<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 April 30, 1997 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 April
30, 1997 was 32,257,848 shares.
Exhibit 14
Total pages 17
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TABLE OF CONTENTS
Page no.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of April 30,
1997 and July 31, 1996 3
Condensed consolidated statements of operations for
quarters and nine months ended April 30, 1997 and 1996 4
Condensed consolidated statements of cash flows for nine
months ended April 30, 1997 and 1996 5-6
Notes to unaudited condensed consolidated financial 7-10
statements
Item 2. Management's discussion and analysis of financial
condition and results of operations 11-14
PART II. OTHER INFORMATION
Item 1. Legal proceedings 14-15
Item 5. Other information 15
Item 6. Exhibits and reports on Form 8-K 16
SIGNATURES 17
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ------------------------------------------------------------------------------------------
April July
ASSETS 30, 1997 31, 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,210,059 $ 3,491,904
Cash in escrow 2,880,000
Short-term investments 711,470
Trade receivables, less allowance for doubtful accounts 2,840,070 2,821,440
Other receivables 787,953 620,378
Inventories 3,651,752 4,200,442
Prepaid expenses and other assets 467,033 444,913
Deferred income taxes 961,413
------------ ------------
Total current assets 11,836,867 13,251,960
------------ ------------
PROPERTY AND EQUIPMENT - Net 1,786,964 1,928,778
PURCHASED TECHNOLOGY RIGHTS - Net 7,019,403 7,346,733
OTHER INTANGIBLE ASSETS - Net 1,232,830 1,631,898
GOODWILL - Net 2,693,919 654,323
OTHER ASSETS 128,043 496,089
------------ ------------
TOTAL $ 24,698,026 $ 25,309,781
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 345,784 $
Accounts payable 3,076,161 2,934,123
Accrued liabilities 1,885,951 1,546,662
Deferred revenue 383,260 187,561
Income taxes payable 1,976,369
Current portion of long-term debt 27,782 27,782
------------ ------------
Total current liabilities 5,718,938 6,672,497
LONG-TERM DEBT - Net of current portion 361,169 382,006
------------ ------------
Total liabilities 6,080,107 7,054,503
------------ ------------
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 32,257,848 shares
(April 30, 1997) and 31,077,330 shares (July 31, 1996) 32,258 31,077
Capital in excess of par value 30,271,126 24,760,270
Unrealized loss on securities available-for-sale (24,832)
Deficit (11,685,040) (6,510,812)
------------ ------------
18,618,344 18,255,703
Less 42,546 common shares held by wholly-owned
subsidiary (at cost) (425) (425)
------------ ------------
Total shareholders' equity 18,617,919 18,255,278
------------ ------------
TOTAL $ 24,698,026 $ 25,309,781
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTERS AND NINE MONTHS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarters ended Nine months ended
------------------------- -------------------------
April April April April
30, 1997 30, 1996 30, 1997 30, 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 9,912,648 $ 9,143,739 $28,880,090 $28,435,990
Licensing fees and royalty revenue 15,345 1,005,488 57,640 1,811,264
----------- ----------- ----------- -----------
9,927,993 10,149,227 28,937,730 30,247,254
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Cost of products sold 6,070,037 6,867,854 17,847,550 18,866,390
Selling, general and administrative 5,202,153 4,892,970 14,426,690 13,689,731
Merger related expenses 38,311 366,866
Impairment charges 587,659
Litigation expenses 84,037 10,950 1,144,288 265,321
Restructuring charges 143,632 271,632
----------- ----------- ----------- -----------
11,394,538 11,915,406 34,373,053 33,093,074
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,466,545) (1,766,179) (5,435,323) (2,845,820)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest income 37,093 12,780 157,092 101,715
Interest expense (22,112) (39,694) (65,499) (160,782)
Other income (expense) 4,477 1,638 4,477 2,954
Realized gain (loss) on short-term
investments 209 (21,493) (1,197)
----------- ----------- ----------- -----------
19,458 (25,067) 74,577 (57,310)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (1,447,087) (1,791,246) (5,360,746) (2,903,130)
INCOME TAX BENEFIT 1,298,882 186,518 1,298,882
----------- ----------- ----------- -----------
NET LOSS $(1,447,087) $ (492,364) $(5,174,228) $(1,604,248)
=========== =========== =========== ===========
NET LOSS PER SHARE $ (0.05) $ (0.02) $ (0.17) $ (0.05)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 31,487,890 30,148,611 31,279,114 29,833,214
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(5,174,228) $(1,604,248)
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Depreciation and amortization 729,489 317,689
ESOP contributions in stock 23,177
Services paid in stock 19,494
Impairment of assets 587,659
Change in assets and liabilities:
Receivables 222,607 76,668
Inventories 764,840 1,800,736
Prepaid expenses and other assets 5,667 70,226
Deferred income taxes 961,413 (1,141,402)
Accounts payable and accrued expenses 196,823 1,015,048
Income taxes payable (1,976,369)
Deferred revenue 195,699 19,894
----------- -----------
Net cash (used) provided by operating activities (3,443,729) 554,611
----------- -----------
INVESTING ACTIVITIES:
Purchases of short-term investments (222,615) (213,620)
Proceeds from sale of short-term investments 958,917 201,869
Purchases of property and equipment (314,083) (426,968)
Patents and licensing costs incurred (49,352) (281,049)
----------- -----------
Net cash provided (used) by investing activities 372,867 (719,768)
----------- -----------
FINANCING ACTIVITIES:
Principal payments on notes payable (418,438)
Net proceeds from short-term borrowings 345,784 1,308,818
Net proceeds from issuance of common stock 882,508 1,046,164
Principal payments on long-term debt (20,837) (627,870)
----------- -----------
Net cash provided (used) by financing activities 789,017 1,727,112
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (2,281,845) 1,561,955
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,491,904 (313,234)
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,210,059 $ 1,248,721
=========== ===========
CASH PAID FOR INTEREST $ 65,524 $ 160,782
=========== ===========
CASH PAID FOR INCOME TAXES $ 1,167,369 $
=========== ===========
</TABLE>
(continued)
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
NINE MONTHS ENDED APRIL 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:
Non-cash aspects of Cygnus acquisition:
Stock issued $ 1,725,000
Fair value of assets acquired other than cash and
cash equivalents 344,343
Liabilities assumed 702,942
Non-cash aspects of CTM acquisition:
Stock issued $ 1,884,375
Non-cash aspects of sale of common stock:
Cash in escrow $ 2,880,000
</TABLE>
See notes to condensed consolidated financial statements
6
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ZILA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of management of Zila, Inc. and Subsidiaries ("Zila" or 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.
The consolidated financial statements include the accounts of Zila,
Inc. and its wholly-owned subsidiaries, Zila Pharmaceuticals, Inc.,
Zila International Inc., Zila Ltd., Bio-Dental Technologies Corporation
("Bio-Dental"), and Cygnus Imaging, Inc. ("Cygnus"). All significant
intercompany balances and transactions are eliminated in consolidation.
2. On January 8, 1997, the Company's merger with Bio-Dental was completed. 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.
The Bio-Dental 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. Certain
adjustments and reclassifications have been made to conform previously
issued Bio-Dental financial statements to classifications and accounting
policies used by Zila.
3. Net loss per common share is computed based on the weighted average number
of shares outstanding during each period after giving effect to any
dilutive stock options and warrants which are considered to be common
stock equivalents. For the quarters and nine month periods ended April 30,
1997 and 1996, 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.
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4. Inventories consist of the following:
<TABLE>
<CAPTION>
April 30, July 31,
1997 1996
---------- ----------
<S> <C> <C>
Finished goods $2,950,884 $3,909,851
Raw materials 700,868 290,591
---------- ----------
$3,651,752 $4,200,442
========== ==========
</TABLE>
5. On June 1, 1997, the Company's revolving bank line of credit which was
collateralized by trade accounts receivable, inventories and rights to
payment expired. At July 31, 1996 and April 30, 1997, the Company had $0
and $260,000 in borrowings against this line of credit, respectively.
Included in short-term borrowings at April 30, 1997 is $85,784 for
installments due on the Company's directors and officers liability
insurance, product liability insurance, and installments due on an
equipment loan.
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. 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. As a result of this analysis,
the Company determined that the long-lived assets associated with
Integrated Dental Technologies ("IDT"), a wholly owned subsidiary of
Bio-Dental, would not likely be recoverable, as defined by SFAS No. 121.
As a result, a $587,659 impairment loss was recognized to reduce the
carrying value of these long-lived assets.
8. In October 1995, the Financial Accounting Standards Board issued 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
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financial statements and will disclose the pro forma effect on net income
and earnings per share, as if the Company had applied the new Statement in
its year-end financial statements.
9. a) 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 alleged 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
sought to enjoin Colgate's manufacture and distribution of Orabase Gel and
requested an award of damages in an appropriate amount. The case was
settled on March 6, 1997 and had no material impact on the Company's
financial statements.
b) 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 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 denied all of the material allegations of the lawsuit against
it and has asserted various affirmative defenses. In November 1996,
Bio-Dental was granted a summary judgment in which the court ruled in
favor of Bio-Dental. The plaintiffs filed a motion to reconsider the
summary judgment ruling, which was denied by the court in January 1997.
Having lost the summary judgment ruling and later having this ruling
upheld, the plaintiffs are in the process of filing an appeal. Bio-Dental
will continue to vigorously defend against the claims set forth in the
lawsuit; however, a contingent liability has been accrued to cover
probable losses.
c) 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.
10. 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 Zila common stock 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.
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11. 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
general corporate purposes. The option to sell stock to the Investor will
remain available for a period of twelve months following the effective
date of the registration statement discussed below (the "Twelve Month
Period"). As part of the Investment Agreement, Zila sold $3.0 million of
stock on April 30, 1997, and has committed to sell an additional $10
million of common stock to the Investor over the Twelve Month 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 million 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.
As a commitment fee for keeping the equity line available for the Twelve
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 $2.9 million, are drawn under the Investment Agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ZILA, INC. AND SUBSIDIARIES
MERGER WITH BIO-DENTAL:
On January 8, 1997, the Company's merger with Bio-Dental was completed. 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.
The Bio-Dental 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. Certain adjustments and
reclassifications have been made to conform previously issued Bio-Dental
financial statements to classifications and accounting policies used by Zila.
RESULTS OF OPERATIONS:
For the quarter ended April 30, 1997, the Company had a net loss of
$1,447,087 compared to a net loss of $492,364 for the quarter ended April 30,
1996. For the nine month period ended April 30, 1997, the Company had a net loss
of $5,174,228 compared to a net loss of $1,604,248 for the nine month period
ended April 30, 1996.
Net sales during the third quarter of the current fiscal year totaled
$9,912,648 compared to net sales of $9,143,739 during the third quarter of the
prior fiscal year, an 8.4% increase. For the first nine months of this fiscal
year, net sales were $28,880,090 compared to $28,435,990 for the same period of
the prior fiscal year, a 1.6% increase. The increases for both the quarter and
nine months ended April 30, 1997, were primarily the result of increased sales
of products in the Zila Pharmaceuticals' line, as well as increased sales at The
Supply House, a subsidiary of Bio-Dental, offset by decreased sales in certain
discontinued product lines associated with the restructuring of Bio-Dental's IDT
subsidiary, which occurred in prior periods.
Cost of sales as a percentage of net sales decreased from 75.1% in the
quarter ended April 30, 1996 to 61.2% in the quarter ended April 30, 1997 and
from 66.3% to 61.8% for the nine month periods in 1996 and 1997, respectively.
The decreases for the quarter and nine months ended April 30, 1997 were
primarily due to the lower costs resulting from the restructuring of IDT.
11
<PAGE> 12
Licensing fees and royalty revenues were $15,345 for the quarter ended
April 30, 1997 compared to $1,005,488 for the quarter ended April 30, 1996. For
the nine month period ended April 30, 1997, licensing fees and royalty revenues
were $57,640 compared to $1,811,264 for the same period of the prior fiscal
year. Approximately $278,000 for the quarter and $977,000 for the nine months
ended April 30, 1996 were due to royalty revenues earned in fiscal 1996, related
to the licensing agreement between Bio-Dental and Denticator International, Inc.
("DII"). In July 1996, Bio-Dental disposed of its rights to receive future
royalty payments from DII in exchange for a lump sum payment of approximately
$7,500,000. In addition, amounts were recorded in fiscal 1996 attributable to
the licensing of OraTest for markets in the United Kingdom and the United States
by the Stafford-Miller Company and The Procter & Gamble Company, respectively.
Of these amounts, $625,000 was paid by Procter & Gamble as a one-time licensing
fee required in connection with the termination of its license agreement with
the Company.
Selling, general and administrative expenses increased $309,183 from
$4,892,970 for the third quarter of fiscal year 1996 to $5,202,153 for the same
period in fiscal year 1997 and increased $736,959 from $13,689,731 during the
nine months of fiscal 1996 to $14,426,690 during the nine months of fiscal 1997.
Approximately $318,000 of the increase for the quarter ended April 30, 1997 was
attributable to costs associated with the funding of ORATEST research,
marketing, and start-up manufacturing costs. An additional $70,000, was expensed
during the quarter ended April 30, 1997 for shareholder relations and public
relations as compared to the same quarter of the previous year. Additionally,
the Company incurred approximately $109,000 in amortization costs related to the
purchased technology rights during the quarter ended April 30, 1997.
For the nine months ended April 30, 1997, approximately $923,000 of the
increases were attributable to costs associated with the funding of ORATEST
research, start-up manufacturing costs and staffing. The Company also incurred
approximately $327,000 in amortization costs related to the purchased technology
rights during the nine months ended April 30, 1997. The increases for the
quarter and nine months ended April 30, 1997, were partially offset by decreases
in marketing, selling, product development and administrative expenses at
Bio-Dental resulting from the restructuring of IDT, which occurred in prior
periods.
Merger related expenses of $38,311 for the quarter and $366,866 for the
nine months ended April 30, 1997, are directly related to the Bio-Dental merger.
Impairment charges of $587,659 for the nine months ended April 30, 1997, relate
to an impairment loss recognized to reduce the carrying value of IDT's
long-lived assets which included goodwill and software rights.
Litigation costs, related to the Colgate and the Shareholder suits, during
the third quarter of fiscal year 1997 increased $73,087 from $10,950 in the
third quarter of fiscal year 1996 to $84,037 during the same period of fiscal
year 1997. For the nine months ended April 30, 1997, litigation costs increased
$878,967 to $1,144,288 from the same period last year. These increases were due
to the accrual of a contingent liability in the event that the outcome of the
Shareholder litigation would be unfavorable to Bio-Dental and also due to 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")
12
<PAGE> 13
Restructuring charges for the nine months ended April 30, 1996, are
directly attributable to the restructuring of IDT.
Interest income during the third quarter of fiscal year 1997 increased
$24,313 from $12,780 in the third quarter of fiscal year 1996 to $37,093 during
the same period in fiscal 1997. For the nine months ended April 30, 1997,
interest income increased $55,377 to $157,092 from the same period last year.
Interest expense decreased from $39,694 in the third quarter of the 1996 fiscal
year to $22,112 in the third quarter of 1997 and from $160,782 to $65,499 for
the nine month periods in 1996 and 1997, respectively. The decreases were
attributable to lower debt obligations during the first nine months of fiscal
year 1997 as compared to fiscal year 1996.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1996, the Company had net working capital of $6,579,463 and a
current ratio of 2.0 to 1. At April 30, 1997, the Company had net working
capital of $6,117,929 and a current ratio of 2.1 to 1.
Accounts receivable at April 30, 1997 were $2,840,070 compared to accounts
receivable at July 31, 1996 of $2,821,440. Accounts receivable as a percentage
of quarterly net sales were 28.7% at April 30, 1997 compared to 30.9% at July
31, 1996. There continues to be an emphasis on strong credit management.
At April 30, 1997, the Company had inventories of $3,651,752, a decrease
of $548,690 from inventories at July 31, 1996. The decrease was primarily due to
the planned reduction of IDT inventory and lower inventory at The Supply House
due to greater than anticipated April sales offset by an increase in inventory
levels at Zila Pharmaceuticals due to market expansion of its Zilactin family
line of products. The Company believes current inventories are at levels
necessary to support market expansion and to maintain adequate 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 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 general corporate purposes. The option to
sell stock to the Investor will remain available for a period of twelve months
following the effective date of the registration statement discussed below (the
"Twelve Month 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 Twelve Month Period. At April
30, the net
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<PAGE> 14
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
Twelve 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 $3,000,000, are drawn under the
Investment Agreement.
In addition, the Company obtained a $500,000 bank line of credit in
December 1996, which was secured by trade accounts receivable, inventories and
rights to payment. This line of credit expired June 1, 1997. Interest is payable
monthly on the unpaid balance outstanding at the bank's prime rate (8.5% at
April 30, 1997) plus 1.75%. At April 30, 1997, the Company had borrowings of
$260,000 against the line of credit. Subsequent to April 30, 1997, all
outstanding balances against the line of credit were repaid.
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 alleged 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
sought to enjoin Colgate's manufacture and distribution of Orabase Gel and
requested an award of damages in an appropriate amount. The case
14
<PAGE> 15
was settled on March 6, 1997 and had no material impact on the Company's
financial statements.
Wildwood. 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 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 denied all of the material allegations of the lawsuit against
it and has asserted various affirmative defenses. In November 1996, Bio-Dental
was granted a summary judgment in which the court ruled in favor of Bio-Dental.
The plaintiffs filed a motion to reconsider the summary judgment ruling, which
was denied by the court in January 1997. Having lost the summary judgment ruling
and later having this ruling upheld, the plaintiffs are in the process of filing
an appeal. Bio-Dental will continue to vigorously defend against the claims set
forth in the lawsuit; however, a contingent liability has been accrued to cover
probable losses.
The Company occasionally encounters minor litigation as a means to resolve
disputes which arise in the ordinary course of business. None of these minor
lawsuits are believed to be material to the Company's ongoing operations or
operating results.
Item 5 - Other information
Bio-Dental Technologies. On January 8, 1997, the Company's merger with
Bio-Dental Technologies Corporation ("Bio-Dental") was completed. 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.
The Bio-Dental 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.
Cygnus Imaging, Inc. 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 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
Zila common stock 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.
15
<PAGE> 16
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
On February 11, 1997, the Company filed a Current Report on Form 8-K
which included as an exhibit, the Bio-Dental stock option plan
assumed by the Company.
On March 17, 1997, the Company filed a Current Report on Form 8-K
which included as an exhibit, unaudited financial information of
Zila, Inc. and subsidiaries, in accordance with Securities and
Exchange Commission FRR 1, Section 201.01.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 13, 1997 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
Director (Principal Financial
& Accounting Officer)
17
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