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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 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)
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DELAWARE 86-0619668
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
5227 NORTH 7TH STREET, PHOENIX, ARIZONA 85014-2800
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (602) 266-6700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At September 30, 1998, the aggregate market value of common stock held
by non-affiliates of the Registrant was approximately $151,187,200.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] N/A
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
At September 30, 1998, the number of shares of common stock outstanding
was 35,088,046.
DOCUMENTS INCORPORATED BY REFERENCE
Materials from the Registrant's 1998 Proxy Statement have been
incorporated by reference into Part III, Items 10, 11, 12 and 13.
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TABLE OF CONTENTS
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PAGE
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PART I .........................................................................................................1
Item 1. BUSINESS........................................................................................1
Item 2. PROPERTIES.....................................................................................16
Item 3. LEGAL PROCEEDINGS..............................................................................16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................17
PART II ........................................................................................................18
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS........................................................................................18
Item 6. SELECTED FINANCIAL DATA........................................................................18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..........................................................................19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................22
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES......................................................................22
PART III ........................................................................................................23
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY...............................................23
Item 11. EXECUTIVE COMPENSATION........................................................................23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................23
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................23
PART IV ........................................................................................................24
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8................................24
SIGNATURES.......................................................................................................26
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PART I
ITEM 1. BUSINESS
GENERAL
Zila, Inc., a Delaware corporation, is an international manufacturer
and marketer of pharmaceutical, biomedical, dental, and nutritional products.
The Company's business is organized into three major product groups:
Pharmaceutical Products, Professional Products and Nutraceutical Products.
Unless the context otherwise indicates, the terms "Zila" and "Company" as used
herein refer to Zila, Inc. and each of its subsidiaries.
The Pharmaceutical Products Group consists of over-the-counter and
prescription products, including the Zilactin(R) family of over-the-counter
products, Peridex(R) prescription mouth rinse and OraTest(R), an oral cancer
diagnostic system. Included in the Pharmaceutical Products Group is Zila
Pharmaceuticals, Inc., a Nevada corporation, a wholly owned subsidiary of the
Company.
The Professional Products Group operates through the Company's wholly
owned subsidiaries Biodental Technologies Corporation, a California corporation,
and Cygnus Imaging, Inc., an Arizona corporation. Biodental Technologies
Corporation has two subsidiaries, Ryker Dental of Kentucky, Inc. a Kentucky
corporation, which does business under the name Zila Dental Supply and is a
national distributor of professional dental supplies, and Integrated Dental
Technologies, Inc., a California corporation which distributes
PracticeWorks(TM), the Company's dental practice management software. Cygnus
Imaging, Inc. ("Cygnus") is a manufacturer and marketer of digital x-ray systems
and intraoral cameras.
The Nutraceutical Products Group includes Oxycal Laboratories,
Incorporated, an Arizona corporation, ("Oxycal") and its two subsidiaries
Inter-Cal Corporation, Inc, an Arizona corporation, and Oxycal Export, Inc. a
U.S. Virgin Islands corporation. Oxycal and its subsidiaries manufacture and
distribute a patented and enhanced form of vitamin C under the trademark
Ester-C(R).
The Company's principal executive offices are located at 5227 North
Seventh Street, Phoenix, Arizona 85014-2800, and its telephone number is (602)
266-6700.
PRODUCTS
PHARMACEUTICAL PRODUCTS GROUP
- - Zilactin(R) The Zilactin(R) line includes five over-the-counter
("OTC"), non-prescription products: Zilactin(R),
Zilactin(R)-B, Zilactin(R)-L, Zilactin(R)-Lip and
Zilactin(R) Baby. The Zilactin(R) products are
used topically for the purposes described below:
- ZILACTIN(R) -- a protective film for canker
sores, cold sores and fever blisters.
- ZILACTIN(R)-B -- Zilactin(R)-B is a
medicated gel containing benzocaine with the
film-forming properties of Zilactin(R).
Zilactin(R)-B has been formulated for a
segment of the market which prefers a
film-forming application with a topical
anesthetic. Zilactin(R)-B quickly controls
the pain associated with mouth sores while
shielding them from the environment of the
mouth.
- ZILACTIN(R)-L -- a liquid for treating
developing fever blisters and cold sores.
- ZILACTIN(R)-Lip -- Zilactin(R)-Lip is
positioned to be a premium-priced, effective
alternative to existing lip balms.
Zilactin(R)-Lip prevents sun blisters and
treats cold sores and dry, chapped lips.
Most other competing products only perform
one or two of such applications.
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- ZILACTIN(R)-Baby -- Zilactin(R)-Baby is a
new medication for teething pain which the
Company began distributing in June 1997.
Zilactin(R)-Baby contains a higher level of
benzocaine than competing products, and has
a cool grape flavor. Unlike other teething
gels, it does not contain saccharin or
coloring dyes.
The Zilactin(R) treatment composition is covered by
several patents owned by the Company. These patents cover
the composition and the film-forming properties of the
product formula. See "Business -- Patents and
Trademarks." Zilactin(R), Zilactin(R)-B, and
Zilactin(R)-L formulas incorporate these proprietary
treatment compositions.
Zilactin(R) and Zilactin(R)-B are packaged as gels in .25
ounce plastic tubes. Zilactin(R)-L, is a liquid packaged
in a 10 cc plastic bottle. The products are applied
directly to affected areas in quantities large enough to
cover the lesion with the gel or liquid. The gels contain
an active ingredient which forms a thin, transparent,
pliable film that holds the active ingredient against the
affected tissue and keeps the affected area clean. The
film can last up to six hours inside the mouth, a feature
which makes the formulation suitable for a variety of
dental applications.
In addition to its over-the-counter applications,
Zilactin(R) is being used by dentists to treat patients
with canker sores and other oral mucosal ulcers or
lesions, and has been evaluated in dental schools at
selected major universities. Zilactin(R) was originally
developed as a treatment for herpes virus lesions. The
most common form is Herpes Simplex Type I, which is the
cause of fever blisters and cold sores. Herpes Simplex
Type II is the cause of genital herpes. Other types of
herpes infections include chicken pox, shingles (herpes
zoster), mononucleosis and the Epstein-Barr Virus.
Depending principally on the availability of resources,
the Company may explore the development of new products,
including the addition of other medications into the
Zilactin(R) vehicle, and/or the approval of existing
products as recognized treatments for Type II herpes and
such other viruses. However, the Company currently does
not market Zilactin(R) as a treatment for genital herpes
or shingles.
The Company believes that superior efficacy and targeted
marketing efforts are the reason that three independent
pharmacist research studies reported that Zilactin(R) is
the number one OTC product pharmacists recommend for
treating canker sores and cold sores.
- - Peridex(R) Peridex(R) is a prescription antibacterial oral rinse
used between dental visits as part of a professional
program for the treatment of gingivitis. The active
ingredient in Peridex(R) is 0.12% chloride glucomate.
Peridex(R) was the first rinse to receive the American
Dental Association seal for reduction of plaque
and gingivitis. Peridex(R) effectively controls
the oral bacteria associated with periodontal
disease, particularly in the first and only completely
reversible stage, gingivitis. Controlling gum disease
at its earliest stage is important because, if
left untreated, gingivitis can progress to
periodontitis, resulting in destruction of the
periodontal structure and supporting bone. The
Company acquired the Peridex(R) product line from
Procter & Gamble on November 5, 1997 for $12.0 million
plus the value of acquired inventory.
- - OraTest(R) The OraTest(R) product, a diagnostic adjunct for oral
cancer and site delineation for biopsy and surgical
excision, has been approved for distribution in the
United Kingdom, Canada, Australia, New Zealand, Hungary,
Taiwan, Belgium, Holland, Luxembourg, Finland, Greece,
Portugal, Bermuda and the Bahamas. The Company is
currently seeking government approval from the Food and
Drug Administration (the "FDA") to distribute the
OraTest(R) product in the United States. The
OraTest(R) product continues to be marketed under the
name OraScreen(R) in the U.K. by the Company's
licensee, Stafford-Miller (a division of Block Drug
Company, Inc.) and under the name OraScan in Canada by
the Germiphene Corporation. The Company will market
the product under the OraTest(R) name in the U.S. and
other countries.
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According to the American Cancer Society, 41,400 new
oral, nasopharyngeal and laryngeal cancers will be
diagnosed and 12,300 oral cancer related deaths will
occur in the U.S. this year. Worldwide, nearly 900,000
new cases of oral cancer occurred in 1996, and incidence
and mortality rates are rising. In most people, by the
time it is diagnosed, oral cancer has usually
metastasized, resulting in a poor prognosis. Those who do
survive frequently undergo significantly disfiguring
surgery. Data published in 1994 by a major dental
publication quotes a Harvard University economist as
stating that the annual cost of treating oral cancer in
the United States is $3.7 billion. The economist further
states that OraTest(R) has the potential of reducing this
cost by approximately 60% because of the product's
ability to identify oral cancer lesions far earlier than
they are being found today. The earlier these lesions are
identified, the greater the chances of reducing morbidity
and mortality.
PROFESSIONAL PRODUCTS GROUP
- - Dental Supplies Zila Dental Supply is a national distributor of
professional dental supplies, carrying brand names such
as Eastman Kodak, Dentsply, Sybron/Kerr and 3M. Most of
Zila Dental Supply's sales are through telemarketing,
outside sales force and direct mail.
Zila Dental Supply distributes consumable supplies and
very small equipment as well as a select group of large
items of dental equipment, such as compressors,
sterilizers, dental lights and chairs in certain
geographical markets and represents the products of over
400 dental manufacturers. The Company believes that these
products constitute the vast majority of supplies used in
the day-to-day operations of a dental practice. For
example, Zila Dental Supply carries a broad line of
dental alloys, x-ray film, composite filling materials,
impression materials, latex gloves, diamond and carbide
cutting instruments, anesthetics, asepsis and infection
control products, operative, hygiene and surgical
instruments, and a variety of other widely used items.
Dentists have traditionally purchased their supplies from
local full-service supply companies, or from mail-order
firms. Historically, Zila Dental Supply has operated
primarily as a direct mail distributor with full-service
operations in certain geographical markets. The mail
order operation uses the efficiencies of direct mail and
telemarketing to provide service, convenience and
competitive prices. The full service operation combines
competitive prices with an even higher level of service
to the dental customer, usually resulting in a higher
level of sales per customer. Zila Dental Supply will
continue to provide the benefits of a mail order company
while, at the same time, seeking to expand its
full-service operations to other geographical markets.
- - Intraoral Cygnus manufacturers and markets intraoral cameras and
Cameras and digital x-ray systems in domestic and international
X-Ray Systems markets. Cygnus' intraoral camera products include the
OralVision 1000(TM) (for U.S. and Canadian markets),
Stylus 1000(TM) (featuring PAL video format for export),
and the Stylus 1500(TM). The Stylus 1500(TM) features
mirror image, x-ray gray scale, quad freeze frame and
image stabilization for tremble-free images. Rounding out
the Cygnus camera line are the Stylus 2000(TM), a fully
self-contained system, and the Gemini(TM) video
management device, which turns any camera into a
hands-free, multi-functional diagnostic system.
During fiscal year 1998, Cygnus entered into an agreement
with Panasonic Medical and Industrial Video Company,
("Panasonic") the U.S. division of Japan's Matsushita
Industrial Equipment Co., Ltd., which gives Cygnus
exclusive U.S. rights for Panasonic x-ray sensors for
filmless digital dental x-ray technology. CygnusRay2(TM),
the first product to result from the new Panasonic
relationship, was introduced in February 1998. The system
reduces exposure to x-ray energy by up to 95% and
eliminates the costly, time-consuming process of
developing x-ray film. The CygnusRay2(TM) system gives
dentists the ability to diagnose patients on the spot and
educate them with the help of on-screen enhancement
controls. The system's Panasonic sensors are available in
pediatric, standard and bite-wing sizes.
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- - PracticeWorks Integrated Dental Technologies, Inc., located in Rancho
Cordova, California, develops and markets
PracticeWorks(TM), proprietary, state-of-the-art dental
office software. Written to be compatible with the
popular Windows and Windows 95 formats, PracticeWorks(TM)
helps in improving the operating efficiency of dental
practices in areas such as patient scheduling, treatment
planning, insurance processing, accounts receivable
management, patient charting, and marketing
communications. PracticeWorks(TM) is a true 32 bit
Windows(R)-based software, and is Year 2000 ready.
NUTRACEUTICAL PRODUCTS GROUP
- - Ester-C(R) Oxycal, located in Prescott, Arizona, manufactures a
patented and enhanced form of Vitamin C under the
trademark Ester-C(R). Its products are distributed by
Inter-Cal Corporation, an Oxycal subsidiary. Products
manufactured with Ester-C(R) are sold throughout the U.S.
and in 41 countries worldwide. Inter-Cal requires its
customers to display the federally-registered Ester-
C(R) logo on their packaging. Exciting opportunities for
Ester-C(R) exist among topical applications (such as skin
creams), chewable vitamins, nutrition bars, sport drinks
and food fortification. Oxycal holds two patents on the
use of Vitamin C metabolites and their impact on
pharmaceutical products as well as nutritional
supplements. During fiscal year 1998, Inter-Cal completed
development of a new liquid formulation for skin care
products - Ester-C(R) Topical. This product provides a
stable form vitamin C that penetrates to the
collagen-producing layers of the skin without chemicals.
Ordinary vitamin C is quite unstable in most health and
beauty care products and thus cannot provide the benefit
of vitamin C to the skin. Ester-C(R)Topical is non-acidic
and free of chemical esters.
MARKETING
PHARMACEUTICAL PRODUCTS GROUP
- - Strategy for The Company's Pharmaceutical Products Group employs
OTC Products three strategies to market its OTC products:
- Education - educate several key groups of health
professionals on the uniqueness and effectiveness of
each of the products. Targeted efforts to build
awareness of the product line are made by direct
mailings and attending medical conventions. During
fiscal year 1998, the Company participated in
thirty-seven meetings geared to dental, pharmacy and
medical professionals. At these meetings, Company
representatives have an opportunity to interact with
and distribute information to thousands of interested
health professionals.
- Participation - participate in retailer-driven
activities designed to make the OTC products available
at more outlets and to offer value to consumers at the
retail store level.
- Awareness - build consumer awareness of the OTC
products through focused efforts like targeted
advertising and direct mail sampling.
- - Peridex(R) Peridex(R) is marketed to healthcare professionals and
pharmacists with extensive support from ICS, Ltd., a
national contract detailing organization. Additionally,
detailers call upon the nation's 54 dental and 200
hygiene schools, as well as managed care organizations,
pharmacists and wholesalers, to reinforce support for
Peridex(R) and Zila's other brands.
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- - OraTest(R) After two years of market preparation, Zila's UK
licensee, Stafford-Miller Ltd. (a division of Block Drug
Company), formally introduced OraTest(R) under the name
OraScreen(R)to general practitioners in the UK in April
1998. The marketing effort for OraScreen(R) in the UK has
been a multilevel strategy designed to educate dentists,
specialists and staff on the accuracy of the
OraScreen(R) product and the strong benefits of the early
detection of oral cancer. Health professionals have
become aware of OraScreen(R) through journal advertising
and some timely (independently authored) articles on the
impact of oral cancer and the benefits of early
intervention. The OraTest(R) product continues to be
marketed under the OraScan(R) name by the Germiphene
Corporation in Canada.
The Company has made extensive preparations for the U.S.
introduction of the OraTest(R) product. One of the
nation's leading dental advertising and marketing firms
has already prepared professional advertising and
training materials, and consumer education tools. A
national detailing force is already in place, and Zila
Dental Supply is well equipped to handle national
OraTest(R) distribution through direct mail promotion,
sophisticated telemarketing, outside sales force, and
Internet selling.
PROFESSIONAL PRODUCTS GROUP
Both Cygnus and PracticeWorks expend considerable effort
educating their distributors about the quality,
reliability and features of its products. They both
advertise their products through industry publications
and direct mail and exhibit their products at industry
trade shows. In addition, Cygnus and PracticeWorks seek
to stimulate interest in their products by providing
information and marketing materials to influential and
prominent experts and consultants in the dental industry.
Zila Dental Supply markets its products directly to the
end user primarily by direct mail, outside sales force,
trade shows and telemarketing.
NUTRACEUTICAL PRODUCTS GROUP
Oxycal's manufacturing and marketing division, Inter-Cal
Corporation, supports education and sales of its
value-added vitamin C products with a multi-million
dollar advertising program. Inter-Cal promotes the
patented Ester-C(R) ingredient on behalf of more than one
hundred manufacturers and marketers of finished
Ester-C(R) products. National radio advertising with
targeted print advertising is utilized in both the United
States and Canada. The advertising is assisting the
transition as an industry leading product in natural food
outlets to more broad-based availability in mass market
and chain stores.
Education and promotion to the trade is primarily
accomplished through the five national trade shows in the
U.S. and Canada. Print advertising in trade journals is
also used.
International sales activity in the forty other
territories is managed by the local distributors and
encouraged by advertising assistance and rebate programs.
Some corporate sponsored public relations and advertising
is done in the U.K.
MANUFACTURING AND SUPPLY
PHARMACEUTICAL PRODUCTS GROUP
The Company employs a network of outside manufacturers to
produce and package all of its products within the
Pharmaceutical Products Group. The following is a
breakdown by product line.
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- - Zilactin(R) Arizona Natural Resources of Phoenix, Arizona
manufactures the Zilactin(R) line of products, and
Clinipad Corporation ("Clinipad") of Charlotte, North
Carolina manufactures all Zilactin(R) sample packets. The
Company places orders with each supplier based on its
anticipated needs for the products. Packaging components
are supplied to each manufacturer by the Company.
Secondary suppliers are maintained as alternate supply
sources, and are an integral part of the Company's
strategy to maintain its product pipeline.
- - Peridex(R) Peridex(R) was manufactured by Procter & Gamble through
June 1998. Accupac of Mainland, Pennsylvania is currently
seeking FDA clearance to manufacture Peridex(R). Once
accepted, Accupac will become the primary manufacturer of
Peridex(R). The Company believes it has sufficient
inventory of Peridex(R) to fulfill all orders until
Accupac receives FDA clearance.
- - OraTest(R) Fleet Laboratories Ltd. of Watford, Herts, United
Kingdom, ("Fleet") produces and packages the
OraTest(R) product under the name OraScreen(R) for
distribution in the UK by the Company's licensee,
Stafford-Miller Ltd. (a division of Block Drug Company,
Inc.). Fleet also manufactures the OraTest(R) product for
sale to other countries including Taiwan. Germiphene
Corporation of Brantford, Ontario, Canada, continues to
produce and package the OraScan(R) product at its
facility. The Company has also identified a US-based
company with the capacity to manufacture the
OraTest(R) kits.
In order to ensure an available and stable supply of
Tolonium Chloride, the world's only pharmaceutical grade
toluidine blue, the active ingredient in the OraTest(R)
product, the Company established its own manufacturing
facility. The FDA has visited the facility and will
return prior to final approval of the OraTest(R) product.
Several test batches of toluidine blue have already been
manufactured at the Company's facility and all have met
the specifications given by the FDA with regard to the
finished active ingredient. In preparation for the U.S.
marketing of the OraTest(R) product and increasing global
sales, the Company is expanding its Phoenix manufacturing
facility with the addition of a second production line.
PROFESSIONAL PRODUCTS GROUP
Products distributed by Zila Dental Supply are
manufactured by over 400 dental manufacturers. The
Company's intraoral cameras are manufactured by Cygnus
at its Scottsdale, Arizona facility and the
CygnusRay2(TM) is manufactured by Panasonic.
NUTRACEUTICAL PRODUCTS GROUP
All products within the Nutraceutical Products Group are
manufactured at Oxycal's Prescott, Arizona location.
COMPETITION
PHARMACEUTICAL PRODUCTS GROUP
All industries in which the Company sells its products
are highly competitive. A number of companies, almost all
of which have greater financial resources, marketing
capabilities and research and development capacities than
the Company, are actively engaged in the development of
products that may compete with the Company's products.
The pharmaceutical industry is characterized by extensive
and ongoing research efforts which may result in
development by other companies of products comparable or
superior to any that are now on the market, including
those sold by the Company.
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- - Zilactin(R) Numerous products exist for treatment of herpes simplex
virus I ("HSV I") symptoms (i.e., cold sores, fever
blisters), including the following products: Orajel and
Tanac by Commerce Drug Company, Herpicin-L by Campbell
Laboratories, Inc., Proxigel by Reed and Carnrick, and
Carmex by Carma Lab, Inc. Although there can be no
assurance in this regard, management of the Company
believes that there is a substantial potential demand for
products that are effective in the treatment of these
conditions. The Company does not believe that any of
these treatments have achieved a dominant market share.
Based upon clinical studies and comments received by the
Company from physicians and dentists, management believes
that its products will be able to meet much of that
demand and that Zilactin(R), Zilactin(R)-B and
Zilactin(R)-L will provide more effective symptomatic
relief of HSV I infections than the treatments of the
Company's competitors.
- - Peridex(R) Peridex(R)competitors include generic versions and name
brands such as Periogard, made by Colgate Oral
Pharmaceuticals. Many of the competitors possess greater
financial resources than the Company. However, the
Company believes that Peridex's(R)reputation as the "gold
standard" of prescription antibacterial oral rinse and
the detailing sales force will allow the Company to
compete effectively in the marketplace.
- - OraTest(R) OraTest(R), which the Company believes to be the world's
first commercial oral cancer detection system, was
introduced in Canada in May 1993, in Australia in 1993
and in the UK in April 1998. In April 1998, regulatory
approvals were obtained in Portugal, Belgium, Luxembourg,
Holland, Finland and Greece. The OraTest(R) product will
be distributed by the Company in those countries not
covered in the license agreement with Stafford-Miller.
Zila(R) Tolonium Chloride is the active ingredient in the
Company's oral cancer detection system, OraTest(R).
Zila(R) Tolonium Chloride is the world's only
pharmaceutical grade toluidine blue, produced in
compliance with stringent FDA Good Manufacturing
Practices ("GMP") regulations. Zila(R) Tolonium Chloride
and its technology are protected by issued and pending
patents. See also "Business -- Patents and Trademarks."
PROFESSIONAL PRODUCTS GROUP
- - Dental Supply Zila Dental Supply competes with approximately 200 dental
supply dealers and mail order supply houses in the United
States, some of which have significantly greater
financial resources than the Company. Zila Dental
Supply's sales make up less than 2% of the total domestic
market for dental supplies. Zila Dental Supply's position
with respect to its competitors is difficult to determine
since most of the companies are privately-held and do not
disclose financial information. However, the Company
believes that approximately 50 percent of the market is
dominated by two public companies: Patterson Dental
Company and Henry Schein, Inc., both of which are very
active in the acquisition market in an effort to gain
market share.
- - PracticeWorks There are many companies marketing dental practice
management software with the major competitors to
PracticeWorks being Dentrix, sold by Henry Schein, Inc.,
EagleSoft, owned by Patterson Dental Company and
SoftDent, purchased by Dentsply New Image. All of these
companies possess greater financial resources than the
Company. However, the Company believes that
PracticeWorks' unique product features, expanded selling
organization and increasingly experienced support staff
make it well positioned to compete with these larger
competitors.
- - Intraoral Cygnus' competitors in both the intraoral camera and
Cameras and digital x-ray markets include Dentsply New Image, Schick
X-ray Systems Technologies, Henry Schein, Inc., Trophy Radiology, and
Welch Allyn Dental Systems. Many of these companies
possess greater financial resources than the Company.
However, the Company believes that with the unique
features of Cygnus' products, its manufacturing expertise
and commitment to product development, Cygnus is well
positioned to compete with these larger competitors.
NUTRACEUTICAL PRODUCTS GROUP
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- - Ester-C Within the vitamin C market, the Company's competitors
include all other vitamin C manufacturers, such as
Roche and Takeda. Many of the Company's competitors,
particularly those in markets other than the health food
and vitamin store market, have substantially greater
financial and other resources than the Company. The
Company believes that the growing number of health food
and vitamin distributors and retailers are increasingly
likely to align themselves with producers that offer a
wide variety of high quality products, have a loyal
customer base, support their brands with strong marketing
and advertising programs and provide consistently high
levels of customer service. The Company believes that it
competes favorably with other producers of vitamin C
because of the positive attributes of its Ester-C
product, high customer-order fill rate, strong
distribution network, and advertising and promotional
support.
LICENSING
PHARMACEUTICAL PRODUCTS GROUP
In certain instances the Company has expanded the
distribution of its products by licensing certain of its
patents to other companies. In 1990, the Company licensed
Bausch & Lomb to distribute the Company's entire oral
care line (except for OraTest(R) in markets outside of
the United States with the right to use the same names,
formulas and packaging used by the Company. Zilactin(R)
was introduced by Bausch & Lomb in Canada in January 1991
and, under the terms of the licensing agreement, the
Company received royalty payments based upon a percentage
of the licensed products' net sales. In 1990, the Company
and Bausch & Lomb amended this agreement in a manner that
limited Bausch & Lomb's distribution rights to Canada.
The Company and Bausch & Lomb terminated this agreement
effective December 31, 1997.
In 1991, the Company acquired ownership of certain
exclusive rights to the patents, technology and process
embodying the formulation and the application of the
OraTest(R) product. The company is obligated to pay
royalties to the National Technical Information Service
based upon certain usages of the OraTest(R) product.
During the 1995 fiscal year, the Company entered into a
licensing agreement pursuant to which Stafford-Miller
Ltd. (a division of Block Drug Company, Inc.) ("Block")
was given the right to distribute the OraTest(R) product
under the name OraScreen(R) in certain markets not
previously pursued by the Company. The Company receives
royalties from Block equal to a set percentage of the net
sales of OraScreen(R) by Block. In April 1998,
OraScreen(R) was launched at the British Dental
Association ("BDA") meeting held in Harrogate in the
United Kingdom. Following this meeting the BDA created
and distributed a booklet titled "Guidelines for Early
Detection." This booklet outlined the education and
application of OraScreen(R) in the dental office head
and neck examination. The early results of both training
of the dentists and utilization of the product have been
positive. Stafford-Miller is expanding from their
original three trainers. They are now training their
entire sales staff to deal with the backlog.
Subsequent to year-end, the Company entered into a
license agreement with Nippon Shoji Kaishi, Ltd. (now
known as Azwell, Inc.) to obtain regulatory approval and
market the OraTest(R) product in Japan.
GOVERNMENT REGULATIONS
General The Company's operations are subject to extensive
regulation by governmental authorities in the United
States and other countries with respect to the testing,
approval, manufacture, labeling, marketing and sale of
pharmaceutical products. The Company devotes significant
time, effort and expense addressing the extensive
government regulations applicable to its business, and in
general, the trend is towards more stringent regulation.
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<PAGE> 11
On an ongoing basis, the FDA reviews the safety and
efficacy of marketed pharmaceutical products and monitors
labeling, advertising and other matters related to the
promotion of such products. The FDA also regulates the
facilities and procedures used to manufacture
pharmaceutical products in the United States or for sale
in the United States. Such facilities must be registered
with the FDA and all products made in such facilities
must be manufactured in accordance with "good
manufacturing practices" established by the FDA.
Compliance with good manufacturing practices guidelines
requires the dedication of substantial resources and
requires significant costs. The FDA periodically inspects
the Company's contract manufacturing facilities and
procedures to assure compliance. The FDA may cause a
recall or withdraw product approvals if regulatory
standards are not maintained. FDA approval to manufacture
a drug is site specific. In the event an approved
manufacturing facility for a particular drug becomes
inoperable, obtaining the required FDA approval to
manufacture such drug at a different manufacturing site
could result in production delays, which could adversely
affect the Company's business and results of operations.
In connection with its activities outside the United
States, the Company is also subject to regulatory
requirements governing the testing, approval,
manufacture, labeling, marketing and sale of
pharmaceutical products, which requirements vary from
country to country. Whether or not FDA approval has been
obtained for a product, approval of the product by
comparable regulatory authorities of foreign countries
must be obtained prior to marketing the product in those
countries. The approval process may be more or less
rigorous from country to country, and the time required
for approval may be longer or shorter than that required
in the United States. No assurance can be given that
clinical studies conducted outside of any country will be
accepted by such country, and the approval of any
pharmaceutical product in one country does not assure
that such product will be approved in another country.
The Company is also subject to worldwide governmental
regulations and controls relating to product safety,
efficacy, packaging, labeling and distribution. While not
all of the products which the Company plans to introduce
into the market are "new drugs" or "new devices," those
fitting the regulatory definitions are subject to a
stringent premarket approval process in most countries.
Submission of a substantial amount of preclinical and
clinical information prior to market introduction
significantly increases the amount of time and related
costs incurred for preparing such products for market.
The federal and state governments in the United States,
as well as many foreign governments, from time to time
explore ways to reduce medical care costs through health
care reform. These efforts have resulted in, among other
things, government policies that encourage the use of
generic drugs rather than brand name drugs to reduce drug
reimbursement costs. Virtually every state in the United
States has a generic substitution law which permits the
dispensing pharmacist to substitute a generic drug for
the prescribed brand name product. The debate to reform
the United States' health care system is expected to be
protracted and intense. Due to uncertainties regarding
the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict
what impact any reform proposal ultimately adopted may
have on the pharmaceutical industry or on the business or
operating results of its pharmaceutical products group.
The Company submits data to the Food and Drug
Administration as necessary in response to the ongoing
monograph review of the safety and efficacy of all
over-the-counter drug products marketed in the U.S. As a
responsible manufacturer, the Company is alert to the
possibility that the final monographs to be issued in the
foreseeable future may require formula modifications of
certain of its products to maintain compliance with these
regulations, a possibility facing competitive products as
well.
Manufacturing companies, especially those engaged in
health care related fields, are subject to a wide range
of federal, state and local laws and regulations. Concern
for maintaining compliance with federal, state, local and
foreign regulations on environmental protection,
hazardous waste management, occupational safety and
industrial hygiene has also increased substantially. The
Company cannot predict what additional legislation or
governmental action, if any, will be enacted or taken
with respect to the above matters and what its effect, if
any, will be on the Company's consolidated financial
position, results of operations or cash flows.
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<PAGE> 12
- - Zilactin(R) Zilactin(R)is marketed by the Company as a treatment for
the symptomatic relief of canker sores (oral mucosal
ulcers and lesions), cold sores and fever blisters. The
Company is not required to file a New Drug Application
("NDA") covering these uses of Zilactin(R); however, the
Company may not market Zilactin(R)as a treatment of
genital herpes or shingles unless NDAs for such purposes
are filed and approved.
The FDA's regulation of most of the over-the-counter drug
products in the United States (such as Zila's
Zilactin(R)family of products) has not been finalized. In
addition, the Federal Trade Commission ("FTC")
continually monitors the advertising practices of
consumer products companies with respect to claims made
relating to product functionality and efficacy.
- - OraTest(R) In 1994, the FDA approved an Investigational New Drug
application ("IND") for the Company's OraTest(R) product.
This approval is the first step in securing an NDA which
will enable the Company to market Oratest(R) in the
United States and allow the Company to manufacture the
product domestically for use in clinical studies and to
market it in 21 countries overseas. In response to the
FDA's requests for more information, the New Drug
Application ("NDA") has been resubmitted with updated
chemistry and manufacturing information and subsequently
more detailed clinical data. The Company is still
awaiting final approval from the FDA.
The company received regulatory approval to market the
OraTest(R)product in Australia in 1993. Approval to
market the OraTest(R)product in certain Caribbean
countries, Hungary and Taiwan has also been received. The
Medicines Control Agency ("MCA"), which is the regulatory
authority in the UK, has also granted approval for the
OraTest(R) product to be marketed in the UK under the
name OraScreen(R).
In January 1998, Zila submitted a Mutual Recognition
Procedure ("MRP") application through the MCA for
regulatory approval of OraScreen(R)in the European Union
("EU"). In April 1998, Belgium, the Netherlands,
Luxembourg, Portugal, Finland and Greece were given
regulatory approval through this application. Zila has
also received licenses to sell in Greece, Luxembourg and
the Netherlands and is finalizing the license procedure
for the remaining EU member nations. The Company is
following up as the procedure warrants with all of the
remaining countries.
- - Ester-C(R) During 1995, Oxycal received an inquiry from the Federal
Trade Commission ("FTC") regarding certain product claims
made in Oxycal's advertising. This inquiry was based on
claims made prior to the Company's acquisition of Oxycal.
In December 1997, Oxycal was notified by the FTC that the
investigation regarding product claims made in Oxycal's
advertising had been closed, as Oxycal had previously
stopped advertising the claims in question.
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<PAGE> 13
PATENTS AND TRADEMARKS
- - Zilactin(R) The Company currently holds three US patents and two
Canadian patents for Zilactin(R). The Zilactin(R) formula
was granted a US patent on August 25, 1981, a US patent
covering extended applications of the basic
Zilactin(R) formula was granted on April 26, 1983, and a
US patent covering the film-forming properties of the
Zilactin(R) formula containing an added medicinal
ingredient was issued on January 14, 1992. Such patents
were granted for periods of seventeen years from the
grant dates and give the Company the right to exclude
others from making, using or selling the patent-protected
products in the United States. The Canadian patent, which
covers the composition and extended applications, was
granted on December 3, 1985. Patent applications are
currently pending in numerous foreign countries and
patents are expected to be issued on these applications
in the near future.
The Company registered the trademark Zilactin(R) with the
United States Patent and Trademark Office effective July
9, 1985. The Company has also registered the trademarks
"Zila(R)", Zilactin(R)-B, and Zilactin(R)-L in the United
States. The Company believes that widespread use of the
"Zila(R)" trademark as a dominant prefix to several
product names will afford reasonable protection for the
"Zila(R)" trademark as well as other marks in which
"Zila(R)" is a dominant prefix. The Company is also
taking steps under applicable international treaties to
register the "Zila(R)" trademark. The names "Zila(R)" and
Zilactin(R) are registered in Canada.
- - Peridex(R) Peridex(R) as a brand name has become the "gold standard"
within the dental industry for prescription oral rinses
in both the U.S. and Canada. Concurrent with the purchase
of the Peridex(R) brand from Procter & Gamble, Zila
Pharmaceuticals purchased the trademark rights to
Peridex(R). Accordingly, Procter & Gamble has assigned
the Peridex(R) trademark to the Company for each country
where it has been previously registered, except for
certain countries in Western Europe. The Company recorded
its trademark assignment for Peridex(R) with the U.S.
Patent and Trademark office on June 26, 1998 and with the
Canadian Registrar of Trademarks on July 3, 1998.
Additionally, the Company is in the process of recording
trademark assignments in other countries where the
Peridex(R) trademark had been previously registered by
Procter & Gamble. As international sales opportunities
continue to develop, the Company intends to register the
Peridex(R) trademark in countries where it has not been
previously registered.
- - OraTest(R) The Company has patents pending on Zila(R) Tolonium
Chloride (the active ingredient of the OraTest(R)
product), and its manufacturing process in both the U.S.
and internationally under "PCT" and "convention"
applications throughout the world.
The Company registered the trademark OraTest(R) with the
United States Patent and Trademark office effective June
19, 1998. The Company is marketing OraTest(R) under the
name OraScreen(R) in the UK and as a result has
registered OraScreen(R) as a trademark in the EU. The
Company has selected the name OraTest(R) when the product
is introduced in the United States and other countries.
The Company registered the trademarks OraTest(R) and
OraScreen(R) in Canada on May 22, 1998. The Company is in
the process of being protected through trademarks in all
countries where the product is planned for introduction.
- - Ester-C(R) Three U.S. patents were issued in connection with
Ester-C(R), in 1989, 1990 and 1992. All three patents
expire in the year 2006. The first patent covers
compositions for administering vitamin C. Ester-C(R) is
the only vitamin C on the market that contains theonate
and other C metabolites. The second and third patents
cover the metabolite technology which improved the
absorption of vitamin C from the Ester-C(R) formulation
and is applicable to a wide variety of other
non-prescription and prescription drugs. Oxycal has filed
and is currently pursuing corresponding patent
applications in all major foreign countries. Most patents
have already been issued on these foreign applications
and remainder are being diligently pursued.
Recently Oxycal developed Ester-C(C) Topical Concentrate,
a stable form of vitamin C that penetrates the skin to
help produce collagen and supporting structures. Oxycal
has filed a patent application for the Ester-C(C) Topical
Concentrate product and method of manufacturing.
The Company has three major and several minor trademarks
issued by the United States Patent and Trademark office
in the United States. The Ester-C(R) trademark was issued
in August 1985; the EC(R) logo trademark was issued in
January 1990; and the CV-Flex(R) trademark was issued in
August 1990. The Company also has trademarks issued in 36
foreign countries with trademarks pending in other
countries.
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<PAGE> 14
EMPLOYEES
As of July 31, 1998, the Company and its operating subsidiaries had 212
employees in the following categories:
Categories Number of Employees
- ----------------------------------- -------------------------
Executive Officers 6
Sales 66
Accounting and Administration 69
Purchasing and Distribution 32
Manufacturing 39
No employees are represented by a labor union, nor are there any
current labor relations complaints on file with any agency. The Company believes
its relationship with its employees is good.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
- - Forward- The disclosure and analysis in this report and in the
Looking Company's 1998 Annual Report to Shareholders contain
Statements some forward-looking statements. Forward-looking
statements give the Company's current expectations or
forecasts of future events, and may be identified by the
fact that they do not relate strictly to historical or
current facts. In particular, forward-looking statements
include statements relating to future actions,
prospective products or product approvals, future
performance or results of current and anticipated
products, sales efforts, expenses, the outcome of
contingencies such as legal proceedings, and financial
results. Many factors discussed in Part I of this report,
for example government regulation, competition, and the
supply of raw materials, will be important in determining
future results.
Any or all forward-looking statements in this report, in
the 1998 Annual Report to Shareholders, and in any other
public statements may turn out to be wrong. They can be
affected by inaccurate assumptions or by known or unknown
uncertainties. No forward-looking statement can be
guaranteed, and actual results may differ materially.
The Company undertakes no obligation to publicly update
forward-looking statements. Shareholders are advised to
consult further disclosures on related subjects in the
Company's other reports to the SEC. The following
cautionary discussion of risks, uncertainties and
possible inaccurate assumptions are factors that the
Company's management believes could cause actual results
to differ materially from expected and historical
results. Factors other than those included below could
also adversely affect the Company's business results.
- - Uncertainties of The rigorous clinical testing and an extensive regulatory
Regulatory approval process mandated by the FDA and equivalent
Approval foreign authorities before the Company can market any
drug can take a number of years and require the
expenditure of substantial resources. Obtaining such
approvals and completing such testing is a costly and
time consuming process, and approval may not be
ultimately obtained. The length of the FDA review period
varies considerably, as does the amount of clinical data
required to demonstrate the safety and efficacy of a
specific product. The Company may also decide to replace
the compounds in testing with modified or optimized
compounds, thus extending the testing process. In
addition, delays or rejections may be encountered based
upon changes in FDA policy during the period of product
development and FDA regulatory review of each submitted
new drug application or product license application.
Similar delays may also be encountered in other
countries. There can be no assurance that even after such
time and expenditures, regulatory approval will be
obtained for any products developed by the Company.
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<PAGE> 15
A marketed product, its manufacturer and its
manufacturing facilities are also subject to continual
review and periodic inspections, and later discovery of
previously unknown problems with a product, manufacturer
or facility may result in restrictions on such product or
manufacturer, potentially including withdrawal of the
product from the market.
- - Introduction of Zila has not yet received final FDA approval for
OraTest(R) In the OraTest(R). As of July 31, 1998, Zila has
United States invested approximately $6.0 million in the
development of OraTest(R) and has also made a
significant financial investment to secure FDA
approval of OraTest(R) and to prepare for the
introduction of OraTest(R) to the United States market.
The failure of the FDA to approve OraTest(R) would make
it impossible for Zila to recoup this investment through
sales of OraTest(R) in the United States. If regulatory
approval is granted, such approval may entail limitations
on the indicated uses for which the product may be
marketed. Further, even if such regulatory approval is
obtained, the FDA will require post-marketing reporting,
and may require surveillance programs to monitor the
usage or side effects of OraTest(R).
If FDA approval of OraTest(R) is received, the Company
must establish a marketing and sales force with technical
expertise to market directly to the dental professional
or it must obtain the assistance of a pharmaceutical
company with a large sales force. It is possible that the
Company might not be successful in gaining market
acceptance of OraTest(R).
- - Dependence on A large percentage of the Company's revenues result from
Key Products sales of Ester-C, Peridex(R), and the Zilactin(R) family
of products. If any of these major products were to
become subject to a problem such as loss of patent
protection, unexpected side effects, regulatory
proceedings, publicity affecting user confidence, or
pressure from competing products, or if a new, more
effective treatment should be introduced, the impact on
the Company's revenues could be significant.
- - Possible Claims The Company could be exposed to possible claims for
Relating to personal injury resulting from allegedly defective
Products products manufactured by third parties with which it has
entered into manufacturing agreements. The
Company maintains product liability insurance coverage
for claims arising from the use of all its products.
However, the Company could be subject to product
liability claims in excess of its insurance coverage. Any
significant product liability claims not within the scope
of the Company's insurance coverage could have a material
adverse effect on the Company.
- - Competition; The pharmaceutical industry is highly competitive. A
Research and number of companies, many of which have greater
Development financial resources, marketing capabilities and research
and development capacities than the Company, are actively
engaged in the development of products similar to those
products produced and marketed by the Company. The
pharmaceutical industry is characterized by extensive and
ongoing research efforts. Other companies may succeed in
developing products superior to those marketed by the
Company. Such companies may even succeed in developing a
cure for herpes simplex virus, which would substantially
reduce the potential market for symptomatic treatments
such as Zilactin(R). In addition, Zila Dental Supply
faces significant competition, primarily from a various
number of dental supply dealers and mail order supply
houses in the United States. PracticeWorks and Cygnus
also face significant competition from providers of
dental practice management software and intra-oral camera
systems. Many of the competing providers of these
products have significantly greater market share and
financial resources than PracticeWorks and Cygnus. In
addition, new competitors may enter into PracticeWorks'
markets from time to time. It may be difficult for
PracticeWorks and Cygnus to maintain or increase sales
volume and market share due to such competition.
- - Generic In the U.S., competition with producers of generic
Competition products is a major challenge. The Company's loss of any
of its product's patent protection could leads to a
dramatic loss in sales of the product in the U.S. market.
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<PAGE> 16
- - Dependence on Zila relies on a combination of patent, copyright,
Proprietary trademark and trade secret protection, nondisclosure
Rights agreements and licensing arrangements to establish and
protect its proprietary rights. Zila owns and has
exclusive licenses to a number of United States and
foreign patents and patent applications, and intends to
seek additional patent applications as it deems
appropriate. Whether patents will issue from any of these
pending applications or, if patents do issue, that any
claims allowed will be sufficiently broad to cover Zila's
products or to effectively limit competition against Zila
is uncertain. Furthermore, any patents that may be issued
to Zila may be challenged, invalidated or circumvented.
Litigation may result from the Company's use of
registered trademarks or common law marks and, if
litigation against Zila were successful, a resulting loss
of the right to use a trademark could reduce sales of
Zila's products and could result in a significant damages
award. Although Zila intends to defend the proprietary
rights, policing unauthorized use of proprietary
technology and products is difficult. International
operations may be affected by changes in intellectual
property legal protections and remedies in foreign
countries in which in the Company does business.
- - Raw Materials Raw materials essential to the Company's business are
generally readily available. However, certain raw
materials and components used in the manufacture of the
pharmaceutical products are available from limited
sources, and in some cases, a single source. Any
curtailment in the availability of such raw materials
could be accompanied by production delays, and in the
case of products for which only one raw material supplier
exists, could result in a material loss of sales. In
addition, because raw material sources for pharmaceutical
products must generally be approved by regulatory
authorities, changes in raw material suppliers could
result in production delays, higher raw material costs
and loss of sales and customers.
- - Future Capital The development of the Company's products will require
Requirements the commitment of substantial resources to conduct the
and Uncertainty time-consuming research and development, clinical
of Future studies and regulatory activities necessary to bring
Funding any potential product to market and to establish
production, marketing and sales capabilities. The Company
may need to raise substantial additional funds for these
purposes. The Company may seek such additional funding
through collaborative arrangements and through public or
private financings. The inability to obtain sufficient
funds may require the Company to delay, scale back or
eliminate some or all of its research and product
development programs, to limit the marketing of its
products or to license third parties the rights to
commercialize products or technologies that the Company
would otherwise seek to develop and market itself.
- - Possible The market price for Common Stock has fluctuated
Volatility of significantly in the past. Management of Zila believes
Common Stock that such fluctuations may have been caused by
Price announcements of new products, quarterly fluctuations
in the results of operations and other factors, including
changes in conditions of the pharmaceutical industry in
general. Stock markets have experienced extreme price
volatility in recent years. This volatility has had a
substantial effect on the market prices of securities
issued by Zila and other pharmaceutical and health care
companies, often for reasons unrelated to the operating
performance of the specific companies. Zila anticipates
that the market price for Common Stock may continue to be
volatile.
- - Issuance of The Company's Board of Directors has the authority,
Preferred Stock without any further vote by the Company's stockholders,
to issue up to 2,500,000 shares of Preferred Stock in one
or more series and to determine the designations, powers,
preferences and relative, participating, optional or
other rights thereof, including without limitation, the
dividend rate (and whether dividends are cumulative),
conversion rights, voting rights, rights and terms of
redemption, redemption price and liquidation preference.
On October 17, 1997, the Company issued 30,000 shares of
its Series A Convertible Preferred Stock as well as
warrants to purchase 360,000 shares of common stock to
various investors for consideration of $30.0 million. As
of July 31, 1998, 1,200 shares of the Series A Preferred
Stock have been converted into shares of the Company's
common stock.
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<PAGE> 17
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. Per guidance from the Emerging Issues
Task Force, 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 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 consolidated balance sheet and has been
accredited to its redemption value.
- - Environment The Company is subject to federal, state and local laws
and Controlled and regulations governing the use, generation,
Use of manufacture, storage, discharge, handling and disposal
Hazardous Materials of certain materials and wastes used in its operations,
some of which are classified as "hazardous." The Company
could be required to incur significant costs to comply
with environmental laws and regulations as its research
activities are increased, and the operations, business
and future profitability of the Company could be
adversely affected by current or future environmental
laws and regulations. Although the Company believes that
its safety procedures for handling and disposing
materials comply with such laws and regulations, the risk
of accidental contamination or injury from these
materials cannot be eliminated. In the event of such an
accident, the Company could be held liable for any
damages that result and any such liability could exceed
the resources of the Company.
- Year 2000 The Company is currently working to mitigate
Compliance the extent of any "Year 2000" problems that
may exist at the Company and may have an effect
on its business, but it has not yet completed
this evaluation. However, the Company does not expect
that the costs to address the problem will be material,
and it does not expect that the consequences of
incomplete or untimely resolution of the problem
will materially impact the operation of its business.
The Company has not incurred, and does not expect
to incur, any specific quantifiable cost that can
be directly and solely related to the Year 2000
issue. The Company's PracticeWorks(R) software is
programmed in such a manner that it is Year 2000 ready.
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<PAGE> 18
ITEM 2. PROPERTIES
- - Corporate On January 4, 1991, the Company purchased a 16,000
Headquarters square foot building located at 5227 North Seventh
Street, Phoenix, Arizona 85014-2800. The Company moved
its corporate headquarters to this location on February
8, 1991. The purchase price of the building was
approximately $600,000. The Company paid 25% of the
purchase price in cash and obtained a loan for the
balance of the purchase price. The Company has refinanced
the mortgage with Bank One, Arizona (the "Bank"). The
terms of the refinancing include interest to be payable
monthly on the unpaid balance at an interest rate of nine
percent (9.00%). The refinanced mortgage loan is
amortized over 20 years and is due on April 1, 2001.
- - Manufacturing The Company leases 3,502 square feet for a manufacturing
Facility facility in Phoenix, Arizona. This facility produces
toluidine blue which will be used in the manufacture of
OraTest(R). The facility is leased under a three year
agreement which expires April 30, 1999, and is located in
an area with property available for expansion. The
agreement has an option to renew for an additional five
years. Monthly lease payments are $1,922. The Company
does not currently intend to invest in any other plants
or manufacturing facilities. The Company's products are
currently manufactured by Clinipad, Arizona Natural
Resources and Germiphene. Together with the Company's
laboratory facilities, the Company believes that these
manufacturers are capable of performing all necessary
production functions. See "Item 1. Business --
Manufacturing and Distribution."
- - OXYCAL The Company's Oxycal subsidiary, owns 2.79 Acres and
occupies a 27,440 square foot facility located at 533
Madison Avenue, Prescott, Arizona 86301. There are no
liens on this property. This facility manufactures and
distributes a patented and enhanced form of Vitamin C
under the trademark Ester-C(r).
- - Other The Company's subsidiaries holds additional leases on
five separate facilities. Bio-Dental leases 25,000 square
feet of office/warehouse space in a concrete building
located at 11291 Sunrise Park Drive, Rancho Cordova,
California. The current lease rate for the Rancho Cordova
facility is $9,837 per month, and is constant for the
duration of the lease. The lease for the Rancho Cordova
facility expires on November 30, 2001, however Bio-Dental
has an option to renew the lease for two subsequent
five-year terms. Bio-Dental's administrative offices are
located in the Rancho Cordova facility. Zila Dental
Supply leases 19,200 square feet in an office/warehouse
complex at 172 Lisle Industrial Avenue, Lexington,
Kentucky. The current lease rate is $2,800 per month, and
expires on October 31, 1998. On may 31, 1996, IDT entered
into a three year lease for 2,000 square feet beginning
July 15, 1996 in an office complex at 6021-A West 71st
Street, Indianapolis, Indiana. The current lease rate is
$1,783 per month, and expires on July 14, 1999.
Bio-Dental is a guarantor of this lease. On April 1,
1997, Cygnus entered into a five year lease for 6,042
square feet of office/warehouse space located at 8240 E.
Gelding Suite 101, Scottsdale, Arizona. The current lease
rate is $4,048 per month and increases every twelve
months with the monthly lease payment to be $4,350 in the
final year. Oxycal leases 6,250 square feet of warehouse
space located at 8601 E. Laredo, Prescott Valley,
Arizona. The facility is leased under a one-year
agreement, which expires April 30, 1999. Monthly lease
payments are $2,500. This agreement contains two options
to renew for one year each, one of which has been used.
ITEM 3. LEGAL PROCEEDINGS
In July 1995, one of Zila's subsidiaries, 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 accrued a liability of $450,000 in September 1996 because
it believed a loss was probable at that time. This amount was Bio-Dental's best
estimate of the loss in the event the outcome of the litigation was unfavorable
to Bio-Dental. In November 1996, Bio-Dental was granted a summary judgment in
which the court ruled in favor of Bio-Dental. In February 1997, the plaintiffs
started the process
-16-
<PAGE> 19
to appeal the judgment. Subsequently, the appellate court upheld the lower
court's summary judgment in favor of Bio-Dental. Accordingly, Bio-Dental
reversed $375,000 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 with Bio-Dental, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of the fiscal year covered by this report.
-17-
<PAGE> 20
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information regarding the market for Zila, Inc.'s common stock (the
"Common Stock") and related stockholder matters is set forth below. The
following table sets forth, for the fiscal periods shown, the high and low
quotations in dollars per share for the Common Stock as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ").
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED JULY 31, 1998
First Quarter 8 7/8 6
Second Quarter 8 5 5/8
Third Quarter 8 3/8 7
Fourth Quarter 8 1/4 6 1/4
FISCAL YEAR ENDED JULY 31, 1997
First Quarter 7 7/8 6 1/4
Second Quarter 8 3/8 6 3/8
Third Quarter 9 3/8 6 7/16
Fourth Quarter 8 1/8 6 7/16
</TABLE>
The number of stockholders of record of the Common Stock as of July 31,
1998 and September 30, 1998 were approximately 3,344 and 3,351, respectively. As
of July 31, 1998 there are 28,800 shares of the Company's preferred stock
outstanding (See "Item 1 -- Additional Information").
The Company has not paid dividends on the Common Stock. It is the
present policy of the Company's Board of Directors to retain future earnings to
finance the growth and development of the Company's business. Any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the financial condition, capital requirements, earnings and
liquidity of the Company as well as other factors the Company's Board of
Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following tables summarize selected financial information derived
from the Company's audited financial statements. The information set forth below
is not necessarily indicative of results of future operations and should be read
in conjunction with the Company's Consolidated Financial Statements and related
Notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Fiscal Year Ended July 31
--------------------------------------------------------------------------------
Statement of Operations Data 1998(1) 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $ 61,942,765 $38,592,252 $37,479,546 $35,064,245 $22,474,672
Licensing Fees and Royalty Revenue 164,345 72,640 2,100,484 1,956,654 1,732,277
Net Income (Loss) 2,301,068 (6,458,377) 1,217,298 (1,282,357) 558,748
Net Income (Loss) to Common Shareholder (5,013,532) (6,458,377) 1,217,298 (1,282,357) 558,748
Net Income (Loss) Per Share To Common
Shareholder (0.15) (0.20) 0.04 (0.04) 0.02
</TABLE>
<TABLE>
<CAPTION>
At July 31
--------------------------------------------------------------------------------
Balance Sheet Data 1998(1) 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current Assets $ 27,992,138 $10,779,049 $13,251,960 $12,010,497 $11,011,202
Current Liabilities 8,777,242 5,804,965 6,672,497 6,401,072 5,557,594
Total Assets 69,863,877 23,604,032 25,309,781 16,691,859 15,085,434
Long-Term Debt 1,355,547 375,908 382,006 1,136,239 437,586
Total Liabilities 10,132,789 6,180,873 7,054,503 7,537,311 5,995,180
Series A Convertible Redeemable
Preferred Stock 33,801,930
Shareholders' Equity 25,929,158 17,423,159 18,255,278 9,154,548 9,090,254
</TABLE>
(1) The increase in the amounts above between 1997 and 1998 is primarily the
result of the acquisitions discussed in Note 2 to the financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-18-
<PAGE> 21
COMPANY OVERVIEW
The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and the audited Consolidated Financial Statements
and Notes thereto.
Zila is a world-wide manufacturer and marketer of pharmaceutical,
biomedical, dental and nutritional products. The Company has three major
operating groups: Pharmaceutical Products, Professional Products and
Nutraceutical Products. The Pharmaceutical Products Group consists of
over-the-counter and prescription products, including the Zilactin(R) family of
over-the-counter products, Peridex(R) prescription mouth rinse, and OraTest(R),
an oral cancer diagnostic system. The Professional Products Group includes Zila
Dental Supply ("Zila Dental"), a national distributor of professional dental
supplies, Cygnus Imaging ("Cygnus"), a manufacturer and marketer of digital
x-ray systems and intraoral cameras, and Integrated Dental Technologies, Inc.,
which distributes PracticeWorks, a dental practice management software. The
Nutraceutical Products Group is comprised of Oxycal Laboratories, Incorporated
("Oxycal") and its Inter-Cal Subsidiary, which are manufacturers and
distributors of a patented and enhanced form of vitamin C under the trademark
Ester-C(R).
On November 5, 1997, the Company's Zila Pharmaceuticals, Inc.
subsidiary completed its acquisition of the Peridex(R) product line, a
prescription anti-bacterial oral rinse from The Procter & Gamble Company
("P&G"). The purchase price was $12.0 million plus the value of acquired
inventory. The Company paid $10.0 million and will make the final two payments
of $1.0 million in November of 1998 and 1999.
On November 10, 1997, the Company acquired Oxycal, paying $28.0 million
for all outstanding shares of Oxycal. The Company raised the funds to consummate
the Merger through 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 $30.0 million.
The Peridex and Oxycal acquisitions were accounted for using the
purchase method of accounting for business combinations. In connection with the
Oxycal acquisition, the excess of assets over liabilities assumed relate
principally to trademarks and goodwill, which are amortized over 25 and 20
years, respectively. 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.
OPERATING RESULTS
Fiscal year ended July 31, 1998. For the fiscal year ended July 31,
1998, the Company had net income of $2,301,068 compared to net loss of
$6,458,377 for 1997. Net income available to common shareholders has been
reduced in the amount of $7,314,600 by the accretion of an embedded dividend on
the Series A Preferred Stock issued in November 1997. As a result, for the
fiscal year 1998, the Company had a net loss available to common shareholders of
$5,013,532 after taking into account the non-cash embedded dividend.
Net sales during the 1998 fiscal year totaled $61,942,765 compared to
net sales of $38,592,252 for the prior fiscal year, an increase of 60.5%.
Pharmaceutical Products Group net sales in 1998 were $15,512,038 compared to
$6,739,571, a 130.2% increase. The increase is primarily due to the acquisition
in the second quarter of Peridex and continued growth in the Zilactin(R) line of
products. Net sales for the Professional Products Group were $34,188,419 in 1998
compared to $31,852,681 in 1997, an increase of 7.3%. The increase was primarily
driven by improved software and dental supply sales. Net sales during the 1998
fiscal year for the Nutraceutical Products Group were $12,242,308 and are
directly attributable to the acquisition of Oxycal in the second fiscal quarter.
Cost of products sold were $30,676,673 for the fiscal year ended July
31, 1998, a 30.3% increase from $23,542,342 for the fiscal year ended July 31,
1997 due to increased sales resulting primarily from the acquisitions of Oxycal
and Peridex. Cost of sales as a percentage of net sales decreased to 49.5%
during fiscal year 1998 compared to 61.0% in fiscal year 1997. This decrease is
primarily due to lower costs as a percentage of revenues relating to the Oxycal
and Peridex(R) product lines.
-19-
<PAGE> 22
The Company incurred selling, general and administrative expenses of
$28,129,922 during the fiscal year ended July 31, 1998, an increase of
$7,995,668 over the prior fiscal year. These increases are attributable mainly
to the Oxycal and Peridex acquisitions and expenses relating to regulatory,
pre-marketing and clinical activities associated with the OraTest(R) oral cancer
detection system.
Merger related expenses due to the Bio-Dental Merger were $371,865
during the fiscal year 1997. Impairment charges during fiscal year 1997 of
$587,659 relate to an impairment loss recognized to reduce the carrying value of
certain Bio-Dental long-lived assets which include goodwill and software rights.
Depreciation and amortization expenses increased $1,615,528 from
$1,154,428 in the prior fiscal year to $2,769,956 in fiscal year 1998. The
increases are mainly due to the additional amortization of intangibles and
goodwill from the Oxycal and Peridex acquisitions that occurred during fiscal
year 1998.
Interest income increased $118,144 from $201,630 in the prior fiscal
year to $319,774 during fiscal year 1998 due to higher cash balances. Interest
expense increased from $79,450 in fiscal year 1997 to $334,646 in fiscal year
1998. The increase was attributable to additional debt obligations during fiscal
year 1998 related to the Peridex acquisition.
During the year ended July 31, 1998, the Company returned to
profitability and as a result recorded an income tax benefit of $2,600,000
($800,000 of which was attributable to the exercise of common stock options and
therefore was credited to capital in excess of par value). In the past, the
Company had fully offset its net deferred tax asset with valuation allowance due
to the Company's lack of earnings history.
Fiscal year ended July 31, 1997. For the fiscal year ended July 31,
1997, the Company had a net loss of $6,458,377 compared to net income of
$1,217,298 for 1996.
Net sales during the 1997 fiscal year totaled $38,592,252 compared to
net sales of $37,479,546 for the prior fiscal year, an increase of 3.0%.
Pharmaceutical Products Group net sales in 1997 were $6,739,571 compared to
$5,978,131 in 1996, a 12.7 % increase. The increase was primarily due to the
sales of Zilactin-B(R) which have continued to increase since its introduction
in the first quarter of fiscal year 1995. Net sales for the Professional
Products Group were $31,852,681 in 1997 compared to $31,501,415 in 1996, an
increase of 1.1%.
Licensing fees and royalty revenues were $72,640 for fiscal year 1997
compared to $2,100,484 for the prior fiscal year. Approximately $1,235,000 in
royalty revenues earned in fiscal year 1996 were related to the licensing
agreement between Bio-Dental and Denticator International, Inc. ("DII"). In July
1996, Zila Dental Supply disposed of its rights to receive future royalty
payments from DII in exchange for a lump sum payment of approximately
$7,500,000. In addition, amounts were recorded in fiscal year 1996 attributable
to the licensing of OraTest(R) for markets in the United Kingdom and the United
States by the Stafford-Miller Company and The Procter & Gamble Company,
respectively. Of these amounts, $625,000 was paid by Procter & Gamble as a
one-time licensing fee required in connection with the termination of its
licensing agreement with the Company.
Cost of products sold were $23,542,342 for the fiscal year ended July
31, 1997, a 5.0% decrease from $24,771,193 for the fiscal year ended July 31,
1996. Cost of sales as a percentage of net sales decreased to 61.0% during
fiscal year 1997 as compared to 66.1% in fiscal year 1996 due primarily to lower
costs resulting from the restructuring of IDT.
The Company incurred $20,154,254 of selling, general and administrative
expenses during the fiscal year ended July 31, 1997, an increase of $1,817,470,
or 10% over the fiscal year ended July 31, 1996. Approximately $1,423,000 of the
increases were attributable to costs associated with the funding of OraTest(R)
research, start-up manufacturing costs and staffing. The Company also incurred
approximately $807,745 of additional litigation costs during fiscal year 1997.
Merger related expenses increased $225,190 from $146,675 in the prior
fiscal year to $371,865 due to the Bio-Dental merger. Impairment charges during
fiscal year 1997 of $587,659 relate to an impairment loss recognized to reduce
the carrying value of IDT's long-lived assets which include goodwill and
software rights.
-20-
<PAGE> 23
Depreciation and amortization expenses increased $390,764 from $763,664
in the prior fiscal year to $1,154,428 in fiscal year 1997. The increases are
mainly due to the additional amortization costs related to purchased technology
rights as compared to the previous fiscal year.
Interest income increased $53,782 from $147,848 in the prior fiscal
year to $201,630 during fiscal year 1997. Interest expense decreased from
$471,607 in fiscal year 1996 to $79,450 in fiscal year 1997. The decrease was
attributable to lower debt obligations during fiscal year 1997 as compared to
fiscal year 1996.
INFLATION
Inflation has had no material effect on the operations or financial
condition of the Company.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, the Company had net working capital of $19,214,896,
and its current ratio (the ratio of current assets to current liabilities) was
3.2 to 1. At July 31, 1997, the Company had net working capital of $4,974,084
and its current ratio was 1.9 to 1.
Trade accounts receivable net at July 31, 1998 were $7,161,240 compared
to trade accounts receivable at July 31, 1997 of $2,822,687. Trade accounts
receivable net as a percentage of quarterly net sales of $16,594,627 were 43.2%
at July 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 July 31, 1998, the Company had inventories of $11,550,009, an
increase of $7,263,382 from inventories at July 31, 1997. The increase is mainly
due to inventories acquired in the Oxycal and Peridex acquisitions. During the
fourth quarter of fiscal year 1998, the Company increased its inventory of
Peridex(R) to prepare for a short-term stoppage in production due to a change in
contract manufacturers of Peridex(R). The Company believes current inventories
are at levels necessary to support market expansion and maintain adequate
liquidity.
Operating cash flows for fiscal year 1998 increased when compared to
fiscal year 1997, primarily because the Company generated net income in the
current year and had a net loss in the prior year, offset in part by the
differences in the net changes in working capital items in each year.
Approximately $36 million was provided by financing activities in
fiscal year 1998 that was used primarily for the acquisitions of Oxycal and
Peridex. Capital expenditures in fiscal year 1998 were approximately $1.3
million and were manufacturing related expenditures for OraTest, Oxycal and
Cygnus products.
The Preferred Stock issued in connection with the Oxycal merger 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 fiscal year ended 1998, the
holders of 1,200 shares of the Preferred Stock converted them into common stock.
Per guidance from the Emerging Issues Task Force, 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 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 consolidated balance
sheet and has been accredited to its redemption value.
Management believes that continued growth in the Company's sales of its
products will provide sufficient funding for the Company's current operating
divisions for the next twelve months. The Company may require additional
financing to fund future OraTest(R) manufacturing and marketing costs. In April
1998, the Company obtained a $2.0 million bank line of credit, which is secured
by trade accounts receivable, inventories and rights to payment. This line of
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<PAGE> 24
credit expires December 31, 1998. Interest is payable monthly on the unpaid
balance outstanding at the bank's prime rate (8.5% at July 31, 1998) plus .50%.
At July 31, 1998, the Company had no borrowings against this line. The Company's
Equity Line Agreement (the "Investment Agreement") with Deere Park Capital
Management allowed the Company to raise a total of $25.0 million through the
sale of its common stock. The Company was committed to sell $10.0 million of its
common stock to the investor over the commitment period and fulfilled this
commitment in January 1998. The commitment period expired in September 1998.
Forward Looking Statements. The foregoing discussion contains
forward-looking statements and information within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. The cautionary statements made in this Report should be read as being
applicable to all forward-looking statements whenever they appear in this
Report. Forward-looking statements, by their very nature, include risks and
uncertainties. Accordingly, the Company's actual results may differ materially
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to those items described
above and in Item 1 of this Annual Report on Form 10-K under the heading,
"Cautionary Factors That May Affect Future Results," and in Item 3, "Legal
Proceedings."
Year 2000 Impact. The Company is currently working to mitigate the extent
of any "Year 2000" problems that may exist at the Company and may have an
effect on its business, but it has not yet completed this evaluation. However,
the Company does not expect that the costs to address the problem will be
material, and it does not expect the consequences of incomplete or untimely
resolution of the problem will materially impact the operation of its business.
The Company has not incurred, and does not expect to incur, any specific
quantifiable cost that can be directly and solely related to the Year 2000
issue. The Company's PracticeWorks(R) software is programmed in such a manner
that it is Year 2000 ready.
New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("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 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 believes the adoption of SFAS No. 130 will have no material impact on
the Company's financial statements. The Company has not completed evaluating the
impact of implementing the provisions of SFAS No. 131.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements, together with the related notes and
the report of Deloitte & Touche LLP and Grant Thornton, independent certified
public accountants, are set forth hereafter. Other required financial
information and schedules are set forth herein, as more fully described in Item
14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information respecting the directors of the Company is incorporated
herein by reference to the "Election of Directors" and the "Section 16(a)
Beneficial Ownership Reporting Compliance" sections of the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders on December 10, 1998.
-22-
<PAGE> 25
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item is incorporated herein by reference
to the "Executive Compensation" section of the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders on December 10, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the Common Stock beneficially owned by each
director of the Company, by all officers and directors of the Company as a
group, and by each shareholder known by the Company to be the beneficial owner
of more than 5% of the outstanding Common Stock is incorporated herein by
reference to the "Principal Stockholders and Stockholdings of Management"
section of the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders on December 10, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this Item is incorporated herein by reference
to the "Certain Transactions" section of the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders on December 10, 1998.
-23-
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE OR
METHOD OF FILING
----------------
<S> <C>
Financial Statements
(a) (1) Report of Deloitte & Touche LLP Filed herewith
(2) Report of Grant Thorton LLP Filed herewith
(3) Consolidated Financial Statements and Notes thereto of the Company
including Consolidated Balance Sheets as of July 31, 1998 and 1997 and
related Consolidated Statements of Operations, Shareholders' Equity,
and Cash Flows for each of the years in
the three-year period ended July 31, 1998 Filed herewith
(b) Reports on Form 8-K.
None.
(c)
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE OR
METHOD OF FILING
<S> <C>
2 Merger Agreement dated August 8, 1996 among Zila, Inc. Bio-Dental
Technologies Corporation and Zila Merger Corporation A
3-A Certificate of Incorporation, as amended B
3-B Bylaws B
4-A Specimen Stock Certificate B
4-B Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock L
4-C Specimen Warrant Certificate C
4-D Form Stock Purchase Warrant re Series A Preferred Stock L
4-E Deere Park Capital Management Warrant
J
4-F Bartholomew Investment, L.P. Warrant J
10-A Revolving Line of Credit Loan Agreement dated April 8, 1991 between
Zila, Inc. and Banc One, Arizona
D
10-B# Stock Option Award Plan (as amended through April 10, 1991) E
10-C# Non-Employee Directors Stock Option Plan (as amended through April 10, 1991) E
10-E# 1997 Stock Option Award Plan L
10-G Manufacturing and Distribution Agreement dated March 12, 1993 between
Zila, Inc. and Germiphene Corporation G
10-H Agreement dated November 26, 1996 between Cheseborough Ponds USA Co
and Zila Pharmaceuticals, Inc H
10-I Private Equity Line of Credit between Deere Park Capital Management
and Zila, Inc. Dated as of April 30, 1997 J
10-J Amendment to Private Equity Line of Credit Agreement J
10-K Registration Rights Agreement dated as of May 9, 1997 between Zila,
Inc. and Deere Park Capital Management J
10-L Registration Rights Agreement dated as of May 9, 1997 between Zila,
Inc. and Bartholomew Investment, L.P J
10-M Merger Agreement dated as of April 3, 1997 among Zila, Inc., Cygnus
Imaging, Inc., Cygnus Merger Corporation, and Egidio Cianciosi,
</TABLE>
-24-
<PAGE> 27
<TABLE>
<CAPTION>
<S> <C> <C>
James Jenson and Kenneth Kirk J
10-N Securities Purchase Agreement dated as of October 17, 1997 by and
among Zila, Inc. and certain investors L
10-O Registration Rights Agreement dated October 17, 1997 by and among
Zila, Inc. and certain investors L
21 Subsidiaries of Registrant *
23-A Consent of Deloitte & Touche LLP (regarding Form S-8 and Form S-3
Registration Statements) *
23-B Consent of Grant Thornton (regarding Form S-8 and Form S-3
Registration Statements) *
24-A Power of Attorney of Joseph Hines *
24-B Power of Attorney of Bradley C. Anderson *
24-C Power of Attorney of Clarence J. Baudhuin *
24-D Power of Attorney of Carl A. Schroeder *
24-E Power of Attorney of Patrick M. Lonergan
*
24-F Power of Attorney of Michael S. Lesser *
24-G Power of Attorney of Curtis M. Rocca *
24-H Power of Attorney of Thomas B. Simone *
27 Financial Data Schedule *
99 The Company's 1998 Proxy Statement for the Annual Meeting of
Stockholders to be held on December 10, 1998 K
# Management contract or compensation plan or arrangement
* Filed herewith
A Incorporated by reference to Exhibit 2 to the Company's Form S-4 Registration Statement
No. 333-10107, as amended
B Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1988, as amended
C Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1994, as amended
D Incorporated by reference to the Company's Form S-3 Registration Statement No.
33-46239
E Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 1996, as amended
F Incorporated by reference to Exhibit 10-C to Post-Effective Amendment No. 3 to Form S-1
Registration Statement No. 33-27739
G Incorporated by reference to Exhibit 10-L to the Company's Annual
Report on Form 10-K For the fiscal year ended July 31, 1993, as amended
H Incorporated by reference to the Company's Quarterly Report for the
quarterly period ended October 31, 1996, as amended
I Incorporated by reference to the Company's Current Report dated February 11,
1997
J Incorporated by reference to the Company's Form S-3 Registration Statement No. 333-31651
K Filed by amendment
L Incorporated by reference to the Company's Annual Report on Form 10-K for fiscal
year ended July 31, 1997
</TABLE>
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<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 29th
day of October, 1998.
ZILA, INC., a Delaware corporation
By /s/ BRADLEY C. ANDERSON
------------------------------------------------
Bradley C. Anderson
Vice President
and Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOSEPH HINES Chairman of the Board, October 29, 1998
- --------------------------------------- President, Chief Executive
Joseph Hines Officer
/s/ BRADLEY C. ANDERSON Vice President and Chief October 29, 1998
- --------------------------------------- Financial Officer
Bradley C. Anderson
* Director October 29, 1998
- ---------------------------------------
Clarence J. Baudhuin
* Director October 29, 1998
- ---------------------------------------
Carl A. Schroeder
* Director October 29, 1998
- ---------------------------------------
Patrick M. Lonergan
* Director October 29, 1998
- ---------------------------------------
Michael S. Lesser
* Director October 29, 1998
- ---------------------------------------
Curtis M. Rocca III
* Director October 29, 1998
- ---------------------------------------
Thomas B. Simone
*By /s/ BRADLEY C. ANDERSON October 29, 1998
- ---------------------------------------
Bradley C. Anderson
Attorney-in-Fact
</TABLE>
-26-
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Zila, Inc.
Phoenix, Arizona
We have audited the consolidated balance sheets of Zila, Inc. and subsidiaries
(the "Company") as of July 31, 1998 and 1997, and the related consolidated
statements of operations, convertible redeemable preferred stock and
shareholders' equity, and cash flows for each of the three years in the period
ended July 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
give retroactive effect to the merger of the Company and Bio-Dental Technologies
Corporation ("Bio-Dental") on January 8, 1997, which has been accounted for as a
pooling of interests as described in Note 1 to the consolidated financial
statements. We did not audit the consolidated statements of operations,
shareholders' equity and cash flows of Bio-Dental for the eight-month period and
year ended March 31, 1996, which statements reflect total revenues of
$22,034,442 and $33,091,216, respectively. Those financial statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Bio-Dental for such
periods, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Zila, Inc. and subsidiaries at
July 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended July 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 28, 1998
F-1
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
BIO-DENTAL TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of BIO-DENTAL TECHNOLOGIES CORPORATION AND SUBSIDIARIES for the
eight months ended March 31, 1996 and for the year ended March 31, 1996 (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements of Bio-Dental Technologies Corporation
and Subsidiaries referred to above present fairly, in all material respects,
the consolidated results of their operations and their consolidated cash flows
for the eight months ended March 31, 1996 and for the year ended March 31, 1996
in conformity with generally accepted accounting principles.
As discussed in note A, the Company merged with Zila, Inc. on January 8, 1997.
/s/ Grant Thornton LLP
- ----------------------------
Grant Thornton LLP
Sacramento, California
April 11, 1997
F-2
<PAGE> 31
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,241,201 $ 2,071,563
Trade receivables, less allowance for doubtful accounts
of $493,520 (1998) and $349,021 (1997) 7,161,240 2,822,687
Income tax receivable 250,877 494,757
Inventories 11,550,009 4,286,627
Prepaid expenses and other current assets 1,003,381 857,487
Deferred income taxes 2,785,430 245,928
------------ ------------
Total current assets 27,992,138 10,779,049
------------ ------------
PROPERTY AND EQUIPMENT - Net 4,955,861 1,865,385
PURCHASED TECHNOLOGY RIGHTS - Net 6,473,854 6,910,293
GOODWILL - Net 17,009,914 2,693,139
TRADEMARKS - Net 11,131,925 28,119
OTHER INTANGIBLE ASSETS - Net 2,173,352 1,200,423
OTHER ASSETS 126,833 127,624
------------ ------------
TOTAL $ 69,863,877 $ 23,604,032
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,917,626 $ 3,262,904
Accrued liabilities 2,251,105 2,106,572
Deferred revenue 567,956 395,594
Short-term borrowings 87,598
Current portion of long-term debt 952,957 39,895
------------ ------------
Total current liabilities 8,777,242 5,804,965
LONG-TERM DEBT - Net of current portion 1,355,547 375,908
------------ ------------
Total liabilities 10,132,789 6,180,873
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 10 and 11)
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK:
Issued 30,000; outstanding 28,800 shares; liquidation
preference value: $1,220 per share 33,801,930
------------
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 34,743,575 shares
(July 31, 1998) and 32,326,581 shares (July 31, 1997) 34,744 32,327
Capital in excess of par value 43,877,560 30,360,446
Deficit (17,982,721) (12,969,189)
------------ ------------
25,929,583 17,423,584
Less 42,546 common shares held by wholly-owned
subsidiary (at cost) (425) (425)
------------ ------------
Total shareholders' equity 25,929,158 17,423,159
------------ ------------
TOTAL $ 69,863,877 $ 23,604,032
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 32
\ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES
Net sales $ 61,942,765 $ 38,592,252 $ 37,479,546
Licensing fees and royalty revenue 164,345 72,640 2,100,484
------------ ------------ ------------
62,107,110 38,664,892 39,580,030
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of products sold 30,676,673 23,542,342 24,771,193
Selling, general and administrative 28,129,922 20,154,254 18,336,784
Merger related expenses 371,865 146,675
Impairment charges 587,659
Depreciation and amortization 2,769,956 1,154,428 763,664
------------ ------------ ------------
61,576,551 45,810,548 44,018,316
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 530,559 (7,145,656) (4,438,286)
------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income 319,774 201,630 147,848
Interest expense (334,646) (79,450) (471,607)
Gain on disposition of royalty rights 7,519,529
Other income (expense) (14,619) (24,832) (1,668)
------------ ------------ ------------
Other (expenses) income - net (29,491) 97,348 7,194,102
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 501,068 (7,048,308) 2,755,816
BENEFIT (PROVISION) FOR INCOME TAXES 1,800,000 589,931 (1,538,518)
------------ ------------ ------------
NET INCOME (LOSS) 2,301,068 $ (6,458,377) $ 1,217,298
============ ============
PREFERRED STOCK DIVIDEND REQUIREMENT:
SERIES A EMBEDDED DIVIDEND (NOTE 10) (7,314,600)
------------
NET (LOSS) INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ (5,013,532)
============
NET (LOSS) INCOME AVAILABLE TO COMMON
SHAREHOLDERS - BASIC $ (0.15) $ (0.20) $ 0.04
============ ============ ============
NET (LOSS) INCOME AVAILABLE TO COMMON
SHAREHOLDERS - DILUTED $ (0.15) $ (0.20) $ 0.04
============ ============ ============
BASIC SHARES OUTSTANDING 33,990,947 31,530,096 30,095,552
EQUIVALENT SHARES 305,684
------------ ------------ ------------
DILUTED SHARES OUTSTANDING 33,990,947 31,530,096 30,401,236
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 33
\ ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
YEARS ENDED JULY 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
----------------------------------------------------------------
COMMON STOCK
CONVERTIBLE REDEEMABLE COMMON STOCK HELD BY
PREFERRED STOCK -------------------- CAPITAL IN WHOLLY-OWNED
---------------------- PAR EXCESS OF SUBSIDIARY
SHARES AMOUNT SHARES VALUE PAR VALUE DEFICIT (AT COST)
--------- --------- ---------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AUGUST 1, 1995 29,446,541 $ 29,447 $ 16,464,780 $ (7,311,293) $ (425)
Issuance of common stock 1,076,299 1,076 7,227,975
Exercise of common stock warrants 140,138 141 179,368
Exercise of common stock options 414,351 414 753,146
Common stock warrants issued for
debt discount 135,000
Change in unrealized loss on
securities available-for-sale
Adjustment to conform year-end of
Bio-Dental (416,817)
Net income 1,217,298
-------- ------------ ---------- -------- ------------ ------------- ------
BALANCE, JULY 31, 1996 - - 31,077,329 31,078 24,760,269 (6,510,812) (425)
Issuance of common stock 810,094 810 4,550,171
Exercise of common stock warrants 153,665 154 478,211
Exercise of common stock options 285,493 285 571,795
Change in unrealized loss on
securities available-for-sale
Net loss (6,458,377)
-------- ------------ ---------- -------- ------------ ------------- ------
BALANCE, JULY 31, 1997 - - 32,326,581 32,327 30,360,446 (12,969,189) (425)
Issuance of preferred stock 30,000 $ 36,555,000
Preferred stock issuance fees (1,352,750)
Conversion of preferred stock into
common stock (1,200) (1,400,320) 190,543 190 1,400,130
Issuance of common stock 1,588,869 1,589 10,177,534
Exercise of common stock warrants 214,609 215 609,862
Exercise of common stock options 422,973 423 529,588
Income tax benefit - stock options 800,000
Net income 2,301,068
Series A Embedded dividend (7,314,600)
-------- ------------ ---------- -------- ------------ ------------- ------
BALANCE, JULY 31, 1998 28,800 $ 33,801,930 34,743,575 $ 34,744 $ 43,877,560 $ (17,982,721) $ (425)
======== ============ ========== ======== ============ ============= ======
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
---------------------------------
UNREALIZED
LOSS ON TOTAL
SECURITIES COMMON
AVAILABLE- SHAREHOLDERS'
FOR-SALE EQUITY
---------- -------------
<S> <C> <C>
BALANCE AUGUST 1, 1995 $ (27,961) $ 9,154,548
Issuance of common stock 7,229,051
Exercise of common stock warrants 179,509
Exercise of common stock options 753,560
Common stock warrants issued for
debt discount 135,000
Change in unrealized loss on
securities available-for-sale 3,129 3,129
Adjustment to conform year-end of
Bio-Dental (416,817)
Net income 1,217,298
--------- ------------
BALANCE, JULY 31, 1996 (24,832) 18,255,278
Issuance of common stock 4,550,981
Exercise of common stock warrants 478,365
Exercise of common stock options 572,080
Change in unrealized loss on
securities available-for-sale 24,832 24,832
Net loss (6,458,377)
--------- ------------
BALANCE, JULY 31, 1997 - 17,423,159
Issuance of preferred stock
Preferred stock issuance fees
Conversion of preferred stock into
common stock 1,400,320
Issuance of common stock 10,179,123
Exercise of common stock warrants 610,077
Exercise of common stock options 530,011
Income tax benefit - stock options 800,000
Net income 2,301,068
Series A Embedded dividend (7,314,600)
--------- ------------
BALANCE, JULY 31, 1998 $ - $ 25,929,158
========= ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 34
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,301,068 $ (6,458,377) $ 1,217,298
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,769,956 1,154,428 763,664
Gain on disposition of royalty rights (7,519,529)
Impairment of assets 587,659
Other 47,381 188,325
Discount on contractual obligation 288,365
Deferred income taxes (1,800,000) 715,485 (283,831)
Change in assets and liabilities:
Receivables, net 1,766,866 353,713 27,975
Inventories (3,010,557) 129,965 1,621,034
Prepaid expenses and other current assets (418,875) (80,379) 319,813
Other assets 368,465 (438,760)
Accounts payable and accrued expenses 585,526 593,105 (346,575)
Income taxes payable (2,471,126) 2,543,689
Deferred revenue 172,362 208,033 12,404
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,654,711 (4,851,648) (1,894,493)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of short-term investments (222,615) (214,150)
Proceeds from sale of short-term investments 934,085 197,878
Purchases of property and equipment (1,276,262) (601,172) (880,024)
Proceeds from sale of property and equipment 8,916
Proceeds from disposition of royalty rights 7,890,047
Acquisitions, net of cash acquired (33,595,322) 18,142 (125,000)
Collections of notes receivable 32,801
Purchases of intangible assets (942,284) (118,465) (226,117)
------------ ------------ ------------
Net cash (used in) provided by investing activities (35,813,868) 9,975 6,684,351
------------ ------------ ------------
FINANCING ACTIVITIES:
Principal payments on short-term borrowings (159,026)
Net proceeds from short-term borrowings 246,624 41,298 (2,727,460)
Net proceeds from long-term debt 93,753
Net proceeds from issuance of common stock 10,559,611 3,833,755 933,068
Net proceeds from issuance of preferred stock 28,647,250
Principal payments on long-term debt (3,059,417) (453,721) (12,509)
------------ ------------ ------------
Net cash provided by (used in) financing activities 36,328,795 3,421,332 (1,806,901)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,169,638 (1,420,341) 2,982,957
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,071,563 3,491,904 508,947
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,241,201 $ 2,071,563 $ 3,491,904
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 46,029 $ 79,450 $ 483,297
============ ============ ============
Cash paid for income taxes $ 23,000 $ 1,165,710 $ 3,000
============ ============ ============
</TABLE>
(continued)
F-6
<PAGE> 35
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED JULY 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES FOR 1998, 1997 AND 1996: 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Non-cash aspects of Oxycal acquisition:
Fair value of assets acquired other than cash and cash
equivalents $12,787,836
===========
Liabilities assumed $ 1,213,729
===========
Intangible assets recorded in connection with acquisition of Oxycal $14,795,040
===========
Non-cash aspects of Peridex acquisition:
Fair value of assets acquired other than cash and cash
equivalents $ 220,000
===========
Contractual obligation recorded in connection with the acquisition
of Peridex $ 5,570,000
===========
Goodwill recorded in connection with the acquisition of Peridex $11,570,637
===========
Embedded dividend recorded in connection with issuance of
Series A Convertible Redeemable Preferred Stock $ 7,314,600
===========
Income tax benefit attributable to exercise of common stock options $ 800,000
===========
Non-cash aspects of Cygnus acquisition:
Stock issued $ 1,725,000
===========
Fair value of assets acquired other than cash and cash
equivalents $ 342,567
===========
Liabilities assumed $ 737,200
===========
Goodwill recorded in connection with the acquisition of Cygnus $ 2,101,491
===========
Issuance of 869,118 shares of common stock in connection with
the acquisition of CTM $ 7,170,223
===========
Assumption of liabilities in connection with the acquisition of CTM $ 70,000
===========
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-7
<PAGE> 36
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
1. NATURE OF BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business Activities -- Zila, Inc. ("Zila" or the "Company"), a
Delaware corporation, is a manufacturer and marketer of pharmaceutical,
biomedical, dental and nutritional products. The Company has organized its
business into three major operating groups: Pharmaceutical Products,
Professional Products and Nutraceutical Products. The Pharmaceutical Products
Group consists of over-the-counter and prescription products, including the
Zilactin family of over-the-counter products, Peridex prescription mouth rinse,
and OraTest, an oral cancer diagnostic system. The Professional Products Group
includes Zila Dental Supply ("Zila Dental"), a national distributor of
professional dental supplies, Cygnus Imaging ("Cygnus"), a manufacturer and
marketer of digital x-ray systems and intraoral cameras, and Practiceworks, a
dental practice management software company. The Nutraceutical Products Group is
presently comprised of Oxycal Laboratories and its Inter-Cal subsidiary,
manufacturers and distributors of a patented and enhanced form of Vitamin C
under the trademark Ester-C(R).
Principles of Consolidation -- The consolidated financial statements include
the accounts of Zila, Inc. and its wholly-owned subsidiaries, Zila
Pharmaceuticals, Inc., Zila International Inc., Zila Ltd., Bio-Dental
Technologies Corporation ("Bio-Dental"), Cygnus Imaging, Inc. ("Cygnus") and
Oxycal Laboratories, Inc. ("Oxycal"). Zila International Inc. has no operations
and its assets at July 31, 1998 and 1997 consist of 42,546 shares of common
stock of the Company. All significant intercompany balances and transactions are
eliminated in consolidation.
On January 8, 1997, the Company completed a merger with Bio-Dental. On
December 30, 1996, Bio-Dental's shareholders approved the all-stock transaction
which provided for a per share exchange of .825 shares of the Company's common
stock for each share of Bio-Dental common stock outstanding. As of January 8,
1997, Bio-Dental had 6,565,300 shares of common stock outstanding.
The merger has been accounted for as a pooling of interests, and accordingly,
the accompanying consolidated financial statements give retroactive effect to
the Bio-Dental merger and include the combined operations of the Company and
Bio-Dental for all periods presented. Prior to the combination, Bio-Dental's
year-end was March 31. Effective August 1, 1995, Bio-Dental's results are
reported on a July 31, 1996 basis along with the results of Zila, Inc.
Bio-Dental's net loss of $416,817 for the four-month period ended July 31, 1995
is reflected as an adjustment to the deficit during the year ended July 31,
1996. For the four-month period ended July 31, 1995, Bio-Dental had revenues of
$11,056,774, operating costs and expenses of $11,631,735, and a net loss of
$416,817. Certain adjustments and reclassifications have been made to conform
previously issued Bio-Dental financial statements to classifications and
accounting policies used by the Company.
F-8
<PAGE> 37
The following table shows the effect on the results of operations as restated
for the periods prior to the combination of Bio-Dental.
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Sales:
Zila, Inc.................. $ 3,153,812 $ 5,978,131
Bio-Dental................. 16,944,215 31,501,415
------------ -------------
Combined sales............... $ 20,098,027 $ 37,479,546
============ =============
Net income (loss):
Zila, Inc.................. $ (135,528) $ (827,337)
Bio-Dental................. (976,356) 2,044,635
------------ -------------
Combined net income (loss) .. $ (1,111,884) $ 1,217,298
============ =============
</TABLE>
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents -- The Company considers highly liquid investments purchased
with original maturities of three months or less to be cash equivalents.
Inventories, which consist of finished goods and raw materials, are stated at
the lower of cost (first-in, first-out method) or market.
Property and equipment are stated at cost and are depreciated using
straight-line methods over their respective estimated useful lives, ranging from
2 to 40 years. Leasehold improvements are depreciated over the lease term or the
estimated useful life, whichever is shorter.
Goodwill and Trademarks are being amortized on a straight-line basis over 15
to 40 years.
Other intangible assets consist of deferred patent and licensing costs,
software rights, and covenants not to compete. Deferred patent and licensing
costs incurred in connection with the acquisition of patent rights, obtaining
Food and Drug Administration ("FDA") regulatory approvals and obtaining other
licensing rights for treatment compositions are capitalized and amortized over
the estimated benefit period not exceeding 17 years. Covenants not to compete
are amortized over the term of the agreement. Research and development costs
totaling approximately $2,853,000, $2,270,000 and $626,000 in 1998, 1997 and
1996, respectively, were expensed.
Net (loss) income per common share - Basic net income per common share is
computed by dividing net (loss) income available to common shareholders by the
weighted average number of common shares outstanding during the year before
giving effect to stock options considered to be dilutive common stock
equivalents. Diluted net income per common share is computed by dividing net
(loss) income available to common shareholders by the weighted average number of
common shares outstanding during the year after giving effect to stock options
and warrants considered to be dilutive common stock equivalents. For the years
ended July 31, 1998 and 1997, options and warrants that would otherwise qualify
as common stock equivalents are excluded because their inclusion would have the
effect of decreasing the loss per share.
F-9
<PAGE> 38
New Accounting Pronouncements -- In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("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 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 believes the adoption of SFAS No. 130 will have no material impact on
the Company's financial statements. The Company has not completed evaluating the
impact of implementing the provision of SFAS No. 131.
Financial Instruments -- The carrying amounts and estimated fair value of the
Company's financial instruments are as follows:
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair values due to the short-term
maturities of these instruments.
The carrying amount of long-term debt and short-term borrowings are
estimated to approximate fair value as the actual interest rate is consistent
with the rate estimated to be currently available for debt of similar term
and remaining maturity.
Financial instruments which potentially subject the Company to credit risk
consist principally of trade receivables. The Company provides credit, in the
normal course of business, to pharmaceutical wholesalers and chains, food
wholesalers and chains, rack jobbers, convenience stores, and dentists. The
Company performs ongoing credit evaluations of its customers and maintains an
allowance for credit losses.
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the classifications used in 1998.
2. ACQUISITIONS
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 paid within 30 days after closing, $3,000,000 paid
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.
F-10
<PAGE> 39
On November 10, 1997, the Company acquired, by merger, Oxycal Laboratories, Inc.
("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 Peridex and Oxycal acquisitions were accounted for using the purchase
method of accounting for business combinations. In connection with the Oxycal
acquisition, trademarks and goodwill of $11,096,280 and $3,698,760 were recorded
and are amortized on a straight-line basis over 25 and 20 years. In connection
with the Peridex acquisition, goodwill of $11,570,637 was recorded and is
amortized on a straight-line basis 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 unaudited 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 unaudited pro forma summary 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. The
unaudited pro forma summary data for the year ended July 31, 1998 combines
actual financial results of the Company for the year ended July 31, 1998, which
includes Peridex and Oxycal results for the nine months ended July 31, 1998, and
Peridex and Oxycal for the three months ended September 30, 1997. The embedded
dividend for the year ended July 31, 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.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues $ 68,329,759 $ 65,757,902
Net income $ 4,991,556 $ 3,942,566
Series A Preferred Stock embedded dividend $ 7,314,600 $ 7,314,600
Net loss available to common shareholders $ (2,323,044) $ (3,372,034)
Basic loss per share $ (0.07) $ (0.11)
</TABLE>
These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as the increase in amortization expense
associated with goodwill as a result of applying the purchase method of
accounting for the acquisitions.
On April 4, 1997, the Company acquired Cygnus, a privately-held company
located in Scottsdale, Arizona that manufactures and distributes intra-oral
camera systems and other dental imaging products. The acquisition was accounted
for as a purchase and resulted in the issuance of 259,398 shares of the
Company's common stock with a market value of $1,725,000 and the recording of
approximately $2,101,000 of goodwill. The goodwill is amortized on a
straight-line basis over 15 years.
F-11
<PAGE> 40
On March 7, 1996, the Company purchased one-third of the outstanding common
stock of CTM Associates, Inc. ("CTM") from one of the three directors and
shareholders of CTM. On June 3, 1996, the Company acquired the remaining
two-thirds of the outstanding shares of CTM. The only significant asset of CTM
was the technology rights it held related to OraTest (a diagnostic for oral
cancer and site delineation device for biopsy and surgical excision) and its
right to receive certain royalties from sales of OraTest from the Company.
Accordingly, the acquisition of CTM eliminates the Company's obligation to pay
royalties to CTM on revenues generated from sales of OraTest. As consideration
for the acquisition of all of the CTM common stock, the Company issued a total
of 869,118 shares of the Company's common stock with a value of $7,170,223, paid
$125,000, and assumed certain liabilities of approximately $70,000. The
acquisition was accounted for as an acquisition of assets and the purchase price
was recorded as purchased technology rights. The purchased technology rights are
being amortized on a straight-line basis over the expected period of benefit of
17 years which is based on the remaining life of the related patents.
3. INVENTORIES
Inventories consist of the following at July 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Finished goods......... $ 7,048,539 $ 4,381,339
Raw materials.......... 4,807,214 451,563
Inventory reserves .... (305,744) (546,275)
------------ ------------
Total inventories ..... $ 11,550,009 $ 4,286,627
============ ============
</TABLE>
Amounts charged to cost of products sold to increase inventory reserves
during fiscal 1998, 1997 and 1996 were $129,880, $396,996 and $1,117,065,
respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at July 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................. $ 817,911 $ 216,731
Building and improvements........................ 2,069,626 651,034
Furniture and equipment.......................... 2,700,739 2,234,889
Leasehold improvements and other assets.......... 374,229 387,631
Production and warehouse equipment............... 1,912,037 118,553
----------- -----------
Total property and equipment..................... 7,874,542 3,608,838
Less accumulated depreciation and amortization .. 2,918,681 1,743,453
----------- -----------
Property and equipment -- net.................... $ 4,955,861 $ 1,865,385
=========== ===========
</TABLE>
F-12
<PAGE> 41
5. INTANGIBLE ASSETS
Intangible assets consist of the following at July 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Purchased technology rights -- net of accumulated
amortization of $945,619 (1998) and $509,180
(1997).............................................. $ 6,473,854 $ 6,910,293
============ ===========
Goodwill -- net of accumulated amortization of
$1,205,338 (1998) and $162,070 (1997)............... $ 17,009,914 $ 2,693,139
============ ===========
Trademarks - net of accumulated amortization of
$427,193 (1998) and $59,741 (1997) ................. $ 11,131,925 $ 28,119
============ ===========
Patents.............................................. $ 1,110,644 $ 482,634
Licensing costs...................................... 1,692,853 1,086,509
Other................................................ 265,844 204,544
------------ -----------
Total other intangible assets........................ 3,069,341 1,773,687
Less accumulated amortization........................ 895,989 573,264
------------ -----------
Other intangible assets -- net....................... $ 2,173,352 $ 1,200,423
============ ===========
</TABLE>
Licensing costs consist primarily of professional fees associated with
obtaining FDA approval for a new product, OraTest (formerly OraScan). The
recoverability of the deferred licensing costs and purchased technology rights
is dependent upon both FDA approval and sufficient revenues generated from sales
of OraTest; management believes they will receive FDA approval and generate
revenues sufficient to recover such costs. Purchased technology rights relate to
the acquisition of CTM (Note 2).
Amortization of the Company's intangible assets during fiscal 1998, 1997 and
1996, was $2,000,090, $656,086 and $335,214, respectively.
6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
The Company obtained a $2,000,000 bank line of credit in April 1998, which is
collateralized 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 July 31, 1998)
plus .50%. At July 31, 1998, the Company had no borrowings against this line.
At July 31, 1998, short-term borrowings consisted of $87,598 for installments
due on the Company's various insurance policies.
At July 31, 1998, long-term debt consists of a mortgage note, the Peridex
purchase commitment, and notes on equipment. The mortgage note of $354,223 at
July 31, 1998, bears interest at a fixed rate of 9.00% per year due in monthly
principal installments of $2,315, through March 2001 with a balloon payment due
April 1, 2001. The note is collateralized by the Company's land and building.
The purchase commitment of $2,000,000 (Note 2) is reduced by $141,635 for the
unamortized discount on the debt which has an imputed interest rate of 10.00%.
Also included in long-term debt at July 31, 1998 is $95,916 in various notes for
equipment and computer systems with interest rates between 3.06% and 9.44% and
maturities between two to three years.
F-13
<PAGE> 42
Aggregate annual maturities of long-term debt for the years ending July 31
are as follows:
<TABLE>
<S> <C>
1999........................... $ 1,072,340
2000........................... 1,079,141
2001........................... 298,658
-----------
Total.......................... 2,450,139
Less unamortized discount ..... 141,635
Less current portion .......... 952,957
-----------
Long-term portion ............. $ 1,355,547
===========
</TABLE>
Under the mortgage note, the Company is required to comply with financial
covenants based on certain financial ratios. At July 31, 1998, the Company was
in compliance with all required covenants.
7. LICENSING FEE INCOME AND ROYALTIES
The Company has entered into various licensing agreements (the "Agreements").
Under the terms of the Agreements, the licensees acquire the right to
manufacture and sell the Company's products in markets previously not pursued by
the Company. In return, the Company will receive non-refundable license fees
and/or royalties equal to a fixed percentage of the net sales by the licensees
of the Company's products. One of the Agreements provides that the royalty
payments will meet certain minimum annual levels irrespective of the volume of
sales subject to the Agreement.
During 1996, the Company received $750,000 in non-refundable licensing fees
from P&G in connection with a licensing agreement between P&G and the Company,
which was subsequently terminated on April 3, 1996. Additionally, under the
licensing agreement with P&G, the Company received $265,330 in reimbursements
for costs associated with obtaining FDA approval for OraTest.
On July 22, 1996, Young Innovations, Inc. ("Young") acquired substantially
all of the assets and certain liabilities of Denticator International, Inc.
("DII"). Bio-Dental received approximately $7,500,000 in lieu of future
royalties that Bio-Dental was entitled to receive in connection with its
licensing agreement with DII. In addition, Young issued Bio-Dental a product
credit against future purchases from Young equal to the amounts due Bio-Dental
at the time of closing. Included in other receivables at July 31, 1997 is
$319,127 of product credits due from Young.
During 1996, Bio-Dental earned royalties under the DII licensing agreement
totaling $1,235,069, which are included in licensing fees and royalty revenue.
8. STOCK OPTIONS AND WARRANTS
As a result of the merger described in Note 1, each Bio-Dental stock option
or stock purchase warrant that was outstanding at the merger date can be used to
purchase .825 shares of Zila, Inc. common stock. The exercise price of
outstanding Bio-Dental options and warrants was also adjusted at the merger
date. The new exercise prices are calculated by dividing the original exercise
price by .825. The summary of activity related to options and warrants below
includes Bio-Dental options and warrants adjusted for the terms of the merger.
F-14
<PAGE> 43
a. Options -- The Company adopted the 1997 Stock Option Award Plan which
became effective on February 5, 1997, authorizing the Board of Directors to
grant options to employees and certain employee directors of the Company to
purchase up to 1,000,000 shares of the Company's common stock. The options are
issuable at an exercise price no less than market value at the date of grant.
Options may be exercised up to five to ten years from the date of grant. At July
31, 1998, 311,874 shares were available for grant under this plan.
The Company adopted a Stock Option Award Plan which became effective on
September 1, 1988, authorizing the Board of Directors to grant options to
employees and certain employee-directors of the Company to purchase up to
4,000,000 shares of the Company's common stock. The plan was amended December 8,
1995 to increase the authorized number of shares to 5,000,000. The options are
issuable at an exercise price no less than the market value at the date of
grant. Options may be exercised at any time up to five to ten years from the
date of grant. At July 31, 1998, no shares were available for grant under this
plan.
The Company adopted a Non-Employee Directors Stock Option Plan which became
effective October 20, 1989, authorizing the Board of Directors to grant options
to 100,000 shares to non-employee members of the Board of Directors in
increments of 2,500 shares per director each year. The plan was amended December
8, 1995 to increase the authorized number of shares to 200,000. The options are
issuable at exercise price equal to the market value at the date of grant. All
options may be exercised at any time up to five years from the date of grant. At
July 31, 1998, 70,000 shares were available for grant under this plan.
A summary of the status of the option plans as of July 31, 1998, 1997 and
1996 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ...... 2,151,946 $ 4.03 1,906,575 $ 2.81 2,040,936 $ 2.35
Granted................................ 586,000 5.97 712,558 6.98 354,242 4.26
Exercised.............................. (422,973) 3.15 (285,493) 1.90 (414,351) 2.28
Forfeited.............................. (248,482) 3.87 (181,694) 3.93 (74,252) 3.51
----------- ----------- -----------
Outstanding at end of year............. 2,066,491 5.26 2,151,946 4.03 1,906,575 2.81
=========== =========== ===========
Options exercisable at year-end ....... 1,494,866 1,703,267 1,851,575
=========== =========== ===========
Weighted average fair value of
options granted during the year ..... $ 1.96 $ 2.54 $ 1.90
=========== =========== ===========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at July 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ ---------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AT REMAINING EXERCISE AT EXERCISE
EXERCISE PRICES JULY 31, 1998 CONTRACTUAL LIFE PRICE JULY 31, 1998 PRICE
--------------- ------------- ---------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$0.12 -- $1.31 279,752 2.83 $ 1.21 279,752 $ 1.21
2.42 -- 4.00 314,688 5.16 3.01 308,063 3.00
4.24 -- 6.13 706,093 6.95 5.49 372,093 5.20
6.50 -- 8.18 765,958 7.46 6.91 534,958 7.01
--------- ---------
0.12 -- 8.18 2,066,491 1,494,866
========= =========
</TABLE>
F-15
<PAGE> 44
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based employee compensation plans. Accordingly, no
compensation cost has been recognized for its stock-based employee compensation
plans. Had compensation cost been computed based on the fair value of awards on
the date of grant, utilizing the Black-Scholes option-pricing model, consistent
with the method stipulated by SFAS No. 123, the Company's net (loss) income
available to common shareholders and (loss) income per share available to common
shareholders for the years ended July 31, 1998, 1997 and 1996 would have been
reduced (increased) to the pro forma amounts indicated below, followed by the
model assumptions used:
<TABLE>
<CAPTION>
JULY 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net (loss) income available to common shareholders:
As reported.................................. $(5,014,000) $(6,458,000) $ 1,217,000
Pro forma.................................... $(6,114,000) $(7,791,000) $ 862,000
Net (loss) income available to common shareholders
per basic shares outstanding:
As reported.................................. $ (.15) $ (.20) $ .04
Pro forma.................................... $ (.18) $ (.25) $ .03
Black-Scholes model assumptions:
Risk-free interest rate...................... 4.2 -- 4.4% 5.5 -- 6.0% 5.5 -- 6.0%
Expected volatility.......................... 38% 39% 39%
Expected term................................ 2 -- 6 years 2 -- 6 years 3 -- 6 years
Dividend yield............................... 0% 0% 0%
</TABLE>
b. Warrants -- The Company has issued warrants to various investors,
shareholders and other third parties in connection with services provided and
purchases of the Company's stock. Activity related to such warrants, which
expire at various dates through October 2000, is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WARRANT PRICE
SHARES PER SHARE
--------- -------------------
<S> <C> <C>
Outstanding, August 1, 1995..... 956,902 $ .60 -- $ 3.77
Exercised.................... (140,138) 2.41
Expired...................... (46,092) 3.13
----------
Outstanding, July 31, 1996..... 770,672 .60 -- 3.77
Issued....................... 300,000 8.6125
Exercised.................... (153,665) .60 -- 3.00
Expired...................... (14,992) .75 -- 2.41
----------
Outstanding, July 31, 1997..... 902,015 .60 -- 8.6125
Issued....................... 456,000 7.625 -- 9.915
Exercised.................... (214,609) .60 -- 3.00
----------
Outstanding, July 31, 1998..... 1,143,406 $ 3.00 -- $ 9.915
=========
</TABLE>
9. INCOME TAXES
The consolidated income tax (benefit) provision consists of the following for
the years ended July 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................. $ (51,000) $ (312,000) $ 1,524,000
State............................... (9,000) -- 455,000
------------ ----------- -----------
Total current......................... (60,000) (312,000) 1,979,000
------------ ----------- -----------
Deferred:
Federal............................. (1,479,000) (304,000) (245,000)
State............................... (261,000) 26,000 (195,000)
------------ ----------- -----------
Total deferred........................ (1,740,000) (278,000) (440,000)
------------ ----------- -----------
Total consolidated income tax (benefit)
provision............................. $ (1,800,000) $ (590,000) $ 1,539,000
============ =========== ===========
</TABLE>
F-16
<PAGE> 45
The reconciliation of the federal statutory rate to the effective income tax
rate for the years ended July 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate............................... 34% (34)% 34%
Adjustments:
State income taxes -- net of federal benefit....... 6 (6) 6
Non-deductible meal and entertainment expenses .... 7 2 2
Non-deductible acquisition expenses and other ..... 14
Non-deductible goodwill amortization .............. 74
(Decrease) increase in valuation allowance......... (494) 30 14
----- ---- -----
Effective tax rate................................... (359)% (8)% 56%
==== ==== ====
</TABLE>
The components of the Company's deferred income tax assets and liabilities
for the years ended July 31 are shown below:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current deferred income tax assets:
Net operating loss carryforwards........................ $ 7,062,000 $ 6,810,000
Allowance for obsolete or discontinued inventory........ 146,000 219,000
Book basis vs. tax basis differences.................... 49,000 227,000
Reserve for litigation.................................. 27,000 180,000
Product warranty allowance.............................. 45,000 173,000
Allowance for doubtful accounts......................... 112,000 140,000
Accrued vacation........................................ 79,000 40,000
Other................................................... 36,000 20,000
----------- -----------
Total current deferred income tax assets.................. 7,556,000 7,809,000
Valuation allowance....................................... (4,771,000) (7,563,000)
----------- -----------
Net deferred income tax asset............................. $ 2,785,000 $ 246,000
=========== ===========
</TABLE>
Approximately $1,739,000 of the deferred tax asset before valuation allowance
relates to deductions generated by the exercise of stock options, which, if
realized, will result in an increase in capital in excess of par value.
Management believes the valuation allowance reduces deferred tax assets to an
amount that represents management's best estimate of the amount of such deferred
tax assets that more likely than not will be realized.
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 year ended July 31, 1998, the Company returned to profitability and as a
result recorded an income tax benefit of $2,600,000 ($800,000 of which was
attributable to the exercise of common stock options and therefore was credited
to capital in excess of par value).
At July 31, 1998, the Company had federal net operating loss carryforwards
totaling approximately $19,412,000 which expire, if not previously utilized,
from 1999 through 2013. Net operating loss carryforwards for state income tax
purposes, totaling approximately $7,703,000, must be utilized within five years
of the date of their origination, and expire from 1999 through 2003.
10. REDEEMABLE PREFERRED STOCK
On November 10, 1997, the Company completed a $30,000,000 financing involving
the private placement of Series A Convertible Redeemable Preferred Stock.
Proceeds from the sale were used primarily to acquire all the outstanding shares
of Oxycal Laboratories, Inc. 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
F-17
<PAGE> 46
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. Per guidance from the Emerging Issues Task Force, 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 consolidated
statement of operations to arrive at the amount of net (loss) 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 consolidated
balance sheet and has been accreted to its redemption value. During the year,
1,200 shares of the Preferred Stock were converted into common stock.
11. COMMITMENTS AND CONTINGENCIES
In June 1992, the Company entered into an agreement with Daleco Capital
Corporation to form a limited partnership known as Daleco Zila Partners II, L.P.
(the "Partnership"). The Company and its officers have no partnership interest
in the Partnership. The purpose of the Partnership was to provide the Company
with a means to fund the marketing program for certain new products. The
original Partnership agreement provided for a minimum of $150,000 and a maximum
of $1,562,500 to be raised by the sale of partnership units. Under the original
agreement, the Partnership will expend up to 80% of the gross partnership
proceeds for marketing and sales-related expenditures on behalf of the Company.
In 1994, the Partnership agreement was amended to increase the maximum amount of
marketing funds potentially available to the Company to be raised to $2,250,000.
At July 31, 1998, approximately $1,820,000 has been spent. The Company is
committed to pay the Partnership a commission equal to 5% to 10% of the gross
sales of certain of the Company's new products, until such time as three times
the amount of funds expended on the Company's marketing program by the
Partnership has been paid to the Partnership. The Company has paid commissions
to the Partnership of approximately $16,000, $64,000 and $15,000, for the years
ended July 31, 1998, 1997 and 1996, respectively.
In connection with the acquisition of patent rights in 1980, the Company
agreed to pay to Dr. James E. Tinnell, the inventor of one of the Company's
treatment compositions, a royalty of 5% of gross sales of the treatment
composition. Royalty expense to Dr. Tinnell for the years ended July 31, 1998,
1997 and 1996 was $371,943, $310,827 and $300,078, respectively.
The Company has a New Drug Application pending with the FDA for OraTest. The
initiation of the marketing of OraTest in the United States is dependent upon
the approval of the New Drug Application by the FDA. During 1994, the FDA
approved the Company's application for an Investigational New Drug for OraTest,
which allows the Company to manufacture the product in the United States for
clinical studies and export to certain foreign countries. The Company believes
that the FDA will approve the New Drug Application and the production and
marketing of OraTest (Note 5).
F-18
<PAGE> 47
The Company leases a manufacturing facility in Phoenix, Arizona under a three
year agreement which expires April 30, 1999. The agreement has an option to
renew for an additional five years. Additionally, the Company leases offices,
warehouse facilities and certain equipment, under operating leases which expire
through 2002. Future minimum lease payments under these non-cancelable leases
are as follows:
<TABLE>
<S> <C>
1999......... 245,503
2000......... 197,189
2001......... 187,835
2002......... 63,194
---------
Total........ $ 693,721
=========
</TABLE>
Rent expense for the years ended July 31, 1998, 1997 and 1996 totaled
$270,297, $209,110 and $171,096 and, respectively.
Peridex was manufactured by Procter & Gamble through June 1998. Subsequently,
Accupac of Mainland, Pennsylvania, became the primary manufacturer and is
currently seeking FDA clearance to manufacture Peridex. The Company believes it
has sufficient inventory of Peridex to fulfill all orders until Accupac receives
FDA clearance.
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.
In July 1995, one of Zila's subsidiaries, 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 accrued a liability of $450,000 in September 1996 because
it believed a loss was probable at that time. This amount was Bio-Dental's best
estimate of the loss in the event the outcome of the litigation was unfavorable
to Bio-Dental. In November 1996, Bio-Dental was granted a summary judgment in
which the court ruled in favor of Bio-Dental. In February 1997, the plaintiffs
started the process to appeal the judgment. Subsequently, the appellate court
upheld the lower court's summary judgment in favor of Bio-Dental. Accordingly,
Bio-Dental reversed $375,000 representing the remaining amount of accrued
liability.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
F-19
<PAGE> 48
12. EMPLOYEE BENEFIT PLAN
The Company has adopted the Zila, Inc. 401(k) Savings and Retirement Plan
(the "Plan") for the benefit of eligible employees. Employees may elect to defer
receipt of a portion of their compensation to future years. The Company may make
matching or profit sharing contributions to the Plan. During 1998, 1997, and
1996, the Company contributed approximately $39,600, $19,000 and $14,000,
respectively, to the Plan.
13. IMPAIRMENT OF ASSETS
In connection with assessing the recoverability of goodwill and other
intangible assets in the first quarter of fiscal 1997, the Company determined
that such assets that are associated with Integrated Dental Technologies, Inc.
("IDT"), a wholly-owned subsidiary of Bio-Dental, would not likely be
recoverable. This determination was the result of IDT failing to achieve
original projections of operating results subsequent to the restructuring of IDT
in early 1996. As a result, a $587,659 impairment loss was recognized to reduce
the carrying value of these long-lived assets to fair value. Fair value was
estimated based on management's best estimate of discounted future cash flows.
14. EQUITY LINE INVESTMENT AGREEMENT
In April 1997, the Company entered into an investment agreement (the
"Investment Agreement") with Deere Park Capital Management (the "Investor")
which allowed the Company to sell up to $25,000,000 of the Company's common
stock with the proceeds to be used to fund OraTest marketing and general
corporate purposes. Under the Investment Agreement the Company sold $13,000,000
of common stock. The option to sell stock to the Investor expired in September
1998.
As a commitment fee for keeping the equity line available for the 12 Month
Period, the Company issued warrants dated May 7, 1997 (the "Warrants") to the
Investor exercisable for 300,000 shares of common stock at an exercise price of
$8.6125 per share. The Warrants are exercisable for a three year period
commencing October 31, 1997.
15. SEGMENTS OF BUSINESS
The Company has organized its business into three major operating groups:
Pharmaceutical Products, Professional Products and Nutraceutical Products. The
Pharmaceutical Products Group consists of over-the-counter and prescription
products, including the Zilactin family of over-the-counter products, Peridex
prescription mouth rinse, and OraTest, an oral cancer diagnostic system. The
Professional Products Group includes Zila Dental Supply ("Zila Dental"), a
national distributor of professional dental supplies, Cygnus Imaging ("Cygnus"),
a manufacturer and marketer of digital x-ray systems and intraoral cameras, and
Practiceworks, a dental practice management software company. The Nutraceutical
Products Group is presently comprised of Oxycal Laboratories and its Inter-Cal
subsidiary, manufacturers and distributors of a patented and enhanced form of
Vitamin C under the trademark Ester-C(R).
F-20
<PAGE> 49
Intersegment sales are not significant.
<TABLE>
<CAPTION>
PHARMACEUTICAL PROFESSIONAL NUTRACEUTICAL TOTAL
-------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Net sales:
1998.................................. $15,512,038 $34,188,419 $12,242,308 $61,942,765
1997.................................. 6,739,571 31,852,681 38,592,252
1996.................................. 5,978,131 31,501,415 37,479,546
(Loss) income before income taxes:
1998.................................. (680,776) (991,833) 2,173,677 501,068
1997.................................. (3,672,521) (3,375,787) (7,048,308)
1996.................................. (827,337) 3,583,153 2,755,816
Identifiable assets:
1998.................................. 28,110,922 13,552,136 28,200,919 69,863,977
1997.................................. 13,908,770 9,695,262 23,604,032
1996.................................. 12,030,307 13,279,474 25,309,781
Capital expenditures:
1998.................................. 456,417 375,664 444,181 1,276,262
1997.................................. 339,095 262,077 601,172
1996.................................. 612,175 267,849 880,024
Depreciation and amortization:
1998.................................. 1,590,324 571,730 607,899 2,769,956
1997.................................. 774,525 379,903 1,154,428
1996.................................. 289,786 473,878 763,664
</TABLE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information is presented in the following summary:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------------
Quarters Ended
------------------------------------------------------------------------
October 31 January 31 April 30 July 31
-------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues...................................... $9,230,522 $9,779,214 $9,927,993 $9,727,163
Gross Profit.................................. 3,444,608 3,720,278 3,857,956 4,099,708
Net loss...................................... (2,274,221) (1,455,619) (1,447,087) (1,281,450)
Net loss per share - basic.................... (0.07) (0.05) (0.05) (0.03)
Net loss per share - diluted.................. (0.07) (0.05) (0.05) (0.03)
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------
Quarters Ended
------------------------------------------------------------------------
October 31 January 31 April 30 July 31
-------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues...................................... $10,800,182 $16,940,983 $17,723,721 $16,642,224
Gross Profit.................................. 4,222,924 8,822,177 9,799,328 8,586,008
Net income (loss)............................. (429,790) 1,281,999 220,661 1,228,198
Net loss available to common
shareholders.................................. (429,790) (1,872,693) (2,667,430) (43,619)
Net loss available to common
shareholders - basic.......................... (0.01) (0.05) (0.08) (0.00)
Net loss available to common
shareholder - diluted......................... (0.01) (0.05) (0.08) (0.00)
</TABLE>
F-21
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE OR
METHOD OF FILING
<S> <C>
2 Merger Agreement dated August 8, 1996 among Zila, Inc. Bio-Dental
Technologies Corporation and Zila Merger Corporation A
3-A Certificate of Incorporation, as amended B
3-B Bylaws B
4-A Specimen Stock Certificate B
4-B Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock L
4-C Specimen Warrant Certificate C
4-D Form Stock Purchase Warrant re Series A Preferred Stock L
4-E Deere Park Capital Management Warrant
J
4-F Bartholomew Investment, L.P. Warrant J
10-A Revolving Line of Credit Loan Agreement dated April 8, 1991 between
Zila, Inc. and Banc One, Arizona
D
10-B# Stock Option Award Plan (as amended through April 10, 1991) E
10-C# Non-Employee Directors Stock Option Plan (as amended through April 10, 1991) E
10-E# 1997 Stock Option Award Plan L
10-G Manufacturing and Distribution Agreement dated March 12, 1993 between
Zila, Inc. and Germiphene Corporation G
10-H Agreement dated November 26, 1996 between Cheseborough Ponds USA Co
and Zila Pharmaceuticals, Inc H
10-I Private Equity Line of Credit between Deere Park Capital Management
and Zila, Inc. Dated as of April 30, 1997 J
10-J Amendment to Private Equity Line of Credit Agreement J
10-K Registration Rights Agreement dated as of May 9, 1997 between Zila,
Inc. and Deere Park Capital Management J
10-L Registration Rights Agreement dated as of May 9, 1997 between Zila,
Inc. and Bartholomew Investment, L.P J
10-M Merger Agreement dated as of April 3, 1997 among Zila, Inc., Cygnus
Imaging, Inc., Cygnus Merger Corporation, and Egidio Cianciosi,
James Jenson and Kenneth Kirk J
10-N Securities Purchase Agreement dated as of October 17, 1997 by and
among Zila, Inc. and certain investors L
10-O Registration Rights Agreement dated October 17, 1997 by and among
Zila, Inc. and certain investors L
21 Subsidiaries of Registrant *
23-A Consent of Deloitte & Touche LLP (regarding Form S-8 and Form S-3
Registration Statements) *
23-B Consent of Grant Thornton (regarding Form S-8 and Form S-3
Registration Statements) *
24-A Power of Attorney of Joseph Hines *
24-B Power of Attorney of Bradley C. Anderson *
24-C Power of Attorney of Clarence J. Baudhuin *
24-D Power of Attorney of Carl A. Schroeder *
24-E Power of Attorney of Patrick M. Lonergan
*
24-F Power of Attorney of Michael S. Lesser *
24-G Power of Attorney of Curtis M. Rocca *
24-H Power of Attorney of Thomas B. Simone *
27 Financial Data Schedule *
99 The Company's 1998 Proxy Statement for the Annual Meeting of
Stockholders to be held on December 10, 1998 K
# Management contract or compensation plan or arrangement
* Filed herewith
A Incorporated by reference to Exhibit 2 to the Company's Form S-4 Registration Statement
No. 333-10107, as amended
B Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1988, as amended
C Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1994, as amended
D Incorporated by reference to the Company's Form S-3 Registration Statement No.
33-46239
E Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 1996, as amended
F Incorporated by reference to Exhibit 10-C to Post-Effective Amendment No. 3 to Form S-1
Registration Statement No. 33-27739
G Incorporated by reference to Exhibit 10-L to the Company's Annual
Report on Form 10-K For the fiscal year ended July 31, 1993, as amended
H Incorporated by reference to the Company's Quarterly Report for the
quarterly period ended October 31, 1996, as amended
I Incorporated by reference to the Company's Current Report dated February 11,
1997
J Incorporated by reference to the Company's Form S-3 Registration Statement No. 333-31651
K Filed by amendment
L Incorporated by reference to the Company's Annual Report on Form 10-K for fiscal
year ended July 31, 1997
</TABLE>
<PAGE> 1
Exhibit 21
Subsidiaries of Registrant
<TABLE>
<CAPTION>
NAME UNDER WHICH SUBSIDIARY
SUBSIDIARIES STATE OR JURISDICTION OF INCORPORATION DOES BUSINESS
- ------------ -------------------------------------- ---------------------------
<S> <C> <C>
Zila Pharmaceuticals, Inc. Nevada Zila Pharmaceuticals, Inc.
Bio-Dental Technologies California Bio-Dental Technologies
Corporation Corporation
Cygnus Imaging, Inc. Arizona Cygnus Imaging, Inc.
Zila Ltd. United Kingdom Zila Ltd.
Zila International, Inc. Arizona Zila International, Inc.
*Ryker Dental of Kentucky, Inc. Kentucky The Supply House; Zila Dental
Supply
*Integrated Dental Technologies, California Integrated Dental Technologies,
Inc. Inc.
Zila Acquisition Corp. Arizona Zila Acquisition Corp.
Zila Acquisition Corp. Delaware Zila Acquisition Corp.
Oxycal Laboratories, Inc. Arizona Oxycal Laboratories, Inc.
**Inter-Cal Corporation Arizona Inter-Cal Corp.
**Oxycal Exports, Inc. U.S. Virgin Islands Oxycal Exports Inc.
</TABLE>
* wholly owned subsidiary of Bio Dental Technologies Corporation
** wholly owned subsidiary of Oxycal Laboratories, Inc.
<PAGE> 1
Exhibit 23.A
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-32805 and No. 33-32970 on Form S-8 and Registration Statements No. 33-46239,
No. 333-06019, No. 333-00645 and No. 333-31651 on Form S-3 of Zila, Inc. of our
report dated October 28, 1998 appearing in this Annual Report on Form 10-K of
Zila, Inc. for the year ended July 31, 1998.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 28, 1998
<PAGE> 1
Exhibit 23.B
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in Registration Statements No.
33-32805 and No. 33-32970 of Zila, Inc. on Form S-8 and Registration Statements
No. 33-46239, No. 333-06019, No. 333-00645 and No. 333-31651 of Zila, Inc. on
Form S-3 of our report dated April 11, 1997 appearing in this Annual Report on
Form 10-K of Zila, Inc. for the year ended July 31, 1998.
/s/ Grant Thornton LLP
- ----------------------------
Grant Thornton LLP
Sacramento, California
October 28, 1998
<PAGE> 1
EXHIBIT 24A
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints BRADLEY C. ANDERSON, as his true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report on Form
10-K for the fiscal year ended July 31, 1998, for filing with the Securities
and Exchange Commission by Zila, Inc., a Delaware corporation, together with
any and all amendments to such Form 10-K, and to file the same with all
exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting to such attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming that such attorney-in-fact and agent, may lawfully do or cause
to be done by virtue hereof.
DATED: October 27, 1998
/s/ JOSEPH HINES
-------------------------------
JOSEPH HINES
STATE OF ARIZONA
ss.
County of Maricopa
On this 27th day of October, 1998, before me, the undersigned Notary
Public, personally appeared JOSEPH HINES, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
-------------------------------
Notary Public
My commission expires:
October 23, 2001
<PAGE> 1
EXHIBIT 24B
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES, as his true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report on Form
10-K for the fiscal year ended July 31, 1998, for filing with the Securities
and Exchange Commission by Zila, Inc., a Delaware corporation, together with
any and all amendments to such Form 10-K, and to file the same with all
exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting to such attorney-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming that such attorney-in-fact and agent, may lawfully do or cause
to be done by virtue hereof.
DATED: October 27, 1998
/s/ BRADLEY C. ANDERSON
-------------------------------
BRADLEY C. ANDERSON
STATE OF ARIZONA
ss.
County of Maricopa
On this 27th day of October, 1998, before me, the undersigned Notary
Public, personally appeared BRADLEY C. ANDERSON, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
-------------------------------
Notary Public
My commission expires:
October 23, 2001
<PAGE> 1
EXHIBIT 24C
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON, as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K for the fiscal year ended July 31, 1998, for filing
with the Securities and Exchange Commission by Zila, Inc., a Delaware
corporation, together with any and all amendments to such Form 10-K, and to file
the same with all exhibits thereto, and all documents in connection therewith,
with the Securities and Exchange Commission, granting to such attorneys-in-fact
and agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
and to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that such attorney-in-fact and agent may lawfully
do or cause to be done by virtue hereof.
DATED: October 27, 1998
/s/ CLARENCE J. BAUDHUIN
------------------------------------
CLARENCE J. BAUDHUIN
STATE OF ARIZONA
ss.
County of Maricopa
On this 27th day of October, 1998, before me, the undersigned Notary
Public, personally appeared CLARENCE J. BAUDHUIN, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
------------------------------------
Notary Public
My commission expires:
October 23, 2001
<PAGE> 1
EXHIBIT 24D
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for a fiscal year ended July
31, 1998, for filing with the Securities and Exchange Commission by Zila, Inc.,
a Delaware corporation, together with any and all amendments to such Form 10-K,
and to file the same with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting to such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 27, 1998
/s/ CARL SCHROEDER
--------------------------------------
CARL SCHROEDER
STATE OF ARIZONA
ss.
County of Maricopa
On this 27th day of October, 1998, before me, the undersigned Notary
Public, personally appeared CARL SCHROEDER, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
--------------------------------------
Notary Public
My commission expires:
October 23, 2001
<PAGE> 1
EXHIBIT 24E
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1998, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully and to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 27, 1998
/s/ PATRICK M. LONERGAN
-------------------------
PATRICK M. LONERGAN
STATE OF ARIZONA
ss.
County of Maricopa
On this 27th day of October, 1998, before me, the undersigned Notary
Public, personally appeared PATRICK M. LONERGAN, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
---------------------
Notary Public
My commission expires:
October 23, 2001
<PAGE> 1
EXHIBIT 24F
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1998, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully and to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 27, 1998
/s/ MICHAEL S. LESSER
-------------------------
MICHAEL S. LESSER
STATE OF ARIZONA
ss.
County of Maricopa
On this 27th day of October, 1998, before me, the undersigned Notary
Public, personally appeared MICHAEL S. LESSER, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
---------------------
Notary Public
My commission expires:
October 23, 2001
<PAGE> 1
EXHIBIT 24G
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1998, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully and to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 27, 1998
/s/ CURTIS M. ROCCA III
---------------------------
CURTIS M. ROCCA III
STATE OF ARIZONA
ss.
County of Maricopa
On this 27th day of October, 1998, before me, the undersigned Notary
Public, personally appeared CURTIS M. ROCCA III, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
---------------------------
Notary Public
My commission expires:
October 23, 2001
<PAGE> 1
EXHIBIT 24H
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1998, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully and to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 27, 1998
/s/ THOMAS B. SIMONE
------------------------
THOMAS B. SIMONE
STATE OF ARIZONA
ss.
County of Maricopa
On this 27th day of October, 1998, before me, the undersigned Notary
Public, personally appeared THOMAS B. SIMONE, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
------------------------
Notary Public
My commission expires:
October 23, 2001
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 5,241,201
<SECURITIES> 0
<RECEIVABLES> 7,654,760
<ALLOWANCES> (493,520)
<INVENTORY> 11,550,009
<CURRENT-ASSETS> 27,992,138
<PP&E> 7,874,542
<DEPRECIATION> (2,918,681)
<TOTAL-ASSETS> 69,863,877
<CURRENT-LIABILITIES> 8,777,242
<BONDS> 1,355,547
33,801,930
0
<COMMON> 34,744
<OTHER-SE> 25,894,414
<TOTAL-LIABILITY-AND-EQUITY> 69,863,877
<SALES> 61,942,765
<TOTAL-REVENUES> 62,107,110
<CGS> 30,676,673
<TOTAL-COSTS> 30,676,673
<OTHER-EXPENSES> 30,899,878
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (334,646)
<INCOME-PRETAX> 501,068
<INCOME-TAX> (1,800,000)
<INCOME-CONTINUING> 2,301,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,301,068
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
