception) through December 31, 1993 and for the years ended
December 31, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Minimum rentals $ - $ 37,447 $137,322
======== ======== ========
</TABLE>
No contingent rentals have been paid through December 31, 1995.
The Company also leases certain equipment under five year capital leases
with expiration dates through June 2000. Equipment under capital leases
as of December 31, 1994 and 1995 was $140,450 and $221,236, respectively,
with accumulated amortization of $10,612 and $51,221, respectively.
Commitments under capital leases are as follows as of December 31, 1995:
<PAGE>
Rocky Mountain Taco, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE F - LEASES - Continued
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1996 $ 64,763
1997 64,763
1998 64,763
1999 50,961
2000 19,955
---------
Total minimum lease payments 265,205
Less amount representing interest (69,154)
Current portion of capital lease
obligations (37,015)
---------
Present value of long-term obligations
under capital leases $159,036
=========
</TABLE>
NOTE G - INCOME TAXES
Deferred tax assets consist of the following as of December 31,:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss $ - $ 10,940 $ 99,450
Leasehold improvements
amortization - 1,040 7,540
Pre-opening cost amortization 734 26,425 42,648
---------- ---------- ----------
734 38,405 149,638
Less valuation allowance (734) (38,405) (149,638)
---------- ---------- ----------
Net deferred tax assets $ - $ - $ -
========== ========== ==========
</TABLE>
The Company has a net operating loss carryforward of $255,000 as of
December 31, 1995 that expires through 2010.
<PAGE>
Rocky Mountain Taco, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE H - FINANCIAL INSTRUMENTS
Included below is information about estimated fair values of financial
instruments as required by FASB Statement 107. Such information, which
pertains to the Company's financial instruments, is based on the
requirements set forth in that statement and does not purport to represent
the aggregate net fair value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value.
CASH AND CASH EQUIVALENTS
The balance sheet carrying amount approximates fair value because of the
short maturity of these instruments.
LONG-TERM DEBT
It is the opinion of management that the carrying value of long-term debt
approximates fair value.
NOTE I - RELATED PARTY TRANSACTIONS
The Chief Executive Officer and the President of the Company are each
partners of D&D Enterprises, owner of 171,429 shares of the Company's
common stock prior to the acquisition by Discovery Technologies, Inc.
(Discovery) (note J). D&D Enterprises also owned 50% of The Colorado Taco
Corporation's common stock prior to the acquisition by Discovery. The
Colorado Taco Corporation is a Colorado corporation and franchisee of one
ZuZu Handmade Mexican Food restaurant in Denver, Colorado. D&D
Enterprises had management contracts with both the Company and The
Colorado Taco Corporation for management services performed by these
individuals prior to December 31, 1995. For the year ended December 31,
1995, the Company paid D&D Enterprises $39,000 related to the management
contract.
As of December 31, 1994, the Company had a receivable from The Colorado
Taco Corporation of $6,453 relating to certain of The Colorado Taco
Corporation's costs paid by the Company. The expenses included legal
fees, architectural fees, and lease expense. As of December 31, 1995, the
Company had a payable to The Colorado Taco Corporation for $225 for legal
fees paid by The Colorado Taco Corporation for the Company's expense.
<PAGE>
Rocky Mountain Taco, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE J - REORGANIZATION
Pursuant to the terms of an agreement and plan of reorganization made and
entered into effective December 31, 1995, by and between the Company,
Discovery Technologies, Inc., (Discovery) (a Kansas corporation) and The
Colorado Taco Corporation (CTC), Discovery acquired all of the issued and
outstanding shares of common stock of the Company and CTC in exchange for
2,800,000 shares of common stock of Discovery, split 1,680,000 shares to
Company stockholders and 1,120,000 shares to CTC stockholders. Also,
124,000 warrants to purchase the Company's common stock at $2.50 per
share, issued during 1995, were exchanged by the holders for warrants to
purchase Discovery voting common stock for $1.04 per share. The Discovery
warrants expire on December 31, 1998.
Additionally, a consent to reorganization agreement was entered into on
April 30, 1996 (note L) whereby ZuZu Franchising Corporation (franchiser)
approved of the acquisition. Terms of the consent to reorganization
agreement provide for the payment by the Company, Discovery and CTC, to
the franchiser of $75,000 of development rights and $45,000 of franchise
fees, of which, $7,500 has been accrued by the Company as of December 31,
1995 with the remaining $112,500 accrued by CTC as of December 31, 1995.
NOTE K - COMMITMENTS
Under the terms of the development agreement discussed in note A1, the
Company has the right and obligation to develop ten restaurants within the
geographic area and development period prescribed within the agreement.
Failure by the Company to adhere to the development schedule set forth in
the agreement shall constitute a material event of default under the
agreement which could result in automatic termination of all rights
granted therein. However, no default under the agreement shall constitute
a default under any franchise agreement between the parties unless the
default is also a default under the terms of such franchise agreement.
<PAGE>
Rocky Mountain Taco, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE L - SUBSEQUENT EVENTS
As part of the consent to reorganization agreement discussed in note J,
the parties also agreed to the following:
- Payment of the development rights and franchise fees of $120,000
discussed in note J will be made pursuant to a promissory note
issued in favor of the franchiser in the principal amount of
$120,000 and dated April 30, 1996 with Discovery, CTC and the
Company as co-makers of the note. The note is due September 1,
1996 with interest payable monthly at 8.25%.
- Extension of the development schedules in the development
agreements of CTC and the Company (note K) to include the
development of thirty-one restaurants by the Company and CTC
through December 31, 1998.
<PAGE>
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
THE COLORADO TACO CORPORATION
DECEMBER 31, 1994 AND 1995
<PAGE>
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
BALANCE SHEETS 4
STATEMENTS OF OPERATIONS 6
STATEMENTS OF STOCKHOLDER'S EQUITY 8
STATEMENTS OF CASH FLOWS 9
NOTES TO FINANCIAL STATEMENTS 10
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
The Colorado Taco Corporation
We have audited the accompanying balance sheets of The Colorado Taco
Corporation as of December 31, 1994 and 1995, and the related statements
of operations, stockholder's equity, and cash flows for the period
November 23, 1994 (inception) through December 31, 1994 and the year ended
December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Colorado Taco
Corporation as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the period November 23, 1994 (inception)
through December 31, 1994 and for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $2,970 and $155,142 for the
period November 23, 1994 (inception) through December 31, 1994 and for the
year ended December 31, 1995, respectively, and has significant debt
service requirements and restaurant development obligations as of December
31, 1995. The Company's ability to generate sufficient cash flows to meet
these obligations, as discussed in Note B, cannot be determined at this
time. These uncertainties raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Colorado Springs, Colorado
April 10, 1996, except notes I and
K which are April 30, 1996
<PAGE>
<TABLE>
The Colorado Taco Corporation
BALANCE SHEETS
December 31,
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note A3) $ 401,090 $ 89,702
Receivable - related party (note H) - 225
Inventories (notes A4, C and D) - 3,764
Prepaid expenses - 4,615
---------- ----------
Total current assets 401,090 98,306
---------- ----------
PROPERTY AND EQUIPMENT, AT COST
(notes A5 and D)
Furniture and fixtures - 6,679
Equipment - 64,043
Leasehold improvements 1,518 243,296
---------- ----------
1,518 314,018
Less accumulated depreciation and
amortization 76 25,864
---------- ----------
1,442 288,154
---------- ----------
OTHER ASSETS
Development rights - at cost,
less accumulated amortization
of $1,167 n 1994 and $12,625
in 1995 (note A6) 28,833 174,875
Franchise fees - at cost, less
accumulated amortization of $0 in
1994 and $2,458 in 1995 (note A6) - 35,042
Organizational costs - at cost, less
accumulated amortization of $0 in
1994 and $441 in 1995 (note A6) 2,118 2,636
Loan costs - at cost, less accumulated
amortization of $0 in 1994 and $98
in 1995 (note A6) - 11,650
Deposits - 6,121
---------- ----------
30,951 230,324
---------- ----------
Total assets $ 433,483 $ 616,784
========== ==========
<PAGE>
The Colorado Taco Corporation
BALANCE SHEETS
December 31,
(Continued)
1994 1995
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term
debt (note D) $ - $ 34,332
Accounts payable - 32,366
Development and franchise fees
payable (note I) - 112,500
Related party payables (note H) 36,453 -
Refunds payable 25,000 -
Other - 10,616
---------- ----------
Total current liabilities 61,453 189,814
---------- ----------
LONG-TERM DEBT, less current
maturities(note D) - 210,082
---------- ----------
COMMITMENTS (notes E and J) - -
---------- ----------
STOCKHOLDER'S EQUITY (note I)
Common stock - authorized,
10,000,000 shares without
par value; issued and
outstanding, 463,620 shares 375,000 375,000
Accumulated deficit (2,970) (158,112)
---------- ----------
372,030 216,888
---------- ----------
Total liabilities and
stockholder's equity $ 433,483 $ 616,784
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
The Colorado Taco Corporation
STATEMENTS OF OPERATIONS
<CAPTION>
Period
November 23, 1994
(inception) through Year ended
December 31, 1994 December 31, 1995
------------------- ------------------
<S> <C> <C>
Net sales $ - $ 58,566
Cost of sales - 55,698
---------- ----------
Gross margin - 2,868
Operating expenses
General and administrative 4,060 162,283
---------- ----------
Loss from operations (4,060) (159,415)
---------- ----------
Other income (expenses)
Interest expense - (2,462)
Interest income 1,090 6,735
---------- ----------
Total other income, net 1,090 4,273
---------- ----------
Net loss $ (2,970) $(155,142)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
The Colorado Taco Corporation
STATEMENTS OF STOCKHOLDER'S EQUITY
For the period November 23, 1994 (inception)
through December 31, 1994 and the year ended
December 31, 1995
<CAPTION>
Common Stock Accumulated
------------------
Shares Amount deficit Total
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Balance November 23, 1994 - $ - $ - $ -
Issuance of common stock 463,620 375,000 - 375,000
Net loss for the period
November 23, 1994 (inception)
through December 31, 1994 - - (2,970) (2,970)
---------- ---------- ---------- ----------
Balance December 31, 1994 463,620 375,000 (2,970) 372,030
Net loss for the year ended
December 31, 1995 - - (155,142) (155,142)
---------- ---------- ---------- ----------
Balance December 31, 1995 463,620 $375,000 $(158,112) $ 216,888
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
The Colorado Taco Corporation
STATEMENTS OF CASH FLOWS
<CAPTION>
Period
November 23, 1994
(inception) through Year ended
December 31, 1994 December 31, 1995
------------------- -----------------
<S> <C> <C>
Increase (decrease) in cash
and cash equivalents
Cash flows from operating
activities
Net loss $ (2,970) $ (155,142)
Adjustments to reconcile
net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,243 40,243
Change in assets and liabilities
Increase in inventories - (3,764)
Payment of loan costs - (11,748)
Increase in accounts payable - 19,180
Increase in other current
liabilities - 10,616
Increase (decrease) related
party payables 2,817 (2,817)
Increase in prepaid
expenses - (4,615)
---------- ----------
Net cash provided by (used in)
operating activities 1,090 (108,047)
---------- ----------
Cash flows from investing activities
Acquisition of property and equipment - (300,384)
Payment of development rights - (82,500)
Payment of organizational costs - (114)
Increase in deposits - (6,121)
---------- ----------
Net cash used in investing
activities - (389,119)
---------- ----------
Cash flows from financing activities
Proceeds from long-term debt - 244,414
Proceeds from issuance of
common stock 375,000 -
Increase (decrease) in
refunds payable 25,000 (25,000)
Decrease in related
party payables - (33,636)
---------- ----------
Net cash provided by
financing activities 400,000 185,778
---------- ----------
Net increase (decrease) in cash
and cash equivalents 401,090 (311,388)
Cash and cash equivalents at
beginning of year - 401,090
---------- ----------
Cash and cash equivalents at
end of year $ 401,090 $ 89,702
========== ==========
<PAGE>
The Colorado Taco Corporation
STATEMENTS OF CASH FLOWS
(Continued)
Period
November 23, 1994
(inception) through Year ended
December 31, 1994 December 31, 1995
------------------- -----------------
Cash paid during the year
for interest $ - $ 2,462
========== ==========
</TABLE>
Noncash investing and financing activities:
Certain stockholders of the Company paid development rights of $30,000 on
behalf of the Company in 1994. The $30,000 is presented in the balance
sheet as development rights and as a related party payable as of December
31, 1994. Additionally, in 1994 leasehold improvements of $1,518 and
organizational costs of $2,118 were paid by a related party (note H) and
the related payable of $3,636 is included in related party payables as of
December 31, 1994.
As of December 31, 1995, development rights of $75,000 and franchise fees
of $37,500 have been accrued and are included in development and franchise
fees payable in the balance sheet. Additionally, $845 of organizational
costs, $225 of receivable-related party and $12,116 of leasehold
improvements are included in accounts payable as of December 31, 1995.
The accompanying notes are an integral part of these statements.
<PAGE>
The Colorado Taco Corporation
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
1. NATURE OF OPERATIONS
The Company, a Colorado corporation, is the franchisee of one ZuZu
Handmade Mexican Food restaurant located in Denver, Colorado which opened
in October 1995. Under the terms of a 1995 development agreement with the
franchiser, the Company has the right and obligation to develop a total of
twenty-five restaurants within the State of Colorado except for El Paso
County, Boulder County, Larimer County and at Denver International Airport
in Denver, Colorado (notes J and K).
Revenues of the Company are derived principally from the sale of freshly-
prepared, authentic, handmade Mexican food and other products in quick-
service restaurants under the mark ZuZu Mexican Food.
Effective December 31, 1995, under the terms of an agreement and plan of
reorganization, 100% of the Company's outstanding common stock was
acquired by Discovery Technologies, Inc. in exchange for 1,120,000 shares
of common stock of Discovery Technologies, Inc., a public company (note
I).
2. USE OF 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
4. INVENTORIES
Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method.
<PAGE>
The Colorado Taco Corporation
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
5. PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives, either five or seven years, using the straight-line method.
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
6. DEVELOPMENT RIGHTS, FRANCHISE FEES, ORGANIZATIONAL COSTS AND LOAN
COSTS
Development rights and franchise fees paid to the franchisor (ZuZu
Franchising Corporation) are stated at cost less amortization computed on
the straight-line method principally over fifteen years. Organizational
costs are stated at cost less amortization computed on the straight-line
method principally over five years. Loan costs are stated at cost less
amortization computed on the straight-line method, which approximates the
interest method, over the life of the loan.
The franchise agreements have an initial term of ten years with an option
by the franchisee to renew the franchise for an additional ten years
subject to compliance with the franchise agreement's terms. Upon
termination of the franchise agreement, all rights granted under the
agreement shall terminate.
7. INCOME TAXES
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires a company to recognize deferred tax liabilities and assets for
the expected future tax consequences of events that have been recognized
in a company's financial statements or tax returns. Taxes are provided on
all revenue and expense items included in the statement of operations,
regardless of the period in which such items are recognized for income tax
purposes, except for items representing a permanent difference between
pretax accounting income and taxable income.
<PAGE>
The Colorado Taco Corporation
NOTES TO FINANCIAL STATEMENTS
NOTE B - GOING CONCERN
The Company's continued existence as a going concern is ultimately
dependent upon its ability to generate sufficient cash flows to meet
operating requirements, debt service requirements and restaurant
development obligations (notes A1, J and K). Management believes that its
marketing plan will produce increased revenues in fiscal 1996 which will
improve cash flow from operations. Additionally, the Company's parent,
Discovery Technologies, Inc. (note I) plans to raise additional capital
through a contemplated public offering of common stock in 1996 and interim
financing through short-term financing prior to the public offering which
will be used in part to support the operations and meet the commitments of
the Company.
NOTE C - INVENTORIES
Inventories consist of the following as of December 31,:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Food items $ - $ 1,617
Beverages - 265
Finished products - 553
Other - 1,329
-------- --------
$ - $ 3,764
======== ========
</TABLE>
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following as of December 31,:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
$450,000 draw note payable to Heller
First Capital, Corp., guaranteed by
the U.S. Small Business Administration,
four monthly interest only payments
after first disbursement, principal and
interest of $6,444 payable monthly
thereafter, interest (11.25% as
of December 31, 1995) adjusted monthly
at 2.75% above lowest New York Prime,
due November 2005, collateralized by
equipment, machinery and inventory,
guaranteed by certain stockholders $ - $244,414
Less current maturities - (34,332)
---------- ----------
$ - $210,082
========== ==========
</TABLE>
<PAGE>
The Colorado Taco Corporation
NOTES TO FINANCIAL STATEMENTS
NOTE D - LONG-TERM DEBT - Continued
Aggregate maturities of long-term debt are as follows as of December 31,
1995:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1996 $ 34,332
1997 56,550
1998 63,251
1999 70,745
2000 19,536
----------
Total $244,414
==========
</TABLE>
NOTE E - LEASES
The Company conducts its operations in leased facilities under a
noncancelable operating lease expiring January 31, 2000. At the end of
the lease term, the lease is renewable for additional periods of up to ten
years. Additionally, certain signage is leased under a noncancelable
operating lease expiring October 1, 2000. This lease has provisions which
allow for the continuation of the lease at the option of the Company.
The minimum rental commitments under operating leases are as follows as of
December 31, 1995:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1996 $ 61,406
1997 61,406
1998 61,406
1999 61,406
2000 9,637
----------
Total $255,261
==========
</TABLE>
Rental expense for all operating leases for the period from November 23,
1994 (inception) through December 31, 1994 and for the year ended December
31, 1995 was $0 and $51,769, respectively.
<PAGE>
The Colorado Taco Corporation
NOTES TO FINANCIAL STATEMENTS
NOTE F - INCOME TAXES
Deferred tax assets consist of the following as of December 31, 1994 and
1995:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss $ - $ 4,430
Leasehold improvements amortization 18 3,787
Pre-opening cost, net of amortization 1,583 53,447
---------- ----------
1,601 61,664
Less valuation allowance (1,601) (61,664)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
</TABLE>
The Company has a net operating loss carryforward of $11,358 as of
December 31, 1995 that expires in 2010.
NOTE G - FINANCIAL INSTRUMENTS
Included below is information about estimated fair values of financial
instruments as required by FASB Statement 107. Such information, which
pertains to the Company's financial instruments, is based on the
requirements set forth in that statement and does not purport to represent
the aggregate net fair value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value.
CASH AND CASH EQUIVALENTS
The balance sheet carrying amount approximates fair value because of the
short maturity of these instruments.
LONG-TERM DEBT
It is the opinion of management that the carrying value of long-term debt
approximates fair value.
<PAGE>
The Colorado Taco Corporation
NOTES TO FINANCIAL STATEMENTS
NOTE H - RELATED PARTY TRANSACTIONS
The Chief Executive Officer and the President of the Company are each
partners of D&D Enterprises, owner of 231,810 shares of the Company's
common stock prior to the acquisition by Discovery Technologies, Inc.
(Discovery) (note I). D&D Enterprises also owned 24.65% and the Chief
Executive Officer owned individually 7.19% of Rocky Mountain Taco, Inc.'s
common stock prior to the acquisition by Discovery. Rocky Mountain Taco,
Inc. is a Colorado corporation and franchisee of four ZuZu Handmade
Mexican Food restaurants in El Paso County and Boulder County, Colorado.
D&D Enterprises had management contracts with both the Company and Rocky
Mountain Taco, Inc. for management services performed by these individuals
prior to December 31, 1995. For the year ended December 31, 1995, the
Company paid D&D Enterprises $45,000 related to the management contract.
As of December 31, 1994, the Company had a payable to Rocky Mountain Taco,
Inc. for $6,453 relating to certain of the Company's costs paid by Rocky
Mountain Taco, Inc. The expenses included legal fees, architectural fees
and lease expense. The Company also had a payable to the two officers
discussed above for $30,000 as of December 31, 1994 relating to
development fees paid by these individuals. As of December 31, 1995 the
Company had a receivable from Rocky Mountain Taco, Inc. of $225 for legal
fees paid by the Company for Rocky Mountain Taco, Inc.'s expense.
NOTE I - REORGANIZATION
Pursuant to the terms of an agreement and plan of reorganization made and
entered into effective December 31, 1995, by and between the Company,
Discovery Technologies, Inc., (Discovery) (a Kansas corporation) and Rocky
Mountain Taco, Inc. (RMT), Discovery acquired all of the issued and
outstanding shares of common stock of the Company and RMT in exchange for
2,800,000 shares of common stock of Discovery, split 1,120,000 shares to
Company stockholders and 1,680,000 shares to RMT stockholders.
In connection with the reorganization, the Company's original 975,000
shares of common stock were reduced to 463,620 shares in a reverse stock
split. All references to the number of common shares have been restated
retroactively to reflect the reverse split.
<PAGE>
The Colorado Taco Corporation
NOTES TO FINANCIAL STATEMENTS
NOTE I - REORGANIZATION - Continued
Additionally, a consent to reorganization agreement was entered into on
April 30, 1996 (note K) whereby ZuZu Franchising Corporation (franchiser)
approved of the acquisition. Terms of the consent to reorganization
agreement provide for the payment by the Company, Discovery and RMT, to
the franchiser of $75,000 of development rights and $45,000 of franchise
fees, of which, all but $7,500 has been accrued by the Company as of
December 31, 1995 with the remaining $7,500 accrued by RMT as of December
31, 1995.
NOTE J - COMMITMENTS
Under the terms of the development agreement discussed in note A1, the
Company has the right and obligation to develop twenty-five restaurants
within the geographic area and development period prescribed within the
agreement.
Failure by the Company to adhere to the development schedule set forth in
the agreement shall constitute a material event of default under the
agreement which could result in automatic termination of all rights
granted therein. However, no default under the agreement shall constitute
a default under any franchise agreement between the parties unless the
default is also a default under the terms of such franchise agreement.
NOTE K - SUBSEQUENT EVENTS
As part of the consent to reorganization agreement discussed in note I,
the parties also agreed to the following:
- Payment of the development rights and franchise fees of $120,000
discussed in note I will be made pursuant to a promissory note
issued in favor of the franchiser in the principal amount of
$120,000 and dated April 30, 1996 with Discovery, RMT and the
Company as co-makers of the note. The note is due September 1,
1996 with interest payable monthly at 8.25%.
- Extension of the development schedules in the development
agreements of RMT and the Company (note J) to include the
development of thirty-one restaurants by the Company and RMT
through December 31, 1998.
<PAGE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
ROCKY THE DISCOVERY PRO PRO
MOUNTAIN COLORADO TECHNO- FORMA FORMA
TACO, TACO LOGIES ADJUST- COMBINED
INC. CORP. MENTS
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents $ 41,577 89,702 316 (316) 131,279
Receivables 0 225 37,959 (37,959) 225
Unbilled Receivables 0 0 3,183 (3,183) 0
Inventories 10,355 3,764 0 0 14,119
Notes Receivable 0 0 200,000 (200,000) 0
Other Assets 0 0 5,467 (5,467) 0
Prepaid expense 2,278 4,615 0 0 6,893
---------- ---------- ---------- ---------- ----------
Total current
assets 54,210 98,306 246,925 (246,925) 152,516
---------- ---------- ---------- ---------- ----------
PROPERTY AND EQUIPMENT, AT COST
Leasehold
improvements 362,011 243,296 0 0 605,307
Furniture and
fixtures 38,445 6,679 40,106 (40,106) 45,124
Equipment 305,172 64,043 0 0 369,215
---------- ---------- ---------- ---------- ----------
705,628 314,018 40,106 (40,106) 1,019,646
Less accumulated
depreciation and
amortization 113,244 25,864 0 0 139,108
---------- ---------- ---------- ---------- ----------
592,384 288,154 40,106 (40,106) 880,538
---------- ---------- ---------- ---------- ----------
OTHER ASSETS
Franchise fees -
at cost, less
accumulated amort 34,667 35,042 0 0 69,709
Development rights -
at cost,
less accumulated
amort 65,000 174,875 0 0 239,875
Organizational costs -
at cost, less
accumulated amort 5,795 2,636 0 0 8,431
Loan costs -
at cost, less
accumulated amort 0 11,650 0 0 11,650
Deposits 42,746 6,121 0 0 48,867
Prepaid expenses 11,502 0 0 0 11,502
---------- ---------- ---------- ---------- ----------
159,710 230,324 0 0 390,034
---------- ---------- ---------- ---------- ----------
Total assets $806,304 $616,784 $287,031 ($287,031) $1,423,088
========== ========== ========== ========== ==========
<PAGE>
LIABILITIES AND STOCK HOLDERS' EQUITY
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
(CONTINUED)
CURRENT LIABILITIES
Current maturities of
long-term debt $32,359 34,332 211,924 (211,924) 66,691
Current portion of
leases payable 37,015 0 0 0 37,015
Note payable 30,000 0 97,362 (97,362) 30,000
Accounts payable 86,505 32,366 211,282 (159,282) 170,871
Salaries 8,903 0 0 0 8,903
Development and
franchise fees
payable 15,000 112,500 0 0 127,500
Royalties 0 0 0 0 0
Related Party Payable 225 0 0 0 225
Accrued liabilities 0 0 237,822 (237,822) 0
Other 6,765 10,616 0 0 17,381
---------- ---------- ---------- ---------- ----------
Total current
liabilities 216,772 189,814 758,390 (706,390) 458,586
---------- ---------- ---------- ---------- ----------
LONG-TERM DEBT,
less current
maturities 259,100 210,082 5,742 (5,742) 469,182
---------- ---------- ---------- ---------- ----------
LEASES PAYABLE,
less current
portion 159,036 0 0 0 159,036
---------- ---------- ---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 555,000 375,000 774,221 1,743,779 3,448,000
Contributed Capital 0 0 170,140 (170,140) 0
Discount on
Common Stock (2,570,000)(2,570,000)
Accumulated
deficit (383,604) (158,112)(1,421,462) 1,421,462 (541,716)
---------- ---------- ---------- ---------- ----------
171,396 216,888 (477,101) 425,101 336,284
---------- ---------- ---------- ---------- ----------
Total liabilities
and stockholders'
equity $806,304 $616,784 $287,031 $(287,031) $1,423,088
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
ROCKY THE DISCOVERY PRO PRO
MOUNTAIN COLORADO TECHNO- FORMA FORMA
TACO, TACO LOGIES ADJUST- COMBINED
INC. CORP. MENTS
<S> <C> <C> <C> <C> <C>
Net sales $ 951,487 58,566 483,604 (483,604) 1,010,053
Cost of sales 771,658 55,698 0 0 827,356
---------- ---------- ---------- ---------- ----------
Gross margin 179,829 2,868 483,604 (483,604) 182,697
Operating expenses -
General and
administrative 415,047 162,283 1,009,230(1,009,230) 577,330
---------- ---------- ---------- ---------- ----------
Profit/Loss
from operations (235,218) (159,415) (525,626) 525,626 (394,633)
---------- ---------- ---------- ---------- ----------
Other income (expenses)
Interest income 269 6,735 5,283 (5,283) 7,004
Interest expense(50,179) (2,462) (34,107) 34,107 (52,641)
Gain on sale
of fixed asset 0 0 (732) 732 0
---------- ---------- ---------- ---------- ----------
Total other income
(expenses), net (49,910) 4,273 (29,556) 29,556 (45,637)
---------- ---------- ---------- ---------- ----------
Provision (Benefit)
for income taxes (1,600) 1,600 0
Net loss (285,128) (155,142) (556,782) 556,782 (440,270)
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
ROCKY THE DISCOVERY PRO PRO
MOUNTAIN COLORADO TECHNO- FORMA FORMA
TACO, TACO LOGIES ADJUST- COMBINED
INC. CORP. MENTS
<S> <C> <C> <C> <C> <C>
Increase (decrease)
in cash and cash
equivalents
Cash flows from
operating activities
Net loss (285,128) (155,142) (556,782) 556,782 (440,270)
Adjustments to
reconcile net loss
to net cash
Depreciation and
amortization 97,072 40,243 32,422 (32,422) 137,315
Allowance for
doubtful
accounts 0 0 (10,000) 10,000 0
Gain on sale of
property and
equipment 0 0 732 (732) 0
Change in assets
and liabilities
Increase in
inventories (5,351) (3,764) 22,500 (22,500) (9,115)
Increase in
prepaid expenses (5,014) (4,615) 18,201 (18,201) (9,629)
Payment of loan
costs 0 (11,748) (11,748)
Increase in
accounts payable (1,155) 19,180 48,993 (48,993) 18,025
Increase (decrease)
in related party
payables 0 (2,817) (2,817)
Accounts Receivable 44,435 (44,435) 0
Unbilled receivables 232,966 (232,966) 0
Other assets 29,161 (29,161) 0
Increase in accrued
& other liabilities 494 10,616 274,236 (274,236) 11,110
---------- ---------- ---------- ---------- ----------
Net cash provided
by (used in)
operating
activities (199,082) (108,047) 136,864 (136,864) (307,129)
---------- ---------- ---------- ---------- ----------
<PAGE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(CONTINUED)
Cash flows from investing activities
Loans from officers
and affiliates 156,169 (156,169) 0
Payment to officers
and affiliates (238,696) 238,696 0
Payments on long
term debt (55,074) 55,074 0
Acquisition of
property and
equipment (207,538) (300,384) 0 0 (507,922)
Payments of
franchise fees 0 0 0 0 0
Payments of
development
rights 0 (82,500) 0 0 (82,500)
Payments of
organizational
costs (1,767) (114) 0 0 (1,881)
(Increase) decrease
in related
party receivable 6,453 0 0 0 6,453
Increase in accounts
payable (28,893) (6,121) 0 0 (35,014)
---------- ---------- ---------- ---------- ----------
Net cash used
in investing
activities (231,745) (389,119) (137,601) 137,601 (620,864)
---------- ---------- ---------- ---------- ----------
Cash flows from
financing activities
Proceeds on
long-term debt 277,754 244,414 244,414 (244,414) 522,168
Principal payments
on long-term debt (19,679) 0 0 0 (19,679)
Proceeds from
note payable 30,000 0 0 0 30,000
Principal payments
on capital leases (18,431) 0 0 0 (18,431)
Proceeds from issuance
of common stock 155,000 0 0 0 155,000
Changes in related
party payables 0 (33,636) (33,636) 33,636 (33,636)
Changes in refunded
payables 0 (25,000) (25,000) 25,000 (25,000)
---------- ---------- ---------- ---------- ----------
Net cash provided
by financing
activities 424,644 185,778 0 0 610,422
---------- ---------- ---------- ---------- ----------
Net increase
(decrease) in
cash and
cash equivs. (6,183) (311,388) (737) 737 (317,571)
Cash and cash
equivalents at
beginning of
period 47,760 401,090 1,053 (1,053) 448,850
---------- ---------- ---------- ---------- ----------
<PAGE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(CONTINUED)
Cash and cash
equivalents at
end of period 41,577 89,702 316 (316) 131,279
---------- ---------- ---------- ---------- ----------
Cash paid during
the year for
interest 48,375 2,462 12,177 (12,177) 50,837
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
DISCOVERY TECHNOLOGIES, INC. (DTI) AND ZUZU (REGISTERED) - COLORADO
- -------------------------------------------------------------------
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following is a description of the pro forma adjustments that have been
made:
(a) Accounts Payable adjusted $52,000 to reflect exercise of warrants on
behalf of IFS.
<PAGE>
INDEPENDENT AUDIT OF ROCKY MOUNTAIN TACO, INC.
----------------------------------------------
AND THE COLORADO TACO CORPORATION (COLLECTIVELY)
------------------------------------------------
ZUZU - COLORADO
---------------
The following consolidated financial information is based solely on
audited financial statements for year ended December 31, 1995 of Rocky
Mountain Taco, Inc. and the Colorado Taco Corporation. Please referenced
the attached independent auditors report and notes to the above referenced
financial statements provided by Grant Thornton LLP.
<TABLE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
DEC. 31, 1995 DEC. 31, 1995
ROCKY COLORADO CONSOLIDATED
MOUNTAIN TACO
TACO CORP.
<S> <C> <C> <C>
Net sales $ 951,487 58,566 1,010,053
Cost of sales 771,658 55,698 827,356
---------- ---------- ----------
Gross margin 179,829 2,868 182,697
Operating expenses -
General and
administrative 415,047 162,283 577,330
---------- ---------- ----------
Profit/Loss from operations (235,218) (159,415) (394,633)
---------- ---------- ----------
Other income (expenses)
Interest income 269 6,735 7,004
Interest expense (50,179) (2,462) (52,641)
---------- ---------- ----------
Total other expenses, net (49,910) 4,273 (45,637)
---------- ---------- ----------
Net income (loss) (285,128) (155,142) (440,270)
========== ========== ==========
</TABLE>
<PAGE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DEC. 31, 1995 DEC. 31, 1995
ROCKY COLORADO CONSOLIDATED
MOUNTAIN TACO
TACO CORP.
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 41,577 89,702 131,279
Inventories 10,355 3,764 14,119
Prepaid expense 2,278 4,615 6,893
---------- ---------- ----------
Total current assets 54,210 98,081 152,291
---------- ---------- ----------
PROPERTY AND EQUIPMENT, AT COST
Leasehold improvements 362,011 243,296 605,307
Furniture and fixtures 38,445 6,679 45,124
Equipment 305,172 64,043 369,215
---------- ---------- ----------
705,628 314,018 1,019,646
Less accumulated depreciation
and amortization 113,244 25,864 139,108
---------- ---------- ----------
592,384 288,154 880,538
OTHER ASSETS
Franchise fees - at cost,
less accumulated amort 34,667 35,042 69,709
Development rights - at cost,
less accumulated amort 65,000 174,875 239,875
Organizational costs - at cost,
less accumulated amort 5,795 2,636 8,431
Loan costs - at cost,
less accumulated amort 0 11,650 11,650
Deposits 42,746 6,121 48,867
Prepaid expenses 11,502 0 11,502
---------- ---------- ----------
159,710 230,324 390,034
---------- ---------- ----------
Total assets $806,304 $616,559 $1,422,863
========== ========== ===========
</TABLE>
<PAGE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
<TABLE>
<CAPTION>
DEC. 31, 1995 DEC. 31, 1995
ROCKY COLORADO CONSOLIDATED
MOUNTAIN TACO
TACO CORP.
<S> <C> <C> <C>
LIABILITIES AND STOCK HOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of
long-term debt $32,359 34,332 66,691
Current portion of leases
payable 37,015 0 37,015
Note payable 30,000 0 30,000
Accounts payable 86,505 32,366 170,871
Salaries 8,903 0 8,903
Development and franchise
fees payable 15,000 112,500 127,500
Royalties 0 0 0
Other 6,765 10,616 17,381
---------- ---------- ----------
Total current liabilities 216,547 189,814 458,361
---------- ---------- ----------
LONG-TERM DEBT,
less current maturities 259,100 210,082 469,182
---------- ---------- ----------
LEASES PAYABLE,
less current portion 159,036 0 159,036
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES 0 0 0
---------- ---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, authorized,
1,000,000 shares of $0.01
par value issuable in series,
none issued 0
Common stock - authorized,
40,000,000 shares of $1 0
555,000 375,000 930,000
Discount on common stock 0
Accumulated deficit (383,604) (158,112) (541,716)
---------- ---------- ----------
171,396 216,888 388,284
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $806,079 $616,784 $1,422,863
========== ========== ===========
</TABLE>
<PAGE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
DEC. 31, 1995 DEC. 31, 1995
ROCKY COLORADO CONSOLIDATED
MOUNTAIN TACO
TACO CORP.
<S> <C> <C> <C>
Increase (decrease) in cash
and cash equivalents
Cash flows from operating
activities
Net loss (285,128) (155,142) (440,270)
Adjustments to reconcile
net loss to net cash
Depreciation and amortization 97,072 40,243 137,315
Change in assets and liabilities
Increase in inventories (5,351) (3,764) (9,115)
Increase in prepaid expenses (5,014) (4,615) (9,629)
Payment of loan costs (11,748) (11,748)
Increase in accounts payable (1,155) 19,180 18,025
Increase in accrued & other
liabilities 494 10,616 11,110
---------- ---------- ----------
Net cash provided by
(used in) operating
activities (199,082) (105,230) (304,312)
---------- ---------- ----------
Cash flows from investing
activities
Acquisition of property
and equipment (207,538) (300,384) (507,922)
Payments of franchise
fees 0
Payments of development
rights (82,500) (82,500)
Payments of organiza-
tional costs (1,767) (114) (1,881)
Increase in deposits (28,893) (6,121) (35,014)
---------- ---------- ----------
Net cash used in
investing activities (238,198) (389,119) (627,317)
---------- ---------- ----------
Cash flows from financing
activities
Proceeds on long-
term debt 277,754 244,414 522,168
Principal payments
on long-term debt (19,679) (19,679)
Proceeds from note
payable 30,000 30,000
Principal payments
on capital leases (18,431) (18,431)
Proceeds from issuance
of common stock 155,000 155,000
Changes in related
party payables (33,636) (33,636)
Changes in refunded
payables (25,000) (25,000)
---------- ---------- ----------
<PAGE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(CONTINUED)
Net cash provided by
financing activities 424,644 185,778 610,422
---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivs. (12,636) (308,571) (321,207)
Cash and cash equivalents
at beginning of period 47,760 401,090 448,850
---------- ---------- ----------
Cash and cash equivalents
at end of period 41,577 89,702 131,279
---------- ---------- ----------
Cash paid during the year
for interest 48,375 2,462 50,837
---------- ---------- ----------
</TABLE>
<PAGE>
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.
Date: October 30, 1996 By:
--------------------- -----------------------
D. William Hill, Chief
Executive Officer
