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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 January 31, 1998 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
January 31, 1998 was 34,418,024 shares.
Exhibit 17
Total pages 17
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TABLE OF CONTENTS
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Page no.
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of January 31, 1998 and July 31, 1997
3
Condensed consolidated statements of operations for the quarters and six months
ended January 31, 1998 and 1997 4
Condensed consolidated statements of cash flows for the six months ended January 31,
1998 and 1997 5-6
Notes to unaudited condensed consolidated financial statements 7-11
Item 2. Management's discussion and analysis of financial condition and results of operations 12-14
PART II. OTHER INFORMATION
Item 1. Legal proceedings 15
Item 4. Submission of matters to a vote of security holders 15
Item 5. Other information 16
Item 6. Exhibits and reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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January 31, July 31,
1998 1997
ASSETS
------------ ------------
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CURRENT ASSETS:
Cash and cash equivalents $ 7,047,390 $ 2,071,563
Trade receivables - net 5,448,299 2,822,687
Other receivables 108,671 319,127
Income tax receivable 3,052,402 494,757
Inventories 9,597,885 4,286,627
Prepaid expenses and other assets 1,105,655 538,360
Deferred income taxes 1,087,928 245,928
------------ ------------
Total current assets 27,448,230 10,779,049
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PROPERTY AND EQUIPMENT - Net 4,771,495 1,865,385
PURCHASED TECHNOLOGY RIGHTS - Net 6,692,074 6,910,293
GOODWILL - Net 28,429,120 2,693,139
OTHER INTANGIBLE ASSETS - Net 2,118,022 1,228,542
OTHER ASSETS 115,619 127,624
------------ ------------
TOTAL $ 69,574,560 $ 23,604,032
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,897,047 $ 3,262,904
Accrued liabilities 2,578,698 2,106,572
Deferred revenue 491,411 395,594
Short-term borrowing 43,764
Current portion of long-term debt 3,907,140 39,895
------------ ------------
Total current liabilities 10,918,060 5,804,965
LONG-TERM DEBT - Net of current portion 1,238,019 375,908
------------ ------------
Total liabilities 12,156,079 6,180,873
------------ ------------
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK:
Issued 30,000 shares; liquidation preference
value: $1,220 per share 32,395,092
------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value - authorized
2,500,000 shares; issued 30,000
shares of Series A Preferred Stock
Common stock, $.001 par value - authorized,
50,000,000 shares; issued 34,418,024 shares
(January 31, 1998) and 32,326,581 shares (July 31, 1997) 34,418 32,327
Capital in excess of par value 41,613,818 30,360,446
Deficit (16,624,422) (12,969,189)
------------ ------------
25,023,814 17,423,584
Less 42,546 common shares held by wholly-owned
subsidiary (at cost) (425) (425)
------------ ------------
Total shareholders' equity 25,023,389 17,423,159
------------ ------------
TOTAL $ 69,574,560 $ 23,604,032
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTERS AND SIX MONTHS ENDED JANUARY 31, 1998 AND 1997
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<CAPTION>
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Quarters ended Six months ended
------------------------------------------ -----------------------------------------
January 31, January 31, January 31, January 31,
1998 1997 1998 1997
------------------ ------------------- ------------------- -----------------
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REVENUES $ 16,940,983 $ 9,779,214 $ 27,741,165 $ 19,009,737
------------------ ------------------- ------------------- -----------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 8,118,806 6,058,936 14,696,064 11,777,513
Selling, general and administrative 7,121,367 4,534,207 11,408,295 8,696,367
Depreciation and amortization 917,626 245,969 1,250,608 528,170
Merger related expenses 158,417 178,730 230,632 328,555
Impairment charges 587,659
Litigation expenses 227,500 1,060,251
------------------ ------------------- ------------------- -----------------
16,316,216 11,245,342 27,585,599 22,978,515
------------------ ------------------- ------------------- -----------------
INCOME (LOSS) FROM OPERATIONS 624,767 (1,466,128) 155,566 (3,968,778)
------------------ ------------------- ------------------- -----------------
OTHER INCOME (EXPENSES):
Interest income 73,516 56,551 124,649 119,999
Interest expense (95,539) (26,594) (107,158) (43,387)
Other expense (20,745) (19,448) (20,848) (21,493)
------------------ ------------------- ------------------- -----------------
(42,768) 10,509 (3,357) 55,119
------------------ ------------------- ------------------- -----------------
INCOME (LOSS) BEFORE INCOME
TAX BENEFIT 581,999 (1,455,619) 152,209 (3,913,659)
INCOME TAX BENEFIT 700,000 700,000 186,518
------------------ ------------------- ------------------- -----------------
NET INCOME (LOSS) 1,281,999 $ (1,455,619) 852,209 $(3,727,141)
=================== =================
PREFERRED STOCK DIVIDEND REQUIREMENT:
SERIES A EMBEDDED DIVIDEND (NOTE 2) 3,154,692 3,154,692
------------------ -------------------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (1,872,693) $ (2,302,483)
================== ===================
BASIC AND DILUTED LOSS PER SHARE $ (0.05) $ (0.05) $ (0.07) $ (0.12)
================== =================== =================== =================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 34,058,097 31,184,990 33,381,442 31,160,359
================== =================== =================== =================
</TABLE>
See notes to condensed consolidated financial statements.
4
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JANUARY 31, 1998 AND 1997
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1998 1997
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OPERATING ACTIVITIES:
Net income (loss) $ 852,209 $ (3,727,141)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,250,608 528,170
ESOP contributions in stock 23,177
Services paid in stock 19,494
Impairment of assets 587,659
Discount on contractual obligation 85,404
Deferred income taxes (700,000) 676,111
Change in assets and liabilities:
Receivables, net 569,611 669,684
Inventories (1,058,433) 194,803
Prepaid expenses and other assets (412,434) (81,071)
Accounts payable and accrued expenses (107,460) 588,643
Income taxes payable (1,976,369)
Deferred revenue 95,817 140,529
----------- ------------
Net cash provided by (used in) operating activities 575,322 (2,356,311)
----------- ------------
INVESTING ACTIVITIES:
Purchases of short-term investments (222,615)
Proceeds from sale of short-term investments 958,917
Purchases of property and equipment (715,653) (166,702)
Acquisitions, net of cash acquired (33,595,322)
Purchases of intangible assets (249,349) (47,904)
----------- ------------
Net cash (used in) provided by investing activities (34,560,324) 521,696
----------- ------------
FINANCING ACTIVITIES:
Principal payments on short-term borrowings (32,981)
Net proceeds from short-term borrowings 76,745 63,420
Net proceeds from long-term debt 93,753
Net proceeds from issuance of common stock 10,195,863 425,328
Net proceeds from issuance of preferred stock 28,647,250
Principal payments on long-term debt (19,801) (13,892)
----------- ------------
Net cash provided by financing activities 38,960,829 474,856
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,975,827 (1,359,759)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 2,071,563 $ 3,491,904
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,047,390 $ 2,132,145
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 22,391 $ 43,387
=========== ============
Cash paid for income taxes $ -- $ 1,167,369
=========== ============
</TABLE>
Continued
5
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
SIX MONTHS ENDED JANUARY 31, 1998 AND 1997
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES FOR 1998:
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Contractual obligation recorded in connection with the acquisition of
Peridex $ 5,570,000
Embedded dividend recorded in connection with issuance of
Series A Convertible Redeemable Preferred Stock $ 3,154,692
Income tax benefit attributable to exercise of common stock options $ 300,000
</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 condensed 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"), Cygnus Imaging, Inc. ("Cygnus"), and Oxycal
Laboratories, Inc. ("Oxycal"). All significant intercompany balances
and transactions are eliminated in consolidation.
2. On November 5, 1997, the Company's Zila Pharmaceuticals, Inc.
subsidiary completed its acquisition of the Peridex(R) product line
("Peridex"), a prescription anti-bacterial oral rinse from The Procter
& Gamble Company ("P&G"). The purchase price was $12,000,000 plus the
value of acquired inventory. Payment of the purchase price was
structured as follows: $6,000,000 paid at closing, $1,000,000 payable
within 30 days after closing, $3,000,000 payable within 180 days after
closing, $1,000,000 is payable within 12 months after closing, and
$1,000,000 is payable within 24 months after closing.
On November 10, 1997, the Company acquired, by merger, Oxycal
Laboratories, Incorporated ("Oxycal"). Oxycal develops, manufactures
and markets a patented, enhanced form of Vitamin C under the trademark
Ester-C(R). The Company paid $28,000,000 for all outstanding shares of
Oxycal. The Company raised the funds to consummate the Merger in a
private placement of 30,000 shares of the Company's Series A
Convertible Redeemable Preferred Stock ("Preferred Stock") and warrants
to purchase 360,000 shares of the Company's Common Stock for
$30,000,000.
The Preferred Stock is convertible into shares of the Company's common
stock at a conversion rate based on the price of such common stock at
the date of issuance. However, if the market price of the Company's
common stock does not appreciate by a fixed percentage at various
measurement dates, the holders of the Preferred Stock have the right to
receive additional shares of the Company's
7
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common stock upon conversion, based on a repricing formula. Per
guidance from the Securities and Exchange Commission, the intrinsic
value of the beneficial conversion feature of the Preferred Stock has
been measured and recognized as an embedded dividend and such non-cash
embedded dividend has been deducted from net income in the accompanying
condensed consolidated statement of operations to arrive at the amount
of net loss available to common shareholders. Additionally, because
the Preferred Stock has conditions for redemption that are not solely
within the control of the Company, it has been classified outside of
permanent equity in the accompanying condensed consolidated balance
sheet and is being accreted to its redemption value.
The Peridex and Oxycal acquisitions were accounted for using the
purchase method of accounting for business combinations. In connection
with the Oxycal acquisition, the Company has not yet completed the
process of allocating the excess of assets acquired over liabilities
assumed to specific assets and liabilities, but believes that this
excess will relate principally to goodwill, which will be amortized
over 20 years. In connection with the Peridex acquisition, the excess
has been allocated to goodwill and is being amortized over 12 years.
Results of operations of Peridex and Oxycal have been included in the
Company's statement of operations from their respective acquisition
dates.
The following pro forma summary presents the consolidated results of
operations as if the acquisitions had occurred as of the beginning of
each period presented and do not purport to be indicative of what would
have occurred had the acquisitions been made as of those dates or of
results which may occur in the future. The pro forma summary data for
the six months ended January 31, 1997 combines historical financial
information of the Company for the six months ended January 31, 1997
and Peridex and Oxycal for the six months ended December 31, 1996. The
pro forma summary data for the six months ended January 31, 1998
combines actual financial results of the Company for the six months
ended January 31, 1998, which includes Peridex and Oxycal results for
the three months ended January 31, 1998, and Peridex and Oxycal for the
three months ended September 30, 1997. The embedded dividend for the
six months ended January 31, 1998 and 1997 represents 180 days of
accretion and is based on the assumption that the Preferred Stock had
been issued at the beginning of each period.
PRO FORMA - SIX MONTHS ENDED JANUARY 31, 1998 AND 1997:
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1998 1997
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<S> <C> <C>
Revenues $33,963,814 $33,396,505
Net income $3,203,646 $3,017,553
Series A Preferred Stock embedded dividend
$6,038,942 $6,038,942
</TABLE>
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<TABLE>
<S> <C> <C>
Net loss available to Common Shareholders $(2,835,296) $(3,021,389)
Basic loss per share $(0.08) $(0.10)
</TABLE>
3. The Company has scheduled a special meeting of its shareholders on
April 14, 1998, seeking ratification of the sale of the Series A
Preferred Stock in accordance with the terms of the securities purchase
agreement relating to the sale of the Preferred Stock which requires,
at the request of the holders of the Preferred Stock, the Company to
hold a special meeting in the event the average market price of the
Company's Common Stock drops below $6.50 per share. The shareholders
will be asked to ratify the terms of the sale of the Preferred Stock
and, in the event a majority of the Company's shareholders do not vote
in favor of such proposal, the holders of the Preferred Stock could
(depending on the price of the common stock on the date of conversion)
be limited in their ability to fully convert their shares of Preferred
Stock into Common Stock of the Company. The securities purchase
agreement relating to the sale of the Preferred Stock provides that if
the holders of the Preferred Stock are unable to fully convert their
shares, they have the right to require the Company to repurchase those
shares of Preferred Stock that cannot be converted. If the Company is
required to repurchase a significant percentage of the Preferred Stock,
such repurchase could have a significant adverse impact on the Company
depending on the price of the Common Stock on the date of repurchase.
4. In March 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share", which is effective for financial statements for both
interim and annual periods ending after December 15, 1997. The Company
has implemented this Statement and, as required, has restated earnings
per share ("EPS") for all periods presented. This new standard requires
dual presentation of "basic" and "diluted" EPS on the face of the
statement of operations and requires a reconciliation of the numerator
and denominator of basic and diluted EPS calculations. Basic earnings
per common share is computed on the weighted average number of shares
of common stock outstanding during each period. Diluted earnings per
common share is computed on the weighted average number of shares of
common stock outstanding plus additional shares that would have been
outstanding if all dilutive potential common shares had been issued.
The Company's loss per common share is computed by taking the net
income for the quarter and six months ended January 31, 1998 and
deducting the Series A Preferred Stock embedded dividend and dividing
the sum of these amounts by the weighted average number of shares
outstanding during each period.
Options and warrants to purchase shares of common stock at various
prices were outstanding during the quarter and six months ended January
31, 1998 and 1997 but were not included in the computation of diluted
earnings per share because their effect would be antidilutive. In
addition, the incremental shares
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from assumed conversion of Series A Convertible Preferred Stock to
shares of common stock were not included in the computation of diluted
earnings per share for the quarter and six months ended January 31,
1998 because their effect would also be antidilutive.
5. Inventories consist of the following:
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<CAPTION>
January 31, July 31,
1998 1997
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<S> <C> <C>
Finished goods $6,042,011 $4,381,339
Raw materials 3,984,618 451,563
Inventory reserves (428,744) (546,275)
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$9,597,885 $4,286,627
=========== ============
</TABLE>
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. 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. Bio-Dental
will continue to vigorously defend against the claims set forth in the
lawsuit. In September 1996, Bio-Dental accrued a liability of $450,000
because it decided to attempt a settlement of this litigation.
Bio-Dental's attempt was not successful. In January 1997, a judgement
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 judgement.
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
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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 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.
8. Under the Company's Equity Line Agreement with Deere Park Capital
Management (the "Investor"), the Company is allowed to sell up to $25
million of its common stock. The Company was committed to sell $10
million of its common stock to the Investor over the commitment period
and fulfilled this commitment with the sale of $2,000,000 of the
Company's common stock in January 1998. The proceeds are to be used for
general corporate purposes.
9. Deferred income taxes reflect the tax effect of temporary differences
between the amounts of assets and liabilities recognized for finacial
reporting and tax purposes. In the past, the Company had fully offset
its net deferred tax asset with a valuation allowance due to the
Company's lack of earnings history. For the quarter ended January 31,
1998, the Company returned to profitability and as a result recorded an
income tax benefit of $1,000,000 ($300,000 of which was attributable to
the exercise of common stock options and therefore was credited to
capital in excess of par value).
10. In June 1997, the 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 established 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 to
shareholders. It also establishes standards for disclosures about
products and services, geographic areas and major customers. Both
statements are effective for fiscal years beginning after December 15,
1997. The Company has not completed evaluating the impact of
implementing the provisions of SFAS Nos. 130 and 131.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ZILA, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS:
For the quarter ended January 31, 1998, the Company had net
income of $1,281,999 compared to a net loss of $1,455,619 for the quarter ended
January 31, 1997. For the six month period ended January 31, 1998, the Company
had net income of $852,209 compared to a net loss of $3,727,141 for the six
month period ended January 31, 1997.
Additionally, as a result of the embedded dividend on the
Series A Preferred Stock issued in November 1997, net income available to common
shareholders has been reduced by the $3,154,692 accretion of such dividend
during the quarter and six months ended January 31, 1998. Therefore, for the
quarter and six months ended January 31, 1998, when taking into account the
embedded dividend, the Company had a net loss available to common shareholders
of $1,872,693 and $2,302,483, respectively.
Revenues during the second quarter of the current fiscal year
totaled $16,940,983 compared to revenues of $9,779,214 during the second quarter
of the prior fiscal year, a 73.2% increase. For the first six months of this
fiscal year, revenues were $27,741,165 compared to $19,009,737 for the same
period of the prior fiscal year, a 45.9% increase. The growth in revenues was
primarily attributable to the Company's acquisitions of Oxycal and Peridex.
Additional growth in revenues during the quarter and six months ended January
31, 1998 was attributable to the Company's Zilactin family of products, software
and dental supply sales.
Cost of products sold as a percentage of revenues decreased to
47.9% in the quarter ended January 31, 1998 from 62.0% in the quarter ended
January 31, 1997 and to 53.0% from 62.0% for the six month periods in 1998 and
1997, respectively. These decreases are primarily due to lower costs resulting
from the acquisitions of Oxycal and the Peridex(R) product line.
Selling, general and administrative expenses increased
$2,587,160 from $4,534,207 in the second quarter of fiscal year 1997 to
$7,121,367 for the same period in fiscal year 1998 and increased $2,711,928 from
8,696,367 during the six months of fiscal 1997 to $11,408,295 during the six
months of fiscal 1998. These increases are attributable mainly to selling,
general and administrative expenses resulting from the Oxycal acquisition.
Additional expenses were incurred related to regulatory, pre-marketing and
clinical activities associated with the Company's OraTest oral cancer detection
system.
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Depreciation and amortization expenses increased $671,657 from
$245,969 in the second quarter of fiscal 1997 to $917,626 for the same period in
fiscal year 1998 and increased $722,438 from $528,170 during the six months of
fiscal 1997 to $1,250,608 during the six months of fiscal 1998. The increases
are mainly due to the additional amortization of goodwill from the Oxycal and
Peridex acquisitions which occurred during the second quarter of fiscal 1998 and
the Cygnus acquisition which occurred during the third quarter of fiscal 1997.
Merger related expenses decreased $20,313 from $178,730 in the
second quarter of the prior fiscal year to $158,417 in the second quarter of the
1998 fiscal year. For the six months ended January 31, 1998, merger related
expenses decreased to $230,632 from $328,555 from the same period last year.
Merger related expenses during the first six months of fiscal 1997 related to
the acquisition of Bio-Dental, whereas the expenses incurred during the first
six months of fiscal 1998 relate to the acquisitions of Oxycal and the
Peridex(R) product line.
Impairment charges during the first six months of fiscal year
1997 of $587,659 related to an impairment loss recognized to reduce the carrying
value of certain Bio-Dental long-lived assets including goodwill and software
rights.
Litigation expenses of $227,500 for the quarter and $1,060,251
for the six months ended January 31, 1997, related to legal expenses arising out
of the Company's efforts to prevent infringements on the Zilactin patents and an
accrual of a liability based on the Company's attempted settlement of the
litigation described in Note 7 to the financial statements (See "Part II - Other
Information Item 1 - Legal Proceedings").
In the past, the Company had fully offset its net deferred tax
asset with a valuation allowance due to the Company's lack of earnings history.
For the quarter ended January 31, 1998, the Company returned to profitability
and as a result recorded an income tax benefit of $1,000,000 ($300,000 of which
was attributable to the exercise of common stock options and therefore was
credited to capital in excess of par value).
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, the Company had net working capital of
$16,530,170 and its current ratio was 2.5 to 1, an increase from the $4,974,084
of net working capital and 1.9 to 1 current ratio at July 31, 1997.
Trade accounts receivable, net of allowance for uncollectible
accounts at January 31, 1998 were $5,448,299 compared to net receivables at July
31, 1997 of $2,822,687. Trade accounts receivable as a percentage of quarterly
net sales of $16,839,471 were 32.4% at January 31, 1998 as compared to 29.1% at
July 31, 1997 which had quarterly net sales of $9,712,162.
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At January 31, 1998, the Company had inventories of
$9,597,885, an increase of $5,311,258 from inventories at July 31, 1997. The
increase is mainly due to inventories acquired in the Oxycal and Peridex
acquisitions. The Company will need to build up inventories of Peridex over the
last six months of fiscal 1998 to prepare for a short-term stoppage in
production due to a change in contract manufacturers of Peridex. The Company
believes current inventories, other than Peridex, are at levels necessary to
support market expansion and to maintain adequate liquidity.
Operating cash flows for the six months ended January 31, 1998
increased when compared to the six month period ended January 31, 1997,
primarily as the result of the Company's net income in the current fiscal period
versus a net loss in the prior comparative period, offset in part by the
differences in the net changes in working capital items in each period.
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 fund future OraTest manufacturing and marketing costs, Peridex
contractual obligation payments and the buildup of Peridex inventories. The
Company's Equity Line Agreement (the "Investment Agreement") with Deere Park
Capital Management allows the Company to raise a total of $25 million through
the sale of its common stock. As of January 31, 1998, the Company has raised $13
million under the Investment Agreement.
The Company has not completed its evaluation of the impact the
Year 2000 computer problem may have on its business. However, the Company does
not expect the costs to address the problem to be material and it does not
expect the consequences of incomplete or untimely resolution of the problem to
materially impact the operation of its business.
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 "Risks and Uncertainties Section" in the Company's
Form 10-K for the year ended July 31, 1997, which identifies some important
factors that could cause actual results to differ materially from those
contained in such forward-looking statements.
14
<PAGE> 15
PART II - OTHER INFORMATION
Item 1.- Legal Proceedings
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. Bio-Dental will
continue to vigorously defend against the claims set forth in the lawsuit. In
September 1996, Bio-Dental accrued a liability of $450,000 because it decided to
attempt a settlement of this litigation. Bio-Dental's attempt was not
successful. In January 1997, a judgement 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 judgement.
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 4 - Submission of matters to a vote of security holders.
(a) The Company held its Annual Meeting on December 11, 1997.
(b) Joseph Hines, Clarence J. Baudhuin, Michael Lesser, Patrick M.
Lonergan, Carl A. Schroeder, Curtis M. Rocca III, and Douglas
L. Ayer were elected directors of the Company at the Annual
Meeting.
(c) At the Annual Meeting, the Company's stockholders ratified
Deloitte & Touche LLP as auditors for the Company for its 1998
fiscal year. The vote was as follows:
<TABLE>
<CAPTION>
Votes for Votes withheld Votes against
--------- -------------- -------------
<S> <C> <C> <C>
29,963,122 168,094 72,011
</TABLE>
At the Annual Meeting, the Company's stockholders ratified the
adoption of the 1997 Stock Option Award Plan. The vote was as
follows:
<TABLE>
<CAPTION>
Votes for Votes withheld Votes against
--------- -------------- -------------
<S> <C> <C> <C>
28,626,937 494,018 1,227,940
</TABLE>
15
<PAGE> 16
Item 5 - Other information
None
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 November 21, 1997, the Company filed a Current Report on
Form 8-K to report that it had acquired the Peridex(R) product
line. This Form 8-K was subsequently amended on December 9,
1997, January 14, 1998 and January 21, 1998.
On November 25, 1997, the Company filed a Current Report on
Form 8-K to report that it had acquired Oxycal Laboratories,
Inc. This Form 8-K was subsequently amended on January 14,
1998 and January 21, 1998.
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: March 17, 1998 By /s/Joseph Hines
---------------- ---------------
Joseph Hines
President, Chairman of the Board
(Principal Executive Officer)
By /s/Bradley C. Anderson
Bradley C. Anderson
Vice President and
Chief Financial Officer
(Principal Financial & Accounting
Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-1-1997
<PERIOD-END> JAN-31-1998
<CASH> 7,047,390
<SECURITIES> 0
<RECEIVABLES> 5,674,681
<ALLOWANCES> (226,382)
<INVENTORY> 9,597,885
<CURRENT-ASSETS> 27,448,230
<PP&E> 7,377,168
<DEPRECIATION> (2,605,673)
<TOTAL-ASSETS> 69,574,560
<CURRENT-LIABILITIES> 10,918,060
<BONDS> 1,238,019
0
32,395,092
<COMMON> 34,418
<OTHER-SE> 24,988,971
<TOTAL-LIABILITY-AND-EQUITY> 69,574,560
<SALES> 27,624,220
<TOTAL-REVENUES> 27,741,165
<CGS> 14,696,064
<TOTAL-COSTS> 27,354,967
<OTHER-EXPENSES> 230,632
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107,158
<INCOME-PRETAX> 152,209
<INCOME-TAX> 700,000
<INCOME-CONTINUING> 852,209
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,302,483)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
