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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the quarterly period ended October 31, 1995 or
----------------
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Transition report pursuant to Section 13 or 15(d) of the
- --- Securities Exchange Act of 1934
For the transition period from to
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Commission file number 0-17521
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ZILA, INC.
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(Exact Name of registrant as specified in its charter)
Delaware No. 86-0619668
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(State of Other Jurisdiction (IRS Employer Identification number)
corporation or organization)
5227 North 7th Street, Phoenix, Arizona 85014
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 266-6700
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(former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No.
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APPLICABLE ONLY TO CORPORATE ISSUERS:
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The number of shares of the Company's common stock outstanding at
October 13, 1995 was 24,481,913 shares.
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Exhibit 16
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Total pages 19
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets as of October 31, 1995
and July 31, 1995 3
Condensed consolidated statements of operations for quarters
ended October 31, 1995 and 1994 4
Condensed consolidated statements of cash flows for quarters
ended October 31, 1995 and 1994 5
Notes to condensed consolidated financial statements 6-8
Item 2. Management's discussion and analysis of financial condition
and results of operations 10-14
PART II. OTHER INFORMATION
Item 1. Legal proceedings 15
Item 5. Other information 16
Item 6. Exhibits and reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
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OCTOBER 31, JULY 31,
1995 1995
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 444,558 $ 459,014
Securities available-for-sale 716,608 694,719
Trade accounts receivable, less allowance for
doubtful accounts of $20,000 780,294 839,307
Inventories 267,839 203,647
Prepaid expenses and other assets 246,540 249,294
Related party receivables 38,729 38,331
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Total current assets 2,494,568 2,484,312
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PROPERTY AND EQUIPMENT -- Net 804,403 739,701
DEFERRED PATENT AND LICENSING COSTS -- Net 961,919 955,727
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TOTAL $ 4,260,890 $ 4,179,740
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 6,162 $ 24,062
Accounts payable 381,854 412,137
Accrued royalties 34,243 49,062
Other accrued expenses 98,456 85,719
Deferred revenue 48,675 63,000
Current portion of long-term debt 11,337 9,795
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Total current liabilities 580,727 643,775
LONG-TERM DEBT 408,993 412,502
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Total liabilities 989,720 1,056,277
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SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value -- authorized
2,500,000 shares; none issued
Common stock, $.001 par value -- authorized,
50,000,000 shares; issued 24,481,913 shares
(October 31, 1995) and 24,355,462 shares (July 31, 1995) 24,482 24,355
Capital in excess of par value 12,913,551 12,759,350
Unrealized loss on securities available-for-sale (17,207) (27,961)
Deficit (9,649,231) (9,631,856)
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3,271,595 3,123,888
Less 42,546 common shares held by wholly-owned
subsidiary (at cost) (425) (425)
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Total shareholder's equity 3,271,170 3,123,463
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TOTAL $ 4,260,890 $ 4,179,740
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</TABLE>
See notes to condensed consolidated financial statements.
3
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ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTERS ENDED OCTOBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
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1995 1994
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<S> <C> <C>
REVENUES
Net sales $ 1,511,978 $ 1,369,032
Licensing fees and royalty revenue 29,325 16,251
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$ 1,541,303 $ 1,385,283
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OPERATING COSTS AND EXPENSES:
Cost of products sold 220,803 200,528
Selling, general and administrative 1,342,092 1,274,315
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1,562,895 1,474,843
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LOSS FROM OPERATIONS (21,592) (89,560)
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OTHER INCOME (EXPENSES):
Interest income 17,317 13,467
Interest expense (13,427) (21,447)
Realized gain (loss) on short-term investments 325 (424)
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4,215 (8,404)
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LOSS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (17,377) (97,964)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 0 29,945
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NET LOSS $ (17,377) $ (68,019)
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NET LOSS PER COMMON SHARE $ 0 $ 0
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 24,404,842 24,044,357
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTERS ENDED OCTOBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
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1995 1994
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (17,377) $ (68,019)
Cumulative effect of accounting change (29,945)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 47,866 38,409
Realized (gain) loss on sale of investments (325) 424
Change in assets and liabilities:
Trade accounts receivable 59,013 154,551
Investment interest receivable (1,958) (6,219)
Inventories (64,192) 60,590
Prepaid expenses and other assets 2,754 13,263
Accounts payable, accrued expenses and
deferred revenue (46,690) 17,234
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Net cash (used in) provided by operating activities (20,909) 180,288
INVESTING ACTIVITIES:
Purchases of short-term investments (17,046) (163,267)
Proceeds from sale of short-term investments 7,400 203,003
Purchases of property and equipment (93,742) (35,843)
Patents and licensing costs incurred (25,018) (100,697)
Funding of related party receivables 398 (2,946)
Collections of related party receivables 13,605
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Net cash used in investing activities (128,008) (86,145)
FINANCING ACTIVITIES:
Principal payments on short-term borrowings (17,900) (250,000)
Net proceeds from borrowings collateralized by securities 292,233
Net proceeds from issuance of common stock 154,328 89,112
Principal payments on long-term debt (1,967) (1,993)
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Net cash provided by financing activities 134,461 129,352
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NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (14,456) 223,495
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 495,014 37,240
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 444,558 $ 260,735
=========== ===========
CASH PAID FOR INTEREST $ 13,427 $ 21,447
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</TABLE>
See notes to condensed consolidated financial statements.
5
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ZILA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management of Zila, Inc. and subsidiaries (the "Company"),
all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included in the condensed
consolidated financial statements. The results of operations for the
interim period are not necessarily indicative of the results that may be
expected for the entire year. Certain prior year balances have been
reclassified to conform with the current year presentation.
2. Net loss per common share is computed based on the weighted average number
of shares outstanding during each period after giving effect for any
dilutive stock options and warrants which are considered to be common stock
equivalents. For the quarters ended October 31, 1995 and 1994, options and
warrants that would otherwise qualify as common stock equivalents are
excluded since their inclusion would have the effect of decreasing the loss
per share.
3. On August 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." SFAS No. 115 requires the classification of securities
at acquisition into one of three categories: available-for-sale, held to
maturity or trading. All the Company's investments are classified as
available-for-sale.
Securities that are being held for indefinite periods of time, including
those securities which may be sold in response to needs for liquidity or
changes in interest rates are classified as securities available-for-sale
and are carried at fair value, with the net, after-tax, unrealized holding
gain or loss reported as a separate component of shareholders' equity, with
no effect on current results of operations. The change in the unrealized
loss on securities available-for-sale for the quarter ended October 31, 1995
is as follows:
<TABLE>
<S> <C>
Unrealized loss on securities available-for-sale at July 31, 1995 $(27,961)
Net decrease in unrealized loss, due principally to decreases in
interest rates 10,754
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Unrealized loss on securities available-for-sale at October 31, 1995 $(17,207)
========
</TABLE>
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A summary of securities available-for-sale at October 30, 1995 is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Mutual funds $320,255 $ 9,650 $310,605
Corporate debt securities 111,186 1,370 109,816
U. S. Government agencies 302,374 6,187 296,187
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$733,815 $17,207 $716,608
======== ======== ======= ========
</TABLE>
Maturities of securities at October 31, 1995 are as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
<S> <C> <C>
Due in: 1995-1998 $567,314 $551,054
1999-2003 141,501 140,991
2004 and later 25,000 24,563
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$733,815 $716,608
======== ========
</TABLE>
4. Inventories consist of the following:
<TABLE>
<CAPTION>
October 31 July 31
1995 1995
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<S> <C> <C>
Finished goods $108,556 $ 91,690
Empty tubes and packaging
materials 159,283 111,957
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$267,839 $203,647
======== ========
</TABLE>
5. The Company adopted SFAS No. 109 "Accounting for Income Taxes",
effective August 1, 1993. There was no cumulative effect on the
Company's financial statements adopting SFAS No. 109.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. The tax
effects of significant items comprising the Company's net deferred tax
asset as of October 31, 1995 and July 31, 1995 are as follows:
7
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<TABLE>
<CAPTION>
October 31, July 31,
1995 1995
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<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 5,103,000 $ 5,096,000
Other 15,000 15,000
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5,118,000 5,111,000
Valuation allowance (5,118,000) (5,111,000)
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Net deferred tax asset 0 0
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</TABLE>
As a result of applying SFAS No. 109, previously unrecorded deferred tax
benefits from operating loss carryforwards incurred by the Company were
recognized at August 1, 1993 as part of the cumulative effect of
adopting the Statement. Also recognized at that date was a valuation
allowance for the same amount. Approximately $1,530,000 of the deferred
tax asset relates to deductions generated by the exercise of stock
options, which upon realization will result in an increase in capital in
excess of par value.
6 The Company has a $250,000 revolving bank line of credit which expires
in April 1996 and which is collateralized by trade accounts receivable,
inventories and rights to payment. Interest is payable monthly on the
unpaid balance at the bank's prime rate plus one and three quarters
percent (1.75%). At July 31, 1995, and October 31, 1995, the Company had
no short-term borrowings against this line of credit. Included in
short-term borrowings at July 31, 1995 and October 31, 1995, is $24,062
and $6,162, respectively, for installments due on the Company's product
liability insurance.
7 The Company has obtained a commitment from Bank One, Arizona (the
"Bank") to refinance the Company's mortgage on the building at 5227
North Seventh Street, Phoenix, Arizona which matures April 1, 1996. The
terms of the commitment, which expires November 1, 1996, include
interest to be payable monthly on the unpaid balance at the Bank's prime
rate plus four and three quarters percent (4.75%) fixed at the date of
closing.
8 On April 13, 1994, the Company filed a complaint in the United States
District Court for the District of Arizona, titled Zila Pharmaceuticals,
Inc. v. Colgate-Palmolive Company ("Colgate"), CIV No. 94-0756 PHX-CAM.
The complaint was served on Colgate on May 10, 1994. The complaint
alleges that Colgate's Orabase Gel product infringes the Company's U.S.
Patent No. 5,081,158 (the "158 Patent"), which covers the Company's
non-prescription, film-forming, bioadhesive medications sold in food and
drug stores nationwide. The complaint seeks to enjoin Colgate's
manufacture and distribution of Orabase Gel and requests an award of
damages in an appropriate amount. On May 27, 1994, Colgate filed its
answer to the Company's complaint, denying infringement and asserting
that the '158 Patent is invalid and unenforceable. The Company has
received an opinion of its patent counsel that the '158 Patent was duly
and validly issued, that the Patent is valid and enforceable and that
Colgate is
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infringing the '158 Patent by its manufacture and distribution of the Orabase
Gel product. The Company intends to vigorously prosecute its claims for
injunctive relief and damages against Colgate. Pretrial discovery procedures
have been completed. The parties are preparing for trial, which has not yet
been scheduled.
On July 14, 1995, the Company filed a declaratory judgment action in federal
district court in Phoenix, Arizona, titled Zila, Inc. v. CTM Associates, Inc.
(the "CTM Action"), CV No. 95-1441-PHX-PGR. In written and oral
communications to the Company, CTM Associates, Inc. ("CTM") has asserted the
position that the Company was not authorized to enter into a License Agreement
with Block Drug Company, Inc. ("Block") for marketing of OraScan in Europe
without CTM's prior consent; and that the License Agreement with Block is
invalid. The Company does not believe that CTM's position has any legal merit.
Accordingly, the Company filed the CTM action requesting that the court enter
judgment in the Company's favor to the effect that no consent of CTM was
required to enter into the License Agreement with Block, and that the Company's
not obtaining CTM's prior consent has no effect on the validity of the License
Agreement. The Company also asked for declaratory judgment that Zila is the
absolute owner of the OraScan patents and technology assigned by CTM pursuant
to the unambiguous terms of the 1991 Assignment and Royalty Agreement between
the Company and CTM, rather than a licensee of such patents and technology as
has been asserted by CTM. The Company has filed a motion for summary judgment
with respect to these issues. CTM has filed an answer denying the allegations
of the Company's complaint, has counter claimed for declaratory relief
regarding the Company's claims and has filed a response opposing the Company's
motion for summary judgment. A hearing on the Company's motion is currently
scheduled for February 12, 1996. If the Company were ultimately unsuccessful in
obtaining the requested declaratory judgment, such a result could possibly have
a significant adverse effect on the Company's OraScan marketing efforts.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ZILA, INC. AND SUBSIDIARIES
Results of Operations:
- ----------------------
For the quarter ended October 31, 1995, the Company had a net loss of
$17,377 compared to a net loss of $68,019 for the quarter ended October 31,
1994. Net sales during the first quarter of the current fiscal year totaled
$1,511,978 compared to net sales of $1,369,032 during the first quarter of the
prior fiscal year, a 10.4% increase. This increase was primarily as a result of
sales of new products that were first introduced after the end of the first
quarter of fiscal year 1995.
In the first quarter ended October 31, 1995, cost of sales increased
10.1% to $220,803 from $200,528 for the same period last year primarily as a
result of increased net sales. The percentage of cost of sales to net sales
remained at 14.6% for the quarters ended October 31, 1995 and 1994. The Company
has continued to control product costs through volume price breaks and
competitive purchases of packaging and other components.
Selling, general and administrative expenses increased $67,777 from
$1,274,315 for the first quarter of fiscal year 1995 to $1,342,092 for the same
period in fiscal year 1996. Sales commissions, royalties, product liability
insurance and freight charges decreased by $23,900 during the first quarter of
fiscal 1996 as compared to the first quarter of fiscal 1995 mainly due to a
decrease in commission rates and lower freight costs. Marketing and sales
expense decreased approximately $7,637 for the quarter ended October 31, 1995,
as compared to the similar period of the prior fiscal year. These decreases
were primarily the result of decreased sales promotion.
Administrative expenses increased $26,172 during the first quarter of
fiscal 1996 as compared to the first quarter of fiscal 1995. Such increases
were primarily a result of travel and licensing expenses. During the first
quarter of fiscal year 1996, approximately $113,000 in expenses were reimbursed
by an unrelated company as a result of preliminary negotiation of a license
agreement with the unrelated company. Internal funding of product development
increased by $73,142 during the first quarter of fiscal 1996 as compared to the
first quarter of fiscal 1995. Such increases were primarily due to the funding
of OraScan research, start-up manufacturing costs and staffing and legal
expenses arising out of the Company's efforts to prevent infringements of the
Zilactin patents (See "Part II--Other Information Item 1--Legal Proceedings").
10
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Interest income during the first quarter of fiscal year 1996 increased
$3,850 from $13,467 in the first quarter of fiscal year 1996 to $17,317 during
the same period in fiscal 1996. The increase was due to stronger performance
from the Company's investments during the first quarter of fiscal year 1996 as
compared to the same period of the previous fiscal year. Interest expense
decreased from $21,447 in the first quarter of the 1995 fiscal year to $13,427
in the first quarter of 1996. The decrease was attributable to lower debt
obligations during the first quarter of fiscal year 1996 as compared to fiscal
year 1995.
Licensing fees and royalty revenues were $29,325 for the quarter ended
October 31, 1995 compared to $16,251 for the quarter ended October 31, 1994.
Licensing expenses for such quarters were $19,263 and $813, respectively. The
increased expenses were primarily attributable to expenses incurred in
connection with the negotiation of an agreement with Stafford-Miller, a
subsidiary of Block Drug Company Inc., to market OraScan in the United Kingdom.
OUTLOOK
The Company uses three strategies to market its product line. The
primary focus has been on educating health professionals on the uniqueness of
each of the products. Targeted efforts to build awareness of the product line
are made by direct mailings and attending medical and dental conventions. The
Company believes that its product line is unsurpassed in terms of efficacy;
accordingly, impartial clinical studies regarding the efficacy of the Company's
products are sent by the Company to dentists, pharmacists and physicians. The
second strategy is to participate in retailer driven activities designed to
make the Company's retail products available at more outlets and offer value to
consumers at the store level. The third strategy is to build consumer awareness
of the Company's products through focused efforts such as targeted advertising.
During the first quarter of fiscal year 1996, the Company participated
in nine meetings geared to dental, pharmacy and medical professionals. At these
meetings, Company representatives interact with, and distribute information to
thousands of interested health professionals. The Company believes that these
types of marketing efforts combined with a superior product are the reason that
Zilactin is the number one product recommended by pharmacists for treating
canker sores and cold sores according to three independently conducted
pharmacist research studies.
Interest in the Company's products by health professionals continues to
grow. Sales of sample dispensers to dentists and physicians through the first
quarter of fiscal year 1996 are up approximately 29% in dollars and 26% in
units as compared to the same period of the prior fiscal year. The distribution
of the Company's new patient information pamphlet on mouth sores, which
features Zilactin, has grown into an excellent tool for health professionals to
educate their patients. Response has been strong as evidenced by requests for
the pamphlets for placement in the doctor's offices. Over 100,000 pamphlets
have been distributed to dental offices via medical conventions and doctors
calling the Company to request pamphlets. Additionally, over 30,000 pamphlets
have been distributed to pharmacists. The Company believes that the
distribution of the brochure increases the
11
<PAGE> 12
recognition of Zila products by the consumer and that such increased
recognition will have a positive effect on the sale of the Company's products.
1996 dollar sales for the Company's products were up 10% in the first
quarter of the current fiscal year over the first quarter of the 1995 fiscal
year. Most of the gains came from Zilactin-B and Zilactin. Zilactin-L dollar
sales were up 35% in the quarter against a strong year ago performance. The
Company's newest nationally distributed product, Zilactin-B sales were actually
higher than Zilactin-L by 41%. The Company attributed these sales to some pipe
line sales and the popularity of benzocaine for the market segment preferring a
topical anesthetic. Zilactin-B has distribution in all major drug wholesalers
and approximately 50% of chain drug outlets.
In the fourth quarter of the 1995 fiscal year, the Company began
testing a lip balm in the Arizona market. The product, called Zilactin-Lip, is
positioned to be a premium priced, effective alternative to the existing lip
balms. Zilactin-Lip prevents sun blisters, treats cold sores and treats dry,
chapped lips. Most other products perform only one or two of such applications.
Based on results to date, Zilactin-Lip is being expanded into additional
markets.
At the national American Dental Association meeting in October 1995,
the Company introduced Quik Floss, a unique dental flosser. The Company
believes that Quik Floss is the only clinically proven dental flosser on the
market. The patented Y-shape allows for one-handed flossing and provides
superior access to even the toughest spots, like back teeth. The Company will
be the only distributor for Quik Floss in the United States.
OraScan, which the Company believes to be the world's first oral cancer
diagnostic, was introduced in Canada during the third quarter of fiscal year
1993. Canada has turned out to be an excellent test market for OraScan by
providing the Company with valuable experience in the areas of insurance
coverage, training, sales strategy, advertising, public relations, marketing
and dentist perspectives. The Company believes that such experiences will
assist OraScan's introduction in Europe, the United States and elsewhere.
OraScan received regulatory approval in the United Kingdom by the
Medicines Control Agency ("MCA") during the third quarter of fiscal year 1995.
The MCA is the UK counterpart of the United States FDA. With this approval,
OraScan can be marketed in the UK and the Company has started the approval
process for OraScan throughout the European Union ("EU"). Prior to the UK
approval Orascan could be marketed in Canada and Australia.
The Company has already made arrangements for the production of OraScan
for the United States domestic market once FDA approval is received. A domestic
source for the basic raw material, toluidine blue, has been located and
qualified and the manufacturer is in the process of scaling up the procedure to
production size batches. They will produce toluidine blue exclusively for the
Company and have prepared and filed Drug Manufacturing File ("DMF") with the
FDA. The Company has also established a local manufacturing facility for the
manufacture of toluidine blue. All other components necessary for the
production of OraScan have been designed and sourced.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1995, the Company had net working capital of $1,840,537 and
a current ratio of 3.9 to 1. At October 31, 1995, the Company had net working
capital of $1,913,841 and a current ratio of 4.3 to 1.
Accounts receivable at October 31, 1995 were $780,294 on quarterly net
sales of $1,511,978 as compared to receivables of $839,307 at July 31, 1995 on
quarterly net sales of $1,334,493. Receivable as a percentage of quarterly net
sales were 51.6% at October 31, 1995 compared to 62.8% at July 31, 1995. This
decrease is primarily due to a decrease in licensing fee receivables of
$100,000 at October 31, 1995. There continues to be an emphasis on strong
credit management.
At October 31, 1995, the Company had inventories of $267,839, an
increase of $64,192 from inventories at July 31, 1995. The increase is
primarily the requirement of a build up of components and finished goods for
new products. The Company believes current inventories are at levels necessary
to support market expansion and to maintain adequate liquidity.
As of October 31, 1995, the Company had no material commitments for
capital expenditures; however, the Company will continue to seek FDA approval
of OraScan, and in connection therewith the Company believes that approximately
$200,000 of additional capital may be necessary in order to receive such
approval. Other than the funds necessary for FDA approval of the OraScan
product, the Company does not believe there are any known trends, demands,
commitments, events or uncertainties which are likely to significantly affect
the Company's liquidity.
On January 4, 1991, the Company purchased a 16,000 quare foot building
located at 5227 North Seventh Street, Phoenix Arizona 85014-2800. The purchase
price of the building was approximately $600,000. The Company paid 25% of the
purchase price in cash and obtained a loan for the balance of the purchase
price. Such loan bears interest at 11.75%, and is due in monthly installments
of $4,877, including interest, through March 1996 with a balloon payment April
1, 1996. The Company has obtained a commitment from Bank One, Arizona to
refinance the Company's mortgage note at maturity.
The Company also leases 1,751 square feet for a manufacturing facility
in Phoenix, Arizona This facility will produce toluidine blue which will be
used in the manufacture of OraScan.
Management believes that continued growth in the Company's sales,
licensing fees and royalty revenues will provide sufficient funding for the
Company's current operations for the next twelve months. The Company may
require additional financing to support production of its products in
quantities sufficient to support market expansion. In anticipation of these
potential requirements, the Company has a $250,000 line of credit with Bank
One, Arizona, NA, which is collateralized by trade receivables, inventories and
rights to payment. This line of credit expires in April of 1996 unless
renewed.. Interest is payable monthly on the unpaid balance at the bank's
prime rate plus one and three quarters percent
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(1.75%) At October 31, 1995, the Company had no borrowings against this line of
credit and anticipates that the line of credit will be renewed. The Company
also has the availability of additional financing by borrowing against the
Company's short term investments. At October 31, 1995, the Company had no
borrowings against its' short-term investments. The Company's product liability
insurance has been financed with an installment note payable. As of October 31,
1995, the balance of this note was $6,162.
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PART II - OTHER INFORMATION
Item 1.- Legal Proceedings
Colgate-Palmolive. On April 13, 1994, Zila filed a complaint in the
United States District Court for the District of Arizona, titled Zila
Pharmaceuticals, Inc. v. Colgate-Palmolive Company ("Colgate"), CIV No. 94-0756
PHX-CAM. The complaint was served on Colgate on May 10, 1994. The complaint
alleges that Colgate's Orabase Gel product infringes the Company's U.S. Patent
No. 5,081,158 (the "158 Patent"), which covers Zila's non-prescription,
film-forming, bioadhesive medications sold in food and drug stores nationwide.
The complaint seeks to enjoin Colgate's manufacture and distribution of Orabase
Gel and requests an award of damages in an appropriate amount. On May 27, 1994,
Colgate filed its answer to the Company's complaint, denying infringement and
asserting that the '158 Patent is invalid and unenforceable. The Company has
received an opinion of its patent counsel that the '158 Patent was duly and
validly issued, that the Patent is valid and enforceable and that Colgate is
infringing the '158 Patent by its manufacture and distribution of Orabase Gel
product. The Company intends to vigorously prosecute its claims for injunctive
relief and damages against Colgate. Pretrial discovery procedures have been
completed. The parties are preparing for trial, which has not yet been
scheduled.
CTM. On July 14, 1995, the Company filed a declaratory judgment action
in federal district court in Phoenix, Arizona, titled Zila, Inc. v. CTM
Associates, Inc. (the "CTM Action"), CV No. 95-1441-PHX-PGR. In written and
oral communications to the Company, CTM Associates, Inc. ("CTM") has asserted
the position that the Company was not authorized to enter into a License
Agreement with Block Drug Company, Inc. ("Block") for marketing of OraScan in
Europe without CTM's prior consent; and that the License Agreement with Block
is invalid. The Company does not believe that CTM's position has any legal
merit. Accordingly, the Company filed the CTM action requesting that the court
enter judgment in the Company's favor to the effect that no consent of CTM was
required to enter into the License Agreement with Block, and that the Company's
not obtaining CTM's prior consent has no effect on the validity of the License
Agreement. The Company also asked for declaratory judgment that the Company is
the absolute owner of the OraScan patents and technology assigned by CTM
pursuant to the unambiguous terms of the 1991 Assignment and Royalty Agreement
between the Company and CTM, rather than a licensee of such patents and
technology as has been asserted by CTM. The Company has filed a motion for
summary judgment with respect to these issues. CTM has filed an answer denying
the allegations of Zila's complaint, has counter claimed for declaratory relief
regarding the Company's claims and has filed a response opposing the Company's
motion for summary judgment. A hearing on the Company's motion is currently
scheduled for February 12, 1996. If the Company were ultimately unsuccessful in
obtaining the requested declaratory judgment, such result could possibly have a
significant adverse effect on the Company's OraScan marketing efforts.
15
<PAGE> 16
Item 5 - Other information
Block Drug Company, Inc. On March 27, 1995, the Company entered into a
License Agreement with Block Drug Company, Inc. ("Block"), pursuant to which
the Company licensed Block (and its affiliate entities) as the exclusive
manufacturer and distributor of OraScan in the United Kingdom, Australia and
New Zealand. The Company also granted Block an option for a specified period of
not less than one year to take an exclusive license in any or all of the
following countries: Germany, France, Italy, Spain, Belgium, Luxembourg,
Holland and Sweden (the "Optioned Countries"). Block has paid the Company
initial non-refundable license fees for the United Kingdom, Australia and New
Zealand of $130,000, in the aggregate, under the License Agreement, and a
non-refundable fee of $63,000 for the option to take license in the Optioned
Countries. An additional non-refundable license fee for the United Kingdom of
$100,000 was paid in the fourth quarter of fiscal 1995. If Block exercises the
option described above, the option fee will be applied toward payment of
non-refundable license fees, which total $190,000 if the option is exercised
with respect to all such countries. Subject to certain limited exceptions, the
License Agreement establishes a royalty on Block's net sales in the United
Kingdom and other countries in the licensed territory. The License Agreement
also establishes certain objectives which, if Block fails to achieve, can
result in the Company's ability to terminate the license in a particular
territory.
The License Agreement requires the Company to use its best efforts to
obtain regulatory approvals for the marketing and sale of OraScan in the
Optioned Countries, and the Company has agreed to spend up to a stipulated
maximum for such purpose. The initial term of the License Agreement in each
licensed country will be the term of any patent in such country resulting from
the Company's pending European patent application corresponding to United
States Patent No. 5,372,801 or, if no such patent issues, seven years from the
commencement of OraScan sales in such country. Based on advice of patent
counsel, the Company anticipates that patents will issue in each of the
Optioned Countries. Any such patents would expire in the year 2012.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
<S> <C> <C>
23 Consent of Deloitte & Touche, LLP
(regarding Form S-3 Registration
Statements) 18
27 Financial Data Schedule 19
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended October 31, 1995.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 15, 1995 By /s/ Joseph Hines
----------------- ----------------
Joseph Hines
President, Chairman of the Board
(Principal Executive Officer)
By /s/ Clarence J. Baudhuin
------------------------
Clarence J. Baudhuin
Executive Vice President of
Finance & Administration
Treasurer, Director (Principal
Financial & Accounting Officer)
17
<PAGE> 1
EXHIBIT NUMBER 23
AUDITORS' CONSENT
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective Amendment No. 1
to Registration Statement No. 33-46239 on Form S-3 of our reports dated
October 12, 1995, appearing in the Annual Report on Form 10-K of Zila, Inc. for
the year ended July 31, 1995, and the reference to us under the heading
"Experts" in the Prospectus, which is part of such Registration Statement.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
December 14, 1995
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> OCT-31-1995
<CASH> 444,558
<SECURITIES> 716,608
<RECEIVABLES> 800,294
<ALLOWANCES> (20,000)
<INVENTORY> 267,839
<CURRENT-ASSETS> 2,494,568
<PP&E> 1,112,897
<DEPRECIATION> (308,494)
<TOTAL-ASSETS> 4,260,890
<CURRENT-LIABILITIES> 580,727
<BONDS> 408,993
<COMMON> 24,482
0
0
<OTHER-SE> 3,246,688
<TOTAL-LIABILITY-AND-EQUITY> 4,260,890
<SALES> 1,511,978
<TOTAL-REVENUES> 1,541,303
<CGS> 220,803
<TOTAL-COSTS> 220,803
<OTHER-EXPENSES> 1,342,092
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,427
<INCOME-PRETAX> (17,377)
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