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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 April 30, 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 April
30, 1998 was 34,651,909 shares.
Exhibit 17
Total pages 17
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TABLE OF CONTENTS
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Page no.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of April 30, 1998 and July
31, 1997 3
Condensed consolidated statements of operations for the quarters
and nine months ended April 30, 1998 and 1997 4
Condensed consolidated statements of cash flows for the nine months
ended April 30, 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 14-15
Item 4. Submission of matters to a vote of security holders 15-16
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)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
April 30, July 31,
1998 1997
------------------------ ------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,748,221 $ 2,071,563
Trade receivables - net 7,180,270 2,822,687
Other receivables 5,480 319,127
Income tax receivable 504,337 494,757
Inventories 9,660,563 4,286,627
Prepaid expenses and other assets 1,403,685 538,360
Deferred income taxes 1,087,928 245,928
------------------------ ------------------------
Total current assets 28,590,484 10,779,049
------------------------ ------------------------
PROPERTY AND EQUIPMENT - Net 5,049,323 1,865,385
PURCHASED TECHNOLOGY RIGHTS - Net 6,582,964 6,910,293
GOODWILL - Net 27,959,502 2,693,139
OTHER INTANGIBLE ASSETS - Net 2,176,673 1,228,542
OTHER ASSETS 125,061 127,624
------------------------ ------------------------
TOTAL $ 70,484,007 $ 23,604,032
======================== ========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,461,912 $ 3,262,904
Accrued liabilities 2,291,589 2,106,572
Deferred revenue 537,293 395,594
Short-term borrowing 161,834
Current portion of long-term debt 3,856,469 39,895
------------------------ ------------------------
Total current liabilities 11,309,097 5,804,965
LONG-TERM DEBT - Net of current portion 1,351,703 375,908
------------------------ ------------------------
Total liabilities 12,660,800 6,180,873
------------------------ ------------------------
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK:
Issued 30,000; outstanding 29,000 shares; liquidation
preference value: $1,220 per share 34,082,863
------------------------
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,
65,000,000 shares; issued 34,651,909 shares
(April 30, 1998) and 32,326,581 shares (July 31, 1997) 34,652 32,327
Capital in excess of par value 42,997,969 30,360,446
Deficit (19,291,852) (12,969,189)
------------------------ ------------------------
23,740,769 17,423,584
Less 42,546 common shares held by wholly-owned
subsidiary (at cost) (425) (425)
------------------------ ------------------------
Total shareholders' equity 23,740,344 17,423,159
------------------------ ------------------------
TOTAL $ 70,484,007 $ 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 NINE MONTHS ENDED APRIL 30, 1998 AND 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Quarters ended Nine months ended
----------------------------------- --------------------------------
April 30, April 30, April 30, April 30,
1998 1997 1998 1997
------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES $17,723,721 $ 9,927,993 $ 45,464,886 $28,937,730
------------- ---------------- -------------- -------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 7,924,393 6,070,037 22,544,786 17,847,550
Selling, general and administrative 8,723,764 5,123,182 20,438,362 15,208,355
Depreciation and amortization 865,909 201,319 2,116,517 729,489
Impairment charges 587,659
------------- ---------------- -------------- -------------
17,514,066 11,394,538 45,099,665 34,373,053
------------- ---------------- -------------- -------------
INCOME (LOSS) FROM OPERATIONS 209,655 (1,466,545) 365,221 (5,435,323)
------------- ---------------- -------------- -------------
OTHER INCOME (EXPENSES):
Interest income 107,480 37,093 232,129 157,092
Interest expense (97,059) (22,112) (204,217) (65,499)
Other income (expense) 585 4,477 (20,263) (17,016)
------------- ---------------- -------------- -------------
11,006 19,458 7,649 74,577
------------- ---------------- -------------- -------------
INCOME (LOSS) BEFORE INCOME
TAX BENEFIT 220,661 (1,447,087) 372,870 (5,360,746)
INCOME TAX BENEFIT 700,000 186,518
------------- ---------------- -------------- -------------
NET INCOME (LOSS) 220,661 $(1,447,087) 1,072,870 $ (5,174,228)
================ =============
PREFERRED STOCK DIVIDEND REQUIREMENT:
SERIES A EMBEDDED DIVIDEND (NOTE 2) 2,888,091 6,042,783
------------- --------------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $(2,667,430) $ (4,969,913)
============= ==============
BASIC AND DILUTED LOSS PER SHARE $ (0.08) $ (0.05) $ (0.15) $ (0.17)
============= ================ ============== =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 34,532,219 31,487,890 33,757,563 31,279,114
============= ================ ============== =============
</TABLE>
See notes to condensed consolidated financial statements.
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED APRIL 30, 1998 AND 1997
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1998 1997
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OPERATING ACTIVITIES:
Net income (loss) $ 1,072,870 $ (5,174,228)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,116,517 729,489
ESOP contributions in stock 23,177
Services paid in stock 19,494
Impairment of assets 587,659
Discount on contractual obligation 170,173
Deferred income taxes (700,000) 961,413
Change in assets and liabilities:
Receivables, net 1,488,896 222,607
Inventories (1,121,111) 764,840
Prepaid expenses and other assets (719,905) 5,667
Accounts payable and accrued expenses 170,296 196,823
Income taxes payable (1,976,369)
Deferred revenue 141,699 195,699
------------ ------------
Net cash provided by (used in) operating activities 2,619,435 (3,443,729)
------------ ------------
INVESTING ACTIVITIES:
Purchases of short-term investments (222,615)
Proceeds from sale of short-term investments 958,917
Purchases of property and equipment (1,234,388) (314,083)
Acquisitions, net of cash acquired (33,595,322)
Purchases of intangible assets (354,275) (49,352)
------------ ------------
Net cash (used in) provided by investing activities (35,183,985) 372,867
------------ ------------
FINANCING ACTIVITIES:
Principal payments on short-term borrowings (84,790) (418,438)
Net proceeds from short-term borrowings 246,624 345,784
Net proceeds from long-term debt 93,753
Net proceeds from issuance of common stock 10,379,928 882,508
Net proceeds from issuance of preferred stock 28,647,250
Principal payments on long-term debt (41,557) (20,837)
------------ ------------
Net cash provided by financing activities 39,241,208 789,017
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,676,658 (2,281,845)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 2,071,563 $ 3,491,904
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,748,221 $ 1,210,059
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 34,682 $ 65,524
============ ============
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, 1998 AND 1997
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1998 1997
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SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES FOR 1998 AND 1997:
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 6,042,783
Income tax benefit attributable to exercise of common stock options 300,000
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 sale of common stock:
Cash in escrow 2,880,000
</TABLE>
See notes to condensed consolidated financial statements.
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ZILA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. 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.
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.
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 common stock upon
conversion, based on a repricing formula. During the third quarter,
1,000 shares of the Preferred Stock were converted into common stock.
Per guidance from the Securities and Exchange Commission, the intrinsic
value of
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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 income 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 nine months ended April 30, 1997 combines historical financial
information of the Company for the nine months ended April 30, 1997 and
Peridex and Oxycal for the nine months ended March 31, 1997. The pro
forma summary data for the nine months ended April 30, 1998 combines
actual financial results of the Company for the nine months ended April
30, 1998, which includes Peridex and Oxycal results for the six months
ended April 30, 1998, and Peridex and Oxycal for the three months ended
September 30, 1997. The embedded dividend for the nine months ended
April 30, 1998 and 1997 represents 270 days of accretion and is based
on the assumption that the Preferred Stock had been issued at the
beginning of each period.
PRO FORMA - NINE MONTHS ENDED APRIL 30, 1998 AND 1997:
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Revenues $49,221,183 $50,541,139
Net income $5,461,442 $4,867,525
Series A Preferred Stock
embedded dividend $7,314,600 $7,314,600
Net loss available to
Common Shareholders $(1,853,158) $(2,447,075)
Basic loss per share $(0.05) $(0.08)
</TABLE>
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3. 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 nine months ended April 30, 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 nine months ended April
30, 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 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
nine months ended April 30, 1998 because their effect would also be
antidilutive.
4. Inventories consist of the following:
<TABLE>
<CAPTION>
April 30, July 31,
1998 1997
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<S> <C> <C>
Finished goods $7,717,910 $4,381,339
Raw materials 2,333,711 451,563
Inventory reserves (391,058) (546,275)
---------- ----------
$9,660,563 $4,286,627
========== ==========
</TABLE>
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5. 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.
6. 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. Subsequently, the appellate court upheld the lower
court's summary judgement in favor of Bio-Dental. Accordingly,
Bio-Dental reversed $350,000 representing the remaining amount of the
accrued liability.
Upon consummation of the Company's merger with Bio-Dental, each of the
outstanding shares of Bio-Dental common stock was converted into .825
shares of the Company's common stock. Subsequent to the merger, the
Company's stock transfer agent was presented with a certificate
purporting to represent 220,000 shares of Bio-Dental common stock which
did not appear on the records of Bio-Dental's stock transfer agent as
of the closing date. The Company is currently investigating this matter
and has not determined whether any shares of the Company's common stock
are required to be issued in exchange for the shares purportedly
represented by this certificate.
The Company 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.
7. 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 in January 1998. The commitment period
expires September, 1998.
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8. Deferred income taxes reflect the tax effect of temporary differences
between the amounts of assets and liabilities recognized for financial
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).
9. 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 April 30, 1998, the Company had net
income of $220,661 compared to a net loss of $1,447,087 for the quarter ended
April 30, 1997. For the nine month period ended April 30, 1998, the Company had
net income of $1,072,870 compared to a net loss of $5,174,228 for the nine month
period ended April 30, 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 accretion of such dividend in the amount of
$2,888,091 for the quarter and $6,042,783 for the nine months ended April 30,
1998. Therefore, for the quarter and nine months ended April 30, 1998, when
taking into account the non-cash embedded dividend, the Company had a net loss
available to common shareholders of $2,667,430 and $4,969,913, respectively.
Revenues during the third quarter of the current fiscal year
totaled $17,723,721 compared to revenues of $9,927,993 during the third quarter
of the prior fiscal year, a 78.5% increase. For the first nine months of this
fiscal year, revenues were $45,464,886 compared to $28,937,730 for the same
period of the prior fiscal year, a 57.1% 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 nine months ended April 30,
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
44.7% in the quarter ended April 30, 1998 from 61.1% in the quarter ended April
30, 1997 and to 49.6% from 61.7% for the nine 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
$3,600,582 from $5,123,182 in the third quarter of fiscal year 1997 to
$8,723,764 for the same period in fiscal year 1998 and increased $5,230,007 from
15,208,355 during the nine months of fiscal 1997 to $20,438,362 during the nine
months of fiscal 1998. These increases are attributable mainly to selling,
general and administrative expenses resulting from the Oxycal and Peridex
acquisitions. 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 $664,590 from
$201,319 in the third quarter of fiscal 1997 to $865,909 for the same period in
fiscal year 1998 and increased $1,387,028 from $729,489 during the nine months
of fiscal 1997 to $2,116,517 during the nine 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.
Impairment charges during the first nine 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.
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 April 30, 1998, the Company had net working capital of
$17,281,387 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 April 30, 1998 were $7,180,270 compared to net receivables at July
31, 1997 of $2,822,687. Trade accounts receivable as a percentage of quarterly
net sales of $17,723,721 were 40.5% at April 30, 1998 as compared to 29.1% at
July 31, 1997 which had quarterly net sales of $9,712,162. The increase is due
mainly to extended terms granted in connection with the launch of new product
lines in the camera and digital x-ray business and receivables related to Oxycal
and Peridex.
At April 30, 1998, the Company had inventories of $9,660,563,
an increase of $5,373,936 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 quarter 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 nine months ended April 30, 1998
increased when compared to the nine month period ended April 30, 1997, primarily
as the result of the Company's net income in the current fiscal period versus a
net loss
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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. The Company was committed to sell $10 million of its common stock to the
Investor over the commitment period and fulfilled this commitment in January
1998. The commitment period expires September, 1998 and the Company does not
anticipate utilizing the Equity Line during the remaining commitment period.
The Company obtained a $2,000,000 bank line of credit in April 1998,
which is secured by trade accounts receivable, inventories and rights to
payment. This line of credit expires December 31, 1998. Interest is payable
monthly on the unpaid balance outstanding at the bank's prime rate (8.5% at
April 30, 1998) plus .50%. At April 30, 1998, the Company had no borrowings
against this line.
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.
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.
14
<PAGE> 15
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. Subsequently, the appellate court upheld the
lower court's summary judgment in favor of Bio-Dental. Accordingly, Bio-Dental
reversed $350,000 representing the remaining amount of accrued liability.
Schick. In April 1998, Cygnus received a letter from Schick
Technologies, Inc. ("Schick") demanding that Cygnus "cease and desist" from
disseminating allegedly false and misleading advertising regarding Cygnus'
digital x-ray system. After settlement negotiations stalled, Cygnus filed a
complaint in the United Stated District Court for the District of Arizona
seeking a declaratory judgment that the statements in Cygnus' advertising were
true and not misleading. In response, Schick filed a complaint in the United
States District Court for the Southern District of New York alleging that
Cygnus' advertising is false and misleading. Both parties seek monetary damages,
attorney fees and injunctions against the opposite party making misstatements
about the other. This litigation is still in its preliminary stages and it is
currently not possible to determine the impact, if any, on the Company.
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 a Special Meeting of Stockholders on April
14, 1998.
(b) At the Special Meeting of Stockholders, the Company's
stockholders ratified the increase in the number of authorized
shares of the Company from fifty million shares to sixty-five
million shares. The vote was as follows:
Votes for Votes withheld Votes against
28,269,278 313,366 1,622,916
15
<PAGE> 16
(c) At the Special Meeting of Stockholders, the Company's
stockholders ratified the issuance of 30,000 shares of the
Company's Series A Redeemable Convertible Preferred Stock,
$.001 par value. The vote was as follows:
Votes for Votes withheld Votes against
14,676,412 416,140 1,588,254
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
None
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 15, 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
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