<PAGE> 1
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) July 21, 1997
ZILA, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 0-17521 86-0619668
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
</TABLE>
5227 North 7th Street Phoenix, Arizona 85014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 266-6700
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ITEM 5. OTHER EVENTS
On January 8, 1997, Zila, Inc. ("Zila" or the "Company")
completed its merger with Bio-Dental Technologies Corporation ("Bio-Dental")
pursuant to which Bio-Dental became a wholly owned subsidiary of the Company.
Under the terms of the merger, each share of Bio-Dental common stock was
exchanged for .825 shares of the Company's common stock. The merger with
Bio-Dental has been accounted for as a pooling of interests.
Set forth under Item 7 of this Form 8-K are the Consolidated
Statements of Operations of the Company for the fiscal years ended July 31,
1996, 1995 and 1994 and the balance sheets as of July 31, 1996 and July 31,
1995. Such financial statements give retroactive effect to the Bio-Dental merger
and include the combined operations of Zila and Bio-Dental for all periods
presented.
Set forth below are restatements of the "Selected Financial Data"
and the "Management's Discussion and Analysis of Financial Condition and Results
of Operation" for the Company's Form 10-K for the fiscal year ended July 31,
1996 which also gives effect to the pooling of interest accounting treatment.
SELECTED FINANCIAL DATA (ITEM 6 TO FORM 10-K)
The following tables summarize selected financial information derived
from the Company's audited financial statements. The information set forth below
is not necessarily indicative of results of future operations and should be read
in conjunction with the Company's Consolidated Financial Statements and related
Notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 8-K.
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Fiscal Year Ended July 31
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Statement of Operations Data 1996 1995 1994 1993 1992
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Net Sales $ 37,479,546 $35,064,245 $22,474,672 $13,445,944 $ 8,331,456
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Licensing fees and royalty revenue 2,100,484 1,956,654 1,732,277 1,846,492 1,020,889
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Net Income (Loss) 1,217,298 (1,282,357) 558,748 1,338,826 (91,061)
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Net Income (Loss) Per Share 0.04 (0.04) 0.02 0.05 (0.00)
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At July 31
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Balance Sheet Data 1996 1995 1994 1993 1992
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Current Assets $ 13,251,960 $12,010,497 $11,011,202 $ 7,055,906 $ 3,582,806
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Current Liabilities (6,672,497) (6,401,072) (5,557,594) (1,885,012) (1,791,211)
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Total Assets 25,309,781 16,691,859 15,085,434 9,833,481 6,245,470
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Long-Term Debt (382,006) (1,136,239) (437,586) (469,959) (588,532)
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Total Liabilities (7,054,503) (7,537,311) (5,995,180) (2,354,971) (2,379,743)
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Shareholders' Equity (18,255,278) (9,154,548) (9,090,254) (7,478,510) (3,865,727)
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2
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(ITEM 7 TO FORM 10-K)
Forward Looking Statements. The following discussion contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to those items described below and those described in Item 1
of the Company's 1996 Annual Report on Form 10-K under the heading "Risks and
Uncertainties" and "Merger with Bio-Dental Technologies Corporation" and in Item
3 "Legal Proceedings."
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
On January 8, 1997, the Company completed a merger with Bio-Dental. On
December 30, 1996, Bio-Dental's shareholders approved the all-stock transaction
which provided for a per share exchange of .825 shares of the Company's common
stock for each share of Bio-Dental common stock outstanding. As of January 8,
1997, Bio-Dental had 6,565,300 shares of common stock outstanding.
The merger has been accounted for as a pooling-of-interests, and
accordingly, the condensed consolidated financial statements give retroactive
effect to the Bio-Dental merger and include the combined operations of Zila and
Bio-Dental for all periods presented. Prior to the combination, Bio-Dental's
year-end was March 31. Effective August 1, 1995, Bio-Dental's results are
reported on a July 31, 1996 basis along with the results of Zila, Inc..
Bio-Dental's net loss for the four-month period ended July 31, 1995 is reflected
as an adjustment to the deficit during the year ended July 31, 1996. For the
four-month period ended July 31, 1995, Bio-Dental had revenues of $11,056,774,
operating costs and expenses of $11,631,735, and a net loss of $416,817. Certain
adjustments and reclassifications have been made to conform previously issued
Bio-Dental financial statements to classifications and accounting policies used
by Zila.
COMPANY OVERVIEW
Zila has three operating groups. Zila Pharmaceuticals markets a growing
line of non-prescription oral healthcare products, including Zilactin,
Zilactin-B, Zilactin-L, Zilactin-Lip,
<PAGE> 4
new Zilactin Baby and Quik Floss. Cygnus Imaging manufactures and markets
internationally CygnaScope and OralVision intraoral video camera systems, and
Sens-A-Ray digital x-ray systems. The third operating group, Bio-Dental
Technologies, consists of Practice Works dental practice management software and
The Supply House, a nationwide dental products distributor, marketing 15,000
items to the dental office through extensive direct mail, catalog sales and
telemarketing.
OPERATING RESULTS
Fiscal year ended July 31, 1996. For the fiscal year ended July 31,
1996, the Company had net income of $1,217,298 compared to a net loss of
$1,282,357 for 1995.
Net sales during the 1996 fiscal year totaled $37,479,546 compared to
net sales of $35,064,245 for the prior fiscal year, an increase of 6.9%. The
growth in net sales was attributable mainly to the Company's distribution
subsidiary, The Supply House (TSH) which was able to increase its average volume
per customer. Sales for TSH rose to $25,077,638 up 22.0% from $20,551,803 last
year. Additional growth came from one of the Company's other subsidiaries, Zila
Pharmaceuticals, which had net sales of $5,978,131 in fiscal year 1996 compared
to $5,147,667 in 1995, a 16.1% increase. The increase at Zila Pharmaceuticals
was primarily due to the sales of ZILACTIN-B which have continued to increase
since its introduction in the first quarter of fiscal year 1995. These increases
were partially offset by a decline in net sales at Integrated Dental
Technologies (IDT), a wholly owned subsidiary of Bio-Dental. The decline at IDT
resulted mainly as a result of IDT's launch of the "paperless" dental office
which was met with little initial demand. Previously, IDT had sold only dental
practice management software systems and intra-oral cameras on a stand-alone
basis. When the Company began focusing on these larger, "integrated" systems,
sales of the individual components declined. In December 1995, IDT announced
that it was discontinuing its "paperless" dental office offering, and returning
to its previous strategy of selling just intra-oral cameras and practice
management software. In connection with this restructuring, the Company recorded
$271,631 in restructuring charges in fiscal year 1996. There were no such
charges in fiscal year 1995.
Licensing fees and royalty revenues were $2,100,484 for fiscal year
1996 compared to $1,956,654 for the prior fiscal year. This increase was
attributable to licensing of OraTest in the United States to The Procter &
Gamble Company ("P&G"). Included in such amounts for the fiscal year ended July
31, 1996, are $750,000 of non-refundable licensing fees that the
<PAGE> 5
Company received from P&G in connection with a licensing agreement between P&G
and the Company, which agreement was terminated on April 3, 1996. The increase
was partially offset by a decrease in royalty revenues from Denticator
International, Inc. (DII), a wholly owned subsidiary of Bio-Dental. This
reduction came mainly as a result of lower levels of profitability at DII, which
had a resulting effect on royalties payable to BioDental. On July 22, 1996,
Young Innovations, Inc. (Young) acquired substantially all of the assets and
certain liabilities of DII. Bio-Dental received approximately $7.5 million in
lieu of future royalties that Bio-Dental was entitled to receive in connection
with its licensing agreement with DII. In addition, Young issued Bio-Dental a
"product credit" against future purchases from Young equal to the amounts due
Bio-Dental at the time of closing. Included in other receivables and other
assets at July 31, 1996 is $600,249 and $355,103, respectively, of product
credits due from Young. Concurrent with the closure of the transaction,
Bio-Dental canceled options to purchase 50,000 shares of Bio-Dental's restricted
common stock that were held by DII.
Cost of products sold were $24,771,193 for the fiscal year ended July
31, 1996 a 12.1% increase from $22,093,228 for the fiscal year ended July 31,
1995. This increase is primarily due to increased sales volume during fiscal
year 1996 as compared to fiscal year 1995. Cost of sales as a percentage of net
sales increased to 66.1% during fiscal year 1996 as compared to 63.0% in fiscal
year 1995. The increase is attributable primarily to the write-off of inventory
associated with the IDT restructuring program and reserves established in
recognition of a degradation of inventory value of older model intra-oral camera
inventory, as IDT released its newer model camera. The inventory write down and
the reserves were not included as "restructuring charges," but rather were taken
against cost of products sold.
The Company incurred $18,606,795 of selling, general and administrative
expenses during the fiscal year ended July 31, 1996 an increase of $2,424,067
over the fiscal year ended July 31, 1995. The bulk of this increase related to
the higher than expected costs of marketing, selling and supporting the various
products of IDT, including IDT's filmless x-ray and computer hardware products.
Additionally, administrative expenses during the fiscal year ended July 31, 1996
increased primarily due to travel and business expense, legal, shareholder
expense, and amortization of purchase technology rights. The Company also had
increases in internal funding of product development during the fiscal year
ended July 31, 1996 as compared to the previous fiscal year. Product development
increases were mainly due to start-up manufacturing costs related to OraTest,
and staffing and legal expenses arising out of the Company's efforts to prevent
infringement of the ZILACTIN patents.
<PAGE> 6
Interest and other income for the fiscal year ended July 31, 1996
decreased $104,824 from $252,672 in the prior fiscal year due primarily to the
scheduled termination of lease revenues from DII in March 1995. Interest expense
increased from $211,544 in fiscal year 1995 to $471,607 in fiscal year 1996. In
April 1996, Bio-Dental borrowed $1.25 million by issuing term notes to provide
additional working capital. Amortization of issuance costs and note discounts
(associated with warrants issued to the lenders) are included in interest
expense. These term notes were repaid in July 1996 and the remaining unamortized
issuance costs were written-off to interest expense at that time.
Fiscal year ended July 31, 1995. For the fiscal year ended July 31,
1995, the Company had a net loss of $1,282,357 compared to net income of
$558,748 for 1994.
Net sales during the 1995 fiscal year totaled $35,064,245 compared to
net sales of $22,474,672 for the prior fiscal year. Net sales for fiscal year
1995 increased approximately 56.0% as compared to net sales in fiscal 1994
primarily due to the first full year of operations of both Ryker Dental of
Kentucky, Inc. (Ryker) and OralVision, following Bio-Dental's acquisition of the
entities effective January 1, 1994. Approximately $5.2 million of the increase
came as a result of OralVision (and the subsequent formation of IDT), $4.0
million came from the acquisition of Ryker, and an additional $2.4 million of
revenue growth was generated by TSH. Additionally, Zila Pharmaceuticals
generated an increase of approximately $1.0 million of net sales due to
increases in distribution in food outlets and in market share in the drug stores
of new ZILACTIN(R) products.
Licensing fees and royalty revenues were $1,956,654 for fiscal year
1995 compared to $1,732,277 for the prior fiscal year. The increased licensing
fees, royalty revenue were primarily attributable to the negotiation of an
agreement with Stafford-Miller, a subsidiary of Block Drug Company, Inc., to
market the ORATEST product in the United Kingdom. As anticipated, royalty
revenues from DII were virtually unchanged from fiscal year 1994. Royalty
revenues from DII were $1,665,699 for 1995 compared to $1,665,664 for fiscal
year 1994. Bio-Dental sold DII in March 1991 in exchange for a royalty
arrangement.
Cost of products sold were $22,093,228 for the fiscal year ended July
31, 1995 a 65.1% increase from $13,382,148 for the fiscal year ended July 31,
1994. This increase is primarily due to increased sales volume during fiscal
year 1995 as compared to fiscal year 1994. Cost of sales as a percentage of net
sales increased to 63.0% during fiscal year 1995 as compared to 59.5% in fiscal
year 1994. The increase is attributable primarily to a delay in the
<PAGE> 7
production of TSH's 1995 catalog, which forced TSH to honor 1994 pricing for
several additional months, even after cost increases had been imposed upon TSH
from its suppliers. In addition, during the first nine months of fiscal 1994
Bio-Dental earned profit-sharing revenues associated with its role as the
manager of OralVision, Inc. These dollars earned were recorded as revenues with
no costs associated with them, thereby providing 100 percent gross margin on
these revenues. Subsequent to the acquisition of OralVision in January 1994,
Bio-Dental recorded all operational activity (revenues, cost of sales and
expenses) and, as such, gross margins have been reduced. This increase was
partially offset by a decrease in cost of sales as a percentage of net sales at
Zila Pharmaceuticals caused by changes in product mix.
The Company incurred $16,182,728 of selling, general and administrative
expenses during the fiscal year ended July 31, 1995, an increase of $6,668,146
over the fiscal year ended July 31, 1994. Increases of approximately $5.5
million at Bio-Dental came primarily as a result of two factors. First, the
acquisition of Ryker added the staff, facility and ongoing operations associated
with that organization. Secondly, the formation, development and marketing of
the new IDT business unit added a very large portion of this increased cost
structure. Additionally, administrative expenses during fiscal year 1995
increased primarily due to licensing expenses, travel and business expense,
legal and shareholder expenses. Internal funding of product development also
increased as compared to the prior year. This increase resulted from staffing,
product evaluation expense, patent protection, and funding of ORATEST research.
Interest income for the fiscal year ended July 31, 1995 increased to
$252,672 from $249,749 in the prior fiscal year. The increase in interest
expense from $82,552 for the fiscal year ended July 31, 1994 to $211,544 for the
1995 fiscal year, was due to additional interest obligations on borrowings made
by Bio-Dental to expand operations of IDT during fiscal year 1995 and fund the
working capital requirements needed to develop the IDT business.
INFLATION
The Supply House experienced decreased gross margins in fiscal 1996.
This was due mostly to suppliers of TSH's products increasing the costs of such
products at a greater rate
<PAGE> 8
than TSH could raise its selling prices, due to price competition in the
marketplace and the timing of its catalog release.
The Supply House estimates that price increases for products it
purchases will average approximately 4 percent in fiscal 1997. TSH believes that
new pricing strategies adopted during the first quarter of fiscal 1997 will
address these anticipated cost increases and should enable TSH to prevent a
decrease in gross margins for its non-managed care sales. Managed care sales are
expected to provide slightly lower gross margins but the sales volume increased
from these contracts should improve the net income of TSH.
Inflation has had no material effect on the operations or financial
condition of the Zila Pharmaceutical or IDT subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1996, the Company had net working capital of $6,579,463,
and its current ratio (the ratio of current assets to current liabilities) was
2.0 to 1. At July 31, 1995, the Company had net working capital of $5,609,425
and its current ratio was 1.9 to 1.
Trade accounts receivable at July 31, 1996 were $2,821,440 compared to
trade accounts receivable at July 31, 1995 of $2,976,583. Trade accounts
receivable as a percentage of quarterly net sales of $9,043,556 were 31.2% at
July 31, 1996 as compared to 33.1% at July 31, 1995 which had quarterly net
sales of $8,998,597.
At July 31, 1996, the Company had inventories of $4,200,442, a decrease
of $1,322,050 from inventories at July 31, 1995. The decrease is primarily due
to Bio-Dental's restructure of IDT and the write down of inventory value for
discontinued products and other inventory allowances in the 1996 fiscal year.
This decrease was partially offset by an increase in Zila Pharmaceutical
inventories due to a build up of components and finished goods for new products.
As of July 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 $250,000 of
additional capital will be necessary 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
<PAGE> 9
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 square 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. The Company has refinanced the mortgage which matured April 1, 1996 with
Bank One, Arizona (the "Bank"). The terms of the refinancing include interest to
be payable monthly on the unpaid balance at the Bank's prime rate plus two and
one quarter percent (2.25%), to move with prime on a daily basis. The Company
has an option, which expires March 31, 1998, to convert to a fixed rate of four
and one quarter percent (4.25%) over the Treasury rate. The refinanced mortgage
loan is amortized over 20 years and is due on April 1, 2001.
The Company also leases 3,502 square feet for a manufacturing facility
in Phoenix, Arizona. This facility will produce toluidine blue which will be
used in the manufacture of OraTest. The facility is leased under a three year
agreement which expires April 30, 1999, and is located in an area with property
available for expansion. The agreement has an option to renew for an additional
five years. Monthly lease payments are $1,922. Bio-Dental holds leases on three
(3) separate facilities. Bio-Dental leases 25,000 square feet of
office/warehouse space in a concrete building located at 11291 Sunrise Park
Drive, Rancho Cordova, California. The current lease rate for the Rancho Cordova
facility is $9,270 per month, and is constant for the duration of the lease. The
lease for the Rancho Cordova facility expires on November 30, 1996, however the
Company has an option to renew the lease for two subsequent five-year terms.
Bio-Dental also leases 19,200 square feet in a warehouse complex in Lexington,
Kentucky and 1,500 square feet of office space in Indianapolis, Indiana. The
current lease rates are $2,800 and $1,715 per month, respectively.
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 and to fund future OraTest manufacturing and
marketing costs. In anticipation of these potential requirements, effective
April 30, 1997, Zila entered into an investment agreement (the "Investment
Agreement") with Deere Park Capital Management (the "Investor") which allows the
Company to sell up to $25 million of Zila's common stock with the proceeds to be
used to fund OraTest marketing and
<PAGE> 10
general corporate purposes. The option to sell stock to the Investor will remain
available for a period of approximately thirteen months following the effective
date of the registration statement discussed below (the "Commitment Period"). As
part of the Investment Agreement, Zila sold $3 million of stock on April 30,
1997, and has committed to sell an additional $10 million of common stock to the
Investor over the Commitment Period. At April 30, 1997 the net proceeds of $2.9
million from the initial sale of shares were held in escrow. During May 1997,
the cash held in escrow was released to the Company.
The Investment Agreement provides that Zila can obtain up to $2,000,000
at any one time through the sale of the Company's common stock. All shares sold
will be at a 7% discount to the average low trading price of the Company's
common stock over a specified period of time, subject to a maximum purchase
price calculation. Sales under the Investment Agreement are subject to the
satisfaction of certain conditions, including registration of the shares, a
minimum market volume, and certain limitations on the number of shares of the
Company's common stock outstanding.
As a commitment fee for keeping the equity line available for the
Commitment Period, the Company has issued warrants dated May 7, 1997 (the
"Warrants") to the Investor exercisable for 300,000 shares of common stock at an
exercise price of $8.6125 per share. The Warrants are exercisable for a
three-year period commencing October 31, 1997. A registration statement
pertaining to the shares issued and to be issued under the Investment Agreement
and the warrants is to be filed and effective no later than August 30, 1997
before any funds, other than the initial draw of $3,000,000, are drawn under the
Investment Agreement.
In addition, the Company obtained a $250,000 bank line of credit in
April 1996, which was secured by trade accounts receivable, inventories and
rights to certain payments. In December 1996, the bank line of credit was
increased to $500,000. This line of credit expired June 1, 1997. Interest is
payable monthly on the unpaid balance outstanding at the bank's prime rate
(8.25% at July 31, 1996) plus 1.75%. At July 31, 1996, the Company had no
borrowings against the line of credit.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
BIO-DENTAL TECHNOLOGIES CORPORATION AND SUBSIDIARIES
We have audited the consolidated balance sheet of BIO-DENTAL TECHNOLOGIES
CORPORATION AND SUBSIDIARIES as of March 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the eight months ended March 31, 1996 and for each of the three years ended
March 31, 1996 (not presented separately herein). 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 consolidated financial position of Bio-Dental
Technologies Corporation and Subsidiaries as of March 31, 1996 and 1995 and the
consolidated results of their operations and their consolidated cash flows for
the eight months ended March 31, 1996 and for each of the three years ended
March 31, 1996 in conformity with generally accepted accounting principles.
As discussed in note A, the Company merged with Zila, Inc. on January 8, 1997.
/s/ GRANT THORNTON LLP
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Grant Thornton LLP
Sacramento, California
April 11, 1997
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
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Page or
(a) Financial Statements and Schedules Method of Filing
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(1) Report of Deloitte & Touche LLP Filed herewith
(2) Report of Grant Thornton LLP Filed herewith
(3) Consolidated Financial Statements and Notes thereto Filed herewith
of the Company including Consolidated Balance Sheets as of
July 31, 1996 and 1995 and related Consolidated Statements of
Operations, Shareholders' Equity, and Cash Flows for each of
the years in the three-year period ended July 31, 1996.
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(c) Exhibits. The following exhibits are filed as part of this Report.
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Exhibit Page or Method of
Number Description Filing
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23-1 Consent of Deloitte & Touche LLP (regarding Form S-8
and Form S-3 Registration Statements) *
23-2 Consent of Grant Thornton (regarding Form S-8 and
Form S-3 Registration Statements) *
27 Financial Data Schedule *
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[INSERT D & T REPORT]
4
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ZILA, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets July 31, 1996 and 1995, and
Related Consolidated Statements of Operations, Shareholders'
Equity and Cash Flows for Each of the Three Years in the
Period Ended July 31, 1996, and Independent Auditors' Report
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Zila, Inc.
Phoenix, Arizona
We have audited the consolidated balance sheets of Zila, Inc. and
subsidiaries (the "Company") as of July 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended July 31, 1996. 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. The consolidated financial statements give retroactive effect to the
merger of the Company and Bio-Dental Technologies Corporation ("Bio-Dental") on
January 8, 1997, which has been accounted for as a pooling of interests as
described in Note 1 to the consolidated financial statements. We did not audit
the consolidated balance sheet of Bio-Dental as of March 31, 1995 or the related
consolidated statements of operations, shareholders' equity, and cash flows of
Bio-Dental for the eight months ended March 31, 1996 and for the years ended
March 31, 1996, 1995 and 1994, which statements reflect total assets of
$12,512,119 as of March 31, 1995, and total revenues of $22,034,442 for the
eight months ended March 31, 1996 and $33,091,216, $31,582,277 and $20,017,039
for the years ended March 31, 1996, 1995 and 1994, respectively. Those financial
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Bio-Dental as
of such dates and for such periods, is based solely on the report of such other
auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Zila, Inc. and subsidiaries at July
31, 1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended July 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
June 30, 1997
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ZILA, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 AND 1995
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ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,491,904 $ 781,862
Short-term investments 711,470 694,719
Trade accounts receivable - less allowance for doubtful accounts
of $183,877 (1996) and $179,124 (1995) 2,821,440 2,976,583
Other receivables 620,378 450,596
Inventories 4,200,442 5,522,492
Prepaid expenses and other assets 444,913 721,225
Current maturities of assets of business
transferred under contractual arrangements 120,000
Deferred income taxes 961,413 177,300
Income taxes receivable 565,720
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Total current assets 13,251,960 12,010,497
PROPERTY AND EQUIPMENT - Net 1,928,778 1,628,111
ASSETS OF BUSINESS TRANSFERRED UNDER
CONTRACTUAL ARRANGEMENTS 370,518
INTANGIBLE ASSETS - Net 2,286,221 2,310,579
DEFERRED INCOME TAXES 297,200
OTHER ASSETS 496,089 74,954
PURCHASED TECHNOLOGY RIGHTS - Net 7,346,733
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TOTAL $25,309,781 $16,691,859
=========== ===========
</TABLE>
(Continued)
-2-
<PAGE> 17
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
CURRENT LIABILITIES:
<S> <C> <C>
Short-term borrowings $ 1,335,832
Accounts payable $ 2,934,123 3,828,471
Accrued liabilities 1,546,662 1,022,354
Deferred revenue 187,561 188,035
Income taxes payable 1,976,369
Capital leases - current portion 16,585
Current portion of long-term debt 27,782 9,795
------------ ------------
Total current liabilities 6,672,497 6,401,072
CAPITAL LEASES - LONG-TERM PORTION 1,507
LONG-TERM DEBT 382,006 1,134,732
------------ ------------
Total liabilities 7,054,503 7,537,311
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)
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, 31,077,329 shares (1996) and 29,446,541 shares (1995) 31,078 29,447
Capital in excess of par value 24,760,269 16,464,780
Unrealized loss on securities available-for-sale (24,832) (27,961)
Deficit (6,510,812) (7,311,293)
------------ ------------
Total 18,255,703 9,154,973
Less common stock held by wholly-owned subsidiary -
42,546 shares (at cost) (425) (425)
------------ ------------
Total shareholders' equity 18,255,278 9,154,548
------------ ------------
TOTAL $ 25,309,781 $ 16,691,859
============ ============
</TABLE>
See notes to consolidated financial statements. (Concluded)
- 3 -
<PAGE> 18
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
- ----------------------------------------------------------------------------------------------------------
1996 1995 1994
REVENUES:
<S> <C> <C> <C>
Net sales $ 37,479,546 $ 35,064,245 $ 22,474,672
Licensing fees and royalty revenue 2,100,484 1,956,654 1,732,277
------------ ------------ ------------
Total revenues 39,580,030 37,020,899 24,206,949
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 24,771,193 22,093,228 13,382,148
Royalty expense 368,697 287,984 214,091
Selling, general and administrative 18,606,795 16,182,728 9,514,582
Restructuring 271,631
------------ ------------ ------------
Total operating costs and expenses 44,018,316 38,563,940 23,110,821
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (4,438,286) (1,543,041) 1,096,128
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 147,848 252,672 249,749
Interest expense (471,607) (211,544) (82,552)
Gain on disposition of royalty rights 7,519,529
Unrealized loss on short-term investments (29,945)
Realized (loss) gain on short-term investments (1,668) 9,611 (19,632)
------------ ------------ ------------
Total other income 7,194,102 50,739 117,620
INCOME (LOSS) BEFORE (PROVISION) BENEFIT
FOR INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 2,755,816 (1,492,302) 1,213,746
(PROVISION) BENEFIT FOR INCOME TAXES (1,538,518) 180,000 (655,000)
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 1,217,298 (1,312,302) 558,748
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 29,945
------------ ------------ ------------
NET INCOME (LOSS) $ 1,217,298 $ (1,282,357) $ 558,748
============ ============ ============
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before cumulative effect of accounting change $ .04 $ (.04) $ .02
Cumulative effect of accounting change
------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ .04 $ (.04) $ .02
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 30,401,236 29,134,901 28,700,648
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 19
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JULY 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON
STOCK
HELD BY UNREALIZED
COMMON STOCK WHOLLY- LOSS ON TOTAL
------------------------- CAPITAL IN OWNED SECURITIES COMMON
PAR EXCESS OF SUBSIDIARY AVAILABLE- SHAREHOLDERS'
SHARES VALUE PAR VALUE DEFICIT (AT COST) FOR-SALE EQUITY
BALANCE,
<S> <C> <C> <C> <C> <C> <C> <C>
AUGUST 1, 1993 27,994,253 $ 27,994 $ 14,038,625 $(6,587,684) $(425) $ 7,478,510
Exercise of common
stock warrants 320,265 320 239,453 239,773
Exercise of common
stock options 194,841 195 176,618 176,813
Issuance of stock 406,500 407 636,003 636,410
Net income 558,748 558,748
---------- -------- ------------- ----------- ----- --------- ----------
BALANCE,
JULY 31, 1994 28,915,859 28,916 15,090,699 (6,028,936) (425) 9,090,254
Private placement of
common stock - net of
expenses of $30,000 316,875 317 1,115,487 1,115,804
Exercise of common
stock warrants 98,775 99 37,310 37,409
Exercise of common
stock options 78,103 78 131,250 131,328
Issuance of stock 36,929 37 90,034 90,071
Unrealized loss on securities
available-for-sale $ (27,961) (27,961)
Net loss (1,282,357) (1,282,357)
---------- -------- ------------- ----------- ----- --------- ----------
BALANCE,
JULY 31, 1995 29,446,541 29,447 16,464,780 (7,311,293) (425) (27,961) 9,154,548
Issuance of common stock 1,076,299 1,076 7,227,975 7,229,051
Exercise of common
stock warrants 140,138 141 179,368 179,509
Exercise of common
stock options 414,351 414 753,146 753,560
Common stock warrants
issued for debt discount 135,000 135,000
Change in unrealized
loss on securities
available-for-sale 3,129 3,129
Adjustment to conform
year-end of Bio-Dental (416,817) (416,817)
Net income 1,217,298 1,217,298
---------- -------- ------------- ----------- ----- --------- ----------
BALANCE,
JULY 31, 1996 31,077,329 $ 31,078 $ 24,760,269 $(6,510,812) $(425) $ (24,832) $18,255,278
========== ======== ============= =========== ===== ========= ==========
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE> 20
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,217,298 $(1,282,357) $ 558,748
Cumulative effect of accounting change (29,945)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 763,664 520,681 252,915
Loss on disposals of property and equipment 33,084 1,955 2,550
Gain on sale of disposition of royalty rights (7,519,529)
Compensation paid in stock 18,573 30,642 40,000
Note discount paid with stock warrants 135,000
Realized loss (gain) on short-term investments 1,668 (9,611) 19,632
Unrealized loss on short-term investments 29,945
Change in assets and liabilities:
Trade accounts receivable 100,122 49,238 (1,776,583)
Other receivables (72,147) (44,304) 138,169
Inventories 1,621,034 (267,507) (3,508,444)
Prepaid expenses and other current assets 319,813 (223,060) (126,317)
Deferred income taxes (283,831) (180,000) (294,295)
Other assets (438,760) 3,652 (32,119)
Accounts payable and accrued expenses (346,575) 380,883 2,899,374
Income taxes receivable (payable) 2,543,689 (718,741) (245,749)
Deferred revenue 12,404 (9,431) 197,466
----------- ----------- ----------
Net cash used in operating activities (1,894,493) (1,777,905) (1,844,708)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (214,150) (270,985) (1,747,634)
Proceeds from sale of short-term investments 197,878 564,761 717,851
Purchases of property and equipment (880,024) (557,095) (521,366)
Proceeds from sale of property and equipment 8,916 474
Proceeds from sale of disposition of royalty rights 7,890,047
Purchases of intangible assets (226,117) (254,196) (379,290)
Acquisition of CTM (125,000)
Loans to related parties (8,836) (154,824)
Collections of notes receivable 32,801 131,956 271,388
----------- ----------- ----------
Net cash provided by (used in) investing activities 6,684,351 (393,921) (1,813,875)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings
1,000,000
Net (payments) proceeds on short-term borrowings (2,727,460) 207,383 843,970
Net proceeds from issuance of common stock 933,068 1,273,398 376,586
Principal payments on long-term debt (12,509) (51,507) (77,494)
----------- ----------- ----------
Net cash (used in) provided by financing activities (1,806,901) 2,429,274 1,143,062
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,982,957 257,448 (2,515,521)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 508,947 524,414 3,039,935
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,491,904 $ 781,862 $ 524,414
=========== =========== ===========
</TABLE>
(Continued)
-6-
<PAGE> 21
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 483,297 $211,544 $ 79,278
========== ======== ==========
Cash paid for income taxes $ 3,000 $691,000 $1,177,000
========== ======== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of 869,118 shares of common stock in connection
with the acquisition of CTM $7,170,223
==========
Assumption of liabilities in connection with the
acquisition of CTM $ 70,000
==========
Fair value of assets acquired other than cash and cash equivalents $273,399 $ 54,947
======== ===========
Assumption of liabilities in connection with the
acquisition of Ryker Dental and Oral Vision $202,827 $ 22,642
======== ===========
Issuance of 39,189 shares of common stock in connection with
the acquisition of Crown $ 70,572
========
Issuance of 181,500 shares of common stock in connection with
the acquisition of Ryker Dental $ 430,597
==========
Issuance of 225,000 shares of common stock in connection with
the acquisition of Oral Vision $ 205,813
==========
</TABLE>
See notes to consolidated financial statements.
(Concluded)
-7-
<PAGE> 22
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS ACTIVITIES - Zila, Inc. and subsidiaries (the "Company")
is involved in the acquisition, development and marketing of
over-the-counter, non-prescription products. In addition, through its
wholly-owned subsidiaries, the Company sells professional dental products
nationally. It markets consumable dental merchandise and supplies and
equipment via telemarketing and catalog sales and markets high-technology
dental products such as intra-oral cameras and practice software to
dentists.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Zila, Inc. and its wholly-owned subsidiaries, Zila
Pharmaceuticals, Inc., Zila International Inc., Zila Ltd. and Bio-Dental
Technologies Corporation ("Bio-Dental"). Zila International, Inc. has no
operations and its assets at July 31, 1996 and 1995 consist of 42,546
shares of common stock of the Company. All significant intercompany
balances and transactions are eliminated in consolidation.
On January 8, 1997, the Company completed a merger with Bio-Dental. On
December 30, 1996, Bio-Dental's shareholders approved the all-stock
transaction which provided for a per share exchange of .825 shares of the
Company's common stock for each share of Bio-Dental common stock
outstanding. As of January 8, 1997, Bio-Dental had 6,565,300 shares of
common stock outstanding.
The merger has been accounted for as a pooling of interests, and
accordingly, the accompanying consolidated financial statements give
retroactive effect to the Bio-Dental merger and include the combined
operations of Zila and Bio-Dental for all periods presented. Prior to the
combination, Bio-Dental's year-end was March 31. Effective August 1, 1995,
Bio-Dental's results are reported on a July 31, 1996 basis along with the
results of Zila, Inc. Bio-Dental's net loss of $416,817 for the four-month
period ended July 31, 1995 is reflected as an adjustment to the deficit
during the year ended July 31, 1996. For the four-month period ended July
31, 1995, Bio-Dental had revenues of $11,056,774, operating costs and
expenses of $11,631,735, and a net loss of $416,817. Certain adjustments
and reclassifications have been made to conform previously issued
Bio-Dental financial statements to classifications and accounting policies
used by Zila.
-8-
<PAGE> 23
The following table shows the effect on the results of operations as
restated for the periods prior to the combination of Bio-Dental.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Sales:
Zila, Inc. $ 5,978,131 $ 5,147,667 $ 4,123,297
Bio-Dental 31,501,415 29,916,578 18,351,375
------------ ------------ ------------
Combined sales $ 37,479,546 $ 35,064,245 $ 22,474,672
============ ============ ============
Net income (loss):
Zila, Inc. $ (827,337) $ (862,920) $ (995,205)
Bio-Dental 2,044,635 (419,437) 1,553,953
------------ ------------ ------------
Combined net income (loss) $ 1,217,298 $ (1,282,357) $ 558,748
============ ============ ============
</TABLE>
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
CASH EQUIVALENTS - The Company considers highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS - The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments
in Debt and Equity Securities, on August 1, 1994. 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. Prior to the
accounting change for the adoption of SFAS No. 115, the Company carried
its investments in short-term marketable debt and equity securities at the
lower of cost or market.
INVENTORIES, which consist of finished goods and raw materials, are stated
at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT are stated at cost and are depreciated using
straight-line methods over their respective estimated useful lives,
ranging from 2 to 20 years. Leasehold improvements are depreciated over
the lease term or the estimated useful life, whichever is shorter.
INTANGIBLE ASSETS consist of deferred patent and licensing costs,
goodwill, software rights, organizational costs, and covenants not to
compete. Deferred patent and licensing costs incurred in connection with
the acquisition of patent rights, obtaining Food and Drug Administration
("FDA") regulatory approvals and obtaining other licensing rights for
treatment compositions are capitalized and amortized over the estimated
benefit period not exceeding 17 years. Goodwill and organizational costs
are being amortized over 20 to 40 years and covenants are amortized over
the term of the agreement. Software rights are being amortized over five
years. Research and development costs totaling
-9-
<PAGE> 24
approximately $626,000, $711,000 and $293,000 in 1996, 1995 and 1994,
respectively, were expensed. The Company assesses the recoverability of
goodwill and other intangible assets based on undiscounted projections of
future cash flows.
NET INCOME (LOSS) PER COMMON SHARE is computed based on the weighted
average number of common shares outstanding during each period after
giving effect for any dilutive stock options, warrants and convertible
preferred stock, all of which are considered to be common stock
equivalents. For the year ended July 31, 1995, options and warrants that
would otherwise qualify as common stock equivalents are excluded because
their inclusion would have the effect of decreasing the loss per share.
Fully diluted net income (loss) per common share is not materially
different from primary net income (loss) per common share.
INCOME TAXES - The Company adopted SFAS No. 109, Accounting for Income
Taxes, on August 1, 1993. The effect of such adoption had no significant
impact on the Company's financial position or results of operations for
the year ended July 31, 1994.
NEW ACCOUNTING PRONOUNCEMENTS - In March 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This
Statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related
to those assets to be held and used and long-lived assets and certain
identifiable intangibles to be disposed of. The Statement requires that
long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In addition, the Statement requires that certain long-lived
assets and intangibles to be disposed of be reported at the lower of
carrying amount or fair value less costs to sell. The Company adopted
this accounting standard effective August 1, 1996, as required.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. This Statement establishes financial accounting and
reporting for stock-based employee compensation plans, including stock
purchase plans, stock options plans, restricted stock and stock
appreciation rights. The Statement requires a fair value based method of
accounting for employee stock options or similar instruments and
encourages a similar method for all employee stock compensation plans.
This method measures compensation cost at the grant date based on the
value of an award and recognizes it over the service period, usually the
vesting period. However, the Statement also allows an entity to continue
measuring compensation cost for such plans using the intrinsic value
method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, provided pro
forma disclosures are made. The Company expects to continue to account for
its stock-based employee compensation plans using the method of accounting
prescribed by APB No. 25 and will provide the pro forma disclosures. The
Company implemented this accounting standard effective August 1, 1996,
as required.
Beginning in fiscal 1998, the Company will be required to implement SFAS
No. 128, Earnings Per Share, which requires, among other matters,
presentation of basic earnings per share, which is calculated utilizing
only weighted average common shares outstanding. The Company has not
completed the process of evaluating the impact that will result from
adopting SFAS No. 128. The Company is therefore unable to disclose the
impact that adopting SFAS No. 128 will have on its financial position and
results of operations when such standard is adopted.
-10-
<PAGE> 25
FINANCIAL INSTRUMENTS - The following disclosure of the estimated fair
value of financial instruments is made in accordance with the requirements
of SFAS No. 107, Disclosures About Fair Value of Financial Instruments.
The carrying amounts and estimated fair value of the Company's financial
instruments are as follows:
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair values due to the
short-term maturities of these instruments.
The carrying amount of long-term debt is estimated to approximate fair
value as the actual interest rate is consistent with the rate estimated
to be currently available for debt of similar term and remaining
maturity.
Financial instruments which potentially subject the Company to credit risk
consist principally of trade receivables. The Company provides credit, in
the normal course of business, to pharmaceutical wholesalers and chains,
food wholesalers and chains, rack jobbers, convenience stores, and
dentists. The Company performs ongoing credit evaluations of its customers
and maintains an allowance for potential credit losses.
CERTAIN RECLASSIFICATIONS have been made to the 1995 and 1994 financial
statements to conform to the classifications used in 1996.
2. ACQUISITIONS
On March 7, 1996, the Company purchased one-third of the outstanding
common stock of CTM Associates, Inc. ("CTM") from one of the three
directors and shareholders of CTM. On June 3, 1996, the Company acquired
the remaining two-thirds of the outstanding shares of CTM. The only
significant asset of CTM was the technology rights it held related to
OraTest (a diagnostic for oral cancer and site delineation device for
biopsy and surgical excision) and its right to receive certain royalties
from sales of OraTest from the Company. Accordingly, the acquisition of
CTM eliminates the Company's obligation to pay royalties to CTM on
revenues generated from sales of OraTest. As consideration for the
acquisition of all of the CTM common stock, the Company issued a total of
869,118 shares of the Company's common stock with a value of $7,170,223,
paid $125,000, and assumed certain liabilities of approximately $70,000.
The acquisition was accounted for as an acquisition of assets and the
purchase price was recorded as purchased technology rights. The purchased
technology rights are being amortized on a straight-line basis over the
expected period of benefit of 17 years which is based on the remaining
life of the related patents. Accumulated amortization and amortization
expense was $72,740 as of and for the year ended July 31, 1996.
On November 14, 1994, the Company signed an agreement and purchased the
assets and certain liabilities of Crown Systems, Inc. ("Crown"), effective
November 1, 1994. In connection with this purchase, the Company issued
29,858 shares of common stock to Crown. The assets acquired consisted
primarily of accounts receivable and dental practice management software
rights. As part of the transaction, the Company retired approximately
$205,000 of assumed liabilities. On October 25, 1995, the Company issued
an additional 9,331 shares of common stock to the previous owners of Crown
due to a change in the calculated purchase price.
The transaction was accounted for as a purchase. The software rights which
were acquired were being amortized over a period of five years. In October
1996, the Company recorded an impairment write-down against all such
software rights as described in Note 15. The assets and liabilities are
held in Integrated Dental Technologies, Inc.("IDT"), a wholly-owned
subsidiary of Bio-Dental.
-11-
<PAGE> 26
On July 6, 1994, the Company signed an agreement and purchased the assets
and certain liabilities of Oral Vision, Inc. The acquisition was effective
as of January 1, 1994, as the Company effectively maintained control of
the operations, assets and liabilities of Oral Vision, Inc. as of that
date. In connection with this purchase, the Company issued 225,000 shares
of restricted common stock. The assets and liabilities acquired consist
mainly of inventories and accounts receivable and trade accounts
payable. As part of the transaction, the Company retired approximately
$515,000 of the assumed liabilities, thereby releasing certain security
interests held by a vendor of Oral Vision, Inc.
The transaction was accounted for as a purchase. The purchase price was
allocated to the fair value of Oral Vision's assets and liabilities and
the excess of $215,919 was allocated to goodwill. The goodwill will be
amortized on the straight-line method over a period of 20 years. The
depreciable assets acquired will be depreciated over their remaining
useful lives on a straight-line basis. The assets and liabilities will be
held in IDT.
On January 3, 1994, Bio-Dental acquired all of the outstanding capital
stock of Ryker Dental of Kentucky, Inc. ("Ryker") pursuant to the merger
("Merger") of Bio-Dental's wholly-owned subsidiary, San Diego Dental
Supply, Inc. ("SDDS"), with and into Ryker with Ryker being the surviving
entity. Pursuant to the Merger, Bio-Dental issued 181,500 shares of
its previously unissued restricted common stock to the shareholders of
Ryker in cancellation of the shares of Ryker common stock. Bio-Dental
became the sole shareholder of Ryker through the conversion of each
outstanding shares of common stock of SDDS into one share of common stock
of Ryker. As part of the transaction, Bio-Dental retired approximately
$720,000 of Ryker's debt, thereby releasing the former shareholders of
Ryker from their original personal guarantees on such debt.
The transaction was accounted for as a purchase. The purchase price was
allocated to the fair value of Ryker's assets and liabilities and the
excess of $388,186 was allocated to goodwill. The goodwill will be
amortized on the straight-line method over a period of 20 years. The
depreciable assets acquired will be depreciated over their remaining
useful lives on a straight-line basis.
3. SHORT-TERM INVESTMENTS
Short-term investments consist of the following at July 31:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Mutual and money market funds $449,718 $10,971 $24,702 $435,987
Corporate fixed income securities 111,186 284 3,506 107,964
Government fixed income securities 175,399 7,880 167,519
-------- ------- ------- --------
Total short-term investments $736,303 $11,255 $36,088 $711,470
======== ======= ======= ========
</TABLE>
-12-
<PAGE> 27
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1995 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Mutual and money market funds $309,120 $1,412 $18,208 $292,324
Corporate fixed income securities 111,186 328 3,856 107,658
Government fixed income securities 302,374 1,066 8,703 294,737
-------- ------ ------- --------
Total short-term investments $722,680 $2,806 $30,767 $694,719
======== ====== ======= ========
</TABLE>
Maturities of securities at July 31, 1996 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in:
1996-1998 $599,942 $580,256
1999-2003 111,361 107,589
2004 and later 25,000 23,625
-------- --------
Total $736,303 $711,470
======== ========
</TABLE>
All of the above short-term investments that are being held for indefinite
periods of time, including those which may be sold in response to needs for
liquidity or changes in interest rates, are accounted for 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 years ended
July 31, 1996 and 1995 is as follows:
<TABLE>
<S> <C>
Unrealized loss on securities available-for-sale at August 1, 1994,
the date of adoption of SFAS No. 115 $(29,945)
Net decrease in unrealized loss, due principally to decrease in interest rates 1,984
--------
Unrealized loss on securities available-for-sale at July 31, 1995 (27,961)
Net decrease in unrealized loss, due principally to decrease in interest rates 3,129
--------
Unrealized loss on securities available-for-sale at July 31, 1996 $(24,832)
========
</TABLE>
4. INVENTORIES
Inventories consist of the following at July 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Finished goods $ 5,168,486 $ 5,423,715
Raw materials 290,771 240,527
Inventory reserves (1,258,815) (141,750)
----------- -----------
Total inventories $ 4,200,442 $ 5,522,492
=========== ===========
</TABLE>
-13-
<PAGE> 28
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at July 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 216,731 $ 216,731
Building and improvements 517,628 507,931
Furniture and equipment 2,086,511 2,164,989
Leasehold improvements and other assets 390,302 88,168
Production and warehouse equipment 111,339 74,245
---------- ----------
Property and equipment 3,322,511 3,052,064
Less accumulated depreciation and amortization 1,393,733 1,423,953
---------- ----------
Property and equipment - net $1,928,778 $1,628,111
========== ==========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consist of the following at July 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Patents $ 466,978 $ 466,978
Licensing costs 1,063,636 837,521
Goodwill 969,637 969,637
Software rights 287,982 275,981
Organizational costs 113,626 122,098
Covenants not to compete 120,000 120,000
---------- ----------
Intangible assets 3,021,859 2,792,215
Less accumulated amortization 735,638 481,636
---------- ----------
Intangible assets - net $2,286,221 $2,310,579
========== ==========
Purchased technology rights - net of accumulated
amortization of $72,740 (1996) $7,346,733
==========
</TABLE>
Deferred licensing costs consist primarily of certain costs associated
with obtaining FDA approval for a new product, OraTest (formerly OraScan).
The recoverability of the deferred licensing costs and purchased
technology rights is dependent upon both FDA approval and sufficient
revenues generated from sales of OraTest; management believes that they
will receive FDA approval and generate revenues sufficient to recover such
costs.
Purchased technology rights relate to the acquisition of CTM (Note 2).
-14-
<PAGE> 29
7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
LINE OF CREDIT - During fiscal 1996, the Company renewed a $250,000
revolving bank line of credit which expired in April 1997, and which was
collateralized by trade accounts receivable, inventories and rights to
payments. Interest is payable monthly on the unpaid balance at the bank's
prime rate (8.25% at July 31, 1996) plus 1.75%. At July 31, 1996, the
Company had no borrowings against the line of credit.
LONG-TERM DEBT - At July 31, 1996, long-term debt consists of a mortgage
note bearing interest at the bank's prime rate (8.25% at July 31, 1996)
plus 2.25% per year due in monthly principal installments of $2,315,
through March 2001 with a balloon payment due April 1, 2001. The Company
has the option through March 1998 to convert to a fixed interest rate of
4.25% over the U.S. Treasury rate. The note is collateralized by the
Company's land and building.
Aggregate annual maturities of long-term debt for the years ending July 31
are as follows:
<TABLE>
<S> <C>
1997 $ 27,782
1998 27,782
1999 27,782
2000 27,782
2001 298,660
--------
Total 409,788
Less current portion 27,782
--------
Long-term portion $382,006
========
</TABLE>
Under the bank line of credit and mortgage note, the Company is required
to comply with financial covenants based on certain financial ratios. At
July 31, 1996, the Company was in compliance with these covenants.
8. LICENSING FEE INCOME AND ROYALTIES
The Company has entered into various licensing agreements (the
"Agreements"). Under the terms of the Agreements, the licensees acquire
the right to manufacture and sell the Company's products in markets
previously not pursued by the Company. In return, the Company will receive
non-refundable license fees and/or royalties equal to a fixed percentage
of the net sales by the licensees of the Company's products. One of the
Agreements provides that the royalty payments will meet certain minimum
annual levels irrespective of the volume of sales subject to the
Agreement.
During the year ended July 31, 1996, the Company received $750,000 in
non-refundable licensing fees from The Procter & Gamble Company ("P&G") in
connection with a licensing agreement between P&G and the Company, which
was subsequently terminated on April 3, 1996. Additionally, under the
licensing agreement with P&G, the Company received $265,330 in
reimbursements for costs associated with obtaining FDA approval for
OraTest. At July 31, 1996, the Company had a receivable of approximately
$130,000 from P&G which was received after year-end.
In March 1991, Bio-Dental incorporated a wholly-owned subsidiary,
Denticator International, Inc. (DII) and transferred Bio-Dental's
manufacturing operations into DII in exchange for the issuance of a
$600,282 note to Bio-Dental with monthly principal payments of $10,005
plus interest at 150% of Bio-Dental's cost of funds from April 1, 1994
through March 31, 1999. Interest only payments were made
-15-
<PAGE> 30
from March 1991 through March 31, 1994. Effective with the date of
incorporation, Bio-Dental entered into a licensing agreement with DII for
the manufacture and sale of certain dental products owned by Bio-Dental.
Under this agreement, DII paid Bio-Dental a monthly royalty equal to the
greater of $30,000 or 17% of net sales of DII. In addition, the agreement
provided for further royalties to be paid to Bio-Dental if DII achieved
certain levels of profitability. On March 31, 1991, Bio-Dental sold all of
the outstanding capital stock of DII to DII's former operations manager.
The sales agreement incorporated the licensing agreement described above.
At July 31, 1995, the note receivable from the sale of DII is presented as
assets of business transferred under contractual arrangements in the
balance sheet.
During 1996, 1995, and 1994, Bio-Dental earned royalties under the DII
licensing agreement totaling $1,235,069, $1,665,699 and $1,665,664,
respectively, which are included in licensing fees and royalty revenue and
interest on the note receivable totaling $66,739, $69,418, and $192,182,
respectively, which is included in interest and other income.
On July 22, 1996, Young Innovations, Inc. ("Young") acquired substantially
all of the assets and certain liabilities of DII. Bio-Dental received
approximately $7,500,000 in lieu of future royalties that Bio-Dental was
entitled to receive in connection with its licensing agreement with DII.
In addition, Young issued Bio-Dental a product credit against future
purchases from Young equal to the amounts due Bio-Dental at the time of
closing. Included in other receivables and other assets at July 31, 1996
is $600,249 and $355,103, respectively, of product credits due from Young.
Concurrent with the closing of the transaction, Bio-Dental canceled
options to purchase 50,000 shares of Bio-Dental's restricted common stock
that were held by DII.
9. STOCK OPTIONS AND WARRANTS
As a result of the merger described in Note 1, each Bio-Dental stock option
or stock purchase warrant that was outstanding at the merger date can be used to
purchase .825 shares of Zila, Inc. common stock. The exercise price of
outstanding Bio-Dental options and warrants was also adjusted at the merger
date. The new exercise prices are calculated by dividing the original exercise
price by .825. The summary of activity related to options and warrants below
includes Bio-Dental options and warrants adjusted for the terms of the merger.
a. OPTIONS - The Company adopted a Stock Option Award Plan which became
effective on September 1, 1988, authorizing the Board of Directors
to grant options to employees and certain employee-directors of the
Company to purchase up to 4,000,000 shares of the Company's common
stock. The plan was amended December 8, 1995 to increase the
authorized number of shares to 5,000,000. The options will be issued
with an exercise price no less than the market value at the date of
grant. Options may be exercised at any time up to five to ten years
from the date of grant. At July 31, 1996, 1,032,893 shares were
available for grant under this plan.
The Company adopted a Non-Employee Directors Stock Option Plan which
became effective October 20, 1989, authorizing the Board of
Directors to grant options to 100,000 shares to non-employee members
of the Board of Directors in increments of 2,500 shares per director
each year. The plan was amended December 8, 1995 to increase the
authorized number of shares to 200,000. The options will be issued
with an exercise price equal to the market value at the date of
grant. All options may be exercised at any time up to five years
from the date of grant. At July 31, 1996, 112,500 shares were
available for grant under this plan.
-16-
<PAGE> 31
Activity related to all of the aforementioned options, which expire
at various dates through 2005, is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
<S> <C> <C> <C>
Outstanding, August 1, 1993 1,260,750 $1.22 - $3.16
Surrendered and cancelled (69,726) 1.25 - 1.31
Granted 814,552 0.12 - 6.13
Exercised (187,980) 1.25 - 2.53
--------
Outstanding, July 31, 1994 1,817,596 0.12 - 6.13
Surrendered and cancelled (23,421) 1.25 - 3.25
Granted 318,580 3.22 - 6.06
Exercised (71,819) 1.22 - 3.25
--------
Outstanding, July 31, 1995 2,040,936 0.12 - 6.13
Surrendered and cancelled (74,252) 1.31 - 6.13
Granted 367,992 3.18 - 4.75
Exercised (428,101) 1.31 - 4.75
--------
Outstanding, July 31, 1996 1,906,575 $ .12 - $6.13
=========
</TABLE>
b. Warrants - The Company has issued warrants to various investors,
shareholders, officers and other third parties in connection with services
provided and purchases of the Company's stock. Activity related to such
warrants, which expire at various dates through October 2000, is summarized
as follows:
<TABLE>
<CAPTION>
NUMBER OF WARRANT PRICE
SHARES PER SHARE
<S> <C> <C> <C>
Outstanding, August 1, 1993 1,281,815 $ .60 - $3.77
Issued 325,000 2.50 - 3.00
Exercised (485,265) .60 - 3.77
Expired (57,828) .60 - 2.88
-----------
Outstanding, July 31, 1994 1,063,722 .60 - 3.77
Issued 50,000 2.50
Exercised (19,300) .60 - 2.41
Expired (137,520) 3.00
-----------
Outstanding, July 31, 1995 956,902 .60 - 3.77
Issued 247,500 3.67
Exercised (387,638) 2.41 - 3.67
Expired (46,092) 3.13
-----------
Outstanding, July 31, 1996 770,672 $ .60 - $3.77
===========
</TABLE>
-17-
<PAGE> 32
10. RELATED PARTY TRANSACTIONS
In connection with the acquisition of patent rights in 1980, the Company
agreed to pay to Dr. James E. Tinnell, the inventor of one of the
Company's treatment compositions and a director of the Company, a royalty
of 5% of gross sales of the treatment composition. Royalty expense to Dr.
Tinnell for the years ended July 31, 1996, 1995 and 1994 was $300,078,
$263,311 and $201,014, respectively.
The Company advanced $129,338 in fiscal year 1994 to certain of its
officers for withholding taxes due upon exercise of common stock options.
The outstanding advances were $16,167 and $38,331 at July 31, 1996 and
1995, respectively. The notes bear interest at 4.16% per year and are
payable in full on December 31, 1996. Included in interest income is $962,
$1,609 and $2,216 for the years ended July 31, 1996, 1995 and 1994,
respectively, related to these notes.
The Company leases office space to a radio broadcasting company (the
"Broadcast Company") controlled by one of the directors of the Company.
During fiscal 1996, 1995 and 1994, the Company recognized approximately
$3,109, $11,863 and $23,494, respectively, in rental income under this
lease. Under the terms of the current lease, monthly rent is approximately
$3,600. As of July 31, 1996, the Broadcast Company is in arrears of
approximately $42,000 in rent and other items related to this lease. The
rent receivable is offset, in full, by a reserve. Subsequent to July 31,
1996, the rent receivable was paid in full and the reserve was reversed.
11. INCOME TAXES
The consolidated income tax provision (benefit) consists of the following
for the years ended July 31:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ 1,524,000 $ 713,000
State 455,000 217,000
----------- -----------
Total current 1,979,000 930,000
----------- -----------
Deferred:
Federal (245,000) $ (124,200) (256,000)
State (195,000) (55,800) (19,000)
----------- ----------- -----------
Total deferred (440,000) (180,000) (275,000)
----------- ----------- -----------
Total consolidated income tax provision (benefit) $ 1,539,000 $ (180,000) $ 655,000
=========== =========== ===========
</TABLE>
The reconciliation of the federal statutory rate to the effective income
tax rate for the years ended July 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal statutory rate 34% (34)% 34%
Adjustments:
State income taxes - net of federal benefit 6 (6) 6
Non-deductible meal, entertainment and other expenses 2 3 2
Increase in valuation allowance 14 25 12
-- --- --
Effective tax rate 56% (12)% 54%
== === ==
</TABLE>
- 18 -
<PAGE> 33
The components of the Company's deferred income tax assets and liabilities
for the years ended July 31 are shown below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current deferred income tax assets:
Net operating loss carryforwards $ 5,840,400 $ 5,096,000
Allowance for obsolete or discontinued inventory 404,000 60,100
Product warranty allowance 114,000 22,900
Allowance for doubtful accounts 70,000 71,700
Accrued vacation 28,000 22,600
Other 15,000 15,000
----------- -----------
Total current deferred income tax assets 6,471,400 5,288,300
Non-current deferred income tax assets (liabilities):
Net operating loss carryforwards 305,000
Federal depreciation (8,000) (7,800)
Valuation allowance (5,502,000) (5,111,000)
----------- -----------
Net deferred income tax asset $ 961,400 $ 474,500
=========== ===========
</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 $1,920,000 of the deferred tax asset before
valuation allowance relates to deductions generated by the exercise of
stock options, which, if realized, will result in an increase in capital
in excess of par value. Management believes the valuation allowance
reduces deferred tax assets to an amount that represents management's best
estimate of the amount of such deferred tax assets that more likely than
not will be realized.
At July 31, 1996, the Company had federal net operating loss carryforwards
totaling approximately $15,355,000 which expire, if not previously
utilized, from 1997 through 2011. Net operating loss carryforwards for
state income tax purposes, totaling approximately $6,438,000, must be
utilized within five years of the date of their origination, and expire
from 1998 through 2002.
12. DALECO ZILA PARTNERS II, L.P.
In June 1992, the Company entered into an agreement with Daleco Capital
Corporation to form a limited partnership known as Daleco Zila Partners
II, L.P. (the "Partnership"). The Company and its officers have no
partnership interest in the Partnership. The purpose of the Partnership
was to provide the Company with a means to fund the marketing program for
certain new products. The original Partnership agreement provided for a
minimum of $150,000 and a maximum of $1,562,500 to be raised by the sale
of partnership units. Under the original agreement, the Partnership will
expend up to 80% of the gross partnership proceeds for marketing and
sales-related expenditures on behalf of the Company. In 1994, the
Partnership agreement was amended to increase the maximum amount of
marketing funds potentially available to the Company to be raised to
$2,250,000.
In addition, the Company issued to Daleco Capital Corporation and the
Partnership warrants to purchase 100,000 and 300,000 shares, respectively,
of the Company's common stock at $3.00 a share subject to a vesting
schedule. As a part of the amendment to the original agreement, Daleco
Capital Corporation and the Partnership were issued an additional 80,000
and 240,000 warrants, respectively. The warrants vest at the rate at which
the Partnership expends the net partnership proceeds on the Company's
marketing program.
- 19 -
<PAGE> 34
At July 31, 1996 and 1995, approximately $1,820,000 has been spent. The
Company is committed to pay the Partnership a commission equal to 5% to
10% of the gross sales of certain of the Company's new products, until
such time as three times the amount of funds expended on the Company's
marketing program by the Partnership has been paid to the Partnership.
Included in selling, general and administrative expense for the years
ended July 31, 1996, 1995 and 1994 is approximately $15,000, $25,000 and
$19,000, respectively, of commissions paid to the Partnership.
During the years ended July 31, 1996, 1995 and 1994, the Partnership
funded or accrued approximately $-0-, $10,500 and $810,000, respectively,
in marketing costs. Included in trade accounts receivable at July 31, 1995
is approximately $60,000 of such costs which were reimbursed by the
Partnership in fiscal 1996.
The Company had no funding of marketing programs by the Partnership after
July 31, 1995 and anticipates no further funding. Accordingly, 137,520
warrants expired as a result of the Partnership raising less than the
maximum level of marketing funds.
13. COMMITMENTS AND CONTINGENCIES
Two officers of the Company are covered under separate employment
contracts. Each contract provides for five years notice of termination and
provides for an annual base compensation ranging from $165,000 to
$175,000.
The Company has a New Drug Application pending with the 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 (Note 6).
In March 1993, the Company entered into a manufacturing and distribution
agreement with Germiphene Corporation ("Germiphene") to manufacture,
distribute and sell OraTest in Canada. For the years ended July 31, 1996,
1995 and 1994, the Company had $7,000, $18,000 and $48,000, respectively,
in sales of OraTest related to the Germiphene agreement.
The Company also leases a manufacturing facility in Phoenix, Arizona under
a three year agreement which expires April 30, 1999. The agreement has an
option to renew for an additional five years. Additionally, the Company
leases offices, warehouse facilities and certain equipment, under
operating leases which expire through 2002. Future minimum lease payments
under these noncancellable leases are as follows:
<TABLE>
<S> <C>
1997 $219,715
1998 204,984
1999 161,650
2000 118,044
2001 118,044
Thereafter 38,348
--------
Total $860,785
========
</TABLE>
- 20 -
<PAGE> 35
Rent expense for the years ended July 31, 1996 and 1995 totaled $171,096
and $170,936, respectively.
The Company filed a complaint against Colgate-Palmolive Company
("Colgate") alleging that one of Colgate's products infringes upon one of
the Company's patents. Colgate answered the Company's complaint, denying
the infringement and asserting that the Company's patent is invalid and
unenforceable. The case was settled on March 6, 1997 and had no material
impact on the Company's financial statements.
In July 1995, Bio-Dental was named as a defendant, along with Bio-Dental's
transfer agent and a shareholder of Bio-Dental (Shareholder), in a
lawsuit. The lawsuit alleges that Bio-Dental wrongfully failed to register
200,000 Bio-Dental shares of stock in the name of the plaintiffs which
were pledged as security by the Shareholder for a debt owed by the
Shareholder to the plaintiffs.
Bio-Dental denies all of the material allegations of the lawsuit against
it and asserts various affirmative defenses. Bio-Dental will vigorously
defend against the claims set forth in the lawsuit. The ultimate outcome
of the above matter could not be determined at July 31, 1996. Accordingly,
no provision for any loss that would result upon resolution of this
lawsuit has been made in the accompanying financial statements as of July
31, 1996. In September 1996, Bio-Dental accrued a liability of $450,000
because it decided to attempt a settlement of this litigation.
Bio-Dental's settlement attempt was not successful. In January 1997, a
judgment by the court in favor of Bio-Dental and against the plaintiffs
was filed. In February 1997, the plaintiffs started the process to appeal
the judgment.
Upon consummation of the Company's merger with Bio-Dental, each of the
outstanding shares of Bio-Dental common stock was converted into .825
shares of the Company's common stock. Subsequent to the merger, the
Company's stock transfer agent was presented with a certificate purporting
to represent 220,000 shares of Bio-Dental common stock which did not
appear on the records of Bio-Dental's stock transfer agent as of the
closing date. The Company is currently investigating this matter and has
not determined whether any shares of the Company's common stock are
required to be issued in exchange for the shares purportedly represented
by this certificate.
The Company is subject to other legal proceedings and claims which arise
in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position or results of operations of the
Company.
14. EMPLOYEE BENEFIT PLAN
The Company has adopted the Zila, Inc. 401(k) Savings and Retirement Plan
(the "Plan") for the benefit of eligible employees. Employees may elect to
defer receipt of a portion of their compensation to future years. The
Company may make matching or profit sharing contributions to the Plan.
During 1996 and 1995, the Company contributed approximately $14,000 and
$11,000, respectively, to the Plan.
Bio-Dental adopted an Employee Stock Ownership Plan (ESOP) in fiscal year
1991. The benefits allocated to each participant are in direct proportion
to that person's annual compensation. All employees who meet the following
criteria are eligible for benefits: 1) must be 18 years of age or older;
2) must have worked at least 1,000 hours in the given plan (fiscal) year;
and 3) must be employed on the last day of the plan year. All participants
become fully vested after 5 years of continuous employment with
Bio-Dental.
Once vested, a person may receive benefits under the plan:
a. no later than six years from the date of termination of employment with
Bio-Dental; or
b. upon reaching the age of 60.
- 21 -
<PAGE> 36
15. RESTRUCTURING
During the year ended July 31, 1996, the Company recorded a charge of
$271,631 for the restructuring of IDT. As a result of the restructuring,
IDT no longer sells computer hardware or filmless x-ray systems. Costs
included in the restructuring charge include contract costs and other
costs. The Company expects that the liabilities associated with such costs
will be paid or settled within the next fiscal year.
As a result of management's decision to restructure its operations, an
inventory valuation allowance of approximately $300,000 was recorded, and
management reserved approximately $250,000 for sales returns related to
discontinued items.
In connection with assessing the recoverability of goodwill and other
intangible assets in the first quarter of fiscal 1997, the Company
determined that such assets that are associated with IDT would not likely
be recoverable as defined by SFAS No. 121. This determination was the
result of IDT failing to achieve original projections of operating results
subsequent to the restructuring of IDT in early 1996. As a result, a
$587,659 impairment loss was recognized to reduce the carrying value of
these long-lived assets to fair value. Fair value was estimated based on
management's best estimate of discounted future cash flows.
16. ADDITIONAL FINANCING
On March 29, 1996, the Company signed term notes in the aggregate
principal amount of $1,250,000. As additional consideration for the term
notes, the Company issued 206,250 warrants to purchase the common stock of
the Company at an initial exercise price of $3.67 per share. In
conjunction with the transaction, the Company paid to a related party, a
placement fee of $100,000 and issued warrants to purchase 41,250 shares of
the Company's stock at an initial exercise price of $3.67 per share. The
transaction was completed on April 1, 1996, when the purchasers of the
notes transferred cash to the Company.
The notes had a stated interest rate of 12%, and accrued interest was due
on September 30, 1996 and March 31, 1997. Thereafter, interest was due on
a quarterly basis. Subsequent to the sale of Bio-Dental's rights to
receive future royalty payments from DII (Note 8), Bio-Dental paid
all principal and interest due under the notes. All warrants issued in
conjunction with this transaction were exercised prior to the merger
between Zila, Inc. and Bio-Dental.
17. SEGMENTS OF BUSINESS
The Company aligns its business into two segments, Consumer and
Professional. The Consumer segment's principal products are
over-the-counter, non-prescription oral care products. Major brands
include Zilactin(R), Zilactin(R)-L, (formerly Zilactol(R)), Zilactin(R)-B
and Zilactin(R)-Lip. These products are distributed primarily through
pharmaceutical wholesalers and chains, food wholesalers and chains, rack
jobbers and convenience stores. The Professional segment includes dental
supplies, dental equipment, dental practice management software, digital
x-ray devices, intra-oral cameras and OraTest product development costs.
These products are used principally in the professional fields by dentists
and other oral care health professionals and are sold directly to the
professional.
- 22 -
<PAGE> 37
Intersegment sales are not significant.
<TABLE>
<CAPTION>
CONSUMER PROFESSIONAL TOTAL
<S> <C> <C> <C>
Net sales:
1996 $ 5,978,131 $ 31,501,415 $ 37,479,546
1995 5,147,667 29,916,578 35,064,245
1994 4,123,297 18,351,375 22,474,672
Income (loss) before income taxes:
1996 443,038 (3,198,854) (2,755,816)
1995 213,040 1,279,262 1,492,302
1994 584,853 (1,798,601) (1,213,748)
Identifiable assets:
1996 3,135,973 22,173,808 25,309,781
1995 3,353,565 13,338,294 16,691,859
1994 3,530,798 11,554,636 15,085,434
Capital expenditures:
1996 256,175 623,849 880,024
1995 51,364 505,731 557,095
1994 68,032 453,334 521,366
Depreciation and amortization:
1996 136,925 626,739 763,664
1995 111,941 408,740 520,681
1994 103,899 149,016 252,915
</TABLE>
18. SUBSEQUENT EVENTS
On April 4, 1997, the Company acquired Cygnus Imaging, Inc., a small
privately-held company located in Scottsdale, Arizona that manufactures
and distributes intra-oral camera systems and other dental imaging
products. The acquisition was accounted for as a purchase and resulted in
the issuance of approximately 260,000 shares of the Company's common stock
with a market value of $1,725,000 and the recording of approximately
$2,059,000 of goodwill. The Company is still evaluating certain
contingencies that could impact the allocation of the purchase price.
Effective April 30, 1997, the Company entered into an investment agreement
(the "Investment Agreement") with Deere Park Capital Management (the
"Investor") which allows the Company to sell up to $25,000,000 of the
Company's common stock with the proceeds to be used to fund OraTest
marketing and general corporate purposes. The option to sell stock to the
Investor will remain available for a period of 12 months following the
effective date of the registration statement discussed below (the "12
Month Period"). As part of the Investment Agreement, the Company sold
$3,000,000 of stock on April 30, 1997, and has committed to sell an
additional $10,000,000 of common stock to the Investor over the 12 Month
Period. At April 30, 1997, the net proceeds of $2,900,000 from the initial
sale of shares were held in escrow. During May 1997, the cash held in
escrow was released to the Company.
The Investment Agreement provides that the Company can obtain up to
$2,000,000 at any one time through the sale of the Company's common stock.
All shares sold will be at a 7% discount to the average low trading price
of the Company's common stock over a specified period of time, subject to
a maximum purchase price calculation. Sales are subject to the
satisfaction of certain conditions, including registration of the shares,
a minimum market volume, and certain limitations on the number of shares
of the Company's common stock outstanding.
- 23 -
<PAGE> 38
As a commitment fee for keeping the equity line available for the 12 Month
Period, the Company has issued warrants dated May 7, 1997 (the "Warrants")
to the Investor exercisable for 300,000 shares of common stock at an
exercise price of $8.6125 per share. The Warrants are exercisable for a
three year period commencing October 31, 1997. A registration statement
pertaining to the shares issued and to be issued under the Investment
Agreement and the Warrants is to be filed and effective no later than
August 30, 1997 before any funds, other than the initial draw of
$2,900,000, may be drawn under the Investment Agreement.
* * * * * *
- 24 -
<PAGE> 39
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 hereunto duly authorized.
ZILA, INC.
Date: July , 1997 By /s/ Joseph Hines
----- ------------------------------------
Joseph Hines
President
- 25 -
<PAGE> 1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statements no.
33-32805 and No. 33-32970 of Zila, Inc. on Form S-8 and Registration Statements
No. 33-46239, No. 333-06019, and No. 333-00645 of Zila, Inc. on Form S-3 of our
report dated June 30, 1997 appearing in this Current Report on Form 8-K.
/s/ DELOITTE & TOUCHE LLP
- -------------------------------------
Deloitte & Touche, LLP
Phoenix, Arizona
July 18, 1997
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in Registration Statements No.
33-32805 and No. 33-32970 of Zila, Inc. on Form S-8 and Registration Statements
No. 33-46239 and No. 333-00645 of Zila, Inc. on Form S-3 of our report dated
April 11, 1997 appearing in this Current Report on Form 8-K dated July 18, 1997
of Zila, Inc.
/s/ GRANT THORNTON LLP
- ----------------------------
Grant Thornton LLP
Sacramento, California
July 17, 1997
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