<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 10, 1997
ZILA, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-17521 86-0619668
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
5227 North 7th Street Phoenix, Arizona 85014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 266-6700
<PAGE> 2
The undersigned registrant hereby amends its Current Report on Form 8-K dated
November 10, 1997 which was filed on November 24, 1997, solely to add the
financial information and pro forma financial information required by Item 7 of
Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business to Be Acquired
The financial statements for Oxycal Laboratories, Incorporated are set
forth below:
2
<PAGE> 3
OXYCAL LABORATORIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEETS, JUNE 30, 1997 AND
SEPTEMBER 30, 1997 (Unaudited) F-3
CONSOLIDATED STATEMENTS OF INCOME, YEARS ENDED
JUNE 30, 1996 AND 1997 AND THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 (Unaudited) F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, YEARS ENDED
JUNE 30, 1996 AND 1997 AND THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 (Unaudited) F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS, YEARS ENDED
JUNE 30, 1996 AND 1997 AND THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 (Unaudited) F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
F-1
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Oxycal Laboratories, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of Oxycal
Laboratories, Inc. and subsidiaries as of June 30, 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the two years in the period ended June 30, 1997. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Oxycal Laboratories,
Inc. and subsidiaries at June 30, 1997, and the results of their operations and
their cash flows for each of the two years in the period ended June 30, 1997 in
conformity with generally accepted accounting principles.
August 23, 1997
Phoenix, Arizona
F-2
<PAGE> 5
OXYCAL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 612,887 $ 1,400,508
Trade accounts receivable, less allowance for doubtful
accounts of $3,360 and $3,360 (unaudited) 1,519,444 1,934,250
Employee and other receivables 5,098 8,098
Inventories (Notes 2 and 11) 4,223,747 4,127,857
Prepaid income taxes 229,681
Prepaid expenses and other assets 40,546 153,314
----------- -----------
Total current assets 6,631,403 7,624,027
PROPERTY AND EQUIPMENT - Net (Note 3) 1,981,110 2,014,531
INTANGIBLE ASSETS - Net (Note 4) 721,479 710,518
DEFERRED INCOME TAXES (Note 7) 249,000 249,000
DEPOSITS AND OTHER ASSETS 6,167 7,167
----------- -----------
TOTAL $ 9,589,159 $10,605,243
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 763,224 $ 422,677
Accrued expenses 117,217 307,421
Income taxes payable 448,094
----------- -----------
Total current liabilities 880,441 1,178,192
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 9 and 10)
STOCKHOLDERS' EQUITY (Note 5):
Common stock, no par value - authorized, 20,000,000 shares;
issued and outstanding, 1,825,807 shares 365,169 365,169
Capital in excess of stated value 3,610,920 3,610,920
Retained earnings 4,732,629 5,450,962
----------- -----------
Total stockholders' equity 8,708,718 9,427,051
----------- -----------
TOTAL $ 9,589,159 $10,605,243
=========== ===========
</TABLE>
F-3
<PAGE> 6
OXYCAL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
JUNE 30, SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES (Notes 6 and 8) $ 10,990,943 $ 14,496,010 $ 3,319,351 $ 3,868,649
COST OF SALES 5,257,246 4,981,948 1,148,890 1,091,157
------------ ------------ ------------ ------------
Gross profit 5,733,697 9,514,062 2,170,461 2,777,492
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES (Note 5) 3,015,661 5,533,802 661,636 1,212,950
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 2,718,036 3,980,260 1,508,825 1,564,542
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 40,313 53,036 13,420 13,242
Interest expense (Note 6) (1,600) (195)
Other 17,948 (1,360) 2,500 1,904
------------ ------------ ------------ ------------
Total other income 56,661 51,481 15,920 15,146
------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES 2,774,697 4,031,741 1,524,745 1,579,688
INCOME TAXES (Note 7) 1,060,000 1,530,000 655,645 678,775
------------ ------------ ------------ ------------
NET INCOME $ 1,714,697 $ 2,501,741 $ 869,100 $ 900,913
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 7
OXYCAL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TOTAL
STATED EXCESS OF RETAINED STOCKHOLDERS'
SHARES VALUE STATED VALUE EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE,
JULY 1, 1995 1,825,807 $ 365,169 $ 3,279,389 $ 1,018,291 $ 4,662,849
Net income 1,714,697 1,714,697
Dividends (136,935) (136,935)
----------- ----------- ----------- ----------- -----------
BALANCE,
JUNE 30, 1996 1,825,807 365,169 3,279,389 2,596,053 6,240,611
Net income 2,501,741 2,501,741
Stock-based
compensation (Note 5) 331,531 331,531
Dividends (365,165) (365,165)
----------- ----------- ----------- ----------- -----------
BALANCE,
JUNE 30, 1997 1,825,807 365,169 3,610,920 4,732,629 8,708,718
Net income (unaudited) 900,913 900,913
Dividends (unaudited) (182,580) (182,580)
----------- ----------- ----------- ----------- -----------
BALANCE,
SEPTEMBER 30, 1997
(Unaudited) 1,825,807 $ 365,169 $ 3,610,920 $ 5,450,962 $ 9,427,051
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 8
OXYCAL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
JUNE 30, SEPTEMBER 30,
------------------------------ ------------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,714,697 $ 2,501,741 $ 869,100 $ 900,913
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 157,836 210,833 44,413 68,439
Loss on sale of fixed assets 4,863
Stock-based compensation 331,531
Accretion on government security (10,118)
Change in assets and liabilities:
Trade accounts receivable (278,548) (312,071) (217,334) (414,806)
Employee and other receivables 8,020 239 1,685 (3,000)
Inventories (1,525,185) (2,063,653) (392,076) 95,890
Prepaid expenses and other assets (5,640) (165,562) (38,927) 115,913
Deferred income taxes 21,000 (118,000)
Accounts payable and accrued expenses 564,614 66,881 556,916 (150,343)
Income taxes payable 366,842 448,094
----------- ----------- ----------- -----------
Net cash provided by operating activities 656,794 446,684 1,190,619 1,061,100
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (268,659) (717,862) (303,839) (90,899)
Proceeds from sale of property and equipment 24,876
Patent and trademark costs incurred (76,011) (60,218) (15,084)
(Purchase) maturity of investment (189,882) 200,000
----------- ----------- ----------- -----------
Net cash used in investing activities (534,552) (553,204) (318,923) (90,899)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (136,935) (365,165) (182,580)
Principal payments on related party debt (65,000)
----------- ----------- ----------- -----------
Net cash used in financing activities (201,935) (365,165) (182,580)
----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (79,693) (471,685) 871,696 787,621
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,164,265 1,084,572 1,084,572 612,887
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,084,572 $ 612,887 $ 1,956,268 $ 1,400,508
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 1,600 $ 195
=========== ===========
Cash paid for income taxes $ 1,092,911 $ 1,784,951 $ 6,000 $ 1,000
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 9
OXYCAL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Oxycal Laboratories, Inc. and subsidiaries (the
"Company") is involved in the development, production and marketing of
a patented food supplement. The Company's products are Ester-C(R)
mineral ascorbates which are distributed worldwide, as detailed in Note
8.
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 and the 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 these estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Oxycal Laboratories, Inc. and its wholly-owned
subsidiaries, Inter-Cal Corp. and Oxycal Exports, Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS include cash on hand and in banks and cash
invested in short-term securities with an original maturity of three
months or less.
INVESTMENT IN GOVERNMENT SECURITY consists of a one-year $200,000 face
value U.S. Government treasury bill, which matured June 18, 1997. The
Company accounts for investment securities in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities. SFAS No. 115
requires the classification of securities at acquisition into one of
three categories: available-for-sale, held-to-maturity or trading.
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
which are as follows:
Building and improvements 15-40 years
Furniture and equipment 3-10 years
Automobiles 5 years
INTANGIBLE assets are comprised of the following:
a. PATENT AND TRADEMARK COSTS - Certain costs incurred in
connection with the acquisition of domestic and foreign patent
rights and product trademarks are capitalized and amortized
over the estimated benefit period which ranges from 10 to 20
years for patents and 15 years for trademarks. Research and
development costs totaling approximately $114,000 and $104,000
in 1997 and 1996, respectively, were expensed.
F-7
<PAGE> 10
b. ORGANIZATION costs consist primarily of legal costs associated
with the incorporation of Oxycal Exports, Inc. and were being
amortized over five years using the straight-line method.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes, which among other things, provides for the
establishment of deferred income taxes for temporary differences
between the financial and income tax bases of reporting.
2. INVENTORIES
Inventories consist of the following at June 30, 1997:
<TABLE>
<S> <C>
Finished goods $ 847,740
Raw materials 3,376,007
----------
Total inventories $4,223,747
==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 1997:
<TABLE>
<S> <C>
Land and land improvements $ 401,180
Building and improvements 941,119
Furniture and equipment 1,295,958
Automobiles 112,747
Construction in progress 1,000
----------
Total 2,752,004
Less accumulated depreciation 770,894
----------
Total property and equipment - net $1,981,110
==========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consist of the following at June 30, 1997:
<TABLE>
<S> <C>
Trademarks - net of accumulated amortization of $21,804 $322,847
Patents in process 205,711
Patents - net of accumulated amortization of $64,422 192,921
--------
Total intangible assets $721,479
========
</TABLE>
5. STOCK OPTIONS
The Company adopted a Stock Option and Incentive Plan (the "Plan")
authorizing the Board of Directors to grant options to employees and
directors of the Company to purchase up to 750,000 shares of the
Company's stock. Options granted under the Plan have terms between 10
and 15 years from the date of grant. At the adoption of the Plan, all
previously issued stock options which were still outstanding were
incorporated into the Plan without a change in the terms of those
options. At June 30, 1997, there were no shares available for grant
under this Plan.
F-8
<PAGE> 11
In addition, 36,602 options to purchase shares at $1.50 per share were
granted during 1992 and 44,000 options to purchase shares at $1.50 per
share were granted during 1997, outside the Plan.
Stock options, and related information, outstanding as of June 30,
1997, which expire at various dates through 2005 are summarized in the
following table.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER EXERCISE AVERAGE
OF PRICE EXERCISE
SHARES RANGE PRICE
<S> <C> <C> <C>
Outstanding, July 1, 1995 and June 30, 1996 786,602 $.69 - $5.44 $ 1.20
Granted 44,000 1.50 1.50
-------
Outstanding, June 30, 1997 830,602 $.69 - $5.44 $ 1.28
=======
</TABLE>
All options outstanding were exercisable at June 30, 1997.
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
in accounting for its stock options. Accordingly, compensation cost for
stock options is recorded as the excess, if any, of the fair value of
the Company's common stock at the date of grant over the exercise price
of the option. Compensation cost recognized in the Company's
consolidated statement of income for 1997 of $331,531 is essentially
the same as that determined in accordance with the methodology
prescribed under SFAS No. 123, Accounting for Stock-Based Compensation.
The fair value of options granted during 1997 was estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: 6.25% risk-free interest rate,
expected option lives of 1 year, and a 4.4% dividend yield.
During 1987 and 1991, 493,341 options with exercise prices ranging from
$.69 to $2.18 were issued to various officers, employees and directors
of the Company. In consideration for the past service of the officers,
employees and directors, the Company agreed to reimburse the required
exercise price of those certain stock options at the date of exercise.
The Company recorded a total of $717,141 of compensation expense at the
time those options were granted, which represented the estimated fair
value of 493,341 shares of the Company's common stock. Option prices
above have not been reduced for the amounts to be reimbursed by the
Company; such amounts total approximately $491,000 at June 30, 1997. At
June 30, 1997, all 493,341 of these options remained outstanding.
F-9
<PAGE> 12
6. RELATED PARTY TRANSACTIONS
For the year ended June 30, 1996, the Company incurred interest at 8%
of approximately $1,600 on related party debt with an officer, director
and stockholder of the Company of approximately $65,000 which was
repaid in 1996.
The Company has two distribution agreements with companies owned by
minority stockholders. Sales under these agreements totaled
approximately $3,961,000 and $3,971,000 for the years ended June 30,
1997 and 1996, respectively. No commissions were paid to these
companies during the years ended June 30, 1997 or 1996.
7. INCOME TAXES
The consolidated provision for income taxes for the years ended June 30
consists of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current provision:
Federal $ 1,310,000 $ 826,000
State 338,000 213,000
----------- -----------
Total current provision 1,648,000 1,039,000
Deferred provision (118,000) 21,000
----------- -----------
Total provision for income taxes $ 1,530,000 $ 1,060,000
=========== ===========
</TABLE>
A reconciliation of the difference between the provision for income
taxes and the amount that would be computed using statutory federal
income tax rates for the years June 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Income taxes at statutory federal rate of 34% $ 1,370,792 $ 943,397
State income taxes, net of federal benefit 219,730 166,482
Foreign sales income exclusion (64,406) (48,598)
Other - net 3,884 (1,281)
----------- -----------
Total $ 1,530,000 $ 1,060,000
=========== ===========
</TABLE>
Components of the net deferred tax asset at June 30, 1997 is as
follows:
<TABLE>
<S> <C>
Future deductible stock option compensation expense $ 407,000
Accelerated depreciation for tax purposes (204,500)
Other 46,500
---------
Net deferred tax asset $ 249,000
=========
</TABLE>
F-10
<PAGE> 13
8. SALES
Sales summarized by geographic region for the years ended June 30 are
as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
United States $11,205,991 77% $ 8,516,925 78%
Canada 509,023 3 366,148 3
Europe 689,652 5 591,231 5
Australia/New Zealand 1,056,995 7 828,550 8
Asia 1,017,148 7 688,089 6
Other 17,201 1
----------- ----------- ----------- -----------
Total $14,496,010 100% $10,990,943 100%
=========== =========== =========== ===========
</TABLE>
Operating profits on sales do not vary materially by geographic region.
One customer accounted for 23% of total sales and 30% of domestic sales
for 1997. That same customer accounted for 31% of total sales and 40%
of domestic sales for 1996. No other customer accounted for more than
10% of sales.
9. COMMITMENTS AND CONTINGENCIES
During 1995, the Company received an inquiry from the Federal Trade
Commission ("FTC") regarding product claims made in the Company's
advertising. The Company responded to the FTC's initial request for
information and has submitted evidence which it believes supports its
claims. During 1996, the FTC requested further information from the
Company. The Company responded to the FTC's request for additional
information. In October 1996, the FTC notified the Company that its
investigation was completed and that its regional staff concluded that
certain claims were not adequately substantiated. Subsequently,
additional information was submitted to the FTC and meetings were held,
with no resolution of the regional office's allegations. The FTC
forwarded their complaint to the Bureau of Consumer Protection ("BCP")
for their suggestion regarding dismissal or further action against the
Company. The Company has met with the BCP to present evidence
supporting its claims. The FTC has the authority, among other things,
to request further information from the Company, to impose fines or to
issue a potential consent order regarding advertising claims.
The Company has a $200,000 unsecured bank line of credit available
until June 1998. Interest on outstanding balances is at variable
interest rates which were approximately 8.25% at June 30, 1997. No
amounts were outstanding under the line of credit at June 30, 1997.
10. 401(k) DEFINED CONTRIBUTION PLAN
The Company adopted a 401(k) defined contribution plan (the "Plan")
effective November 1, 1995 for all eligible employees. An employee may
contribute up to certain maximum amounts each year. Company
contributions were $34,640 for 1997. The Company did not make a
contribution to the Plan during 1996.
F-11
<PAGE> 14
11. NOTE TO UNAUDITED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited consolidated financial statements for the
three months ended September 30, 1997 and 1996, have been prepared in
accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments
and reclassifications considered necessary for a fair and comparable
presentation have been included and are only of a normal recurring
nature. Operating results for the three months ended September 30, 1997
are not necessarily indicative of the results that may be expected for
the year ending June 30, 1998.
NEW PRONOUNCEMENTS - In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
capital in the equity section of a statement of financial position.
SFAS No. 131 establishes standards for the way that public enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for disclosures
about products and services, geographic area and major customers. Both
statements are effective for financial statements for periods beginning
after December 15, 1997. The Company has not completed evaluating the
impact of implementing the provisions of SFAS Nos. 130 and 131.
INVENTORIES consist of the following at September 30, 1997:
<TABLE>
<S> <C>
Finished goods $1,142,127
Raw materials 2,985,730
----------
Total inventories $4,127,857
==========
</TABLE>
SUBSEQUENT EVENTS - On November 10, 1997, all of the shares of the
Company's common stock were acquired by Zila, Inc. for $28,000,000.
On December 17, 1997, the Company was notified by the FTC that the
investigation regarding product claims made in the Company's
advertising, as previously discussed in Note 9 had been closed, as the
Company had previously stopped advertising the claims in question.
* * * * * *
F-12
<PAGE> 15
(b) Pro Forma Financial Information - The required pro forma
financial information is set forth below:
Zila, Inc. (the "Company" or "Zila"), through its wholly owned subsidiary Zila
Pharmaceuticals, Inc., completed its acquisition of the Peridex(R) product line
("Peridex") from The Procter & Gamble Company ("P&G") pursuant to the terms of
that Asset Sale and Purchase Agreement dated November 5, 1997 (the "Agreement")
between P&G, The Procter & Gamble Distributing Company and Zila Pharmaceuticals,
Inc. Peridex is a prescription anti-bacterial oral rinse.
Under the terms of the Agreement, the Company also acquired certain inventory,
technology, contract rights, trademarks and other intellectual property
associated with Peridex. The purchase price of the Peridex product line, which
was determined in arms-length negotiations, was $12 million plus the value of
the inventory acquired at the closing. Under the terms of the Agreement, the
purchase price is to be delivered to P&G as follows: $6 million was paid at
closing, $4 million is payable within 180 days after closing, $1 million is
payable within 12 months after closing and $1 million is payable within 24
months after closing. The initial $6 million payment of the purchase price was
drawn from the funds available pursuant to the terms of that certain Private
Equity Line of Credit Agreement dated as of April 30, 1997 (the "Equity
Financing") between Deere Park Capital Management and the Company.
On November 10, 1997 (the "Closing Date"), the Company acquired by merger (the
"Merger") Oxycal Laboratories, Incorporated ("Oxycal") pursuant to the terms of
the Acquisition Agreement and Plan of Merger dated October 28, 1997, by and
among the Company, Oxycal and Zila Acquisition Corp. ("Acquisition Corp.").
Under the terms of the Merger, Oxycal was merged into Zila Acquisition Corp., a
wholly owned subsidiary of Zila, with Oxycal being the surviving corporation.
After the Closing Date, all the issued and outstanding shares of Acquisition
Corp. were converted into the common stock of Oxycal, the separate existence of
Acquisition Corp. ceased, and Oxycal continued its corporate existence under the
laws of the State of Arizona as a wholly owned subsidiary of Zila. Under the
terms of the Merger, each outstanding share of Oxycal common stock was converted
into the right to receive per share cash consideration of $10.1795. The total
cash consideration equaled twenty eight million dollars ($28,000,000) (the
"Merger Consideration") which was reached by arms-length negotiations between
the Company and Oxycal. Oxycal develops, manufactures and markets a patented and
enhanced form of vitamin C under the trademark name Ester-C(R).
The Company raised the funds to consummate the Merger in a private placement of
30,000 shares of the Company's Series A Convertible Preferred Stock (the "Series
A Preferred Stock") and warrants to purchase 360,000 shares of the Company's
Common Stock (the "Warrants") for $30,000,000 (the "Preferred Stock Proceeds").
The shares of Series A Preferred Stock, the Warrants and the Preferred Stock
Proceeds were deposited into escrow and were released from escrow upon the
consummation of the Merger.
3
<PAGE> 16
The unaudited pro forma condensed balance sheet at October 31, 1997 combines
historical financial information as if the acquisitions of Peridex and Oxycal
occurred on October 31, 1997. The unaudited pro forma condensed combined
statement of operations data for the year ended July 31, 1997 and the three
months ended October 31, 1997 combine historical statements of operations data
for the Company, Peridex and Oxycal, as if the acquisitions had occurred on
August 1, 1996.
The unaudited pro forma condensed combined balance sheet data at October 31,
1997 combines historical financial information of the Company at October 31,
1997 and Peridex and Oxycal at September 30, 1997. The unaudited pro forma
condensed combined statement of operations data for the three months ended
October 31, 1997 combines historical financial information of the Company for
the three months ended October 31, 1997 and Peridex and Oxycal for the three
months ended September 30, 1997. The unaudited pro forma condensed combined
statement of operations data for the year ended July 31, 1997 combines
historical financial information of the Company for the year ended July 31, 1997
and Peridex and Oxycal for the year ended June 30, 1997. As the most recent
fiscal year ends of both Peridex and Oxycal differ from the Company's fiscal
year end by less than 93 days, no adjustments were made to Peridex's or Oxycal's
statement of operations data for the purpose of the pro forma presentation.
The detailed assumptions used to prepare the unaudited pro forma condensed
combined financial information are contained herein. The unaudited pro form
condensed combined financial information reflects the use of the purchase method
of accounting for the acquisitions. The purchase price allocation used in the
preparation of the pro forma financial information is preliminary and subject to
change based upon final evaluations being performed.
The unaudited pro forma combined financial information assumes the initial $6
million payment of the purchase price for Peridex was drawn from the funds
available pursuant to the Equity Financing. The remaining amount of purchase
price of Peridex is reflected as current and long-term contractual obligations.
The unaudited pro forma combined financial information assumes the acquisition
of Oxycal was funded from the private placement of the Series A Preferred Stock
and Warrants.
The pro forma data are not necessarily indicative of the financial position or
results of operations which would actually have been reported had the
transaction been consummated at the date mentioned above or which may be
reported in the future.
The pro forma data should be read in conjunction with the notes to unaudited pro
forma condensed combined financial information and the historical financial
statements and notes thereto of Zila and Peridex (incorporated by reference
herein) and Oxycal (contained elsewhere herein).
4
<PAGE> 17
ZILA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA
OCTOBER 31, 1997
<TABLE>
<CAPTION>
----------HISTORICAL---------- PRO FORMA PRO FORMA
ASSETS ZILA OXYCAL ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,818,599 $ 1,400,508 $ (4,570,000)(a) $ 4,649,107
Cash in escrow 1,000,000 (1,000,000)(a)
Trade receivables - net 3,215,329 1,934,250 5,149,579
Other receivables 218,439 8,098 226,537
Income tax receivable 310,379 2,151,906(b) 2,462,285
Inventories 4,767,583 4,127,857 230,000(c) 9,125,440
Prepaid expenses and other assets 897,115 153,314 1,050,429
------------ ------------ ------------ ------------
Total current assets 18,227,444 7,624,027 (3,188,094) 22,663,377
------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT - Net 1,951,363 2,014,531 500,000(d) 4,465,894
OTHER ASSETS 137,617 256,167 393,784
INTANGIBLE ASSETS - Net 10,761,466 710,518 27,032,949(e) 38,504,933
------------ ------------ ------------ ------------
TOTAL $ 31,077,890 $ 10,605,243 $ 24,344,855 $ 66,027,988
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,620,864 $ 422,677 $ 3,043,541
Accrued liabilities 2,376,189 307,421 2,683,610
Income taxes payable 448,094 (448,094)(b)
Deferred revenue 394,728 394,728
Contractual obligation - net of $250,000 discount $ 4,750,000(f) 4,750,000
Short-term borrowing 70,769 70,769
Current portion of long-term debt 39,895 39,895
------------ ------------ ------------ ------------
Total current liabilities 5,502,445 1,178,192 4,301,906 10,982,543
LONG-TERM LIABILITIES:
Long-term debt - net of current portion 368,962 368,962
Contractual obligation - net of $180,000 discount 820,000(f) 820,000
------------ ------------ ------------ ------------
Total liabilities 5,871,407 1,178,192 5,121,906 12,171,505
------------ ------------ ------------ ------------
SERIES A CONVERTIBLE PREFERRED STOCK
$.001 par value - authorized 30,000 shares;
issued 30,000 shares 28,650,000(a) 28,650,000
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value - authorized
2,470,000 shares; none issued
Common stock, $.001 par value - authorized,
50,000,000 shares; issued 33,885,889 shares 33,886 365,169 (365,169)(g) 33,886
Capital in excess of par value 38,572,001 3,610,920 (3,610,920)(g) 38,572,001
Retained earnings (deficit) (13,398,979) 5,450,962 (5,450,962)(g) (13,398,979)
------------ ------------ ------------ ------------
25,206,908 9,427,051 (9,427,051) 25,206,908
Less 42,546 common shares held by wholly-owned
subsidiary (at cost) (425) (425)
------------ ------------ ------------ ------------
Total shareholders' equity 25,206,483 9,427,051 (9,427,051) 25,206,483
------------ ------------ ------------ ------------
TOTAL $ 31,077,890 $ 10,605,243 $ 24,344,855 $ 66,027,988
============ ============ ============ ============
</TABLE>
5
<PAGE> 18
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA
OCTOBER 31, 1997
(a) Represents the following adjustments to cash, cash equivalents and cash in
escrow:
<TABLE>
<S> <C>
Gross proceeds from the issuance of Series A Preferred Stock $ 30,000,000
Purchase price of Oxycal..................................... (28,000,000)
Initial payment for purchase of Peridex and related inventory (6,220,000)
Series A Preferred Stock issuance costs...................... (1,350,000)
------------
Total.................................................. $ (5,570,000)
============
</TABLE>
(b) Represents income tax receivable resulting from Oxycal generating income
tax deductions immediately prior to the acquisition date. The tax
deduction is a result of certain Oxycal option holders exercising their
options to purchase common stock which generated an ordinary deduction for
Oxycal.
(c) Represents the following adjustments to inventories:
<TABLE>
<S> <C>
Purchase of Peridex inventory................................ $ 220,000
Net purchase price adjustments to Oxycal inventories......... 10,000
------------
Total.................................................. $ 230,000
============
</TABLE>
The purchase price for the Peridex inventory is subject to adjustment
based on the actual value of inventory purchased. Based on information
received from P&G, the amount of such adjustment may result in an increase
in the purchase price of approximately $100,000. The purchase price
adjustments to Oxycal inventories reflect adjustments to value raw
materials inventories at replacement cost and finished goods inventories
at estimated selling prices less costs of disposal and selling effort
profit.
(d) Represents purchase accounting adjustment to increase the value of
property, plant and equipment of Oxycal to current replacement cost.
6
<PAGE> 19
(e) Represents pro forma adjustments to allocate the purchase price of Peridex
and Oxycal as follows:
Purchase price of Peridex, including inventory ........ $ 12,220,000
Assets acquired ....................................... (220,000)
Discount on contractual obligation .................... (430,000)
------------
Excess of cost over net assets acquired - Peridex 11,570,000
------------
Purchase price of Oxycal .............................. 28,000,000
Assets acquired ....................................... (10,605,243)
Liabilities assumed ................................... 1,178,192
Pro forma adjustment for:
Income tax receivable ........................... (2,600,000)
Inventories - Finished goods .................... (230,000)
Inventories - Raw materials ..................... 220,000
Property, plant and equipment ................... (500,000)
------------
Excess of cost over net assets acquired - Oxycal ...... 15,462,949
------------
Total ........................................... $ 27,032,949
============
While the Company has yet to complete the allocation of the excess of cost
over net assets acquired to the specific assets acquired, based on its
preliminary estimate, the Company believes that the excess will be
allocated principally to patents, trademarks and goodwill, which is
estimated to be amortized over 15 years for Peridex and 20 years for
Oxycal.
(f) Represents pro forma adjustment for contractual obligation to pay
remaining purchase price of Peridex as follows: $4 million is payable
within 180 days after closing, $1 million is payable within 12 months
after closing and $1 million is payable within 24 months after closing.
The contractual obligation does not have a stated interest rate and,
therefore, has been discounted using an imputed interest rate that
approximates the rate the Company would have negotiated in a similar
transaction.
(g) Represents eliminating entries for combination purposes.
7
<PAGE> 20
ZILA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS DATA
YEAR ENDED JULY 31, 1997
<TABLE>
<CAPTION>
-------------------HISTORICAL-------------------- -----------PRO FORMA------------
ZILA PERIDEX OXYCAL ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 38,664,892 $ 12,597,000 $ 14,496,010 $ 65,757,902
OPERATING COSTS AND EXPENSES
Cost of products sold 23,542,342 2,424,000 4,981,948 30,948,290
Selling, general and administrative 20,161,319 741,000 5,533,802 $ 1,600,000(a) 28,036,121
Merger related expenses 371,865 371,865
Impairment charges 587,659 587,659
Litigation expenses 1,147,363 1,147,363
------------ ------------ ------------ ------------ ------------
45,810,548 3,165,000 10,515,750 1,600,000 61,091,298
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (7,145,656) 9,432,000 3,980,260 (1,600,000) 4,666,604
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income 201,630 53,036 254,666
Interest expense (79,450) (195) (340,000)(b) (419,645)
Other income (expense) (1,360) (1,360)
Realized loss on short-term
investments (24,832) (24,832)
------------ ------------ ------------ ------------ ------------
97,348 51,481 (340,000) (191,171)
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE (PROVISION)
BENEFIT FOR INCOME TAXES (7,048,308) 9,432,000 4,031,741 (1,940,000) 4,475,433
(PROVISION) BENEFIT FOR INCOME TAXES 589,931 (c) (1,530,000)(c) 1,530,000(c) 589,931
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (6,458,377) $ 9,432,000 $ 2,501,741 $ (410,000) $ 5,065,364
============ ============ ============ ============ ============
INCOME (LOSS) PER SHARE $ (0.20) $ 0.16
============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 31,530,096 32,512,096(d)
============ ============
</TABLE>
8
<PAGE> 21
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS DATA
FOR THE YEAR ENDED JULY 31, 1997
(a) Represents the amortization of excess of assets acquired over liabilities
assumed of Peridex and Oxycal. While the Company has yet to complete the
allocation of the excess of cost over net assets acquired to the specific
assets acquired, based on its preliminary estimate, the Company believes
that the excess will be allocated principally to patents, trademarks and
goodwill, which is estimated to be amortized over 15 years for Peridex and
20 years for Oxycal.
(b) Represents amortization of discount on contractual obligation.
(c) Represents elimination of income taxes associated with Oxycal. The
historical financial statements of Peridex reflect only direct revenues
and direct expenses of the Peridex brand of P&G and do not reflect a
provision for income taxes. It is assumed that net operating loss
carryfowards of the Company would be utilized to offset income from
Peridex and Oxycal.
(d) Includes 982,000 shares issued in connection with the Equity Financing, as
if such shares were issued on August 1, 1996.
9
<PAGE> 22
ZILA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS DATA
THREE MONTHS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
---------------HISTORICAL--------------- ------------PRO FORMA-----------
ZILA PERIDEX OXYCAL ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 10,800,182 $ 2,354,000 $ 3,868,649 $ 17,022,831
OPERATING COSTS AND EXPENSES
Cost of products sold 6,577,258 614,000 1,091,157 8,282,415
Selling, general and administrative 4,612,925 246,000 1,212,950 $ 400,000(a) 6,471,875
Merger related expenses 72,215 72,215
------------ ------------ ------------ ------------ ------------
11,262,398 860,000 2,304,107 400,000 14,826,505
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (462,216) 1,494,000 1,564,542 (400,000) 2,196,326
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income 51,133 13,242 64,375
Interest expense (11,619) (25,000)(b) (36,619)
Other income (expense) (7,088) 1,904 (5,184)
------------ ------------ ------------ ------------ ------------
32,426 15,146 (25,000) 22,572
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE (PROVISION)
BENEFIT FOR INCOME TAXES (429,790) 1,494,000 1,579,688 (425,000) 2,218,898
(PROVISION) BENEFIT FOR INCOME TAXES (678,775)(c) 678,775(c)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (429,790) $ 1,494,000 $ 900,913 $ 253,775 $ 2,218,898
============ ============ ============ ============ ============
INCOME (LOSS) PER SHARE $ (0.01) $ 0.07
============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 32,699,119 33,681,119(d)
============ ============
</TABLE>
10
<PAGE> 23
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS DATA
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997
(a) Represents the amortization of excess of assets acquired over liabilities
assumed of Peridex and Oxycal. While the Company has yet to complete the
allocation of the excess of cost over net assets acquired to the specific
assets acquired, based on its preliminary estimate, the Company believes
that the excess will be allocated principally to patents, trademarks and
goodwill, which is estimated to be amortized over 15 years for Peridex and
20 years for Oxycal.
(b) Represents amortization of discount on contractual obligation.
(c) Represents elimination of income taxes associated with Oxycal. The
historical financial statements of Peridex reflect only direct revenues
and direct expenses of the Peridex brand of P&G and do not reflect a
provision for income taxes. It is assumed that net operating loss
carryfowards of the Company would be utilized to offset income from
Peridex and Oxycal.
(d) Includes 982,000 shares issued in connection with the Equity Financing, as
if such shares were issued on August 1, 1997.
11
<PAGE> 24
(c) Exhibits
Exhibit No. Description
2 Articles of Merger and Plan of Merger *
10 Acquisition Agreement and Plan of Merger dated as of October 28, 1997 *
by and among Zila, Inc., Oxycal Laboratories, Incorporated and Zila
Acquisition Corp.
23 Consent of Deloitte and Touche LLP +
99 Press Release dated as of November 10, 1997 *
* Previously Filed
+ Filed Herewith
12
<PAGE> 25
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: January 13, 1998 By /s/ Joseph Hines
----------------
Joseph Hines
President
13
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-32805, 33-32970, and 333-42769 of Zila, Inc. on Form S-8 and in Registration
Statement Nos. 33-46239, 333-06019, 333-00645 and 333-31651 of Zila, Inc. on
Form S-3 of our report dated August 23, 1997 relating to the consolidated
financial statements of Oxycal Laboratories, Inc., appearing in this Form 8-K/A
of Zila, Inc.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
January 14, 1998
