<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended October 31,1996 or
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from______________________to__________________________
Commission file number 0-17521__________________________________________________
ZILA, INC.
________________________________________________________________________________
(Exact Name of registrant as specified in its charter)
Delaware No. 86-0619668
____________________________ ____________________________________
(State or Other Jurisdiction (IRS Employer Identification number)
corporation or organization)
5227 North 7th Street, Phoenix, Arizona 85014
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602)266-6700
_____________________________
(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
_____ ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
_____________________________________
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 31, 1996 was 25,859,545 shares.
Exhibit 16
Total pages 16
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page no.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets as of October 31, 1996 (unaudited) and July
31, 1996 3
Condensed consolidated statements of operations (unaudited) for quarters ended
October 31, 1996 and 1995 4
Condensed consolidated statements of cash flows (unaudited) for quarters ended
October 31, 1996 and 1995 5
Notes to condensed consolidated financial statements (unaudited)
6-8
Item 2. Management's discussion and analysis of financial condition and results of operations
9-12
PART II. OTHER INFORMATION
Item 1. Legal proceedings 13
Item 5. Other information 13
Item 6. Exhibits and reports on Form 8-K 14
SIGNATURES 15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------
October July
31, 1996 31, 1996
ASSETS (Unaudited)
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 72,266 $ 204,055
Short-term investments 717,315 711,470
Accounts receivable:
Trade, less allowance for doubtful accounts of $20,000 672,891 789,591
Licensing fees and royalty receivables 50,000 35,000
Inventories 445,304 398,976
Prepaid expenses and other assets 145,582 144,777
Related party receivables 75,068 16,167
------------ ------------
Total current assets 2,178,426 2,300,036
------------ ------------
PROPERTY AND EQUIPMENT - Net 1,289,672 1,282,793
DEFERRED PATENT AND LICENSING COSTS - Net 1,094,137 1,100,744
PURCHASED TECHNOLOGY RIGHTS - Net 7,237,623 7,346,733
------------ ------------
TOTAL $ 11,799,858 $ 12,030,306
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 200,506 $
Borrowings collateralized by securities 343,627
Accounts payable 698,375 963,388
Accrued royalties 35,761 47,532
Other accrued expenses 162,992 202,757
Deferred revenue 11,195
Current portion of long-term debt 27,782 27,782
------------ ------------
Total current liabilities 1,469,043 1,252,654
LONG-TERM DEBT 375,060 382,006
------------ ------------
Total liabilities 1,844,103 1,634,660
------------ ------------
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 25,859,545 shares
(October 31, 1996) and 25,774,944 shares (July 31, 1996) 25,860 25,775
Capital in excess of par value 21,103,837 20,854,321
Unrealized loss on securities available-for-sale (16,167) (24,832)
Deficit (11,157,350) (10,459,193)
------------ ------------
9,956,180 10,396,071
Less 42,546 common shares held by wholly-owned
subsidiary (at cost) (425) (425)
------------ ------------
Total shareholders' equity 9,955,755 10,395,646
------------ ------------
TOTAL $ 11,799,858 $ 12,030,306
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
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ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) QUARTERS ENDED
OCTOBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------------------
Quarters ended October 31,
----------------------------------------
1996 1995
------------ ------------
<S> <C> <C>
REVENUES
Net sales $ 1,598,458 $ 1,511,978
Licensing fees and royalty revenue 26,812 29,325
------------ ------------
1,625,270 1,541,303
------------ ------------
OPERATING COSTS AND EXPENSES
Cost of products sold 264,628 220,803
Royalty expense 9,321 19,263
Selling, general and administrative 2,047,357 1,322,829
------------ ------------
2,321,306 1,562,895
------------ ------------
LOSS FROM OPERATIONS (696,036) (21,592)
------------ ------------
OTHER INCOME (EXPENSES)
Interest income 16,716 17,317
Interest expense (16,793) (13,427)
Realized gain (loss) on short-term
investments (2,044) 325
------------ ------------
(2,121) 4,215
------------ ------------
NET LOSS $ (698,157) $ (17,377)
============ ============
NET LOSS PER COMMON SHARE $ (0.03) $ (0.00)
============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 25,822,263 24,404,842
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
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ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
QUARTERS ENDED OCTOBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------------------------------------
Quarters ended October 31,
----------------------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(698,157) $ (17,377)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 178,173 47,866
Realized loss (gain) on sale of investments 2,044 (325)
Change in assets and liabilities:
Accounts receivable 101,700 59,013
Investment interest receivable 2,410 (1,958)
Inventories (46,328) (64,192)
Prepaid expenses and other assets (805) 2,754
Accounts payable, accrued expenses and
deferred revenue (327,744) (46,690)
--------- ---------
Net cash used in operating activities (788,707) (20,909)
--------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments (228,057) (17,046)
Proceeds from sale of short-term investments 226,423 7,400
Purchases of property and equipment (53,233) (93,742)
Patents and licensing costs incurred (16,102) (25,018)
Funding of related party receivables (58,901) 398
--------- ---------
Net cash used in investing activities (129,870) (128,008)
--------- ---------
FINANCING ACTIVITIES:
Principal payments on short-term borrowings (17,900)
Net proceeds from short-term borrowings 200,506
Net proceeds from borrowings collateralized by securities 343,627
Net proceeds from issuance of common stock 249,601 154,328
Principal payments on long-term debt (6,946) (1,967)
--------- ---------
Net cash provided by financing activities 786,788 134,461
--------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (131,789) (14,456)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 204,055 459,014
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 72,266 $ 444,558
========= =========
CASH PAID FOR INTEREST $ 16,793 $ 13,427
========= =========
</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. 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.
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, 1996 and
1995, 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. Inventories consist of the following:
<TABLE>
<CAPTION>
October 31, July 31,
1996 1996
-------- --------
<S> <C> <C>
Finished goods $144,254 $189,179
Raw materials, primarily empty tubes and
packaging materials 301,050 209,797
-------- --------
$445,304 $398,976
======== ========
</TABLE>
4. The Company has a $250,000 revolving bank line of credit which expires
in April 1997 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 (8.25% at October 31, 1996)
plus 1.75%. At July 31, 1996 and October 31, 1996, the Company had $0
and $160,000, respectively, in borrowings against this line of credit.
The Company's debt agreement with the bank contains various covenants
including net working capital and current ratio. As of October 31,
1996, the Company was not in compliance with certain of these
covenants. The Company has obtained a waiver from the bank against
current covenant violations as of October 31, 1996. The Company is
uncertain whether these
6
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debt covenants will be complied with at the next quarterly reporting
date on January 31, 1997. Included in short-term borrowings at October
31, 1996 is $40,506 for installments due on the Company's directors and
officers liability insurance.
5. 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"). 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.
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 the Orabase Gel product.
The Company is vigorously prosecuting its claims for injunctive relief
and damages against Colgate. The Court has denied Colgate's Motions for
Summary Judgment that the Patent is invalid. The parties are completing
pretrial procedures. The Court has scheduled the case for trial
commencing April 22, 1997.
6. The Company has a New Drug Application pending with the Food and Drug
Administration ("FDA") for ORATEST. The initiation of the marketing of
ORATEST in the United States is dependent upon the approval of the New
Drug Application by the FDA. During 1994, the FDA approved the
Company's application for an Investigational New Drug for ORATEST,
which allows the Company to manufacture the product in the United
States for clinical studies and export to certain foreign countries.
The Company believes that the FDA will approve the New Drug Application
and the production and marketing of ORATEST.
7. On June 3, 1996, the Company announced that it had signed a letter of
intent with Bio-Dental Technologies Corporation ("Bio-Dental") for the
merger of Bio-Dental with Zila. It is the intention of the parties that
the merger be accounted for as a pooling of interests. On August 8,
1996, the parties entered into a definitive merger agreement. The terms
of the merger agreement provide for a per share or exchange of between
.75 and .825 shares of the Company's common stock for each share of
Bio-Dental common stock outstanding on the closing date and for the
assumption by the Company of outstanding Bio-Dental stock options and
warrants. As of October 31, 1996, Bio-Dental had 6,444,986 shares of
common stock outstanding. The consummation of the merger is subject to
a number of conditions set forth in the merger agreement, including the
approval of the merger by Bio-Dental's shareholders, the ability of the
parties to account for the merger as a pooling of interests, and
various other closing conditions.
7
<PAGE> 8
8. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, on August 1, 1996. The effect
of such adoption had no significant impact on the Company's financial
position or results of operations for the quarter ended October 31,
1996.
In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation" which became effective for
the Company beginning August 1, 1996. SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured
based on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company has elected to continue to apply APB
Opinion No. 25 in its financial statements and will disclose in a
footnote the pro forma effect on net income and earnings per share, as
if the Company had applied the new Standard in its year-end financial
statements.
8
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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, 1996, the Company had a net loss of
$698,157 compared to a net loss of $17,377 for the quarter ended October 31,
1995. Net sales during the first quarter of the current fiscal year totaled
$1,598,458 compared to net sales of $1,511,978 during the first quarter of the
prior fiscal year, a 5.7% increase. This increase was primarily the result of
sales of new products, including ZILACTIN LIP and QUIK FLOSS.
In the first quarter ended October 31, 1996, cost of sales increased
19.8% to $264,628 from $220,803 for the same period last year primarily as a
result of increased net sales. Cost of sales as a percentage of net sales
increased from 14.6% in the quarter ended October 31, 1995 to 16.6% in the
quarter ended October 31, 1996. This increase is due to the sales of new
products during the quarter ended October 31, 1996 with lower margins. The
Company expects cost of sales as a percentage of net sales to continue to
increase as sales of the new products increase. The Company has continued to
control product costs through volume price breaks and competitive purchases of
packaging and other components.
Licensing fees and royalty revenues were $26,812 for the quarter ended
October 31, 1996 compared to $29,325 for the quarter ended October 31, 1995. The
decrease was due to lower royalty revenues from the licensing of ORATEST for the
United Kingdom by the Stafford-Miller Company. Licensing expenses decreased to
$9,321 from $19,263 for the same period of the previous fiscal year, a decrease
of $9,942. The expenses for fiscal year 1996 were higher due to expenses
incurred in connection with negotiations to license ORATEST for the UK market.
Selling, general and administrative expenses increased $724,528 from
$1,322,829 for the first quarter of fiscal year 1996 to $2,047,357 for the same
period in fiscal year 1997. Sales commissions, royalties, product liability
insurance and freight charges increased by $32,598 during the first quarter of
fiscal 1997 as compared to the first quarter of fiscal 1996. Marketing and sales
expense increased approximately $82,574 for the quarter ended October 31, 1996,
as compared to the similar period of the prior fiscal year. These increases were
primarily the result of increased advertising, trade show and professional
expenses.
Administrative expenses increased $307,820 during the first quarter of
fiscal 1997 as compared to the first quarter of fiscal 1996. Such increases were
primarily a result of
9
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acquisition, amortization, shareholder and staffing expenses. Internal funding
of product development increased by $301,536 during the first quarter of fiscal
1997 as compared to the first quarter of fiscal 1996. Such increases were
primarily due to the funding of ORATEST 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").
Interest income during the first quarter of fiscal year 1997 decreased
$601 from $17,317 in the first quarter of fiscal year 1996 to $16,716 during the
same period in fiscal 1997. Interest expense increased from $13,427 in the first
quarter of the 1996 fiscal year to $16,793 in the first quarter of 1997. The
increase was attributable to higher debt obligations during the first quarter of
fiscal year 1997 as compared to fiscal year 1996.
MARKETING STRATEGY
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 conventions and advertising in
key publications. 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 1997, the Company participated
in seven meetings geared to dental, pharmacy and medical professionals. At these
meetings, Company representatives have an opportunity to 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 1997 are up approximately 11.2% in dollars and 18.7% in
units as compared to the same period of the prior fiscal year. The distribution
of the Company's patient information pamphlet on mouth sores (it also mentions
the Zilactin product line) has grown into an excellent tool for health
professionals to educate their patients. Response has been strong as evidenced
by thousands of requests for the pamphlets for placement in the doctors'
offices. Over 185,000 pamphlets have been distributed to dental offices via
medical conventions and doctors calling the Company to request pamphlets.
Additionally, over 45,000 pamphlets have been distributed to pharmacists. The
Company believes that the sample dispenser and brochure distribution efforts
will have a positive effect on the sale of the Company's products.
10
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PRODUCT INFORMATION UPDATE
The Company nationally launched two new products in the second half of
fiscal year 1996. ZILACTIN LIP BALM expanded out of its test market to
availability in retailers in most parts of the country. Initial feedback has
been positive and a major objective of the next fiscal year is to expand the
number of retailers carrying the item. QUIK FLOSS, a disposable flosser, was
rolled out in late fiscal year 1996 with initial acceptance among several large
customers. Zila licenses QUIK FLOSS under a comprehensive marketing and
distribution agreement. As with ZILACTIN LIP BALM, a major objective for QUIK
FLOSS is to expand the distribution base in the upcoming year.
1997 sales for the Company's products were up 5.7% in the first quarter
of the current fiscal year over the first quarter of the 1996 fiscal year. Most
of the gains came from ZILACTIN-B, ZILACTIN LIP BALM and QUIK FLOSS. The Company
attributed these gains to some pipe line sales and the popularity of benzocaine
for the market segment preferring a topical anesthetic.
The ORATEST product was introduced in Canada during the third quarter
of 1993. The demographics of Canada enabled the Company to test various
marketing strategies in connection with the introduction of ORATEST. Through
test marketing, the Company acquired information regarding insurance coverage,
training tapes, advertising, public relations and the perspective of dentists
and other professionals. The Company believes that this knowledge will be
invaluable as the Company prepares for the introduction of the ORATEST product
in the EU and the United States.
ORATEST received regulatory approval in the United Kingdom from the
Medicines Control Agency ("MCA") during the second quarter of fiscal year 1995.
The MCA is the UK counterpart of the United States FDA. With this approval,
ORATEST can be marketed in the UK and the Company has started the approval
process for ORATEST throughout the European Union ("EU"). Prior to the UK
approval ORATEST could be marketed in Canada and Australia.
In order to ensure an available and stable supply of toluidine blue,
the active ingredient in the OraTest product, the Company established its own
manufacturing facility. In 1995, the Company leased a facility and hired a
chemist to oversee the project. Company management believe this manufacturing
facility is now operating in accordance with "Good Manufacturing Practices" and
the rules and regulations of the FDA as confirmed by experienced industry
consultants. The FDA has made an appointment to inspect the facility. Several
test batches of toluidine blue have already been prepared by the manufacturing
unit and all have met the specifications given to the FDA with regard to the
finished active ingredient. The Company is confident that the facility will pass
inspection.
11
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LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1996, the Company had net working capital of $1,047,382 and
a current ratio of 1.8 to 1. At October 31, 1996, the Company had net working
capital of $709,383 and a current ratio of 1.48 to 1.
Accounts receivable at October 31, 1996 were $722,891, consisting of
$50,000 in licensing fee and royalty receivables and $672,891 in trade accounts
receivable as compared to accounts receivable at July 31, 1996 of $824,591,
consisting of $35,000 in licensing fee and royalty receivables, $129,319 in
receivables related to the termination of the licensing agreement with the
Procter & Gamble Company and $660,272 in trade accounts receivable. Trade
accounts receivable as a percentage of quarterly net sales were 42.1% at October
31, 1996 compared to 41.4% at July 31, 1996. There continues to be an emphasis
on strong credit management.
At October 31, 1996, the Company had inventories of $445,304, an
increase of $46,328 from inventories at July 31, 1996. The increase is the
result 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, 1996, the Company had no material commitments for
capital expenditures. However, the Company will continue to seek FDA approval of
ORATEST and in connection therewith the Company believes that approximately
$75,000 of additional capital may be necessary in order to receive such
approval. Other than the funds necessary for FDA approval of the ORATEST product
and for litigation expenses for the Colgate-Palmolive litigation, 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.
Management believes that continued growth in the Company's sales of its
products will provide sufficient funding for the Company's current operations
for the next twelve months. The Company may require additional financing to
support the production of its products in quantities sufficient to support
continued market expansion. In anticipation of these potential requirements, the
Company obtained a $250,000 bank line of credit in April 1996, which is secured
by trade accounts receivable, inventories and rights to payment. This line of
credit expires in April of 1997. Interest is payable monthly on the unpaid
balance outstanding at the bank's prime rate (8.25% at October 31, 1996) plus
1.75%. At October 31, 1996, the Company had borrowed $160,000 against the line
of credit. The Company's debt agreement with the bank contains various covenants
including net working capital and current ratio. As of October 31, 1996, the
Company was not in compliance with certain of these covenants. The Company has
obtained a waiver from the bank against current convenant violations as of
October 31, 1996. The Company is uncertain whether these debt covenants will be
complied with at the next quarterly reporting date on January 31, 1997. The
Company also has the availability of additional financing by borrowing
12
<PAGE> 13
against the Company's short-term investments. At October 31, 1996, the Company
had available $506,457, of which the Company had borrowed $343,627 against its'
short-term investments. The Company's directors and officers liability insurance
has been financed with an installment note payable. As of October 31, 1996, the
balance of this note was $40,506.
FORWARD LOOKING INFORMATION
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. See the "Investments Considerations Section " in the
Company's registration statement on Form S-4 (Registration No. 333-10107), which
identifies some important factors that could cause actual results to differ
materially from those contained in such forward-looking statements.
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-EHC. 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 Zila'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 the Orabase Gel product. The
Company intends to vigorously prosecute its claims for injunctive relief and
damages against Colgate. The Court has denied Colgate's Motions for Summary
Judgment that the Patent is invalid. The parties are completing pretrial
procedures. The Court has scheduled the case for trial commencing April 22,
1997.
Item 5 - Other information
Bio-Dental Technologies. On June 3, 1996, the Company announced that it
had signed a letter of intent with Bio-Dental Technologies Corporation
("Bio-Dental") for the merger of Bio-Dental with Zila. It is the intention of
the parties that the merger be accounted for as a pooling of interests. On
August 8, 1996, the parties entered into a definitive merger agreement. The
terms of the merger agreement provide for a per share or exchange of between .75
and .825 shares of the Company's common stock for each share of Bio-Dental
common stock outstanding on the closing date and for the assumption by the
Company of outstanding Bio-Dental stock options and warrants. As of October 31,
1996, Bio-Dental had 6,444,986 shares of common stock outstanding. The
consummation of the merger is subject to a number of conditions set forth in the
merger agreement, including the
13
<PAGE> 14
approval of the merger by Bio-Dental's shareholders, the ability of the parties
to account for the merger as a pooling of interests, and various other closing
conditions.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(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, 1996.
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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, 1996 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)
15
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